-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B9ub6VDrYGn0HvfvToBQ18JI3BllxakPv8hm3KmBOJxXy1CrN8Hom3xYzRTrwKMt A+R8GnNXXTxxlSI2b6tfYQ== 0000929624-97-000332.txt : 19970329 0000929624-97-000332.hdr.sgml : 19970329 ACCESSION NUMBER: 0000929624-97-000332 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BA MERCHANT SERVICES INC CENTRAL INDEX KEY: 0001024674 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 943252840 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-13985 FILM NUMBER: 97567910 BUSINESS ADDRESS: STREET 1: ONE SOUTH VAN NESS AVENUE CITY: SAN FRANCISCO STATE: CA ZIP: 94103 BUSINESS PHONE: 4152413390 MAIL ADDRESS: STREET 1: ONE SOUTH VAN NESS AVENUE CITY: SAN FRANCISCO STATE: CA ZIP: 94103 10-K 1 FORM 10-K 1 9 9 6 A N N U A L R E P O R T [BA MERCHANT SERVICES, INC. LOGO APPEARS HERE] To Our Stockholders Since this is our inaugural Annual Report, I thought I would begin by introducing our company and then discussing where we've been and where we're going. WHO WE ARE. BA Merchant Services, or "BAMS" as we call it, was organized in October 1996 from the domestic merchant card processing businesses of BankAmerica Corporation. Shortly after this, in December, BAMS successfully completed an initial public offering of common stock which netted the company approximately $233 million, about half of which was used to repay short-term borrowings before year end. The other half, approximately $115 million, plus net cash generated from operations, will be available to invest in our endeavors to expand our business. Although new to the public equities market, the BAMS organization's experience in the merchant card processing business dates back more than thirty years to the time when BankAmerica first introduced the BankAmericard. We are currently a major player in the domestic national merchant card services arena, ranking fourth among the largest merchant card processing businesses and first in the processing of debit card transactions. In addition to our domestic success, we expect to become a significant international presence after the completion of the planned transfers of several of BankAmerica's Asia merchant card operations to BAMS, currently planned for 1997. BAMS enjoys an exceptional competitive advantage from our connection with BankAmerica. In the area of merchant card processing, we have exclusive use of the BankAmerica brand and the recognition it brings, as well as exclusive access to BankAmerica's large customer base and extensive distribution channels. We also have opportunities to establish multi-product relationships by offering our merchant processing products jointly with BankAmerica's checking, credit, cash management, and other business-related products. In addition, we can offer our customers debit card processing for cards issued by BankAmerica on a cost-advantaged basis. All of this enables BAMS to focus on customer service and provide new and innovative products as they arise in the marketplace. WHERE WE'VE BEEN. As I mentioned earlier, the BAMS organization has been in the merchant card processing business for the past thirty years. During the past four years, we have been concentrating on becoming the major market player that we currently are. Sales volume has increased steadily at a rate of nearly 20 percent per year during this period without the help of acquisitions. In addition, our technological capabilities, pricing flexibility, and emphasis on quality of service have resulted in a customer retention rate of about 95 percent. Further, the diversity of our customer base has helped to insulate us from seasonal downturns in transaction volumes, and the relatively high percentage of small and mid-sized merchants that we serve has tended to produce high operating profit margins and low loss levels. While we benefit significantly from our relationship with BankAmerica, we are not completely dependent on its market presence for our revenues. As recently as 1993, we had 56 sales professionals on staff, representing only approximately 12 percent of our employee base, and virtually no merchant customers outside of BankAmerica's retail markets. Since then, we have invested heavily in our sales infrastructure. We now have over 130 sales professionals who comprise almost 25 percent of our overall staff. Last year we opened sales offices in Chicago and New York, which proved so successful that we also established offices in Orlando, Florida and Atlanta, Georgia. As a result of our successful growth, new sales volume more than quadrupled between 1993 and 1996, increasing from $1.1 billion to more than $5 billion. Twenty-five percent of our new sales volume now comes from outside of BankAmerica's retail markets. While business growth has been a high priority, cost containment has been equally important. Between 1993 and 1996, we reduced our transaction unit cost by more than 35 percent to 22 cents per transaction. This is a significant accomplishment, but we intend to make the continuation of this trend a top priority. WHERE WE'RE GOING. BAMS already enjoys one of the best operating margins in the business, and we are striving to improve it further through our efforts to increase revenue from existing and new customers, while holding expenses down. To bring in new customers, we are planning to expand our sales staff further, and expect to have more than 165 people dedicated to sales by the end of 1997. At that point, two-thirds of our staff will be dedicated to bringing customers in the door and keeping them here. In addition, since our regional sales offices have proven to be so successful, we are planning to establish a fifth sales office, probably in the Boston area, to serve the northeastern region. Looking ahead, we expect the pace of our sales and revenue growth to improve for a number of reasons. First, as I've said, we are still expanding our sales force. Second, the combined use of debit and credit cards for consumer expenditures is expanding in the United States, and that trend is expected to continue. This translates into more transactions from which BAMS generates its revenues. And third, we are beginning to implement our strategy for Asia, where growth is expected to be explosive in the next few years. This means both more merchant customers and higher card transaction volumes. In addition, we believe we have further opportunities to reduce unit costs by continuing to upgrade technology, eliminating redundancies, consolidating certain vendor relationships, and moving more of our processing activities in house. We are grateful for the confidence our stockholders have shown by investing in our new company, and we are dedicated to increasing investment value and returns by continuing as an active and innovative player in this rapidly growing business. /s/ Sharif M. Bayyari - ------------------------------------- SHARIF M. BAYYARI, President and Chief Executive Officer San Francisco, California March 28, 1997 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the fiscal year ended December 31, 1996 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] COMMISSION FILE NUMBER: 1-7377. BA MERCHANT SERVICES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE ONE SOUTH VAN NESS AVENUE 94-3252840 (STATE OR OTHER SAN FRANCISCO, CALIFORNIA 94103 (I.R.S. EMPLOYER JURISDICTION OF 415-241-3390 IDENTIFICATION NO) INCORPORATION OR (ADDRESS AND TELEPHONE NUMBER ORGANIZATION) OF PRINCIPAL EXECUTIVE OFFICES) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: New York Stock Exchange: Class A Common Stock, Par Value $0.01 per share SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price on the consolidated transaction reporting system on March 17, 1997, was $223.3 million. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 17, 1997. Class A Common Stock, $0.01 par value--16,236,092 shares outstanding on March 17, 1997. Class B Common Stock, $0.01 par value--30,200,000 shares outstanding on March 17, 1997. DOCUMENTS INCORPORATED BY REFERENCE AND PARTS OF FORM 10-K INTO WHICH INCORPORATED: Portions of the Proxy Statement for the May 28, 1997 Annual Meeting of Stockholders Part III. ================================================================================ FORM 10-K PART I Item 1. Business General........................................................ 2 Forward-Looking Statements..................................... 3 Products....................................................... 3 New Product Initiatives........................................ 5 Merchant Customer Base......................................... 6 Technology..................................................... 7 Relationship with BankAmerica and the Bank..................... 8 Asian Operations............................................... 9 Competition.................................................... 10 Supervision and Regulation..................................... 11 Employees...................................................... 12 Item 2. Properties..................................................... 12 Item 3. Legal Proceedings.............................................. 12 Item 4. Submission of Matters to a Vote of Security Holders............ 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder 13 Matters....................................................... Dividend Policy................................................ 13 Description of Capital Stock................................... 13 Item 6. Selected Financial Data........................................ 16 Item 7. Management's Discussion and Analysis of Financial Condition and 17 Results of Operations......................................... General........................................................ 17 Results of Operations.......................................... 18 Balance Sheet Review........................................... 19 Liquidity and Capital Resources................................ 20 Risk Management................................................ 20 New Transaction System and Future Effects of Technological 22 Change........................................................ Fluctuation in Quarterly Operating Results..................... 22 Forward-Looking Statements..................................... 22 Item 8. Financial Statements and Supplementary Data.................... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and 39 Financial Disclosure.......................................... PART III Item 10. Directors and Executive Officers of the Registrant............. 39 Item 11. Executive Compensation......................................... 39 Item 12. Security Ownership of Certain Beneficial Ownership and 39 Management.................................................... Item 13. Certain Relationships and Related Transactions................. 39 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8- 39 K............................................................. Signatures............................................................... 41
