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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-12365
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BA MERCHANT SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3252840
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
ONE SOUTH VAN NESS AVENUE
SAN FRANCISCO, CALIFORNIA 94103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
415-241-3390
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes^[X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock, $0.01 par value--16,241,092 outstanding on June 30, 1997
Class B Common Stock, $0.01 par value--30,350,000 outstanding on June 30, 1997
This document serves both as an analytical review for analysts,
shareholders, and other interested persons, and as the quarterly report on
Form 10-Q of BA Merchant Services, Inc. to the Securities and Exchange
Commission, which has taken no action to approve or disapprove the report or
to pass upon its accuracy or adequacy. Additionally, this document is to be
read in conjunction with BA Merchant Services, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1996, including the consolidated
financial statements and notes thereto.
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INDEX
BA MERCHANT SERVICES, INC.
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet.............................................. 1
Consolidated Statement of Operations.................................... 2
Consolidated Statement of Cash Flows.................................... 3
Consolidated Statement of Changes in Stockholders' Equity............... 4
Notes to Consolidated Financial Statements.............................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Highlights.............................................................. 9
Results of Operations................................................... 9
Balance Sheet Review ................................................... 10
Liquidity and Capital Resources......................................... 10
Forward-Looking Statements.............................................. 10
PART II OTHER INFORMATION
Item 2(c). Changes in Securities: Equity Securities Sold That Were Not
Registered Under the Securities Act................................ 11
Item 4. Submission of Matters to a Vote of Security Holders............... 11
Item 6. Exhibits and Reports on Form-8-K.................................. 12
Exhibit Index............................................................. 13
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BA MERCHANT SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents........................... $218,497 $138,398
Short-term investments.............................. 21,571 --
Drafts in transit................................... 28,331 87,803
Accounts receivable................................. 45,719 35,282
Other current assets................................ 11,032 4,778
-------- --------
Total current assets.............................. 325,150 266,261
Property and equipment, net........................... 18,056 16,760
Other assets.......................................... 7,911 3,700
-------- --------
Total assets...................................... $351,117 $286,721
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................... $ 741 $ 415
Merchants payable................................... 54,528 14,092
Accrued liabilities................................. 5,373 5,603
Accrued credit card association and interchange
fees............................................... 9,346 5,060
Income taxes payable................................ 4,321 3,188
Other current liabilities........................... 8,338 6,238
-------- --------
Total current liabilities......................... 82,647 34,596
-------- --------
Stockholders' equity:
Class A Common Stock, par value $0.01 (authorized
200,000,000 shares; issued and outstanding 16,241,092
shares).............................................. 162 162
Class B Common Stock, par value $0.01 (authorized
50,000,000 shares; issued and outstanding 30,350,000
shares).............................................. 304 302
Additional paid-in capital............................ 249,985 249,622
Retained earnings..................................... 17,972 2,039
Accumulated foreign currency translation adjustments.. 47 --
-------- --------
Total stockholders' equity........................ 268,470 252,125
-------- --------
Total liabilities and stockholders' equity........ $351,117 $286,721
======== ========
See Notes to Consolidated Financial Statements.
1
BA MERCHANT SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
1997 1996 1997 1996
------- ------- ------- -------
Net revenue.................................... $35,965 $31,430 $68,855 $59,672
------- ------- ------- -------
Operating expense (Note 6):
Data processing and communications........... 8,228 7,055 15,793 13,733
Salaries and employee benefits............... 7,805 6,220 15,207 12,180
General and administrative................... 4,327 4,191 8,961 7,390
Depreciation................................. 2,556 2,134 4,656 4,037
Occupancy.................................... 653 468 1,273 936
Amortization of intangibles.................. 108 282 221 570
------- ------- ------- -------
Total operating expense.................... 23,677 20,350 46,111 38,846
------- ------- ------- -------
Income from operations......................... 12,288 11,080 22,744 20,826
Net interest income............................ 2,563 -- 4,413 --
------- ------- ------- -------
Income before income taxes..................... 14,851 11,080 27,157 20,826
Provision for income taxes..................... 6,138 4,577 11,224 8,602
------- ------- ------- -------
Net income................................. $ 8,713 $ 6,503 $15,933 $12,224
======= ======= ======= =======
Earnings per common and common equivalent
share......................................... $ 0.19 N/A $ 0.34 N/A
Earnings per common share--assuming full
dilution...................................... $ 0.19 N/A $ 0.34 N/A
See Notes to Consolidated Financial Statements.
