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 June 30, 1998
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-- 16,264,253 outstanding on
June 30, 1998
Class B Common Stock, $0.01 par value-- 32,400,000 outstanding on
June 30, 1998
- -------------------------------------------------------------------------------
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, 1997, including the consolidated financial statements and
notes thereto.
INDEX
BA MERCHANT SERVICES, INC.
PAGE
----
PART I FINANCIAL INFORMATION
Item 1.Financial Statements:
Balance Sheet........................................................ 1
Statement of Operations.............................................. 2
Statement of Cash Flows.............................................. 3
Statement of Changes in Stockholders' Equity......................... 4
Notes to Financial Statements........................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Highlights........................................................... 8
Results of Operations................................................ 8
Balance Sheet Review................................................. 9
Liquidity and Capital Resources...................................... 10
Year 2000............................................................ 10
Forward-Looking Statements........................................... 11
PART II OTHER INFORMATION
Item 4.Submission of Matters to a Vote of Security Holders............... 12
Item 6.Exhibits and Reports on Form-8-K.................................. 13
Signatures........................................................... 14
Exhibit Index........................................................ 15
i
PART I
FINANCIAL INFORMATION
BA MERCHANT SERVICES, INC.
BALANCE SHEET
UNAUDITED
ITEM 1. FINANCIAL STATEMENTS
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............................. $ 75,262 $ 29,426
Short-term investments................................ 48,494 64,018
Drafts in transit..................................... 101,708 106,463
Accounts receivable................................... 65,350 63,461
Other current assets.................................. 7,691 11,533
-------- --------
Total current assets................................ 298,505 274,901
Property and equipment, net............................. 29,683 27,762
Other assets............................................ 22,625 25,422
-------- --------
Total assets.......................................... $350,813 $328,085
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 260 $ 32
Merchants payable..................................... 8,574 8,058
Accrued liabilities................................... 11,221 6,050
Accrued credit card association and interchange fees.. 8,449 9,192
Income taxes payable.................................. 4,657 3,459
Other current liabilities............................. 7,611 9,225
-------- --------
Total current liabilities........................... 40,772 36,016
Other liabilities....................................... 841 816
-------- --------
Total liabilities..................................... 41,613 36,832
-------- --------
Stockholders' equity:
Class A Common Stock, par value $0.01; authorized
200,000,000 shares;
issued and outstanding 16,264,253 shares at June 30,
1998 and 16,253,126
at December 31, 1997................................... 162 162
Class B Common Stock, par value $0.01; authorized
50,000,000 shares;
issued and outstanding 32,400,000 shares............... 324 324
Additional paid-in capital.............................. 252,693 252,479
Retained earnings....................................... 56,204 38,280
Accumulated foreign currency translation adjustments,
net of income taxes.................................... (183) 8
-------- --------
Total stockholders' equity............................ 309,200 291,253
-------- --------
Total liabilities and stockholders' equity............ $350,813 $328,085
======== ========
See Notes to Financial Statements.
1
BA MERCHANT SERVICES, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ---------------
1998 1997 1998 1997
------- ------- ------- -------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net revenue................................... $45,239 $38,882 $87,073 $74,851
------- ------- ------- -------
Operating expense:
Salaries and employee benefits.............. 10,464 8,447 19,915 16,506
Data processing and communications.......... 9,629 8,315 18,878 15,983
General and administrative.................. 7,324 5,977 13,567 12,216
Depreciation................................ 3,642 2,732 7,191 5,013
Amortization of intangibles................. 444 108 888 221
------- ------- ------- -------
Total operating expense................... 31,503 25,579 60,439 49,939
------- ------- ------- -------
Income from operations........................ 13,736 13,303 26,634 24,912
Net interest income........................... 1,900 2,228 3,746 3,752
------- ------- ------- -------
Income before income taxes................ 15,636 15,531 30,380 28,664
Provision for income taxes.................... 6,411 6,420 12,456 11,848
------- ------- ------- -------
Net income................................ $ 9,225 $ 9,111 $17,924 $16,816
======= ======= ======= =======
Earnings per common share..................... $ 0.19 $ 0.19 $ 0.37 $ 0.35
Diluted earnings per common share............. $ 0.19 $ 0.19 $ 0.37 $ 0.35
See Notes to Financial Statements.