1 PART I ITEM 1. BUSINESS GENERAL BA Merchant Services, Inc. (the Company) was incorporated in October 1996. At the close of business on December 3, 1996, the merchant processing business of Bank of America NT&SA (the Bank), a multi-state operation based in California, and the merchant processing business of Bank of America NW, National Association (formerly Seattle-First National Bank) (BANW), located principally in the state of Washington, were transferred to the Company. At December 31, 1996, both the Bank and BANW were subsidiaries of BankAmerica Corporation (BAC). On January 1, 1997, BANW was merged into the Bank. References in this report to BankAmerica shall be deemed to be references to BAC and its subsidiaries and affiliates, including the Bank and BANW, unless the context otherwise requires. On December 19, 1996, the Company commenced initial public offerings (the Offerings) of 16.1 million shares of Class A Common Stock, $0.01 par value, at $15.50 per share. Of these shares, 12.9 million shares were offered in the United States and 3.2 million shares were offered in a concurrent international offering outside the United States. The Company completed the Offerings on December 31, 1996. Net proceeds from the Offerings were $232.9 million. In late December 1996, $126.3 million of the proceeds from the Offerings were used to pay down the outstanding balance on a revolving line of credit with an affiliate. Such borrowings, the amount of which reflected the level of the Company's business during the 1996 year-end holiday season, had been used to finance operations pending receipt of the proceeds of the Offerings. The balance of such proceeds and net cash generated by the Company's operations after the Offerings will be used for general corporate purposes, strategic technology investments, the funding of research and product development, and future acquisitions. As a result of the completion of the Offerings, BAC, which indirectly owns 100 percent of the outstanding Class B Common Stock of the Company, owns 65.2 percent of the outstanding common stock of the Company. Such economic ownership of BAC represents 94.9 percent of the combined voting power of the Company's outstanding common stock. For information regarding the presentation of the Company's financial statements and related discussions of financial information contained herein, see Note 2 of the Notes to Consolidated Financial Statements on page 30. The Company provides an array of payment processing and related information products and services to merchants throughout the United States who accept credit and charge cards (collectively "credit cards") and debit cards as payment for goods and services. According to published industry sources, the Company is the fourth largest processor of merchant credit card transactions and the largest processor of debit card transactions in the United States. The Company provides its products and services to a customer base of merchants in a wide variety of industries, including general retailers, restaurants, and supermarkets. The Company's customers are comprised of large multi-regional chains, middle-market merchants, and small merchants that collectively operate from approximately 160,000 locations as of year-end 1996. The Company markets its products and services to merchants directly and also indirectly through BankAmerica's branch network and product distribution system. In addition, the Company has increased its customer base as well as its transaction volume through the use of agent banks and independent sales organizations (ISOs) that enlist merchant customers on its behalf. The Company continually invests in technology, research, and product development and emphasizes excellent customer service in the delivery of its products and services to attract and retain customers. The Company's annual customer retention rate has exceeded 95 percent in recent years. 2 In order to process credit and debit card transactions, the Company, along with all other nonbank merchant processors, must be controlled or sponsored by a financial institution that is a principal member of the credit card associations and debit card networks. The Company is a member of Visa(R) and MasterCard(R), and participates in various debit networks including Interlink(R), Explore(R), Accel(R), Pulse(R), and Cash Station(R) for processing transactions through those associations or networks. The Company experienced substantial growth in its transaction volume, net revenue, and net income during the three years ended December 31, 1996, principally through internally generated growth. The number of card transactions processed by the Company increased from 251.6 million for the year ended December 31, 1994 to 377.1 million for the year ended December 31, 1996. During the same periods, the Company's net revenue and net income increased from $98.1 million and $18.5 million to $126.2 million and $24.7 million, respectively. Management believes that the Company's growth in recent years has been attributable in part to, and will continue to benefit from, its close affiliation with BankAmerica. As a result of its contractual arrangements with BankAmerica, the Company is able to utilize the Bank of America name and family of brands and also directly access BankAmerica's product distribution channels and customer base to conduct its operations and generate new business. The Bank of America name and brands are widely recognized by consumers and businesses and provide the Company with substantial credibility in the merchant processing market. The Company's relationship with BankAmerica also affords the Company access to the marketing and sales capabilities of BankAmerica's approximately 2,000 retail banking branches in 11 states, to reach more than 850,000 small-business and middle-market customers of BankAmerica, approximately 11 million BankAmerica debit cardholders, approximately 9 million BankAmerica credit cardholders, and approximately 8 million consumers holding BankAmerica checking accounts at December 31, 1996. For information regarding the Company's relationship with BankAmerica, see "Relationship with BankAmerica and the Bank" on page 8. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements, usually containing the words "estimate," "project," "expect," or similar expressions. Those statements are subject to uncertainties, including those discussed in this report, particularly in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 17 through 23. These uncertainties 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. For additional information regarding such forward-looking statements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Forward-Looking Statements," on page 22. PRODUCTS The core products and services provided by the Company are described below: Electronic Authorization Services. The Company provides electronic transaction authorization services for all major credit and debit cards. Authorization generally involves approving a cardholder's purchase at the point of sale after verifying that the card is not lost or stolen and that the transaction amount is within the cardholder's credit or account limit. The authorization and data capture processes are completed at the same time, usually within 3 to 15 seconds. The authorization process begins when the merchant enters or swipes the card through its point-of-sale (POS) terminal and is completed upon obtaining approval from the card issuer for the cardholder's purchase. Utilizing third-party national authorization networks available on a subscription basis, the Company confirms with the card issuer that the cardholder has adequate credit or funds to cover the amount of the purchase and verifies that the card has not been reported lost or stolen. As a large customer of these networks, the Company has been able to obtain access to such authorization information on a favorable cost basis. In the case of certain "On-Us" transactions (those transactions originated in California involving credit and debit cards issued by BankAmerica), the Company obtains the necessary authorization directly from BankAmerica, thus avoiding third- party authorization networks and the related fees. In the event that a merchant is not able to connect with the electronic network, the Company provides access to voice authorization and automated voice response that is available 24 hours a day, seven days a week. 3 For debit card transactions, authorization is conducted through the use of a cardholder's Personal Identification Number (PIN) rather than a signature. The PIN is encrypted at the POS terminal and is carried along with the financial data associated with the transaction. At the card issuer, the PIN is decrypted and matched to the PIN on record for that account. Data Capture and Reporting Services. The Company records data relating to card transactions at the time of the transaction authorization and aggregates this data for each merchant customer using a software application programmed by the Company into the merchant's terminal. The Company compiles this aggregated data and uses it to provide merchants with information services, such as specialized management reports. While the transaction is being processed, the transaction data, including purchase price and card number, are captured both at the merchant's POS terminal and at the Company. This redundancy helps to ensure accurate transaction reconciliation with each merchant and protects against potential data loss. From time to time each day, the Company "batches" or aggregates and organizes data from the merchant's POS terminal for use in settling transactions and preparing merchant reports. For certain national merchant customers, the Company captures data via a "host-to- host" linkage with the merchant's own mainframe computer which, in turn, allows the merchant enhanced access to the Company's reporting capabilities on its proprietary systems. Settlement, Clearing, and Accounting Services. The Company processes transactions for settlement, forwards transaction data to credit card associations for payment, and provides daily payments to merchants. The settlement process involves managing a record of each merchant customer's transactions and transferring funds for payment from the card issuer to the merchant. Transaction information is transmitted by the Company to the card- issuing bank through the card association, such as Visa(R) or MasterCard(R). The Company then arranges for funds to be transferred to the merchant's bank account via Automated Clearing House (ACH) or Fedwire transfer, or via BankAmerica's internal deposit system in the event the merchant has a BankAmerica deposit account. The cardholder is then billed by the card issuer. Settlement payments are received by the Company from a card association clearing bank, net of interchange fees. The merchant is billed by the Company primarily on a monthly basis for its processing fees and for interchange fees payable to card issuers. Similar settlement processes exist for