2
BA MERCHANT SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 15,933 $ 12,224
Adjustments to net income to arrive at cash provided by
operating activities:
Depreciation............................................. 4,656 4,037
Amortization of intangibles.............................. 221 570
Provision for (benefit from) deferred income taxes....... (755) 671
Amortization of restricted stock......................... 373 --
Amortization of loan fees................................ 169 --
Changes in operating assets and liabilities:
(Increase) decrease in drafts in transit............... 59,472 (10,220)
(Increase) in accounts receivable...................... (10,437) (1,558)
(Increase) in other current assets..................... (6,254) (94)
Increase (decrease) in accounts payable................ 326 (134)
Increase in current income taxes payable............... 1,133 --
Increase in merchants payable.......................... 40,436 2,535
Increase (decrease) in accrued liabilities............. (230) 125
Increase (decrease) in accrued credit card association
and interchange fees.................................. 4,286 (754)
Other, net............................................. (1,746) (639)
-------- --------
Net cash provided by operating activities............ 107,583 6,763
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......................... (5,847) (6,316)
Purchase of short-term investments......................... (21,571) --
-------- --------
Net cash used for investing activities............... (27,418) (6,316)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in underwriting expense........................... (113) --
BAC's change in funding.................................... -- 225
-------- --------
Net cash provided by (used for) financing activities. (113) 225
-------- --------
EXCHANGE RATE EFFECT ON CASH............................... 47 --
-------- --------
Increase in cash and cash equivalents...................... 80,099 672
Cash and cash equivalents at beginning of period........... 138,398 345
-------- --------
Cash and cash equivalents at end of period................. $218,497 $ 1,017
======== ========
CASH PAID DURING THE PERIOD FOR:
Income taxes............................................. $ 10,846 $ 7,931
======== ========
See Notes to Consolidated Financial Statements.
3
BA MERCHANT SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30,
------------------
1997 1996
-------- --------
CLASS A COMMON STOCK:
Balance at beginning of period.............................. $ 162 $ --
Issuance of additional stock................................ -- --
Dividends................................................... -- --
-------- --------
Balance at end of period.................................. 162 --
CLASS B COMMON STOCK:
Balance at beginning of period.............................. 302 --
Issuance of additional stock................................ 2 --
-------- --------
Balance at end of period.................................. 304 --
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period.............................. 249,622 --
Amortization of unvested portion of restricted stock........ 373 --
Additional underwriting expenses............................ (113) --
Issuance of additional stock................................ 103 --
-------- --------
Balance at end of period.................................. 249,985 --
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT:
Balance at beginning of period.............................. -- --
Translation adjustments..................................... 47 --
-------- --------
Balance at end of period.................................. 47 --
RETAINED EARNINGS:
Balance at beginning of period.............................. 2,039 --
Net income.................................................. 15,933 --
-------- --------
Balance at end of period.................................. 17,972 --
BAC'S EQUITY INTEREST:
Balance at beginning of period.............................. -- 99,168
Net income.................................................. -- 12,224
BAC's change in funding..................................... -- 225
-------- --------
Balance at end of period.................................. -- 111,617
-------- --------
Total stockholders' equity end of period................ $268,470 $111,617
======== ========
See Notes to Consolidated Financial Statements.