2
BA MERCHANT SERVICES, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------
1998 1997
------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $17,924 $ 16,816
Adjustments to net income to arrive at cash provided by
operating activities:
Depreciation.............................................. 7,191 5,013
Amortization of intangibles............................... 888 221
Benefit from deferred income taxes........................ ( 880) (755)
Amortization of restricted stock.......................... 209 373
Amortization of loan fees................................. -- 169
Changes in operating assets and liabilities:
Decrease in drafts in transit........................... 4,755 63,540
Decrease in accounts receivable......................... (1,889) (10,437)
Decrease (increase) in other current assets............. 3,842 (7,865)
Increase in accounts payable............................ 228 326
Increase in current income taxes payable................ 1,198 1,015
Increase in merchants payable........................... 516 40,661
Increase in accrued liabilities......................... 5,171 896
(Decrease) increase in accrued credit card association
and interchange fees (743) 2,979
Other, net.............................................. 1,200 (1,765)
------- --------
Net cash provided by operating activities............. 39,610 111,187
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (9,112) (6,252)
Purchase of short-term investments.......................... (6,669) (21,571)
Maturities of short-term investments........................ 22,193 --
------- --------
Net cash provided by (used for) investing activities.. 6,412 (27,823)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in underwriting expense............................ -- (113)
Issuance of common stock.................................... 5 105
BAC's change in funding..................................... -- (3,244)
------- --------
Net cash used for financing activities................ 5 (3,252)
------- --------
EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS........... (191) 47
------- --------
Increase in cash and cash equivalents....................... 45,836 80,159
Cash and cash equivalents at beginning of period............ 29,426 138,413
------- --------
Cash and cash equivalents at end of period.................. $75,262 $218,572
======= ========
See Notes to Financial Statements.
3
BA MERCHANT SERVICES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
------------------
1998 1997
-------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
CLASS A COMMON STOCK:
Balance at beginning of period.............................. $ 162 $ 162
Issuance of additional stock................................ -- --
-------- --------
Balance at end of period.................................. 162 162
CLASS B COMMON STOCK:
Balance at beginning of period.............................. 324 302
Issuance of additional common stock......................... -- 2
-------- --------
Balance at end of period.................................. 324 304
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period.............................. 252,479 249,622
Amortization of unvested portion of restricted stock........ 209 373
Additional underwriting expenses............................ -- (113)
Issuance of additional common stock......................... 5 103
-------- --------
Balance at end of period.................................. 252,693 249,985
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT:
Balance at beginning of period.............................. 8 --
Translation adjustments..................................... (191) 47
-------- --------
Balance at end of period.................................. (183) 47
RETAINED EARNINGS:
Balance at beginning of period.............................. 38,280 2,039
Net income.................................................. 17,924 15,933
-------- --------
Balance at end of period.................................. 56,204 17,972
BAC'S EQUITY INTEREST:
Balance at beginning of period.............................. -- 27,883
Net income.................................................. -- 883
BAC's change in funding..................................... -- (3,244)
-------- --------
Balance at end of period.................................. -- 25,522
-------- --------
Total stockholders' equity end of period................ $309,200 $293,992
======== ========
See Notes to Financial Statements.
4
BA MERCHANT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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. 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 these
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 which generated net cash
proceeds of $232.9 million.
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 $153,000) 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%.
NationsBank Corporation Merger--On April 13, 1998, BAC and NationsBank
Corporation ("NBC") announced a definitive agreement to merge in a stock-for-
stock transaction. The merger, which is expected to close on September 30,
1998, is subject to shareholder and regulatory approvals and the satisfaction
or waiver of other conditions set forth in the merger agreement. For further
disclosure, see Management's Discussion and Analysis of Financial Condition
and Results of Operations "Highlights" on page 9.