transactions made with Diners Club(R)and JCB(R) cards. American Express(R) and Discover(R) card transactions processed by the Company are transmitted to those issuers who then credit merchants directly for transactions involving those cards. For its merchant customers who are billed weekly or monthly, the Company bears the risk of merchant nonpayment of applicable fees and assessments. For debit card transactions, settlement is similar to credit cards. Billing Dispute Resolution Services. The Company assists merchants in investigating and resolving billing disputes with customers. The credit card associations have rules that apply to a bank or other processing firm that acquires a card transaction from a merchant and processes it in the credit card system for presentment to the card issuer. In certain billing disputes between a cardholder and a merchant, the Company, as the merchant processor of the transaction, assists the merchant in investigating and resolving the dispute. If the dispute is not resolved in favor of the merchant, the transaction is charged back to the merchant and that amount is credited or otherwise refunded to the cardholder. If the Company or any of its clearing banks is unable to collect from the merchant's account, and if the merchant refuses or is unable due to bankruptcy or other reasons to reimburse the Company for the chargeback, the Company bears the loss for the amount of the refund paid to the cardholder. In cases in which the transaction is processed by a merchant processor other than the entity that will enter it in the credit card system, the merchant processor is generally required by that entity to indemnify it against such losses. The Company has entered into such indemnification arrangements with BankAmerica. Terminal Services. The Company rents and sells POS terminals to its merchant customers. The Company customizes and regularly updates the software that drives the terminals and provides terminal maintenance services. Customer Service and Support. The Company maintains a telephone call-in service staffed by customer service representatives which is available 24 hours a day, seven days a week. 4 Merchant Marketing Programs. The Company and BankAmerica jointly offer a number of services designed to allow merchant customers to target and reward retail BankAmerica customers who are frequent customers of a merchant. Merchant customers, through joint marketing programs of BankAmerica and the Company, are able to communicate directly with BankAmerica retail customers through advertising, statement messages and inserts, automated teller machine (ATM) transaction receipts, newsletters, and direct mail. Specialty Applications. The Company also provides products and services tailored to the needs of individual merchants or a particular industry. In the retail industry, a variety of products are offered to support different types of equipment at the point of sale, including POS terminals, electronic cash registers, and personal computers. For restaurants, the Company offers products that assist merchants in managing the entry and distribution of tips to servers. For lodging establishments, the Company offers products which assist such establishments in managing the unique circumstances that result from numerous types of transaction activity occurring over a period of days. The Company offers additional products to support supermarkets and large- volume/low-dollar-amount merchants who find it economically beneficial to process transactions in batches rather than individually. For very small merchants, the Company offers voice authorization and the deposit of paper drafts at the Bank or agent bank branches. These products are supported through a variety of arrangements that involve the use of the Company's internal authorization and capture system or third-party authorization and capture systems. NEW PRODUCT INITIATIVES The Company devotes substantial time and resources to the development of new products and services. Such new product initiatives include electronic commerce pilot programs, a quasi-cash access product for the gaming industry, several stored value cards, electronic benefit transfer and payment products, and a corporate purchasing card. These new product initiatives are described below: Electronic Commerce. The Company is pursuing several initiatives in the developing arena of electronic commerce, and has entered into several pilot programs with high technology companies specializing in Internet navigational software, including Netscape Communications Corp. and Cybercash, Inc. Through these programs, the Company is designing and developing credit card payment solutions for on-line retail sales, and has activated several merchant pilot programs. In addition, the Company is working actively with BankAmerica's Interactive Banking Group which has, within the last year, introduced bill payment by telephone, launched a new home banking service and established the first financial institution site on America Online(R). The Company and BankAmerica are also involved in the development and evaluation of data encryption standards for the secure transport of cardholder data across the Internet. The Company and BankAmerica will be participating in Visa's(R) pilot program on the Internet during the second half of 1997. It is the Company's objective to deliver a complete, secure on-line payment solution to Internet merchants by the time Visa(R) implements its anticipated system-wide launch of Internet card payment transactions in early 1998. There can be no assurance the Company will develop the requisite technology to accomplish this objective. Quasi-Cash Access. For many years, the gaming industry has utilized the services of a small number of credit card processors whose specialized products enable credit cardholders to access their available lines of credit to generate a negotiable check at the gaming establishment. This negotiable check is then cashed by the gaming establishment for the cardholders. These "quasi-cash" transactions subject cardholders to a convenience fee which credit card processors charge for each transaction. This additional fee results in revenue margins associated with these transactions exceeding the industry norm. To compete in this industry, the Company has developed a new product pursuant to which customers at gaming establishments can use not only their credit cards but also their debit cards at automated terminals to obtain authorization for negotiable instruments which are redeemable for cash at the gaming establishment. The Company is utilizing BankAmerica's lending and cash management relationships with major gaming industry companies to market this new product. In 1996, the Company signed an agreement with a large gaming concern to install this product in most of its gaming venues. 5 Stored Value Cards. The Company is working closely with the Bank's Interactive Banking Group to bring consumers and merchants together in pilot programs to test and evaluate emerging stored value card payment technologies. The Bank has issued approximately 4,000 reloadable stored value cards to employees at one of the Bank's facilities who may use their cards at cafeteria vending machines and cashier counters and at selected merchants in the surrounding area. The Company is the processor for the reload transactions whereby employees may use their credit or debit cards to load value onto their stored value cards. In addition, at the headquarters of Visa U.S.A. Inc. and Visa International, Inc. in Foster City, California, the Bank has issued approximately 17,000 disposable and 2,500 reloadable stored value cards to employees. The Company is the processor for transactions that involve the purchase of these cards through card dispensing machines. Employees can buy the cards using cash, credit cards, or debit cards. Electronic Benefit Transfer and Payment. The government sector will present an opportunity for increased merchant processing volume for the Company as a result of the proliferation of government benefit (e.g., food stamps) programs. Recipients will be able to access their benefits through a benefit card that operates much like a commercial debit card. In addition, there is increasing demand among government agencies for the ability to accept credit, debit, and smart cards for payments that have traditionally been paper-based. The Company is in the process of enhancing its product offerings to support the unique requirements of these government-related payment transactions. Corporate Purchasing Cards. Recently, both Visa(R) and MasterCard(R) have introduced corporate purchasing cards which are designed to enable large companies to conduct their relatively low-dollar-value (under $25,000) procurement transactions through the use of credit cards. These card products are designed to alleviate the paper-intensive purchase order and check remittance processes that many larger companies experience when acquiring goods or services. The Company's specialized processing services for corporate purchasing cards enables vendors of goods or services to accept the cards as payment and generates the necessary transaction support data (e.g., invoice number and tax amount) for the corporate purchaser paying for the goods or services. The Company works closely with BankAmerica to enroll vendors in this new program. MERCHANT CUSTOMER BASE The Company provides merchant processing services to a diverse customer base, consisting of businesses located throughout the United States that range from large multi-regional chains to small merchants. At December 31, 1996, the Company provided merchant processing services to over 132,500 merchant locations directly, to over 14,000 merchant locations through 151 agent banks not affiliated with the Company, and to over 13,500 merchant locations through ISOs. The Company's merchant accounts were distributed by type of merchant at December 31, 1996 (as measured by annualized credit card sales volume for the year ended December 31, 1996) as follows:
MERCHANT TYPE PERCENTAGE ------------- ---------- General Retail................................................. 26% Supermarkets................................................... 11 Lodging Establishments......................................... 9 Restaurants.................................................... 8 Mail Order Companies........................................... 7 Other.......................................................... 39 --- Total........................................................ 100% ===
As indicated by the above table, the composition of the Company's merchant customer base emphasizes general retail merchants, supermarkets, lodging establishments, restaurants, and other similar merchants whose businesses are not generally prone to customer chargebacks, which can increase the processor's operating costs 6 and expose it to losses. In the "Other" category, no single merchant type accounted for more than 6 percent of annualized credit card sales volume. These merchant accounts were distributed by size at December 31, 1996 (as measured by credit card sales volume for the year ended December 31, 1996) as follows:
