ITEM 1. BUSINESS
First USA Paymentech, Inc. (the "Company"), incorporated in 1995, is a Delaware corporation, which, through its wholly owned subsidiary First USA Merchant Services, Inc. ("Merchant Services"), engages in the credit card industry primarily as a payment processor of bankcard transactions. According to published industry sources, the Company 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"), the Company 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.
First USA, Inc. ("First USA") is the beneficial owner of approximately 77% of the outstanding common stock of the Company. First USA is also the beneficial owner of all of the outstanding common stock of First USA Bank, the fourth largest issuer of Visa and MasterCard credit cards in the United States, and First USA Federal Savings Bank ("First USA FSB"), a thrift institution which offers financial products other than credit cards, focusing on relationships with existing Cardmembers of First USA Bank.
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.
PAYMENT PROCESSING
General
According to published industry sources, the Company is the third largest payment processor of bankcard transactions in the United States. During fiscal 1996, the Company processed approximately $30.9 billion in sales volume and approximately 574 million transactions. The Company 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 the Company are located in Dallas, Texas, with a number of additional sales and sales support offices throughout the United States. The principal corporate operations of the Company outside of Dallas, Texas are located in Salem, New Hampshire; Tampa, Florida; Murray, Utah; New York, New York; and Mentor, Ohio.
Payment Cycle
The payment cycle includes authorizing bankcard transactions at the point of sale, capturing data related to transactions, settling transactions with the card association on behalf of the merchant and providing transaction reporting to the merchant. In the course of processing an electronic transaction, various parties operate together and the authorization and capture process is usually completed within 8-15 seconds. The authorization process includes obtaining approval from the card issuing bank for the cardholder's purchase at the merchant location. Authorization procedures confirm that the cardholder has the available credit to cover the purchase, and verify that the card has not been reported lost or stolen. In the event that the merchant is not able to connect with the electronic draft capture ("EDC") network, the Company provides access to a voice authorization and automated voice response unit that is available 24 hours a day, seven days a week.
While the transaction is being authorized, the transaction data, including dollar amount and card number, is captured in the EDC network and transmitted to the Company for use in settling the transaction and preparing reports to the merchant. Depending upon the merchant's EDC network, the merchant can capture transactions at the terminal level or the network computer level. The Company's internal proprietary data capture system is capable of managing multiple batches of transactions and data per day from each merchant, which is an important feature during peak sales periods. In addition, the Company's high-speed batch deposit system allows direct response merchants to deliver transactions to the Company and receive immediate authorization responses.
Settlement involves managing a record of each merchant's transactions and transferring funds from the issuer of the card to the merchant for payment. The Company transmits transaction information to the card issuing bank through Visa and MasterCard and arranges for funds to be transferred to the merchant's bank account via Automated Clearing House or Fedwire transfer, which is ultimately credited to the merchant's account. The cardholder is then billed by the card issuing bank. Settlement payments made to merchant accounts may reflect a discount from the full transaction price, which generally includes the Company's processing fee and Visa and MasterCard interchange and assessments. Each step in the settlement process involves a number of procedures that must be completed in accordance with Visa and MasterCard requirements. From the time of closing a batch of transactions, the merchant's account will generally be credited within 24 to 72 hours.
The Company 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. The Company has entered into agreements with several third party vendors who provide merchant accounting, network and other processing services to the Company. Other services are provided by the Company's internal data processing systems. The Company has emphasized converting existing merchants to, and installing new merchants on, the Company's internal data processing systems, which have operating costs that are lower than the costs of obtaining data processing services from third party vendors. The Company's internal network provides authorization, capture, settlement and reporting capabilities to its merchants.
In furtherance of the Company's strategy of converting volume to internal systems, in August 1996, the Company acquired GENSAR Holdings, Inc. ("GENSAR"), the largest independent third party processor and one of the premier providers of EDC and authorization services for financial institutions and sales agents, processing approximately 300 million transactions annually. This acquisition provided the Company with new and advanced capabilities and product offerings which it previously outsourced. By converting more volume to its internal systems, the Company believes it can develop and deliver unique products to the merchant community.
Products
The Company offers a wide range of quality products and services related to payment processing, which are known as Paymentech Solutions. The Company'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. The Company also provides value-added services in connection with its processing systems, including on-line data access, electronic mail communication capabilities and customized reporting features. The Company 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 EDC programs, Paymentech Solutions provide products that meet the unique needs of the lodging, dining and direct response industries.