Basis of Presentation--The unaudited financial statements of BAMS 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, 1997. 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. ("SMSI"), a wholly owned
subsidiary of BANW. SMSI was subsequently dissolved on December 29, 1997. The
accompanying
5
BA MERCHANT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 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.
Prior to the respective dates of the Asia Acquisitions, 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 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 expenses in the 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, the financial
statements may not necessarily reflect the Company's results of operations,
changes in equity and cash flows as they would have been had the Company owned
and operated the Asian operations. 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 the Asian operations.
NOTE 2--INCOME TAXES
The following is a summary of the components of income tax expense:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- ---------------
1998 1997 1998 1997
------ ------ ------- -------
Provision for income taxes:
Federal..................................... $4,816 $4,754 $ 9,357 $ 8,893
State....................................... 1,410 1,384 2,740 2,531
Foreign..................................... 185 282 359 424
------ ------ ------- -------
Total..................................... $6,411 $6,420 $12,456 $11,848
====== ====== ======= =======
The Company's estimated annual effective income tax rate for the 1998 and
1997 interim periods was 41.0% and 41.3%, respectively. These rates are higher
than the federal statutory tax rate of 35% due principally to state income
taxes.
NOTE 3--EARNINGS PER COMMON SHARE
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). Under the
new requirements, the Company's computation of earnings per common and common
equivalent share is replaced by earnings per common share, which excludes any
dilutive effect of stock options and warrants outstanding during the period.
Earnings per common share is computed by dividing net income applicable to
common stock by the average number of common shares outstanding during the
period.
Also, under SFAS No. 128, the Company's computation of earnings per common
and common equivalent share, assuming full dilution, is replaced with diluted
earnings per common share. Diluted earnings per common share is computed by
dividing net income applicable to common stock by the average number of common
shares
6
BA MERCHANT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
outstanding during the period including the dilutive effect of stock options
and warrants outstanding during the period. The dilutive effect of stock
options and warrants outstanding during the period is computed using the
average market price of the Company's common stock for the period.
Earnings per share for the three and six month periods ended June 30, 1997
has been computed by dividing net income by the weighted average number of
common shares outstanding assuming the stock issued in the Asia Acquisitions
had been outstanding since January 1, 1994. The earnings per common share
amount for each period presented below is the same as the diluted earnings per
common share amount presented for the respective period.
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ---------------
1998 1997 1998 1997
------- ------- ------- -------
(amounts in thousands, except earnings per
share data)
Net income.................................. $ 9,225 $ 9,111 $17,924 $16,816
Average number of common shares outstanding
and common stock equivalents............... 48,794 48,699 48,803 48,699
Diluted earnings per common share........... $ 0.19 $ 0.19 $ 0.37 $ 0.35
NOTE 4--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, processing, system support, telecommunications,
marketing, regulatory compliance, legal, tax and treasury, accounting and
audit 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 was unaffiliated with BAC.
NOTE 5--COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which
requires companies to report and display comprehensive income and its
components. The adoption of SFAS No. 130 did not have an impact on the
Company's financial position or results of operations as reported herein.
The following is a summary of the components of total comprehensive income,
net of related income taxes:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- ----------------
1998 1997 1998 1997
------ ------ ------- -------
Net income................................... $9,225 $9,111 $17,924 $16,816
Foreign currency translation adjustment...... (122) 47 (191) 47
------ ------ ------- -------
Total comprehensive income................. $9,103 $9,158 $17,733 $16,863
====== ====== ======= =======
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
HIGHLIGHTS
On April 13, 1998, BankAmerica Corporation (BAC) and NationsBank Corporation
(NBC) announced a definitive agreement to merge in a stock-for-stock
transaction. The merger, which is expected to close on September 30, 1998, is
subject to shareholder and regulatory approvals and the satisfaction or waiver
of other conditions set forth in the merger agreement. Under various
contractual arrangements with BAC (described on page 7 of the Company's Annual
Report on Form 10-K under "Relationship with BankAmerica and the Bank"), the
Company has access to BAC's client base, the Bank of America name and
trademarks, the implementation of On-Us transaction processing and marketing,
the Bank's distribution channels, and credit and debit card association and
network sponsorships. The Company is BAC's exclusive provider of merchant
processing services.