SALES VOLUME PERCENTAGE ------------ ---------- Less than $250,000............................................. 16% $250,000 to $50,000,000........................................ 57 More than $50,000,000.......................................... 27 --- Total........................................................ 100% ===
As shown by the above data, a significant percentage of the Company's business is with merchants with less than $50 million in annual sales volume. In the Company's experience, its smaller retail merchant customers have been less price sensitive than large corporate businesses regarding their merchant processing requirements. Fees per transaction paid by high volume merchants in relation to sales volume generally are lower than in the case of the Company's overall merchant base. In addition, no single merchant accounted for more than 5 percent of the net revenue of the Company in 1996. At December 31, 1996, more than half of the merchant locations served by the Company were located in the State of California. The Company estimates that approximately 40 percent of its charge volume processed for the year ended December 31, 1996 was derived from merchant locations in California. TECHNOLOGY To remain competitive in the merchant processing industry, the Company has dedicated significant resources to developing proprietary technologies that lower costs and enhance service. The Company believes its continuing investment in technology will allow it to remain competitive in the industry. The principal systems that the Company has developed are described below: Transaction Processing System. The Company's new transaction processing system, called HostLink(TM), is an advanced system with which the Company is replacing its existing system beginning in the first quarter of 1997. Business directed to third-party processors in recent years will be redirected in- house. The Company's reduced reliance on external vendors is expected to reduce per transaction costs. Management believes that the client server architecture, on which the new system is based, will enhance the Company's position among the technological leaders of the payment processing business. The new system will enable the Company to meet the processing requirements of diverse media, including the Internet. It also will enable the Company to expand the types and delivery methods of information reported to merchants. Management also believes that the flexibility resulting from the open architecture design of the system will result in reduced maintenance costs compared with those normally associated with mainframe systems, improved product differentiation, and reduced product development time. On-Us Transactions. The Company has recently developed the capability to process On-Us transactions directly with the Bank and thereby bypass the networks and the attendant network charges. The capability is presently operational for on-line debit transactions initiated in California. Non-California On-Line Debit Transactions. BankAmerica is currently consolidating the card authorization systems of its various banking subsidiaries. The Company understands that this consolidation is expected to be completed in 1997. Upon completion, the Company expects to offer On-Us capabilities for debit transactions in the 10 other states in the BankAmerica market area. Off-Line On-Us Debit Transactions. The Company is presently developing a system to process off-line On-Us debit transactions directly and expects that this capability will be operational by 1998. 7 Credit Card Transactions. The Company understands that BankAmerica is planning to complete the migration of its settlement, accounting, and statement functions for most of its credit card accounts to a third-party card processing system by mid-1997. The migration of the rest of its accounts should be completed by 1998. When completed, the Company will be able to offer direct processing of On-Us credit card transactions. Automated Chargeback System. The Company's Automated Chargeback System automates the processing of billing disputes between the Company's merchants and their customers. Disputed transactions involve the receipt, processing, and tracking of retrieval requests and chargebacks. Retrieval requests are requests from card-issuing banks for copies of sales drafts. Chargebacks are transactions returned by card-issuing banks to merchant processors when customers dispute the receipt of goods or services from merchants. According to card association rules, if the merchant processor is unable to collect the amount of the transaction from the merchant, the merchant processor is liable for such amount. The system automates many of the time-consuming, labor- intensive processes normally associated with the handling of retrieval requests and chargebacks. The system incorporates all aspects of the transaction dispute process, including the receipt of chargebacks from issuing banks, the distribution of chargeback notices to merchants, the receipt of merchant rebuttals, and the collection of transaction dollar amounts. The system improves the timeliness of the dispute resolution process and reduces operating costs and losses associated with the processing of retrieval requests and chargebacks. RELATIONSHIP WITH BANKAMERICA AND THE BANK For information regarding BankAmerica and the Bank, see Item 13, "Certain Relationships and Related Transactions" on page 39 of this report. The Bank owns 100 percent of the outstanding Class B Common Stock of the Company, which represents 65.2 percent of the Company's outstanding common stock. Such economic ownership represents 94.9 percent of the combined voting power of the Company's outstanding common stock. The Bank also has the ability to elect all of the members of the Board of Directors of the Company and to exercise a controlling influence over the business and affairs of the Company. As of the date of this report, the size of the Board of Directors of the Company is fixed at six. Two of the present members of the Board of Directors are independent of BankAmerica. The Company and BankAmerica engage in various intercompany transactions and arrangements, including the provision by BankAmerica of various services to the Company. Such services are provided pursuant to certain intercompany agreements (Intercompany Agreements) which provide, among other things, for the grant to the Company of a license to use the Bank of America name and certain trademarks and servicemarks, including Bank of America(R), BankAmericard(R), VERSATEL(R) and VERSATELLER(R), in connection with the Company's business. The Intercompany Agreements also provide for BankAmerica to perform for the Company certain product distribution services, processing services, marketing services, system support services, association and network sponsorship and representation in the Visa(R) and MasterCard(R) associations, telecommunications services, tax and treasury services, regulatory, compliance, legal, accounting and audit services, and other miscellaneous support and administrative services. The Company and BankAmerica also have entered into agreements concerning registration rights, the allocation of tax liabilities, and the leasing of certain facilities by the Company from BankAmerica. All of the Intercompany Agreements may be terminated by BankAmerica if it beneficially owns shares representing less than a majority of the voting power of the outstanding Common Stock of the Company. The Company expects that the Intercompany Agreements and the Corporate Opportunities Agreement (discussed below) will govern the relationship between the Company and BankAmerica, the provision of services and the payments therefor, for the foreseeable future. Because these agreements were entered into at a time when the Company was still wholly-owned by BankAmerica, they are not the result of arm's length negotiations between the parties, and the Company was not represented in connection therewith by separate counsel. In connection with the Offerings, BAC and the Company also entered into a Non-Competition and Corporate Opportunities Allocation Agreement (Non- Competition Agreement) pursuant to which BAC will not compete with the Company for a period of five years with respect to payment processing for merchants to the extent that such payments arise in the use of credit, charge, or debit cards for the purchase of goods and services 8 and are authorized through an electronic medium originating at the point of sale in the United States and, following any transfer of the Bank's merchant processing business in an Asian country, in such Asian country. Any or all of the intercompany agreements may be terminated by BAC, if at any time it beneficially owns shares representing less than a majority of the voting power of the Company's outstanding common stock. For more information regarding the Non-Competition Agreement, see Note 10 of the Notes to Consolidated Financial Statements on page 36. BankAmerica is not required to maintain control of the Company, and any disposition by BankAmerica of its interest in the Company could, depending upon the circumstances, have an adverse effect on the Company or the price of its stock. Any divestiture by BankAmerica which results in it owning less than a majority of the voting power of the Company will permit BankAmerica to terminate its contractual arrangements with the Company under which the Company has access to the Bank's consumer base, the Bank of America name and trademarks, the implementation of On-Us transaction processing and marketing, the Bank's product distribution channels, and credit and debit card association and network sponsorships. Any such termination could have a material adverse effect on the Company's business. The Company believes that its growth in recent years has been attributable in part to, and that it will continue to benefit from, its close affiliation with BankAmerica. However, no assurances can be given that this will continue to be the case. ASIAN OPERATIONS The Bank presently operates merchant processing businesses in five Asian countries: Taiwan, the Philippines, Thailand, South Korea, and India. In Asia, where the sales organizations are managed separately for each country, the Bank markets both through direct sales professionals and through agent banks. In addition, the Bank has recently established an agent bank program in The People's Republic of China, is licensed to conduct business in Indonesia, and is exploring opportunities to enter Vietnam. The administrative headquarters of the Bank's Asian merchant processing businesses is in Hong Kong. The Company entered into a definitive agreement with BankAmerica to acquire each of the merchant processing businesses presently conducted by the Bank in the Philippines and Thailand (Asian Acquisitions) in consideration for the