Lodging Solutions enable hotels of all sizes to streamline front desk and back office procedures by offering automatic re-authorization at checkout. Through PC-support software and networking, they also enable hotels to consolidate information from the gift shop, restaurant and front desk to a single PC for night auditor or management review.
Dining Solutions is the line of specialized software applications for the dining industry, designed to provide easy tip-editing and tab-opening functions and integrated reporting packages which comply with the Internal Revenue Service tip reporting requirements.
Direct Response Solutions is the Company's comprehensive batch authorization and accounting system developed exclusively for non-face-to-face transactions that provides fast transaction authorization and capture capabilities and installment and deferred billing programs, combined with the industry's most advanced fraud prevention and chargeback resolution capabilities. The system also provides for automatic address verification which reduces fraud. In addition to bankcard processing, the Company also offers electronic check processing to merchants in the direct response and catalog industries.
PC Passport is the Company's PC-support software that collects transaction data from all terminals and all locations and stores it on a single PC, which enables merchants to balance and review transactions and make one system-wide batch deposit. The Company has also developed the capability to track frequent shopper information from proprietary card data and transmit the data to the merchant's PC. Targeted marketing and demographic reporting is being tested in cooperation with First USA Bank. The Company also offers customized point of sale solution packages for car rental agencies, health care providers, governmental agencies, salons/spas, gas stations, supermarkets and other commercial establishments that are just beginning to accept bankcards as payment. The Company believes that its processing systems and services are among the most comprehensive in the payment processing industry.
Net Revenue
The Company'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. The Company also receives income for several value-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.
The Company'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.
The following table provides an example of a transaction in the amount of $100 in the Visa network in which the discount rate charged to the merchant is 2.0%, the interchange fee is 1.25% and the Visa assessment fee is 0.08%. These fees can vary substantially among different merchant types.
Operating Strategy
In order to remain competitive in the payment processing industry, the Company 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 the Company believes its dedication to developing these products will allow it to remain highly competitive in the industry.
The Company is committed to providing superior service and retaining its current customer base. The Company provides an extensive package of high quality service features to its merchants, including toll-free customer service and terminal support 24 hours a day, seven days a week, 48-hour terminal replacement, terminal set-up assistance and training for new merchants and flexible reporting capabilities, both in frequency and format. Long-term relationships are established through the continued support and interaction of professional account managers.
The Company believes that its investment in open systems versus mainframe technology has allowed it to implement business solutions in less time and at a lower cost than its competitors. This approach provides a broad range of EDC products and merchant accounting systems.
The Company has obtained a license for a new artificial intelligence system that will significantly improve chargeback and retrieval processing. A chargeback is an action initiated by a cardholder, or an issuing bank on behalf of a cardholder, disputing a particular transaction. A chargeback requires a prompt response and appropriate actions to avoid the merchant being debited for the transaction amount. The system is called ACE (Automated Chargeback Exchange), and its features will allow the Company to reduce the number of chargebacks ultimately charged to its merchants as well as the back office time and expense associated with chargeback resolutions. The new chargeback system allows approximately 40% of all chargebacks to be resolved automatically, without human intervention, and reduces resolution cycle times.
The Company has developed an innovative on-line risk management program to address the bankcard fraud concerns of merchants. The program is designed to effectively detect and monitor potential fraudulent activity in merchant accounts. Additional re-engineering projects currently in development which management believes will enhance the Company's product offerings include remote, on-line application processing, help desk automation, a project prioritization system, accelerated account setup and virtual terminal on-line support.
During calendar 1995, the Company tested and implemented a new disaster recovery planning system, a reliable recovery program designed to maintain company operations in the event of emergencies, such as physical destruction to office buildings, natural disasters, bomb threats or loss of network capabilities. The plan entails a hierarchy of activities and procedures for each department to implement in the event of such disasters that minimize service interruption as well as improve financial security.
Growth Strategy
The Company 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, the Company 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 the Company's growth strategy relies on sales volume growth from merchants that are solicited directly through the Company's internal sales force. Direct merchants are the most profitable segment of the Company's portfolio. The Company intends to continue to aggressively seek new direct merchant customers of all sizes, especially within those industries in which the Company's products and services exhibit a significant advantage, including the dining, lodging, hospitality and direct response industries.
The Company is dedicated to increasing the effectiveness and efficiency of its sales team. The Company has made a significant investment in a sales force automation system which enables it to improve the productivity of its sales team by providing sales tools, instant data access and remote on-line communication. This allows the representatives to pursue prequalified prospects, and to reach potential customers using various means of communication. The system utilizes technology to streamline operations and contains modules which provide various services and materials needed by the sales team. This system enables the Company to address the many challenges inherent in a decentralized sales force.