On May 29, 1998, the Company announced that BAC and NBC had jointly
determined that the Company will be the principal merchant processing servicer
for their combined organization following the merger. The combined BAC/NBC
franchise will have approximately 4,800 retail branches in twenty-two states,
an increase of approximately 3,000 retail branches from BAC alone. The Company
believes the opportunity to be the exclusive merchant acquirer for new
business with access to the NBC retail branch network will be a significant
source of revenue growth for the Company. However, the Company can not
estimate the impact this may have on its financial position or results of
operation at this time. NBC currently offers merchant processing services
through a minority-owned interest in a venture with another merchant
processing provider. NBC will seek to renegotiate this existing venture
relationship in order to assure that there is a single provider of merchant
processing services for the combined organization. The negotiations will
determine whether all or any portion of NBC's interest in the existing
merchant portfolio could be acquired by the Company. At this time, the Company
cannot determine the outcome of the negotiations or what impact the
negotiations would have on its financial position or results of operations.
On July 9, 1998, the Company entered into an agreement to invest in a new
limited liability company ("LLC") with First Data Financial Services, LLC and
Global Cash Access ("Global"). The joint venture will provide cash advance and
related services, as described below, to the gaming business. The proposed
investment is subject to regulatory approval. In the event the investment is
approved, the Company will invest cash, in addition to its interest in
existing gaming contracts and gaming-related assets, for a 21 percent
ownership in the LLC. In the event regulatory approval is not given for the
investment, the Company will sell its interest in the gaming contracts and
fixed assets for a price to be negotiated. At this time, the Company cannot
estimate the impact the proposed joint venture may have on the Company's
financial position or results of operations. The LLC will provide the
following services in gaming areas and to gaming establishments and/or patrons
at gaming establishments: (a) credit and debit cash card advance services, (b)
ATM services, (c) development and operation of a cashless gaming system for
use in slot machines and similar gaming devices by gaming patrons, (d) check
verification and guarantee services at gaming establishments, (e) operations
of financial services booths located on the premises of gaming establishments,
and (f) single system financial services authorization platforms to be
utilized by gaming establishments.
RESULTS OF OPERATIONS
SECOND QUARTER REVIEW
Net Revenue--For the three month period ended June 30, 1998, net revenue was
$45.2 million, up $6.4 million, or 16 percent over the three month period
ended June 30, 1997. The increase was primarily attributable to a $2.0 billion
or 25 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.
8
Operating Expense--Total operating expense was $31.5 million for the second
quarter of 1998, an increase of $5.9 million, or 23 percent over the same
period a year ago. On the same comparative basis, salaries and employee
benefits increased $2.0 million or 24 percent, reflecting growth in direct
sales staff and related support personnel. Data processing and communications
expense increased $1.3 million, or 16 percent. This increase was primarily
related to higher authorization expense and data processing contract services
related to growth in transaction volume, net of reductions in other data
processing costs as a result of the conversion of United States merchants from
the old transaction processing system to HostLINK(TM) during the second
quarter of 1997. General and administrative expense increased $1.3 million, or
23 percent. The increase was attributable to a loss on one merchant along with
increased losses and reserves related to higher than usual backlogs in
chargeback processing. Depreciation expense increased $0.9 million or 33
percent primarily due to the acquisition of merchant processing terminals
required for the Company's expanded merchant base and secondarily due to the
impact of the installation of HostLINK(TM) during the second quarter of 1997.
Amortization of intangibles increased $0.3 million related to amortization of
the portfolio of merchant processing contracts acquired in September 1997.