issuance by the Company of 550,000 and 150,000 additional shares, respectively, of Class B Common Stock. Consummation of the Asian Acquisitions is subject only to, and will close as soon as possible after, receipt of applicable foreign regulatory approvals. The Company expects to receive the decision of foreign regulatory authorities in the Philippines and Thailand during the second quarter of 1997, although no assurance can be given that any such approvals will be obtained or as to the timing thereof. On December 9, 1996, the Federal Reserve Board granted the approval required under certain United States banking laws for such acquisitions. On February 28, 1997, the Thai government approved the Company's application for a Company branch office in Thailand, to which the Bank's merchant processing business will be transferred. Taiwan. A formal application was submitted to the Ministry of Finance of the Republic of China on January 16, 1997. The Company expects to receive a decision with respect to Taiwan during the second half of 1997. Although the Company and BankAmerica are pursuing Taiwanese approval for the Bank to transfer its merchant processing business to the Company, no assurances can be given that such approval will ever be obtained. In addition, in the definitive agreement relating to the Asian Acquisitions, the Company and BankAmerica have agreed to evaluate during the term of such agreement the possibility of entering into an outsourcing or other arrangement that would permit the Company to participate meaningfully in the Bank's merchant processing business in Taiwan in the event that such regulatory approval cannot be obtained. This agreement will terminate on December 31, 1997, unless mutually extended. There is no assurance that any such outsourcing or other arrangement will ultimately prove practicable. It is the intention of the Company and BankAmerica that any future acquisition of the Bank's Taiwanese merchant processing business, or any of the Bank's other merchant processing businesses in Asia, would involve the issuance by the Company to BankAmerica of additional shares of the Company's Class B Common Stock in exchange therefor. The amount 9 of such shares or other consideration and the other terms and conditions of any such transaction would be subject to the agreement of the Company and BankAmerica. There can be no assurance that the Company and BankAmerica will be able to reach agreement on the terms of any such acquisition. Potential Future Asian Markets. The Company expects to explore opportunities to expand its business to other Asian markets beyond those which are the subject of the Asian Acquisitions. In the agreement with BankAmerica with respect to the Asian Acquisitions, the Company and BankAmerica have agreed to work cooperatively to allow the Company to acquire in the future the Bank's merchant processing businesses that are conducted in South Korea, India, The People's Republic of China, and Vietnam in addition to mutual efforts already under way to obtain regulatory approval for the transfer of the Taiwan business to the Company. With respect to certain countries, however, local regulatory requirements may make it difficult or preclude the Company from operating such businesses. COMPETITION The United States domestic market in which the Company competes for credit, charge, and debit card payment processing for merchants is intensely competitive. According to publicly available industry sources, the 10 largest merchant processors in the United States processed approximately 70 percent of the credit card sales volume processed during the calendar year 1995. Other competitors include smaller vertically integrated processors, community and regional banks, and ISOs. The Company competes on the basis of price, the availability of products and services, the quality of customer service and support, and transaction processing speed, quality, and reliability. The Company also competes by building alliances with other banks to gain access to their distribution systems, acquiring merchant portfolios, and enlisting ISOs. The majority of the Company's contracts with its merchant customers are cancelable at will or on short notice or provide for renewal at frequent periodic intervals, and, accordingly, the Company and its competitors regularly rebid such contracts. This competition may influence the prices the Company can charge, which consequently requires the Company to aggressively control costs to maintain acceptable profit margins. Since 1991, price competition has caused the Company's net revenue in relation to sales volume to decline, particularly with respect to high-volume retailer customers. No assurance can be given that the Company will be able to maintain acceptable profit margins, whether with respect to its high-volume retailer customers or its small and middle-market customers. The merchant processing industry in general requires the use of advanced computer hardware and software technology, and has been characterized by the development of new products and services to meet increasingly complex and rapidly changing client and regulatory requirements. The success of any competitor in this industry, including the Company, depends in part on its ability to continue to adapt its technology in a timely and cost-effective basis to meet these requirements. In recent years, there has been a trend toward consolidation in the merchant processing industry. Further tightening, of margins may result in banks and other payment processors abandoning the transaction processing business, thus accelerating the trend toward consolidation. Due to market demands requiring processors to provide advanced and efficient technology, certain processors have recently left the business or merged with other providers. This consolidation has enabled certain of the Company's competitors to have access to significant capital, management, marketing, and technological resources that are equal to or greater than those of the Company, and there can be no assurance that the Company will continue to be able to compete successfully with such other processors. In Asia, where the Company plans to compete following consummation of the Asian Acquisitions, due to language differences and variances in association regulations and interchange fees, each country represents a separate market. Competition is highly localized within country borders where local banks have priced aggressively in order to preserve market share against various large multi-national banks that compete for business in the region. The MasterCard(R) interchange structure is designed to discourage banks from operating only as processors and not as issuers in a particular market by charging non-issuer processors higher fees which may affect the profitability of the Company's operations in Asia. 10 SUPERVISION AND REGULATION As a result of BankAmerica's control of the Company and until the Bank no longer has a controlling interest in the Company, the Company is subject to all provisions of federal banking laws and regulations that are applicable to the Bank unless specifically provided otherwise (collectively, the Banking Laws). As a result, the Company's activities are generally limited to those that are permissible for a national bank, e.g., those activities which are a part of or incidental to the business of banking. In addition, the Company is subject to the supervision and examination of the Office of the Comptroller of the Currency (OCC), one of the principal regulatory bodies having jurisdiction over the Bank, as well as the Board of Governors of the Federal System (Federal Reserve Board) with respect to foreign activities and investments. The Company may not engage in any new activities until it first obtains the written approval of the OCC and/or the Federal Reserve Board. The OCC will only approve those activities legally permissible for a national bank that are consistent with prudent banking principles and OCC policy. The Federal Reserve Board applies similar requirements to the Company's foreign activities and/or investments. All of the current activities of the Company are permissible for national banks. Future acquisitions by the Company may also require the prior written approval of the OCC and/or the Federal Reserve Board. In order to obtain such approval for domestic acquisitions, the Bank must submit a letter to the OCC detailing the proposed activities and stating whether any activity would be conducted at some location other than the Bank's main office or a previously approved branch of the Bank. The Company may consummate the acquisition after 30 days from the date the OCC receives the Bank's letter, unless otherwise notified by the OCC, or in less than 30 days if so notified. The OCC may extend the 30-day period if it determines that the Bank's letter raises issues which require additional information or additional time for analysis. If the 30-day period is extended, the Company may consummate the acquisition only upon written approval by the OCC. The OCC reserves the right to grant written approval, subject to conditions where there are legal or supervisory concerns. Federal Reserve Board approval may be needed for foreign acquisitions if the consideration involved exceeds $25 million. In such circumstances, the Company and the Bank must give the Federal Reserve Board 45 days' prior written notice. The Company may consummate the acquisition at the end of such 45-day period or sooner if the Federal Reserve Board waives the notice period. The Federal Reserve Board may also elect not to allow consummation of an acquisition until it has given its specific consent. No assurance can be given that the Banking Laws will not be amended or construed differently, or that new laws or regulations will not be adopted, the effect of which could be to materially and adversely affect the operations of the Company. To facilitate BankAmerica's compliance with applicable Banking Laws and to allow BankAmerica to obtain any required consents or approvals, the Company and the Bank have entered into an agreement which prohibits the Company from entering into any business activities prior to the receipt of any consents and approvals required pursuant to the Banking Laws and, if such consents are not received, prohibits the Company from engaging in such business activities. The Company must adhere to the standards of the credit card associations and debit card networks or else risk suspension or termination of its membership or participation status. There can be no assurance that: (i) the credit card associations or debit card networks will maintain the Company's membership or participation status; (ii) the rules of the credit card associations or debit card networks allowing the Company and other nonbank transaction processors to market and provide transaction processing services will remain in effect; or (iii) the credit card associations or debit card networks will continue to interpret their rules as they have done in the past, which may have an impact on the Company's business operations. 