The sales group includes 56 field representatives and 14 proactive sales representatives. Proactive sales is the telemarketing arm of the Company and provides the Company with the ability to reach unmanned markets in a cost effective manner. This group also supports the field representatives in a broad range of programs that increase the productivity of the entire team as well as increase penetration in any given vertical or geographic market.
Financial Institutions. The Company markets to local, regional and national financial institutions. The Company 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, the Company generally assumes the marketing and support functions.
Sales Agents. Sales agents solicit new customers on behalf of the Company. The sales agents provide varying degrees of customer service to the merchants which the Company approves for processing. The fees charged to sales agents by the Company vary based upon level of service provided, allocation of risk of loss and transaction volume. As part of the process of approving a new sales agent, an analysis of the credit of the sales agent as well as its principals is performed. This analysis encompasses a business and personal credit review and contacting Visa and MasterCard regarding the sales agent's relationship with prior processors. The Company is required to register all of its sales agents with Visa and MasterCard and file quarterly sales and activity reports.
Acquisitions. The Company has completed a number of acquisitions and continues to consider acquisition opportunities as a component of its growth.
The Company acquired Litle & Company, Inc. ("Litle") and certain assets of DMGT Corporation during the first quarter of fiscal 1996, both of which were significant providers of processing services for the direct 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, the Company acquired approximately $10.2 billion in annual sales volume processed, of which $4.3 billion represented additional sales volume processed for the Company. The remaining sales volume was formerly processed by the Company for Litle as a sales agent of the Company. 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 the Company.
In August 1996, the Company 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 the Company 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
The Company 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%). The Company provides transaction processing for large national accounts, as well as for many smaller, regional merchants. No one merchant represents in excess of 5% of the Company's annual sales volume processed.
Merchant attrition is a normal part of the payment processing business. The Company believes that providing cost-effective, reliable and responsive service is the most effective long-term strategy to attract and retain merchants in a competitive industry. In addition to the occasional loss of merchants experienced by the Company due to attrition, in certain cases the Company has elected not to continue processing for merchants that were experiencing financial difficulties. The Company has also lost merchant accounts to competitors in situations in which the Company was unwilling to match a competitor's rates in light of the credit risks associated with the particular merchant or its industry. The Company believes that its attrition rates related to customer dissatisfaction and pricing have not been material.
New Product Initiatives
Given the large market potential for Internet transactions, the Company is exploring processing methods that are secure and effective on the Internet. The Company 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.
In fiscal 1996, the Company purchased for $4.0 million, shares of convertible preferred stock which represent a minority interest in First Virtual Holdings, Inc. ("First Virtual"), a privately-held company formed to facilitate Internet commerce. First Virtual offers an off-line Internet payment system which became fully operational in
October 1994. The Company has been the payment processor for all of First Virtual's bankcard transactions since its inception. The Company's President and Chief Executive Officer serves as a director on the Board of Directors of First Virtual.
Credit
Visa and MasterCard require that an in-depth examination of the merchant be performed prior to processing for the merchant. The Company 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. For each merchant, the Company conducts a premises inspection of the merchant location that includes verifying that the location, the merchandise, the estimated sales volume and the average ticket appear reasonable for the type of business. A review of the relationship with the previous processor is conducted to determine the reason the merchant is changing processors. An acceptable Combined Terminated Merchant File Report, which is a report derived from a Visa and MasterCard database of merchants who have violated Visa and MasterCard rules in the past, an acceptable credit bureau report on principals of the business and acceptable financial statements for the business are also required.
After merchants begin processing, the Company reviews unusual activity on a daily basis. Visa and MasterCard have established minimum standards for weekly review. The Company believes that its daily procedures generally exceed these standards. Volume and average ticket variations are analyzed along with excessive even dollar transactions, duplicate amounts, duplicate cardholder transactions, keyed transactions and chargebacks. The Company has the ability to hold a merchant's daily settlement if fraudulent activity is suspected. Security analysts talk to cardholder banks, cardholders, Visa and MasterCard, as well as the merchants to determine if the unusual activity is legitimate or fraudulent. If fraudulent activity is discovered, the merchant is terminated and placed in the Combined Terminated Merchant File so that future processors will be aware of previous problems. The Company has had minimal losses due to merchant fraud because of the initial credit review and the extensive monitoring procedures that are in place.
The Company also reviews potential merchants based upon the merchant's industry. According to Visa and MasterCard rules, the Company has contingent liability for chargeback transactions. For most industry types, a chargeback and potential Company 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, the Company's potential liability is greater. The Company takes these and other risks into account in making its credit determinations with respect to potential new merchants. At June 30, 1996, the Company 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 the Company 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. The Company is not exposed to cardholder credit losses.
