SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-12365
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER:
BA Merchant Services, Inc.
STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION:
Delaware
I.R.S. EMPLOYER IDENTIFICATION NUMBER:
94-3252840
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
One South Van Ness Avenue
San Francisco, California 94103
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
415-241-3390
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 -- 16,253,092 outstanding on September
30, 1997
Class B Common Stock, $0.01 par value -- 32,400,000 outstanding on September
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.
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........................................ 11
PART II OTHER INFORMATION
Item 2 (c).Changes in Securities: Equity Securities Sold That Were Not
Registered Under the Securities Act.............................. 12
Item 6. Exhibits and Reports on Form-8-K.................................... 12
Signatures.......................................................... 13
Exhibit Index....................................................... 14
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BA MERCHANT SERVICES, INC.
CONSOLIDATED BALANCE SHEET
UNAUDITED
(DOLLAR AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 55,186 $138,413
Short-term investments............................ 71,214 --
Drafts in transit................................. 93,237 116,992
Accounts receivable............................... 51,984 35,282
Other current assets.............................. 12,515 5,038
-------- --------
Total current assets............................ 284,136 295,725
Property and equipment, net......................... 23,555 18,567
Other assets........................................ 16,020 3,969
-------- --------
Total assets...................................... $323,711 $318,261
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 2,604 $ 415
Merchants payable................................. 8,538 16,823
Accrued liabilities............................... 7,062 5,784
Accrued credit card association and interchange
fees............................................. 8,692 5,060
Income taxes payable.............................. 4,127 3,306
Other current liabilities......................... 11,324 6,596
-------- --------
Total current liabilities....................... 42,347 37,984
Other liabilities................................... 891 269
-------- --------
Total liabilities................................. 43,238 38,253
-------- --------
BAC's equity interest in Asia merchant processing
operations......................................... -- 27,883
-------- --------
Stockholders' equity:
Class A Common Stock, par value $0.01 (authorized
200,000,000 shares; issued and outstanding
16,253,092 shares)................................. 162 162
Class B Common Stock, par value $0.01 (authorized
50,000,000 shares; issued and outstanding
32,400,000 shares at September 30, 1997 and
30,200,000 at December 31, 1996)................... 324 302
Additional paid-in capital.......................... 252,398 249,622
Retained earnings................................... 27,825 2,039
Accumulated foreign currency translation adjust-
ments.............................................. (236) --
-------- --------
Total stockholders' equity........................ 280,473 252,125
-------- --------
Total liabilities and stockholders' equity........ $323,711 $318,261
======== ========
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 ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1996 1997 1996
--------- --------- -------- --------
Net revenue............................ $ 41,192 $ 35,444 $116,043 $100,677
--------- --------- -------- --------
Operating expense (Note 5):
Salaries and employee benefits....... 8,703 7,042 25,209 20,333
Data processing and communications... 8,332 7,517 24,315 21,425
General and administrative........... 5,343 5,939 16,042 14,641
Depreciation......................... 2,869 2,370 7,882 6,624
Occupancy............................ 762 586 2,279 1,733
Amortization of intangibles.......... 106 250 327 820
--------- --------- -------- --------
Total operating expense............ 26,115 23,704 76,054 65,576
--------- --------- -------- --------
Income from operations................. 15,077 11,740 39,989 35,101
Net interest income (expense).......... 2,059 (254) 5,811 (815)
--------- --------- -------- --------
Income before income taxes............. 17,136 11,486 45,800 34,286
Provision for income taxes............. 7,082 4,744 18,930 14,160
--------- --------- -------- --------
Net income......................... $ 10,054 $ 6,742 $ 26,870 $ 20,126
========= ========= ======== ========
Earnings per common and common equiva-
lent share............................ $ 0.21 N/A $ 0.55 N/A
Earnings per common share-assuming full
dilution.............................. $ 0.21 N/A $ 0.55 N/A
See Notes to Consolidated Financial Statements.