11 EMPLOYEES At December 31, 1996, the actual number of persons employed by the Company was 554. On a full-time equivalent basis, the Company's staff level was 547. ITEM 2. PROPERTIES The Company leases its principal executive offices and processing facility in San Francisco from BankAmerica. The Company also leases other facilities in California (Los Angeles, Azusa, and Foster City) and Washington (Bellevue, Seattle and Spokane) from BankAmerica. ITEM 3. LEGAL PROCEEDINGS Various legal actions arising in the ordinary course of business are pending against the Company. None of the litigation pending against the Company, individually or collectively, is expected to have a material adverse effect on the Company's financial condition, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Class A Common Stock of the Company is listed for trading on the New York Stock Exchange and began trading under the symbol BPI on December 19, 1996. The initial offering price was $15.50 per share. As of December 31, 1996, the closing market price of the Class A Common Stock per share was $17.875. During the month of December 1996, the high and low sales prices per share of Class A Common Stock were $18.25 and $16.375, respectively. DIVIDEND POLICY The Company has not paid any dividends since its incorporation. It currently intends to retain all future earnings for use in the operations of its business and does not anticipate paying any cash dividends in the foreseeable future. The Company's future dividend policy will be determined by its Board of Directors on the basis of various factors, including the Company's results of operations, financial condition, liquidity needs, capital requirements and investment opportunities. The historical financial statements included in this report for periods prior to the Offerings reflect the remittance to BankAmerica of all cash generated by the Company in excess of the amount required for the Company's operating and investing activities. DESCRIPTION OF CAPITAL STOCK AUTHORIZED CAPITAL STOCK The authorized capital stock of the Company consists of 200 million shares of Class A Common Stock, par value $0.01 per share, 50 million shares of Class B Common Stock, par value $0.01 per share, and 10 million shares of Preferred Stock, par value $0.01 per share. None of the Preferred Stock was issued or outstanding as of December 31, 1996. Of the 200 million shares of Class A Common Stock authorized, 16,236,092 shares were outstanding as of January 31, 1997 held by approximately 2,800 beneficial stockholders, 30,900,000 shares have been reserved for issuance upon conversion of Class B Common Stock into Class A Common Stock and 7,000,000 shares have been reserved for issuance pursuant to certain employee and nonemployee director benefit and option plans. Of the 50 million shares of Class B Common Stock authorized, 30,200,000 shares, or 100 percent of the outstanding shares, are held by BankAmerica. In addition, 700,000 additional shares of Class B Common Stock are subject to issuance to BankAmerica upon consummation of the Asian Acquisitions. The following summary description of the capital stock of the Company is qualified in its entirety by reference to the Certificate of Incorporation of the Company and the Bylaws of the Company, a copy of each of which is filed as an exhibit to this report. COMMON STOCK Voting Rights. The holders of Class A Common Stock and Class B Common Stock generally have identical rights except that holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to ten votes per share on all matters to be voted on by stockholders. The holders of Common Stock are not entitled to cumulative voting rights. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of Class A Common Stock and Class B Common Stock present in person or represented by proxy, voting together as a single class, subject to any voting rights granted to holders of any Preferred Stock. In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of Common Stock would be entitled to share ratably in all assets remaining after payment of liabilities subject to prior distribution rights and payment of any distributions owing to holders of shares of Preferred Stock then outstanding, if any. Holders of the shares of Common Stock have no preemptive rights, and the shares of Common Stock are not subject to further calls or assessment by the Company. There are no redemption or sinking fund provisions applicable to the shares of Common Stock. Dividends. Holders of Class A Common Stock and Class B Common Stock will share in an equal amount per share in any dividend declared by the Board of Directors, subject to any preferential rights of any outstanding 13 Preferred Stock. Dividends consisting of shares of Class A Common Stock and Class B Common Stock may be paid only as follows: (i) shares of Class A Common Stock may be paid only to holders of Class A Common Stock and shares of Class B Common Stock may be paid only to holders of Class B Common Stock and (ii) shares shall be paid proportionally with respect to each outstanding share of Class A Common Stock and Class B Common Stock. Conversion. Prior to a Tax-Free Spin-Off (as hereinafter defined), each outstanding share of Class B Common Stock is convertible at the holder's option into one share of Class A Common Stock. Additionally, each share of Class B Common Stock shall automatically convert into one share of Class A Common Stock if at any time prior to a Tax-Free Spin-Off the number of outstanding shares of Class B Common Stock owned by BankAmerica or any of its subsidiaries (or a Class B Transferee or any of its subsidiaries) represents less than 30 percent of the economic ownership represented by the aggregate number of shares of Common Stock then outstanding. Following the occurrence of a Tax-Free Spin-Off, if any, shares of Class B Common Stock shall not be convertible into shares of Class A Common Stock at the option of the holder thereof. Except as provided below, any shares of Class B Common Stock transferred to a person other than BankAmerica shall automatically convert to shares of Class A Common Stock upon such disposition. Prior to a Tax-Free Spin-Off, shares of Class B Common Stock representing more than a 50 percent economic interest in the Company transferred in a single transaction to one unrelated person (a Class B Transferee) or among such Class B Transferee and its subsidiaries shall not automatically convert to shares of Class A Common Stock upon such disposition. Any shares of Class B Common Stock retained by BankAmerica following any such transfer of shares of Class B Common Stock to a Class B Transferee shall automatically convert into shares of Class A Common Stock upon such transfer. Shares of Class B Common Stock transferred to stockholders of BankAmerica or of a Class B Transferee in a transaction intended to be on a tax-free basis (a Tax-Free Spin-Off) under the Internal Revenue Code of 1986 (Code) shall not convert to shares of Class A Common Stock upon the occurrence of such Tax-Free Spin-Off. Following a Tax-Free Spin-Off, shares of Class B Common Stock shall be transferred as Class B Common Stock; provided, however, that shares of Class B Common Stock shall automatically convert into shares of Class A Common Stock on the fifth anniversary of the Tax-Free Spin-Off, unless prior to such Tax- Free Spin-Off, BankAmerica, or the Class B Transferee, as the case may be, delivers to the Company written advice of counsel reasonably satisfactory to the Company (which shall include BankAmerica's General Tax Counsel) to the effect that (i) such conversion could adversely affect the ability of BankAmerica or the Class B Transferee, as the case may be, to obtain a favorable ruling from the Internal Revenue Service (IRS) that the distribution would be a Tax-Free Spin-off or (ii) the IRS has adopted a general non-ruling policy on tax-free spin-offs and that such conversion could adversely affect the status of the transaction as a Tax-Free Spin-Off. If such written advice is received, approval of such conversion shall be submitted to a vote of the holders of the Common Stock as soon as practicable after the fifth anniversary of the Tax-Free Spin-Off, unless BankAmerica or the Class B Transferee, as the case may be, delivers to the Company written advice of counsel reasonably satisfactory to the Company (which shall include BankAmerica's General Tax Counsel) prior to such anniversary that such vote could adversely affect the status of the distribution as a Tax-Free Spin-Off, including the ability to obtain a favorable ruling from the IRS; if such written advice is delivered, such vote shall not be held and no such conversion shall take place. Upon further written advice of counsel, this fifth anniversary conversion provision shall be null and void. In the event that such vote is held, approval of such conversion will require the affirmative vote of the holders of a majority of the shares of both Class A Common Stock and Class B Common Stock present and voting, voting together as a single class, with each share entitled to one vote for such purpose. The foregoing requirements are intended to ensure that tax-free treatment of the Tax-Free Spin-Off is preserved should the IRS challenge such automatic conversion as violating the 80 percent vote requirement currently required by the Code for a tax-free spin-off. PREFERRED STOCK The Board of Directors has the authority, without further action by the stockholders, to issue preferred stock in one or more series and to fix the rights, designation, preferences, privileges, limitations and restrictions thereof, including dividend rights, conversion rights, terms and rights of redemption, liquidation preferences, and sinking 14 fund terms (any or all of which may be greater than the rights of the common stock). The Board of Directors, without stockholder approval, can issue shares of preferred stock with conversion, voting, and other rights which could adversely affect the rights of the holders of shares of common stock. DELAWARE LAW AND CERTAIN CHARTER PROVISIONS Control of the Company by BankAmerica, as well as certain statutory provisions of Delaware law and the Company's Certificate of Incorporation and Bylaws, may have the effect of deterring hostile takeovers or delaying or preventing changes in control or changes in management of the Company, including transactions in which stockholders of the Company might otherwise receive a premium over the then current market price for their shares. These provisions include (i) the right of the Board of Directors to issue unissued and unreserved shares of Common Stock without stockholder approval, (ii) the right of the Board of Directors to issue shares of Preferred Stock in one or more series and to designate the number of shares of each such series and the relative rights and preferences of such series, including voting rights (in addition to the voting rights provided by law), whether