Competition
The payment processing market is highly competitive. Uniform interchange requirements and Visa and MasterCard compliance rules limit significant pricing variances among processors. Therefore, the Company 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.
As a result of its single purpose focus and many years of experience in payment processing, the Company has been able to develop operating efficiencies which the Company believes allow it to competitively bid for new business. In addition, the Company has continually made technological improvements, and is thus able to respond to the unique needs of merchants in various industries. Furthermore, such single purpose focus allows the Company's workforce to provide more responsive customer service to merchants.
Investment in open systems technology has allowed the Company to implement business solutions in less time and at a lower cost than competitors utilizing mainframe technology. This approach provides a broad range of EDC products and merchant accounting systems. Through a combination of strategic acquisitions and construction of custom solutions, the Company believes that it continues to deliver more innovative choices than the competition. Responding to the changing point of sale environment and rapidly evolving payment systems is an ongoing requirement for payment processors.
The payment processing industry has consolidated significantly in the past few years, due to the large investments required for the development of technologically advanced systems and expanded business services. The Company believes this trend will continue as the technological demand on processors continues to increase, and believes it is well positioned to continue to grow in terms of volume and the number of industries it serves.
COMMERCIAL CARDS
The Company's commercial card operations are located in Murray, Utah. The Company 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. The Company began to actively market and issue its commercial cards in September 1995 following receipt of an initial capital contribution of $16.1 million.
The Company'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 the Company, 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, the Company 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. The Company expects its commercial card operations to become profitable in late fiscal 1997. The losses associated with this operation did not have a material impact on the consolidated results of the Company in fiscal 1996 and the Company believes that its losses associated with this operation will not have a material impact on the consolidated results of the Company in fiscal 1997.
The Company 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, and the Company has agreed to comply with the By-laws and Operating Regulations of Visa and MasterCard, which are subject to change.
The Company 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 or MasterCard account, as well as agreements with each individual Cardmember.
The Company'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. Annual fees are negotiable based upon
certain pricing assumptions made by the Company, including the number of cards that will be issued for the account of the customer, the expected aggregate charge volume for the cards issued, the length of the billing cycle, the anticipated credit losses associated with the cards, the liability structure of the card account agreements and other considerations. The Company also charges other fees associated with corporate cards, including late, cash advance and returned check fees. Customers generally pay daily, weekly or pursuant to other billing options of 30 days or less from the billing date. A standard reporting package is provided to each customer, with enhanced on-line packages available at the customer's request. As an incentive to the customer to encourage use of its corporate cards, the Company may in some instances pay rebates to the customer if certain charge volume or other requirements are met.
In addition to corporate cards, the Company offers 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. The purchasing card permits the Cardmember to charge such items in a streamlined fashion without the need for cumbersome and paper-intensive purchase orders and invoices. The reporting package provided by the Company in connection with the purchasing card provides detailed information regarding the products purchased and other relevant information required for the customer's records, and thereby helping to eliminate the need for purchase orders and invoices. As with corporate cards, annual fees charged for purchasing cards are negotiable based upon certain pricing assumptions made by the Company, and in certain instances the Company may grant rebates if a customer meets certain charge volume or other requirements. The Company may also charge other fees associated with the purchasing cards, including late, cash advance and returned check fees. The Company 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. The fees and charges associated with these accounts are similar to those charged for corporate card and purchasing card accounts.
The Company's product offerings also include business cards designed for use by small to medium companies for routine business purchases, including travel and entertainment expenditures and equipment and supply purchases. Business cards 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. Annual fees are charged to the customer based upon the number of cards issued on the customer's account. The Company also charges other fees associated with the business card, including late, cash advance, overlimit, returned check and administrative fees. A standard reporting package is provided to each customer, with enhanced reporting packages available at the customer's request. In addition, Cardmembers have access to packages of discounts and other services.
The Company competes with national, regional and other issuers of commercial cards. In seeking funding from the public, the Company 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 Financial Services include issuing certificates of deposit and other borrowings. Financial Services' liquidity is invested in overnight reverse repurchase agreements and other short-term investments. Financial Services' Asset and Liability Committee, consisting of executive management, reviews and manages all funding and liquidity decisions.
The Company has an agreement with a third party vendor for data processing services in connection with the Company's commercial card business.