2
BA MERCHANT SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 26,870 $ 20,126
Adjustments to net income to arrive at cash provided by
operating activities:
Depreciation........................................... 7,882 6,624
Amortization of intangibles............................ 327 820
Provision for (benefit from) deferred income taxes..... (1,051) 173
Amortization of restricted stock....................... 479 --
Amortization of loan fees.............................. 254 --
Changes in operating assets and liabilities:
(Increase) decrease in drafts in transit............. 23,755 (11,607)
(Increase) in accounts receivable.................... (16,702) (4,402)
(Increase) in other current assets................... (7,477) (2,176)
Increase (decrease) in accounts payable.............. 2,189 (1,883)
Increase in current income taxes payable............. 821 53
Increase (decrease) in merchants payable............. (8,285) 3,417
Increase (decrease) in accrued liabilities........... 1,278 (153)
Increase in accrued credit card association and in-
terchange fees...................................... 3,632 1,940
Other, net........................................... 4,769 3,780
--------- --------
Net cash provided by operating activities.......... 38,741 16,712
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....................... (12,870) (10,455)
Purchase of short-term investments....................... (71,214) --
Acquisition of portfolio of merchant processing con-
tracts.................................................. (11,000) --
--------- --------
Net cash used for investing activities............. (95,084) (10,455)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in underwriting expense......................... (165) --
BAC's change in funding.................................. (26,483) (6,653)
--------- --------
Net cash used for financing activities............. (26,648) (6,653)
--------- --------
EXCHANGE RATE EFFECT ON CASH............................. (236) --
--------- --------
Decrease in cash and cash equivalents.................... (83,227) (396)
Cash and cash equivalents at beginning of period......... 138,413 405
--------- --------
Cash and cash equivalents at end of period............... $ 55,186 $ 9
========= ========
CASH PAID DURING THE PERIOD FOR:
Income taxes........................................... $ 19,160 $ 13,934
========= ========
See Notes to Consolidated Financial Statements.
3
BA MERCHANT SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1997 1996
--------- ---------
CLASS A COMMON STOCK:
Balance at beginning of period........................... $ 162 $ --
Issuance of additional stock............................. -- --
--------- ---------
Balance at end of period................................ 162 --
CLASS B COMMON STOCK:
Balance at beginning of period........................... 302 --
Issuance of additional stock............................. 22 --
--------- ---------
Balance at end of period................................. 324 --
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period........................... 249,622 --
Amortization of unvested portion of restricted stock..... 479 --
Additional underwriting expenses......................... (165) --
Issuance of additional stock............................. 2,462 --
--------- ---------
Balance at end of period................................ 252,398 --
CUMULATIVE FOREIGN CURRENCY TRANSALTION ADJUSTMENT:
Balance at beginning of period........................... -- --
Translation adjustments.................................. (236) --
--------- ---------
Balance at end of period................................ (236) --
RETAINED EARNINGS:
Balance at beginning of period........................... 2,039 --
Net income............................................... 25,786 --
--------- ---------
Balance at end of period................................ 27,825 --
BAC'S EQUITY INTERST:
Balance at beginning of period........................... 27,883 122,821
Net income............................................... 1,084 20,126
Transfer of net assets from BAC in exchange for Class B
Common Stock............................................ (2,484) --
BAC's change in funding.................................. (26,483) (6,653)
--------- ---------
Balance at end of period................................ -- 136,294
--------- ---------
Total stockholders' equity end of period.............. $ 280,473 $ 136,294
========= =========
See Notes to Consolidated Financial Statements.
4
BA MERCHANT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION
Description of Business--BA Merchant Services, Inc. ("BAMS" or the
"Company") 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.
Organization and Domestic Operations--BAMS 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 to "BAC" in the Consolidated Financial Statements and notes thereto
shall be deemed to be references to BankAmerica Corporation and its
subsidiaries and affiliates, including the Bank and, prior to January 1, 1997,
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.
Asian Operations--On June 2, 1997, BAMS acquired BAC's merchant processing
business in Thailand (net assets of approximately $91,000) in consideration
for 150,000 shares of Class B Common Stock. On July 1, 1997, BAMS acquired
BAC's merchant processing business in the Philippines (net assets of
approximately $182,000) in consideration for 550,000 shares of Class B Common
Stock. On September 30, 1997, BAMS acquired BAC's merchant processing business
in Taiwan and merchant processing administrative office in Hong Kong (net
assets of approximately $2.2 million) in consideration for 1,500,000 shares of
Class B Common Stock. The acquisition of these entities will be collectively
referred to as the "Asia Acquisitions". With the issuance by BAMS of
additional shares of Class B Common Stock to BAC in connection with the Asia
Acquisitions, BAC's financial interest in BAMS increased from 65.0% to 66.6%.
Basis of 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.
BAC's transfer to BAMS of certain assets and liabilities of its United
States and certain Asian 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 in a manner similar to a pooling of interests. Included in the transfer
of net assets was Seafirst Merchant Services, Inc., a wholly owned subsidiary
of BANW. The accompanying financial statements have been prepared as if the
Company had operated as a separate entity for all periods presented. The
financial statements include the combined historical results of operations,
assets and liabilities of the U.S. merchant processing businesses of BAC for
all periods prior to the
5
BA MERCHANT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reorganization. The financial statements also include the combined historical
results of operations, assets and liabilities of BAC's merchant processing
businesses in Thailand, the Philippines, Taiwan and the merchant processing
administrative office in Hong Kong for all periods prior to the Asia
Acquisitions. For simplicity of presentation, these financial statements are
referred to herein as Consolidated Financial Statements.