4
BA MERCHANT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND NATURE OF OPERATIONS
BA Merchant Services, Inc. ("BAMS" or the "Company") was incorporated on
October 11, 1996 and commenced operations December 4, 1996, upon the transfer
by Bank of America National Trust & Savings Association (the "Bank") and Bank
of America NW, National Association ("BANW", formerly Seattle-First National
Bank) of their respective United States merchant processing businesses to BAMS
in consideration for 30.2 million shares of Class B Common Stock (the
"Reorganization"). Effective January 1, 1997, BANW was merged into the Bank.
The Bank is a wholly owned subsidiary of BankAmerica Corporation ("BAC").
References in the consolidated financial statements and these Notes to
Consolidated Financial Statements to "BAC" shall be deemed to be references to
BankAmerica Corporation and its subsidiaries and affiliates, including the
Bank and, prior to January 1, 1997, BANW. The Bank owns 100% of the Company's
Class B Common Stock.
BAC's transfer to BAMS of certain assets and liabilities of its United
States merchant processing businesses (net assets) was accounted for as a
reorganization of entities under common control and, accordingly, the transfer
of these net assets was accounted for at historical cost. Included in the
transfer of net assets was Seafirst Merchant Services, Inc., a wholly owned
subsidiary of BANW.
During December 1996, BAMS issued 16.1 million shares of Class A Common
Stock in underwritten initial public offerings (the "Offerings") which
generated gross cash proceeds of $249.6 million less the underwriters'
discount and expense totaling $16.7 million, resulting in net cash proceeds of
$232.9 million. In late December 1996, $126.3 million of the net proceeds were
used to pay down the outstanding balance on a revolving line of credit with an
affiliate. The borrowings had been used to finance operations between the
Reorganization and the Offerings.
In connection with the Reorganization, BAMS entered into a definitive
agreement with BAC to acquire its merchant processing businesses in Thailand
(the "Thailand Operations") and the Philippines and to work cooperatively to
allow BAMS to acquire BAC's merchant processing businesses in Taiwan and other
countries in Asia, subject to the approval of the local regulatory authorities
in each country. On June 2, 1997, BAMS acquired the Thailand Operations (net
assets of approximately $132,000) in consideration for the issuance by the
Company of 150,000 shares of Class B Common Stock. The acquisition of the
Thailand Operations was accounted for as a reorganization of entities under
common control and, accordingly, the transfer of net assets was accounted for
at historical cost. The accompanying consolidated financial statements include
the financial results of the Thailand Operations only since June 2, 1997.
Periods prior to June 2, 1997 have not been restated because the impact would
not be material to the consolidated financial statements.
BAMS provides an array of payment processing and related information
products and services to merchants throughout the United States and certain
Asian countries who accept credit, charge and debit cards as payment for goods
and services. BAMS is one of the largest processors of merchant debit and
credit card transactions in the United States.
NOTE 2--FINANCIAL STATEMENT PRESENTATION
The unaudited consolidated financial statements of BAMS and its subsidiary,
Seafirst Merchant Services, Inc., are prepared in conformity with generally
accepted accounting principles for interim financial information, the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of
management, all adjustments necessary for a fair presentation of the financial
position and results of operations for the periods presented have been
included. All such adjustments are of a normal recurring nature. These
unaudited financial statements should be read in conjunction with the audited
consolidated financial statements included in BAMS' Annual Report on Form 10-K
for the year ended December 31, 1996. Results for the interim periods should
not be considered indicative of results to be expected for the full year.
5
BA MERCHANT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accompanying consolidated financial statements have been prepared as if
BAMS had operated as a separate entity for all periods presented. The
Statements of Operations for the three and six month periods ended June 30,
1996 represent the combined historical results of operations of the United
States merchant processing businesses of BAC. Financial statements for periods
presented subsequent to the Reorganization include the consolidated results of
operations and assets and liabilities of the Company. For simplicity of
presentation, these financial statements are referred to herein as
Consolidated Financial Statements.
Prior to the Reorganization, changes in BAC's equity interest represented
net income of the Company adjusted for net cash transfers to and from BAC.