EMPLOYEES
At June 30, 1996, the Company and its subsidiaries had approximately 830 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 FINANCIAL SERVICES
Financial Services is an industrial loan corporation chartered under the laws of the State of Utah, the deposits of which are insured by the Bank Insurance Fund (the "BIF") of the Federal Deposit Insurance Corporation ("FDIC"), up to applicable limits. Financial Services is subject to comprehensive regulation and periodic examination by the Utah Department of Financial Institutions and the FDIC, as administrator of the BIF. Financial Services received FDIC approval for federal deposit insurance.
The federal and state banking laws contain numerous provisions affecting various aspects of the business and operations of Financial Services. The following description of statutory and regulatory provisions, which is not intended to be a complete description of these provisions or their effects on Financial Services, is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.
Holding Company Status
Generally a company which controls a "bank," as defined in the Bank Holding Company Act of 1956 (the "BHCA"), is required to register as a bank holding company under the BHCA and becomes subject to regulation and examination as a bank holding company by the Federal Reserve Board. The Company is not a bank holding company under the BHCA, as a result of ownership of Financial Services, and the Company's parent companies are not bank holding companies under the BHCA, as a result of ownership of Financial Services, First USA Bank or First USA FSB, because each of those three depository institutions meet criteria to cause it to be exempt from the definition of "bank" under the BHCA. Accordingly, if Financial Services, First USA Bank or First USA FSB failed to meet the criteria for the exemption, the Company (in the case of Financial Services failing to meet the criteria) and its holding companies (in the case of any one of the institutions failing to meet the criteria) would become subject to the provisions of the BHCA. The Company believes that becoming a bank holding company would not restrict, curtail, or eliminate any of the Company's operations or activities at current levels.
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 any assistance provided by the FDIC to such commonly-controlled institution which is in danger of default. First USA Bank and First USA FSB are insured depository institutions under common control with Financial Services for purposes of this statutory provision.
Dividends and Transactions with Affiliates
There are various limitations under federal and Utah law on the extent to which Financial Services can finance or otherwise supply funds, through dividends, loans or otherwise, to the Company's and Financial Services' other affiliates. These limitations include minimum regulatory capital requirements, Utah requirements concerning the payment of dividends out of net profits or surplus, and Section 23A and 23B of the Federal Reserve Act, governing transactions between an insured depository institution and its affiliates.
Capital Maintenance and FDICIA
Financial Services is currently subject to capital adequacy guidelines adopted by the FDIC, which provide generally for a minimum ratio of Tier 1 capital to risk-weighted assets (which are the credit risk equivalents of both 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 (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 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. As of June 30, 1996, Financial Services' total risk-based capital ratio was 164%, its Tier 1 risk-based capital ratio was 163% and its leverage ratio was 60%, which reflect the start-up nature of its operations.
In addition, under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal bank regulatory agencies are empowered, and in certain cases required, to take "prompt corrective action" with respect to banks that do not meet minimum capital requirements, including, in the most severe cases, placing an institution into conservatorship or receivership. The extent of the agencies' powers depends upon whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Among other things, an institution in one of the three undercapitalized categories is required to submit a capital restoration plan to its appropriate federal regulator, and the capital restoration plan will not be accepted without the guaranty of the institution's parent company. As of June 30, 1996, Financial Services met the capital requirements of a "well capitalized" institution.
Financial Services may accept brokered deposits as part of its 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 there are limitations on the rates that may be paid on such deposits. Undercapitalized institutions may not accept, renew or roll over brokered deposits.
Deposit Insurance Assessments
The deposits of Financial Services are insured by the BIF, 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, depending upon the institution's capital position and other supervisory factors.
There are a number of proposals being considered by Congress to recapitalize the Savings Association Insurance Fund of the FDIC, which insures most thrift institution deposits. If enacted, these proposals could affect the assessment rates imposed on all FDIC-insured institutions and the use of the proceeds from such assessments.
Enforcement Powers of Federal and State Regulators
The FDIC has broad enforcement powers over the institutions it regulates, including the power to terminate deposit insurance, impose substantial fines and other civil penalties and, in the most severe cases, to appoint a conservator or receiver. In addition, the Utah Commissioner of Financial Institutions also has broad enforcement powers under state law, including the power to take possession of an institution in certain circumstances.
Lending Activities
Although Financial Services' activities are commercial and not consumer- oriented, its activities as a credit card lender may be subject to regulation under various federal laws including the Truth-in-Lending Act, the Equal Credit Opportunity Act and the Soldiers' and Sailors' Civil Relief Act, as well as state lending laws. Where applicable, regulators are authorized to impose penalties for violations of these statutes and, in certain cases, to order 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 may also affect Financial Services' ability to collect outstanding balances owed by Cardmembers who seek relief under these statutes.