Prior to the respective dates of the Asia Acquisitions and the
Reorganization, changes in BAC's equity interest represented net income of the
Company adjusted for net cash transfers to and from BAC. Additionally, prior
to these dates, the 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-Asia Acquisition and 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 respective dates of the Asia
Acquisitions and 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
these dates, the Company performed these functions using its own resources and
purchased services (from BAC and other companies) and was responsible for the
cost and expenses associated with the management of a stand-alone entity.
NOTE 2--INCOME TAXES
The following is a summary of the components of income tax expense:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1996 1997 1996
--------- --------- -------- --------
Provision for income taxes:
Federal............................. $ 5,208 $ 3,453 $ 13,931 $ 10,116
State............................... 1,597 1,099 4,269 3,281
Foreign............................. 277 192 730 763
--------- --------- -------- --------
Total............................. $ 7,082 $ 4,744 $ 18,930 $ 14,160
========= ========= ======== ========
BAMS'estimated annual effective income tax rate for the three and nine month
periods ended September 30, 1997 and 1996 was 41.3%. This rate is higher than
the federal statutory tax rate of 35% due principally to state and foreign
income taxes. Income taxes payable to BAC were $1.9 million at September 30,
1997 and $3.3 million at December 31, 1996.
NOTE 3--EARNINGS PER COMMON SHARE
Historical earnings per share have not been presented for the three and nine
month periods ended September 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 nine month periods ended September 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, Asia Acquisitions and Offerings had been outstanding
since January 1, 1994.
6
BA MERCHANT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1996 1997 1996
--------- --------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT
EARNINGS
PER SHARE DATA)
Net income............................. $ 10,054 $ 6,742 $ 26,870 $ 20,126
Average number of shares outstanding... 48,649 N/A 48,641 N/A
Pro forma average number of shares out-
standing.............................. N/A 48,500 N/A 48,500
Earnings per share..................... $ .21 N/A $ .55 N/A
Pro forma earnings per share........... N/A $ .14 N/A $ .41
Pro forma earnings per share, as ad-
justed (a)............................ N/A $ .16 N/A .48
- --------
(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 4--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 nine
month periods ended September 30, 1997.
NOTE 5--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.
The Company believes that the cost of services provided under the
intercompany arrangements have not been materially different from the costs
that would have been incurred if the Company were unaffiliated with BAC.
7
BA MERCHANT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--ACQUISITION OF PORTFOLIO OF MERCHANT PROCESSING CONTRACTS
On September 25, 1997, the Company acquired a portfolio of approximately
4,200 merchant processing contracts from First Data Merchant Services
Corporation ("FDMSC"), a unit of First Data Corporation. The portfolio
currently produces more than $850 million in credit card sales volume on an
annualized basis. Under the terms of the purchase agreement, the Company will
receive revenues attributable to the portfolio effective October 1, 1997.
The Company made an initial payment of $11.0 million to FDMSC in September
1997 which has been included in other assets on the Consolidated Balance Sheet
as of September 30, 1997. The remainder of the purchase price will be
determined and paid in the fourth quarter of 1997. The total purchase price
will be amortized over ten years on a straight-line basis beginning October 1,
1997.
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 nine months of 1997 were $24.1 billion or 26 percent higher than the
same period last year and reflect the results generated by an expansion of
internal sales staff. During the nine month period ended September 30, 1997,
BAMS opened eight new sales offices and increased its sales staff by
approximately 45 percent.
On September 30, 1997, BAMS acquired the merchant processing business in
Taiwan and merchant processing administrative office in Hong Kong of
BankAmerica Corporation ("BAC") in consideration for 1,500,000 shares of BAMS'
Class B Common Stock. Together with BAC's Thailand and Philippines merchant
processing businesses acquired on June 2, and July 1, 1997, respectively,
(collectively the "Asia Acquisitions"), BAMS is now positioned to capitalize on
BAC's long history and customer relationships in these growth markets. See Note
1 of the Notes to the Consolidated Financial Statements for a more detailed
description of these transactions. Based on the levels of sales volume
processed, these three businesses represent approximately five percent of BAMS'
volume for the three months ended September 30, 1997.
On September 25, 1997, BAMS acquired a portfolio of approximately 4,200
merchant processing contracts from First Data Merchant Services Corporation, a
unit of First Data Corporation. The portfolio currently produces more than $850
million in credit card sales volume on an annualized basis. See Note 6 of the
Notes to Consolidated Financial Statements for a more detailed description of
this transaction.