Additionally, the pre-Reorganization Consolidated Financial Statements include
allocations of certain assets (primarily property and equipment) and expenses
relating to the merchant processing businesses transferred from BAC.
Management believes these allocations are reasonable. Certain of the pre-
Reorganization expenses in the Consolidated Financial Statements are not
necessarily indicative of the costs that would have been incurred if the
Company had performed these functions as a stand-alone entity. Therefore,
prior to the Reorganization, the Consolidated Financial Statements may not
necessarily reflect the Company's consolidated results of operations, changes
in equity and cash flows as they would have been had the Company been a
separate, stand-alone entity during the periods presented. Subsequent to the
Reorganization, the Company performed these functions using its own resources
and purchased services (from BAC and other companies) and was responsible for
the costs and expenses associated with the management of a stand-alone entity.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
NOTE 3--INCOME TAXES
The following is a summary of the components of income tax expense:
THREE MONTHS
ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
------------- --------------
1997 1996 1997 1996
------ ------ ------- ------
(DOLLAR AMOUNTS IN
THOUSANDS)
Provision for income taxes:
Federal.................................... $4,754 $3,517 $ 8,693 $6,609
State...................................... 1,384 1,060 2,531 1,933
------ ------ ------- ------
Total.................................... $6,138 $4,577 $11,224 $8,602
====== ====== ======= ======
BAMS' estimated annual effective income tax rate for the three and six month
periods ended June 30, 1997 and 1996 was 41.3%. This rate is higher than the
federal statutory tax rate of 35% due principally to state income taxes.
Income taxes payable to BAC were $2.8 million at June 30, 1997 and $3.2
million at December 31, 1996.
6
BA MERCHANT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--EARNINGS PER COMMON SHARE
Historical earnings per share have not been presented for the three and six
month periods ended June 30, 1996 since the Company had no outstanding stock as
of that date and such information would not be meaningful. Pro forma earnings
per share for the three and six month periods ended June 30, 1996 are listed
below and have been computed by dividing net income by the weighted average
number of common shares outstanding assuming the stock issued in the
Reorganization and Offerings had been outstanding since January 1, 1994.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
1997 1996 1997 1996
------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT
EARNINGS
PER SHARE DATA)
Net income................................ $ 8,713 $ 6,503 $15,933 $12,224
Average number of shares outstanding...... 46,687 N/A 46,687 N/A
Pro forma average number of shares
outstanding.............................. N/A 46,300 N/A 46,300
Earnings per share........................ $ .19 N/A $ .34 N/A
Pro forma earnings per share.............. N/A $ .14 N/A $ .26
Pro forma earnings per share, as adjusted
(a)...................................... N/A $ .16 N/A $ .31
- --------
(a) Pro forma earnings per share, as adjusted, assumes that proceeds from the
Offerings in the fourth quarter of 1996 were available from January 1, 1994
and were invested in short-term investments.
NOTE 5--CHANGES IN EARNINGS PER SHARE CALCULATIONS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"), which is effective for periods ending after December 15, 1997. BAMS
expects to adopt SFAS No. 128 in the fourth quarter of 1997. Upon the adoption,
BAMS will be required to change the method currently used to compute earnings
per share and to restate all prior periods presented. SFAS No. 128 eliminates
"primary" earnings per share and earnings per share, assuming full dilution,
and requires only "basic" and "diluted" earnings per share. As a result, under
the new requirements, BAMS' computation of earnings per common and common
equivalent share will be replaced by earnings per common share which excludes
any dilutive effects of outstanding stock options and warrants. Also, BAMS'
computation of earnings per common share, assuming full dilution, will be
replaced with diluted earnings per share and will be based on the average
market price of the Class A Common Stock for the period. There is no impact
expected in connection with the adoption of SFAS No. 128 for the three and six
month periods ended June 30, 1997.