Cautionary Statements
Information or statements provided by the Company from time to time may contain certain "forward-looking information," including information relating to anticipated growth in earnings per share, anticipated returns on equity, anticipated growth in net revenue, account origination and growth, merchant or Cardmember base, anticipated operations costs and employment growth, anticipated marketing expense or anticipated credit and other losses. 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 financial products and services who may employ various competitive strategies. 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. In addition, the Company competes against issuers of commercial cards that are offering highly competitive and attractive rates, including rates which are at or below rates charged by the Company, in order to preserve or gain market share.
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 chargeback and other losses due to the Company's contingent liability for such losses through its merchants (such as where the cardholder is dissatisfied with the product or service charged); 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, which may lead to processing 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.
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 commercial card operations, 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.
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.
Seasonality
. The impact of seasonality in the Company's business, typically realizing higher net revenue in its second fiscal quarter, which includes the end of the year holiday season.
Regulation
. The effects of, and changes in, monetary and fiscal policies, laws and regulations (financial, regulatory or otherwise), other activities of governments, agencies and similar organizations, and social and economic conditions, such as inflation, and changes in taxation of the Company's earnings. For example, in recent years, several pieces of legislation have been proposed by members of 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.
ITEM 2.
ITEM 2. PROPERTIES
First USA, Inc. provides the Company with its principal office space in Dallas, Texas consisting of approximately 110,000 square feet, pursuant to an intercompany agreement. The Company's right to use such space expires upon the expiration of First USA's underlying leases therefor in June 2005, unless First USA exercises its right to extend the leases for two successive five-year periods. See Item 13, "Certain Relationships and Related Transactions." The Company leases additional facilities from which certain other operations of the Company are conducted.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Two subsidiaries of the Company ("Company Subsidiaries") and First USA filed an action in the Dallas District Court of Texas against LitleNet L.L.C. ("LitleNet"), and LitleNet subsequently filed a companion case against the Company Subsidiaries in the Superior Court of the State of New Hampshire. In the Texas lawsuit, the Company Subsidiaries and First USA seek declaratory relief that they committed no breach under an agreement entered into in September 1995 (the "Agreement") with LitleNet and relief relating to certain breaches of the Agreement by LitleNet. In the New Hampshire lawsuit, LitleNet is seeking declaratory relief, injunctive relief and damages based upon its claim that the Company Subsidiaries breached the Agreement. Pursuant to the Agreement, the Company Subsidiaries provided certain software programs to LitleNet to assist it in the development of a communication platform. LitleNet claims that the Company Subsidiaries failed to deliver to LitleNet all of the software required by the Agreement and related documents. Discovery on the merits has begun in both cases. In the New Hampshire action, a temporary restraining order has been issued against termination of the relationship between the parties.
The Company believes it and its subsidiaries fully complied with the terms of the Agreement. Accordingly, the Company intends to vigorously defend against the action in New Hampshire and vigorously pursue the action in Texas. While it is impossible to predict the outcome of the lawsuits, the Company believes that they will not have a material adverse effect on the consolidated financial position of the Company.
In addition, the Company has been named as a defendant in various additional legal actions arising from the conduct of its normal business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the opinion of the Company, any such liability will not have a material impact on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1996, no matters were submitted to a vote of the stockholders of the Company.
PAGE>
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The section entitled "Common Stock" of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference and filed as part of Exhibit 13.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The section entitled "Five Year Statistical Summary" of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference and filed as part of Exhibit 13.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference and filed as part of Exhibit 13.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Accompanying Notes and the sections entitled "Report of Independent Auditors" and "Quarterly Financial Information" of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference and filed as part of Exhibit 13.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections entitled "Election of Directors" and "Incumbent Directors" of the Company's definitive Proxy Statement are incorporated herein by reference.
The following table sets forth certain information regarding the executive officers of the Company and its subsidiaries as of September 2, 1996.
John C. Tolleson. Mr. Tolleson has been Chairman of the Board of the Company since December 1995, and Chairman of the Board of Merchant Services since May 1985. Mr. Tolleson has also served as Chairman of the Board and Chief Executive Officer of First USA since August 1989, and of First USA's predecessor since its formation in May 1985. Mr. Tolleson has been a Director of First USA Bank since May 1985 and a Director of First USA FSB since March 1996. Mr. Tolleson currently serves on the Boards of Visa USA, Inc., Visa International, Inc., Capstead Mortgage Corporation and Jayhawk Acceptance Corporation and on the Executive Board of the Cox School of Business at Southern Methodist University.