Net Income--The Company earned net income of $9.2 million for the second
quarter of 1998, an increase of $0.1 million or one percent over the same
period a year ago. Net income from domestic operations for the second quarter
of 1998 increased approximately $0.5 million or 6 percent over the comparable
quarter in 1997. This improvement was a result of an increase in domestic net
revenue of $7.3 million or 20 percent over the second quarter of 1997 on an
increase in sales volume processed of $2.0 billion or 26 percent. Second
quarter 1998 net income from the Company's Asian operations was breakeven, a
96 percent decrease from the second quarter of 1997, the decrease was a result
of a 32 percent decrease in net revenue, reflecting both increased competition
and the area's economic turmoil.
SIX MONTH REVIEW
Net Revenue--Net revenue was $87.1 million for the first six months of 1998,
up 16 percent over the 1997 comparable period. Sales volume processed for the
six months ended June 30, 1998 was $19.1 billion, an increase of $3.9 billion
or 26 percent over the first six months of 1997. The net revenue percentage
growth rate was lower than the sales volume processed growth rate for the same
reasons discussed above for the second quarter.
Operating Expense--Total operating expense for the first six months of 1998
was $60.4 million, up 21 percent over the 1997 comparable period. On the same
comparative basis, salaries and employee benefits increased $3.4 million (21
percent), data processing and communications increased $2.9 million (18
percent), general and administrative increased $1.4 million (11 percent),
depreciation increased $2.2 million (43 percent) and amortization of
intangibles increased $.7 million. Increases in those expense categories were
substantially due to the same reasons cited for the second quarter expense
comparisons above.
Net Income--The Company earned net income of $17.9 million for the first six
months of 1998, an increase of $1.1 million or 7 percent over the same period
the same period a year ago. Net income from domestic operations for the 1998
period was $17.8 million, an increase of $2.0 million or 13 percent over the
comparable 1997 period. This improvement was the result of an increase in
domestic net revenue of $14.3 million or 21 percent over the comparable 1997
period on an increase in sales volume processed of $3.9 billion or 27 percent.
Net income from the Company's Asian operations for the first six months of
1998 decreased 81 percent from the same period in 1997 reflecting both
increased competition and the area's economic turmoil.
BALANCE SHEET REVIEW
The Company's assets totaled $350.8 million as of June 30, 1998, up $22.7
million from December 31, 1997. The decreases in drafts in transit ($4.8
million), other current assets ($3.8 million) and other current liabilities
($1.6 million) since December 31, 1997 were the result of lower levels of
merchant settlement activity.
9
The variances in these accounts are dependent upon the day of the week on
which the reporting period ends. Other assets decreased $2.8 million since
December 31, 1997 primarily related to a $2.7 million reduction in the foreign
currency translation reserves due to expiration of foreign exchange contracts.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated net cash from operating activities of $39.6 million
and $111.2 million for the six month periods ended June 30, 1998 and 1997,
respectively. The net cash provided by operating activities for the 1998
period was primarily related to net income adjusted for non-cash depreciation
and amortization of $26.0 million, plus an aggregate of $8.6 million related
to decreases in drafts in transit and other current assets. 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 increased by $18.8 million to $257.7 million at June 30,
1998. The Company anticipates that its cash and cash equivalent and short-term
investment balances will be adequate 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 $100 million revolving line of credit
with Bank of America expiring December 31, 1998. Borrowings outstanding under
the commitment amounted to $0.6 million as of June 30, 1998, resulting from
Asian operations.
YEAR 2000
The Company has instituted a comprehensive program to ensure that its
computer systems and applications will be ready for the Year 2000. The
program, headed by a senior officer of the company, includes the following:
. review and testing internally used software and systems for Year 2000
compliance;
. remediating internally used software and systems that are not Year 2000
compliant;
. certifying internally used software and systems for Year 2000 compliance;
. reviewing the status of key business partners with Year 2000 compliance;
. developing contingency plans in case the company encounters any
difficulties with the Year 2000 date change either from its internal
systems or from key business partners.