such shares shall be redeemable and, if so, the terms of redemption without further stockholder approval, and (iii) provisions restricting the ability of stockholders to call a special meeting except upon the request of stockholders representing a majority of the voting power of the entire capital stock of the Company issued and outstanding and entitled to vote at such meeting. The Company's Bylaws also contain provisions requiring advance notice to the Company of (i) nominations of candidates for election to the Board of Directors who are not nominated by the Board of Directors and (ii) business to be conducted at the Company's annual meeting of stockholders (other than such business as may be brought by or at the direction of the Board of Directors). Without compliance with these provisions, any such nominations or business may not be considered by the stockholders. Further, unless otherwise provided in the certification of incorporation, Section 203 of the Delaware General Corporation Law (Section 203) regulates certain transactions incident to or following large accumulations of shares of a Delaware corporation, including those made by tender offers. Section 203 may have the effect of significantly delaying a purchaser's ability to acquire the entire interest sought if such acquisition is not approved by the corporation's board of directors. Pursuant to Section 203, the Company's Certificate of Incorporation contains a provision making such section inapplicable to the Company. DIRECTOR AND OTHER LIABILITY AND INDEMNIFICATION The Company's Certificate of Incorporation provides that directors of the Company will not be liable for monetary damages in connection with any breach of their fiduciary duties (with certain exceptions). Under certain circumstances provided in the Bylaws, the Company will indemnify any director or officer or any former director or officer of the Company or any other corporation or enterprise (if serving at the request of the Company) against expenses, liability and loss (including attorney fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) reasonably incurred or suffered by such person by reason of the fact that he or she is or was such director or officer in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative. 15 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (IN MILLIONS, EXCEPT PER SHARE AND COST PER TRANSACTION DATA) OPERATING DATA(1): Net revenue........................... $ 126.2 $ 109.9 $ 98.1 $ 88.9 $ 81.6 Operating expense: Data processing and communications.. 29.1 27.8 24.6 28.0 28.2 Salaries and employee benefits...... 25.4 22.3 20.5 19.0 18.0 General and administrative.......... 15.2 15.1 13.5 15.1 11.2 Depreciation........................ 8.6 6.3 4.4 3.7 3.7 Employee stock exchange(2).......... 2.4 -- -- -- -- Occupancy........................... 1.9 1.9 2.3 2.3 1.3 Amortization of intangibles......... 1.1 1.2 1.3 1.5 0.7 ------- ------- ------- ------- ------- Total operating expense........... 83.7 74.7 66.6 69.5 63.1 ------- ------- ------- ------- ------- Income from operations................ 42.5 35.2 31.5 19.4 18.5 Net interest expense.................. 0.4 -- -- -- -- Provision for income taxes............ 17.4 14.6 13.0 8.0 7.4 ------- ------- ------- ------- ------- Net income............................ $ 24.7 $ 20.7 $ 18.5 $ 11.5 $ 11.1 ======= ======= ======= ======= ======= Pro forma net income per share(3)..... $ 0.53 $ 0.45 $ 0.40 $ 0.25 $ 0.24 ======= ======= ======= ======= ======= Pro forma net income per share, as adjusted(4).......................... $ 0.66 $ 0.55 $ 0.48 NA NA ======= ======= ======= ======= ======= OTHER DATA: Number of credit card transactions processed............................ 295.8 234.5 177.0 136.2 122.3 Number of debit card transactions processed............................ 81.3 84.5 74.6 65.6 NA Cost per transaction processed(5)..... $ 0.22 $ 0.23 $ 0.26 $ 0.34 $ 0.52 Credit card sales volume processed.... 22,612 18,633 14,903 12,642 10,171 Debit card sales volume processed..... 2,330 2,336 2,076 1,861 NA BALANCE SHEET DATA AT DECEMBER 31: Total assets.......................... $ 286.7 $ 116.0 $ 105.2 $ 90.1 $ 90.8 Total liabilities..................... 34.6 16.8 21.2 19.1 18.9 BankAmerica's equity interest(6)...... NA 99.2 84.0 71.0 71.9 Stockholders' equity.................. 252.1 NA NA NA NA
- -------- (1) Certain amounts have been reclassified to conform with current year presentation. (2) On December 31, 1996 certain employees of the Company elected to exchange their employee stock options and restricted stock from BAC for options and restricted stock of the Company. This employee stock exchange resulted in a one-time expense of $2.4 million. (See Note 8 of the Notes to the Consolidated Financial Statements on page 33.) (3) Pro forma net income per share for all historical periods has been calculated as if the Offerings of Class A Common Stock had been completed on January 1, 1992, and 46,436,092 shares (30,200,000 shares of Class B Common Stock and 16,236,092 shares of Class A Common Stock) had been outstanding in all periods presented. (4) Pro forma earnings per share, as adjusted, assumes that the proceeds from the Offerings were available from January 1, 1994 and were invested in short-term investments, and excludes the one-time expense related to the employee stock exchange ($2.4 million) and interest expense ($492,000) from the 1996 results. (5) Calculated as the ratio of total operating expense to number of credit and debit card transactions processed. (6) BankAmerica's equity interest represents cumulative historical net income of the Company adjusted for net cash transfers to and from BankAmerica. On December 3, 1996, BankAmerica's equity interest in the Company was exchanged for 30.2 million shares of Class B Common Stock. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's net revenue is generated primarily from fee income earned under processing agreements with merchants, agent banks, and independent sales organizations (ISOs), which is offset by credit card interchange fees and assessments and the fees and charges of debit networks in the case of debit transactions. The Company also receives income for several value-added services it provides, such as enhanced reporting options and terminal products it sells and rents to merchants. The Company has two principal billing methods: the discount rate method and the flat fee method. Under the discount rate method, the Company charges a per transaction fee that is a percentage of the dollar amount of the transaction (the discount). Out of the discount collected, the Company pays an interchange fee and an assessment fee charged by the credit card associations and records the remainder as net revenue. The discount rate method is used by the Company for the substantial majority of its clients, in particular smaller merchants. Under the flat fee method, the Company charges a client a flat fee for each transaction, plus the interchange, assessment, and other fees. Merchants receive their settlement payments for the gross amount of the transactions. The Company's principal transaction expenses are credit card association interchange fees and assessments and the fees and charges of debit networks in debit transactions (other than On-Us transactions). Interchange fees are stated fees charged by the credit card associations to reimburse card-issuing banks for the risk of transaction fraud, processing expenses, and funding during the period from purchase to payment. The fee schedules are set by the credit card associations and are based upon the type of merchant, transaction type (electronic or paper-based), and settlement time. Interchange fees generally range from 1.25% to 2.10% of the transaction amount. Although interchange rates vary by merchant industry, they are generally uniform among merchant processors. Assessments are stated fees charged by credit card associations to fund their internal operations and are generally uniform among merchant processors. In certain cases, the Company, as a processor, bears the risk of merchant nonpayment of applicable interchange, assessment, and other fees. The Company receives payments for merchant transactions from a card association clearing bank less the fees payable to the card issuer (intercharge fees). For those merchants which the Company bills on a periodic basis (generally monthly), the Company advances payment to the merchant for the gross amount of the merchant's transactions. The Company then bills the merchant periodically for the interchange fees and processing fees. Any failures by merchants to honor such invoices adversely affects the Company's net revenue. The Company's operating expenses consist primarily of: data processing and communication charges, which relate directly to processing credit and debit card transactions; salaries and employee benefits; general and administrative expense; depreciation of point-of-sale (POS) terminals purchased by the Company for rental to its merchant base and depreciation of investments made by the Company in proprietary technologies; and amortization of intangibles, primarily composed of an annual charge of approximately $1.0 million related to the buyout of a non-competition agreement in 1992, which will be fully amortized by the end of 1997. In recent years, the Company has seen a change in the composition of its merchant base, with an increasing percentage of high-volume retailers. Fees per transaction paid to the Company by high-volume retailers in relation to sales volume generally are lower than with respect to the Company's overall merchant base. As a result of this change in the merchant base and price competition, the Company's net revenue has not increased at the same rate as its sales volume, and the Company expects this trend to continue. In addition, there has been a trend toward consolidation in the merchant processing industry. Further tightening of margins may result in banks and other card processors abandoning the merchant processing business, thus accelerating the trend toward consolidation. Due to market demands requiring processors to provide advanced and efficient technology, certain processors have recently left the business or merged with other providers. The Company's principal strategic objectives include efforts to maintain its position as one of 17 the largest merchant processors through growth generated primarily through the Company's own sales channels and, to the extent attractive opportunities arise, augmented through acquisitions. The Company and BankAmerica engage in various intercompany transactions and arrangements, including the provision by BankAmerica of various services to the Company. Such services are provided pursuant to certain Intercompany Agreements. For additional information, see "Business--Relationship with BankAmerica and the Bank" on page 8 of this report and Note 10 of the Notes to Consolidated Financial Statements on page 36. Subsequent to the initial public offerings