Pamela H. Patsley. Ms. Patsley has been President, Chief Executive Officer and a Director of the Company since December 1995. She has also served as President and Chief Executive Officer of Merchant Services since December 1991 and Executive Vice President and Manager since July 1990, and as Chairman of the Board of Financial Services since August 1994. Ms. Patsley has also served as Executive Vice President and Secretary of First USA since July 1989. She has been a Director of First USA Bank since November 1993 and a Director of First USA FSB since March 1996. Ms. Patsley was Chief Financial Officer of First USA and its predecessor from January 1987 to April 1994 and a Senior Vice President prior to such time. Ms. Patsley originally joined First USA's predecessor as its Vice President and Controller in February 1985. Ms. Patsley currently serves on the VisaNet Services Advisors' Committees of Visa USA, Inc. and Visa International, Inc. Ms. Patsley is also a Director of First Virtual.
David W. Truetzel. Mr. Truetzel has been Chief Financial Officer and Secretary of the Company since December 1995. From June 1985 to December 1995, Mr. Truetzel was affiliated with A.G. Edwards & Sons, Inc., where he most recently served as a Vice President in the firm's Corporate Finance Department. Mr. Truetzel was
formerly employed by KPMG Peat Marwick, L.L.P. and Deloitte, Touche, L.L.P. He is also a Director of National Home Centers, Inc.
Elena R. Anderson. Ms. Anderson has been Group Executive of Portfolio Management since December 1995. Ms. Anderson also served as Senior Vice President of Accounting/Finance and Risk Management of Merchant Services from July 1992 to December 1995, and has been employed by the Company and Merchant Services since May 1985. Ms. Anderson is responsible for credit, risk monitoring, chargeback processing, merchant settlement and portfolio acquisitions. Ms. Anderson also serves on the Acquirer's Council of Visa USA, Inc. and the Client Advisory Board of the Northern Trust Company.
James W. Baumgartner. Mr. Baumgartner has been President and a Director of Financial Services since June 1996. From 1992 to June 1996, Mr. Baumgartner was Senior Vice President and General Manager of the commercial card business and merchant bankcard business at First Bank System, Inc. From 1989 to 1992, Mr. Baumgartner was Vice President and Controller of the Electronic Banking Division at First Bank System, Inc. Mr. Baumgartner was formerly a Senior Manager at Ernst & Young LLP, where he was employed from 1982 to 1989.
Susan H. Cerpanya. Ms. Cerpanya has been Group Executive of Marketing since December 1995. Ms. Cerpanya also served as Senior Vice President-- Marketing and Product Development of Merchant Services from June 1994 to December 1995. Her responsibilities include marketing, product development, training, network sales and operations. Ms. Cerpanya has been employed by the Company and Merchant Services since January 1989. Ms. Cerpanya also serves on the Acquirer's Committee of MasterCard International, Inc.
Jeffrey C. Connelly. Mr. Connelly has been Group Executive of Network Sales since August 1996. From July 1994 to August 1996, Mr. Connelly served as Executive Vice President of Sales and Marketing for GENSAR Technologies Inc. He was Senior Vice President at Visa USA from April 1989 to July 1994, where he was general manager of the business unit responsible for all point of sale processing in the United States.
Michael P. Duffy. Mr. Duffy has served as Group Executive of Direct Marketing Operations since December 1995. From August 1992 to December 1995, Mr. Duffy served as Vice President--Finance of Litle. Mr. Duffy also served as Vice President and Assistant Group Controller at Equifax Credit Information Services from November 1991 to August 1992, and Assistant Vice President--Finance and Administration at Equifax Credit Bureau Marketing from June 1990 to October 1991.
Raymond J. McArdle. Mr. McArdle has served as Group Executive of Technology since December 1995. Mr. McArdle also served as Senior Vice President--Operations for Merchant Services from May 1991 to December 1995. In these positions, he has been responsible for back office and field operations and the application of open systems architecture to increase the operational efficiency and product implementation of the Company. Mr. McArdle also serves on the Customer Advisory Board of Verifone, Inc. and has served on various ad hoc committees of Visa USA, Inc. and MasterCard International, Inc.
Thomas J. McHugh. Mr. McHugh has been Group Executive of Network Operations since August 1996. From March 1993 to August 1996, Mr. McHugh was Executive Vice President and Chief Operating Officer of GENSAR Technologies Inc. From June 1982 to March 1993, Mr. McHugh was Senior Vice President at CoreStates Financial Corp., responsible for technology and operations for electronic payment services.