NOTE 6--RELATED PARTIES
The Company and BAC engage in various intercompany transactions and
arrangements including the provision by BAC of various services to the Company.
Such services are currently provided pursuant to various intercompany
agreements which, among other things, grant to the Company a license to use the
Bank of America name and certain trademarks and service marks in connection
with the Company's business.
Additional services provided under the intercompany agreements include
product distribution services, direct access processing services, direct access
marketing services, system support services, association and network
sponsorship and representation in the credit card associations,
telecommunications services, tax and treasury services, regulatory and
compliance, legal, accounting and audit services and other miscellaneous
support and administrative services.
7
BA MERCHANT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company believes that the cost of services provided under the
intercompany arrangements are not materially different from the costs that
would have been incurred if the Company were unaffiliated with BAC.
NOTE 7--SUBSEQUENT EVENTS
On July 1, 1997, BAMS acquired BAC's merchant processing business in the
Philippines (net assets of approximately $263,000) in consideration for the
issuance by BAMS of 550,000 shares of Class B Common Stock. Based on levels of
sales volume processed, the Philippines and Thailand (see Note 1) merchant
processing businesses represent approximately one percent of BAMS' volume as
of June 30, 1997. Unaudited pro forma financial information is not presented
for the Philippines acquisition as the impact thereof would not be material to
the Consolidated Financial Statements.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
HIGHLIGHTS
Sales processed by BA Merchant Services, Inc. ("BAMS" or the "Company") for
the first six months of 1997 were up $2.9 billion or 25 percent over the same
period last year and reflect the expansion of internal sales staff. During the
six month period ended June 30, 1997, BAMS opened sales offices in Orlando,
Florida; Atlanta, Georgia; Philadelphia, Pennsylvania; and Boston,
Massachusetts. Additionally, BAMS now has a sales presence in Colorado,
Nebraska and Oklahoma.
BAMS completed the acquisition of two Asian merchant processing businesses
of BankAmerica Corporation ("BAC"). The BAC Thailand and Philippines merchant
processing businesses were acquired on June 2 and July 1, 1997, respectively,
in consideration for the issuance by BAMS of a total of 700,000 shares of
Class B Common Stock. See Notes 1 and 7 to the Consolidated Financial
Statements for a more detailed description of these transactions. These
acquisitions provide BAMS an entry into selected Asian markets which BAMS
believes to have potential for significant future growth. Based on levels of
sales volume processed, these two businesses represent approximately one
percent of BAMS' volume as of June 30, 1997.
During the second quarter of 1997, the Company successfully converted and
integrated its Northwest operations acquired from Bank of America NW, National
Association ("BANW") into its primary merchant accounting system in San
Francisco. With one merchant accounting system for merchants in the United
States, BAMS expects to reduce costs by eliminating duplicate back office
operations and computer systems and restructuring certain customer service
functions.
The Company substantially completed the conversion of United States
merchants from its old transaction processing system to its new advanced
transaction processing system called Hostlink(TM) during the second quarter.
The new system is expected to allow the Company to reduce its dependence on
third party vendors and reduce incremental costs of processing new merchants.
RESULTS OF OPERATIONS
Second Quarter Review
Net Revenue--For the three-month period ended June 30, 1997, net revenue was
$36.0 million, up $4.5 million, or 14 percent over the three-month period
ended June 30, 1996. This increase was primarily attributable to a
$1.6 billion or 26 percent increase in sales volume processed over the
comparable prior year quarter. Increased sales volume resulted primarily from
growth in the Company's merchant base through continued emphasis on marketing
and sales growth, including expansion in new sales territories, such as New
York and Chicago. The growth rate in net revenue was lower than that for sales
volume processed primarily as a result of greater sales volume growth in lower
spread business (debit card and high volume merchants) and to a lesser degree,
declining spreads in existing business consistent with historical competitive
trends in the merchant processing industry.