RESULTS OF OPERATIONS
THIRD QUARTER REVIEW
Net Revenue--For the three month period ended September 30, 1997, net revenue
was $41.2 million, up $5.7 million, or 16 percent over the three month period
ended September 30, 1996. This increase was primarily attributable to a $1.9
billion or 27 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 into new sales territories. 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 $26.1 million for the third
quarter of 1997, an increase of $2.4 million, or 10 percent over the same
period a year ago. On the same comparative basis, salaries and employee
benefits increased $1.7 million or 24 percent, reflecting growth in direct
sales staff and related support personnel. Data processing and communications
expense increased $815,000 or 11 percent due to increased authorization expense
and data processing contract services related to growth in transaction volume.
These increases were offset by a $596,000 or 10 percent decrease in general and
administrative expense. General and administrative expense decreased as a
result of reduced usage and lower cost of services provided by BAC affiliates
during 1997 partially offset by higher merchant supplies expense related to
increased sales volume processed and increased administrative expense
associated with being an independent company, including insurance, accounting
and financial reporting expense.
BAMS' operating expense for the third quarter of 1997 and for several
preceding quarters has included charges incurred in connection with making its
computer systems year 2000 compliant. BAMS expects to continue incurring
charges related to this project through the year 2000, however, none of these
costs are expected to materially impact its results of operations in any one
period.
9
NINE MONTH REVIEW
Net Revenue--Net revenue was $116.0 million for the first nine months of
1997, up 15 percent over the 1996 comparable period. Sales volume processed
for the nine months ended September 30, 1997 was $24.1 billion, an increase of
$5.0 billion or 26 percent over the first nine months of 1996. The net revenue
percentage growth rate was lower than the sales volume processed growth rate
for the same reasons discussed above for the third quarter.
Operating Expense--Total operating expense for the first nine months of 1997
increased 16 percent over the 1996 comparable period. On the same comparative
basis, salaries and employee benefits increased 24 percent and data processing
and communications increased 13 percent for the same reasons discussed for the
third quarter. General and administrative expense for the 1997 nine month
period increased 10 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
and (3) a one-time expense associated with the startup cost of a new merchant.
These expenses were partially offset by reduced usage and lower cost of
services provided by BAC affiliates during 1997.
BALANCE SHEET REVIEW
The Company's assets totaled $323.7 million as of September 30, 1997, up
$5.5 million from December 31, 1996. 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 September
30, 1997 were significantly different from the balances at December 31, 1996,
the net total of these combined accounts was $211.1 million at September 30,
1997, versus $238.6 million at December 31, 1996.
The $16.7 million increase in accounts receivable since December 31, 1996,
was primarily due to the integration of BAMS' Northwest operations into its
primary merchant accounting system in San Francisco which shifted the
collection of the Northwest operations' discount fees from the last day of the
month to the first few days of the next month. Other assets increased $12.1
million over the December 31, 1996 level due to the $11.0 million initial
payment related to the acquisition of the portfolio of merchant processing
contracts described in Note 6 of the Notes to Consolidated Financial
Statements. BAC's equity interest of $27.9 million at the beginning of 1997
represents its interest in the net assets of the Asian merchant processing
businesses.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated net cash from operating activities of $38.7 million
and $16.7 million for the nine month periods ended September 30, 1997 and
1996, respectively. The increase for the 1997 period was primarily related to
net income adjusted for non-cash depreciation and amortization of $35.8
million, plus a $23.8 million decrease in drafts in transit, offset by
increases in accounts receivable ($16.7 million) and other current assets
($7.5 million) and a decrease in merchants payable ($8.3 million). Prior to
the time BAC transferred its merchant processing businesses to the Company,
funds generated by the Company's operations and not used for investments were
remitted to BAC.
Working capital decreased by $16.0 million to $241.8 million at September
30, 1997. Average cash and cash equivalent and short-term investment balances
were $165.3 million during the nine months ended September 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 expiring December 31, 1997. The commitment was not utilized as of
September 30, 1997.
10
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.
11
PART II OTHER INFORMATION
ITEM 2(C). CHANGES IN SECURITIES: EQUITY SECURITIES SOLD THAT WERE NOT
REGISTERED UNDER THE SECURITIES ACT
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.
Taiwan Acquisition: On September 30, 1997, BAMS issued 1,500,000 shares of
Class B Common Stock to BAC in exchange for BAC's merchant processing
operations in Taiwan and merchant processing administrative office in Hong
Kong. 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.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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 September 30, 1997.
12
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
November 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
November 13, 1997
13
EXHIBIT INDEX
EXHIBIT
REFERENCE DESCRIPTION
--------- -----------------------
27 Financial Data Schedule
14