Gary T. Staub. Mr. Staub has been Group Executive of Business Development since August 1996. From August 1992 to August 1996, Mr. Staub was Executive Vice President of GENSAR, serving as business manager for merchant processing services and manager of strategic initiatives and acquisitions. From 1990 to 1992, Mr. Staub was First Vice President at Mellon Bank (Network Services Division) responsible for merchant and ATM business management, and served in various other positions at Mellon Bank from 1981 to 1990.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's definitive Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" in the Company's definitive Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Index to Financial Statements:
(1) The following financial statements of first USA Paymentech, Inc. and its subsidiaries are incorporated by reference from the Company's 1996 Annual Report to Stockholders:
(2) The following consolidated financial statement schedule of first USA Paymentech, Inc. and its subsidiaries is included in item 14(d):
No financial statement schedules are required to be filed.
(3) LISTING OF EXHIBITS
The following exhibits are incorporated by reference or filed herewith:
_________________ * Filed herewith
b. Reports on Form 8-K filed in the fourth quarter of fiscal year ended June 30, 1996:
None.
Reports on Form 8-K filed subsequent to the fourth quarter of fiscal year ended June 30, 1996:
Report on Form 8-K filed September 3, 1996
Item 2. Acquisition or Disposition of Assets.
Item 7. Financial Information and Exhibits--Exhibits: Agreement and Plan of Merger
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.
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 PAYMENTECH, INC.
Dated: September 18, 1996 By: /s/ Pamela H. Patsley ------------------------------------- Pamela H. Patsley President 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 September 18, 1996.
SIGNATURE TITLE --------- -----
/s/ John C. Tolleson Chairman of the Board - - -------------------------------- JOHN C. TOLLESON
/s/ Pamela H. Patsley President, Chief Executive Officer - - -------------------------------- and Director (Principal Executive Officer) PAMELA H. PATSLEY
/s/ David W. Truetzel Chief Financial Officer and Secretary - - -------------------------------- (Principal Financial and Accounting Officer) DAVID W. TRUETZEL
/s/ Richard W. Vague Director - - -------------------------------- RICHARD W. VAGUE
/s/ Gene H. Bishop Director - - -------------------------------- GENE H. BISHOP
/s/ Rupinder S. Sidhu Director - - -------------------------------- RUPINDER S. SIDHU
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE NO. - - ------ ----------- --------
2 Agreement and Plan of Merger, dated as of July 19, 1996, by and among First USA, the Company, First USA Management Resources, Inc., First USA Opportunity III, Inc., GENSAR and Golder Thoma Cressey Fund III Limited Partnership and the other stockholders of GENSAR filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed September 3, 1996 and incorporated by reference herein.
3.1 Certificate of Incorporation of the Company, as amended, filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (No. 333-262) (the "Registration Statement") and incorporated by reference herein.
3.2 By-Laws of the Company, filed as Exhibit 3.2 to the Registration Statement and incorporated by reference herein.
10.1 Intercompany Services Agreement between the Company and First USA Management, Inc., filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference.
10.2 Registration Rights Agreement between the Company and First USA, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference.
10.3 Tax Sharing Agreement between the Company and First USA, filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference.
10.4 1996 Stock Option Plan of the Company, filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference.
10.5 1996 Restricted Stock Plan of the Company, filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference.
10.6 Revolving Credit Agreement dated February 21, 1996 among the Company, the lenders listed therein and NationsBank of Texas N.A., as Agent, including the notes and guaranty related thereto, filed as Exhibit 10.6 to the Registration Statement and incorporated by reference herein.
10.7 Deferred Compensation Plan of First USA, filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (No. 333-06979) and incorporated by reference herein.
10.8* Employee Stock Purchase Plan of the Company.
10.9 First USA Paymentech Retirement Savings Plan, filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (No. 333-11249) and incorporated by reference herein.
10.10* First USA Paymentech Supplemental Executive Retirement Plan.
10.11* First USA Paymentech Savings Restoration Plan.
11 Computation of Net Income Per Share (included in Note D to the Accompanying Notes to the Consolidated Financial Statement in the Company's 1996 Annual Report to Stockholders, filed herewith as Exhibit 13 and incorporated by reference herein).
13* Sections entitled "Common Stock", "Five Year Statistical Summary", "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Report of Independent Auditors" and "Quarterly Financial Information" and the Consolidated Financial Statements and Accompanying Notes in the Company's 1996 Annual Report to Stockholders.
21* Subsidiaries of the Company.
23* Consent of Ernst & Young LLP.
27* Financial Data Schedule. ________
* Filed herewith