Operating Expense--Total operating expense was $23.7 million for the second
quarter of 1997, an increase of $3.3 million, or 16 percent over the same
period a year ago. This increase was primarily attributable to a 25 percent
($1.6 million) increase in salaries and employee benefits, reflecting growth
in direct sales staff and related support personnel, and a 17 percent ($1.2
million) increase in data processing and communications expense due to
increased authorization expense and data processing contract services related
to growth in transaction volume.
Six Month Review
Net Revenue--Net revenue was $68.9 million for the first six months of 1997,
up 15 percent over the 1996 comparable period. Sales volume processed for the
six months ended June 30, 1997 was $14.3 billion, an increase of $2.9 billion
or 25 percent over the first six months of 1996. The net revenue percentage
growth rate was lower than the sales volume processed growth rate for the same
reasons discussed above.
9
Operating Expense--Total operating expense for the first six months of 1997
increased 19 percent over the 1996 comparable period. On the same comparative
basis, salaries and employee benefits increased 25 percent and data processing
and communications increased 15 percent for the same reasons discussed for the
second quarter. General and administrative expense for the 1997 six month
period increased 21 percent over the comparable 1996 period, due to: (1)
increased merchant supplies expense from increased sales volume processed,
(2) increased administrative expense associated with being an independent
company (including insurance, accounting and financial reporting expense) and
(3) a one-time expense associated with the startup cost of a new merchant.
BALANCE SHEET REVIEW
The Company's assets totaled $351.1 million as of June 30, 1997, up $64.4
million from December 31, 1996. The increase was primarily due to increases in
cash and cash equivalents and short-term investments ($101.7 million) and
accounts receivable ($10.4 million), partially offset by a $59.5 million
decrease in drafts in transit. Total liabilities at June 30, 1997 amounted to
$82.7 million, up $48.1 million from December 31, 1996 primarily as a result
of a $40.4 million increase in merchants payable.
The balances in cash and cash equivalents, short-term investments, drafts in
transit and merchants payable can fluctuate greatly depending on the day of
the week in which the reporting period ends. The timing of payments received
from credit card associations and debit card networks, remittances to
merchants and weekend processing influence these balances. While the
individual balances in these accounts at June 30, 1997 were significantly
different from the balances at December 31, 1996, the net total of these
combined accounts was $213.9 million at June 30, 1997, versus $212.1 million
at December 31, 1996. The increase in accounts receivable was due to the
integration of BAMS' Northwest operations into its primary merchant accounting
system in San Francisco which shifted the collection of discount fees from the
last day of the month to the first few days of the next month.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated net cash from operating activities of $107.6 million
and $6.8 million for the six month periods ended June 30, 1997 and 1996,
respectively. The increase for the 1997 period was primarily related to the
$59.5 million decrease in drafts in transit and the $40.4 million increase in
merchants payable as described above. Prior to the time BAC transferred its
merchant processing businesses to the Company in the fourth quarter of 1996,
funds generated by the Company's operations and not used for investments were
remitted to BAC.
Working capital improved by $10.8 million to $242.5 million at June 30,
1997. Average cash and cash equivalent and short-term investment balances were
$168.8 million during the six months ended June 30, 1997. The Company
anticipates utilizing these balances for funding the daily cash needs of the
business as well as for acquisitions, strategic technology investments and the
funding of research and product development.
The Company has a commitment for a $70 million revolving line of credit with
an affiliate. The commitment was not utilized as of June 30, 1997.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, usually containing the
words "estimate", "project", "expect" or similar expressions. These statements
are subject to uncertainties, including those discussed in this report and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations--"Forward-Looking Statements" in BAMS' Annual Report on Form 10-K
for the year ended December 31, 1996, that could cause actual results to
differ materially. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
10
PART II
OTHER INFORMATION
ITEM 2(C). CHANGES IN SECURITIES: EQUITY SECURITIES SOLD THAT WERE NOT
REGISTERED UNDER THE SECURITIES ACT
During the second quarter of 1997, BAMS issued shares of Class B Common
Stock to BAC in exchange for the Thailand merchant processing business of BAC.