The Company expects that it will be ready for the Year 2000 date change, and
its goal is to have all of its internal systems tested and certified for Year
2000 compliance by the end of 1998. BAMS has completed testing and
certification of its back office operation system, all desktop environment and
all of its point-of-sale terminal applications. BAMS has not completed testing
and certification of its chargeback imaging system, but expects to have that
system tested and certified for Year 2000 compliance by September 30, 1998.
The testing and certification of its HostLINK(TM) system is currently underway
and is expected to be in compliance by year-end 1998.
The Company has undertaken to review the status of Year 2000 compliance of
key suppliers. Letters of certification have been received from all major
third-party processing vendors with the exception of the Company's merchant
accounting system vendor. A project plan has been received from the merchant
accounting system vendor. The Company understands from the merchant accounting
system vendor's representative that the internal testing is to be completed
and the system handed over to the Company for testing by October 31, 1998. The
Company expects to complete its testing and certification by year-end 1998.
The Company estimates that it will spend a total of approximately $350,000
in preparation for the Year 2000. Of that amount, the Company has spent
approximately $200,000 in its compliance efforts, including $40,000 in 1998
year-to-date. The Company does not believe the cost incurred in its Year 2000
compliance efforts will be
10
material in any one quarter. Because of the relatively insignificant costs
associated with Year 2000, costs are expensed as they are incurred by the
Company. In addition, a significant portion of these costs are not expected to
be incremental to the Company but instead will constitute a reassignment of
existing internal systems technology resources. At this time, Year 2000 has
caused no significant delays or cancellations to any project having a material
impact on the financial condition of the Company.
The Company believes it is taking all appropriate measures to prepare for
the Year 2000 date change. Ultimately, the potential impact of the Year 2000
issue will depend not only on the corrective measures the Company undertakes,
but also on the way in which the Year 2000 issue is addressed by businesses
and other entities who provide data to, or receive data from the Company, or
whose financial condition or operational capability is important to the
Company as suppliers or customers. Consequences of a failure of the Company or
its key business partners to be Year 2000 compliant include the Company having
to resort to voice authorizations and paper draft processing for a portion of
its merchants for purposes of maintaining ongoing business. Consequently, no
assurances can be made that Year 2000 compliance can be achieved without costs
and uncertainties that might have a material adverse effect on the Company's
financial condition, business or results of operations.
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, 1997, 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 IIOTHER INFORMATION
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 7, 1998 ("Annual Meeting"):
Directors: Each of the following persons was elected as a director of BAMS,
to hold office until the 1999 Annual Meeting of Stockholders or until earlier
retirement, resignation or removal.
NUMBER OF VOTES
DIRECTORS NAME FOR WITHHELD
-------------- --- --------
Sharif M. Bayyari 335,830,147 140,933
Christopher A. Callero 333,930,412 2,040,668
Barbara J. Desoer 335,823,472 147,608
Donald R. Dixon 335,838,147 132,933
William E. Fisher 335,838,147 132,933
James G. Jones 335,823,572 147,508
Hatim A. Tyabji 335,831,372 139,708
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
NON-
FOR AGAINST ABSTENTIONS VOTES
--- ------- ----------- -------
Ernst & Young LLP as
Independent Auditors 335,957,237 733 13,110 0
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits:
27Financial Data Schedule
(b)Reports on Form 8-K:
During the second quarter of 1998, the Company filed reports on Forms 8-K
dated April 17, 1998 and May 29, 1998. The April 17 report filed, pursuant to
Item 5 of the report, the announcement of a definitive agreement between
BankAmerica Corporation (the parent of Bank of America National Trust and
Savings Association, which owns 100% of the Company's Class B Common Stock, or
approximately 66.6% of the Company's outstanding common stock) and NationsBank
Corporation to merge in a stock-for-stock transaction. The May 29 report
filed, pursuant to Item 5 and 7(c) of the report, a copy of the Company's May
29, 1998 press release titled "BA Merchant Services (BAMS) to be Merchant
processor following merger."
13
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, 1998
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, 1998
14
EXHIBIT INDEX
EXHIBIT
REFERENCE DESCRIPTION
--------- -----------------------
27 Financial Data Schedule
15