After June 30, 1997, BAMS issued additional shares of Class B Common Stock to
BAC in exchange for the Philippines merchant processing business of BAC.
Each share of Class B Common Stock is convertible into one share of Class A
Common Stock at the holder's option. Details regarding the conversion features
are contained in BAMS' 1996 Annual Report on Form 10-K, Part II, Item 5 and
are incorporated herein by reference.
Thailand Acquisition: On June 2, 1997, BAMS issued 150,000 shares of Class
Common Stock to BAC in exchange for BAC's merchant processing operations in
Thailand. No underwriter was involved in the transaction. The transaction was
exempt from registration under Section 4 (2) of the Securities Act of 1933,
because it was a transaction of the issuer not involving any public offering.
Philippines Acquisition: On July 1, 1997, BAMS issued 550,000 shares of
Class B Common Stock to BAC in exchange for BAC's merchant processing
operations in the Philippines. No underwriter was involved in the transaction.
The transaction was exempt from registration under Section 4 (2) of the
Securities Act of 1933, because it was a transaction of the issuer not
involving any public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Set forth below is information concerning each matter submitted to a vote at
the Annual Meeting of Stockholders on May 28, 1997 ("Annual Meeting"):
Directors: Each of the following persons was elected as a director of BAMS,
to hold office until the 1998 Annual Meeting of Stockholders or until earlier
retirement, resignation or removal.
NUMBER OF VOTES
--------------------
DIRECTOR'S NAME FOR WITHHELD
--------------- ----------- --------
Sharif M. Bayyari.................................. 313,205,650 89,450
Barbara J. Desoer.................................. 313,202,050 93,050
Donald R. Dixon.................................... 313,265,000 30,100
William E. Fisher.................................. 313,265,100 30,000
James G. Jones..................................... 313,261,500 33,600
H. Eugene Lockhart................................. 313,204,050 91,050
Thomas E. Peterson................................. 313,203,950 91,150
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Long-Term Incentive Plan: The stockholders approved the adoption of the BA
Merchant Services, Inc. Long-Term Incentive Plan.
NUMBER OF VOTES
-------------------------------------------
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
----------- --------- ----------- ---------
Long-Term Incentive Plan........ 307,986,180 3,665,525 15,297 1,628,098
Short-Term Incentive Plan: The stockholders approved the adoption of the BA
Merchant Services, Inc. Short-Term Incentive Plan.
NUMBER OF VOTES
-------------------------------------------
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
----------- --------- ----------- ---------
Short-Term Incentive Plan....... 312,631,963 648,790 14,347 0
Auditors: The shareholders ratified the appointment of Ernst & Young LLP,
Certified Public Accountants, as independent auditors of the Company for 1997.
NUMBER OF VOTES
-------------------------------------------
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
----------- --------- ----------- ---------
Ernst & Young LLP as Independent
Auditors....................... 313,281,503 3,900 9,697 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.b BA Merchant Services, Inc. Bylaws, as amended. Article II, Section 13
and Article II, Section 14 were amended, effective May 28, 1997.
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarterly period
ended June 30, 1997.
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EXHIBIT INDEX
EXHIBIT
REFERENCE DESCRIPTION
--------- -----------
3.b BA Merchant Services, Inc. Bylaws, as amended. Article II, Section
13 and Article II, Section 14 were amended, effective May 28, 1997.
27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BA MERCHANT SERVICES, INC.
(Registrant)
By Principal Executive Officer and
Duly Authorized Signatory:
/s/ Sharif M. Bayyari
_____________________________________
SHARIF M. BAYYARI
President and Chief Executive
Officer
August 13, 1997
By Principal Financial Officer and
Duly Authorized Signatory:
/s/ James H. Williams
_____________________________________
JAMES H. WILLIAMS
Executive Vice President, Chief
Financial Officer and Chief
Accounting Officer
August 13, 1997
14