in December 1996 (the Offerings), neither the Company nor its operations are included in the consolidated federal income tax return of BAC. However, the Company and its operations will be included in certain state consolidated and combined tax returns filed by BAC. RESULTS OF OPERATIONS Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Net Revenue. For the year ended December 31, 1996, net revenue was $126.2 million, up $16.3 million, or 15 percent, from 1995. This increase was primarily attributable to a $3.9 billion increase in sales volume processed during the same period. The increase in sales volume resulted primarily from growth in the Company's merchant base reflecting its continued emphasis on marketing and sales. Growth in credit card sales volume processed was partially offset by a small decline in debit card sales volume, reflecting the loss by the Interlink(R) debit card network of a major debit card issuer. Furthermore, to offset interchange rate increases in April 1996 and April 1995, the Company implemented a price increase in April 1996 which added approximately $1.5 million to net revenue during the year ended December 31, 1996. This price increase was accomplished without any material customer attrition. Consistent with prior periods, approximately 95 percent of the net revenue was from merchant relationships originated by the Company's direct sales force. Sales volume increased at a higher rate than net revenue as a result of a continuing change in the composition of the Company's merchant base. Fees per transaction paid to the Company by high-volume retailers in relation to sales volume generally are lower than in the case of the Company's overall merchant base. Operating Expense. Total operating expense was $83.7 million in 1996, an increase of $9.0 million, or 12 percent, from 1995. Excluding the effect of the non-recurring employee stock exchange of $2.4 million, total operating expense increased $6.6 million, or 9 percent, from 1995. This increase was primarily due to higher salaries and employee benefits, depreciation, and data processing and communications expense. Salary and employee benefits expense increased $3.1 million from 1995, resulting primarily from the opening of the Company's New York and Chicago sales and marketing offices. In addition, the cost of employee benefits increased during 1996, reflecting changes in the benefit formulas resulting from benefit plan amendments. Depreciation expense increased $2.2 million from 1995, and was primarily related to terminals added to support new merchant locations. In addition, data processing and communications costs increased $1.3 million, and were attributable to higher authorization expense and telecommunications, reflecting increased transaction volume. During 1996, operating expense declined to $0.22 from $0.23 per debit and credit card transaction. This decline reflected greater economies of scale, expense reduction resulting from the Company's in-house performance of certain processing functions previously performed by third parties, and the favorable renegotiation of a third-party vendor arrangement. In addition, the Company began to realize cost savings as a result of the expansion of its processing of On-Us debit card transactions. Provision for Income Taxes. The provision for income taxes was $17.4 million for the year ended December 31, 1996, compared to $14.6 million for the same period in 1995, reflecting higher operating income. For additional information, see Note 7 of the Notes to Consolidated Financial Statements on page 33. 18 Merchant processing companies like the Company may be subject to state taxation of certain portions of their service fees charged to merchants. Application of this tax is an emerging issue in the industry and the states have not yet adopted uniform guidelines regarding the taxation of merchant services. In the event the Company is required to bear all or a portion of these costs, and is unable to pass such costs through to its merchant customers, the Company's business, financial condition, or results of operations could be adversely affected. Year Ended December 31, 1995 Compared with Year Ended December 31, 1994 Net Revenue. Net revenue was $109.9 million in 1995, up $11.8 million, or 12 percent, from 1994. This increase was primarily attributable to a 23.5 percent increase in total sales volume processed to $21.0 billion in 1995. The increase in sales volume resulted from growth in the Company's merchant base as a result of its continued emphasis on marketing and sales. Increased sales volume and net revenue in 1995 were partially offset by the loss in the first quarter of 1995 of a major account associated with BANW's merchant processing business. The account represented approximately 3.0 percent of the 1994 net revenue associated with BANW's merchant processing business. The Company also was subject to an increase in April 1995 of the interchange rates charged by the credit card associations which the Company, for competitive purposes, chose not to pass on to its customers. The increased interchange rates reduced 1995 net revenue by approximately $1.4 million. Sales volume increased at a higher rate than net revenue as a result of a continuing change in the composition of the Company's merchant base. The proportion of sales volume attributable to high-volume retailers increased during 1995 compared with 1994, reflecting the success of the Company's sales efforts directed towards this segment. In particular, four of the Company's current five largest accounts, as measured by sales volume, were acquired at the end of 1994. The increased sales volume also reflected an increased proportion of debit card sales volume processed by the Company. Fees on debit card transactions generally are lower than fees on credit card transactions in relation to the associated sales volume. Operating Expense. Operating expense totaled $74.7 million in 1995, up $8.1 million or 12 percent, from 1994. Of this increase, $3.2 million is attributable to increased data processing and communications costs, reflecting increased transaction volume. Salary and employee benefits increased by $1.8 million, reflecting growth in the direct sales staff and related support personnel. Depreciation related to new terminals to support new merchant locations resulted in an additional $1.9 million of depreciation expense. The remainder of the increase was attributable to increases in general and administrative costs, including merchant supply costs, driven by the increased sales volume. Provision for Income Taxes. Income taxes were $14.6 million for 1995, up from $13.0 million for 1994. The increase was primarily due to higher income from operations. BALANCE SHEET REVIEW Assets totaled $286.7 million at December 31, 1996, up $170.7 million from year-end 1995. The increase was primarily due to an increase in cash and cash equivalents of $138.1 million, reflecting the proceeds from the Offerings and operating cash flow retained in the business. In addition, drafts in transit and accounts receivable increased from their 1995 levels by $16.4 million and $10.7 million, respectively. These increases primarily reflected the larger volume of business activity, particularly in the 1996 holiday season. Total liabilities were $34.6 million at December 31, 1996, an increase of $17.8 million from December 31, 1995. Merchants payable liabilities were $14.1 million at year-end 1996, up $8.2 million from 1995. The increase was primarily due to holiday volume in 1996 exceeding 1995 volume, as well as normal processing fluctuations resulting from increased weekend activity in December 1996. 19 Total stockholders' equity was $252.1 million at December 31, 1996, and was primarily due to the effects of BankAmerica's exchange of its equity interest in the Company for 30.2 million shares of Class B Common Stock (the Reorganization) and the issuance of 16.1 million shares of Class A Common Stock (including the exercise of the underwriters' overallotment options to acquire 2.1 million shares), at $15.50 per share in the Offerings. LIQUIDITY AND CAPITAL RESOURCES The Company generated cash flows from operations of $23.1 million, $14.4 million, and $12.8 million for the years ended December 31, 1996, 1995, and 1994, respectively. Prior to the time BankAmerica transferred its domestic merchant processing businesses to the Company, funds generated by the Company's operations and not used for investment were remitted to BankAmerica. For the years ended December 31, 1996, 1995, and 1994, $107.1 million, $5.5 million, and $5.5 million, respectively, were remitted to BankAmerica. The 1996 amount includes $97.8 million of drafts in transit retained by BAC as part of the Reorganization. The Company completed the Offerings on December 31, 1996. Net proceeds from the Offerings were $232.9 million, of which $126.3 million was used by the Company to retire short-term debt under a line of credit with an affiliate. The balance of such proceeds and net cash generated by the Company's operations after the Offerings will be used for general corporate purposes, including strategic technology investments, the funding of research and product development, and future acquisitions. At the time of the transfer to the Company of the merchant processing businesses of the Bank and BANW, BAC retained substantially all of the drafts in transit relating to the transferred businesses. The Company anticipates that for the foreseeable future it generally will be able to satisfy its working capital requirements from internally-generated funds. The Company currently intends to retain future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The Company's future dividend policy will be determined by its Board of Directors on the basis of various factors, including the Company's results of operations, financial condition, liquidity needs, capital requirements, and investment opportunities. The Company had capital expenditures of $10.8 million, $9.4 million, and $7.7 million for the years ended December 31, 1996, 1995, and 1994, respectively. These expenditures were primarily for merchant terminals as well as technology-related equipment to support transaction processing. The Company expects to spend approximately $15.0 million in 1997, of which approximately $10.0 million will be related to the acquisition of terminals to support new merchant locations. The remainder is for strategic technology investments (including the Company's new transaction processing system, HostLink(TM), which is expected to become operational in the first quarter of 1997) and the funding of research and product development. The Company also has an unutilized line of credit of $75 million that is available for general corporate purposes and to meet working capital requirements. For additional information, refer to Note 6 of the Notes to Consolidated Financial Statements on page 32. RISK MANAGEMENT The credit card associations have rules that apply to a bank or other processing firm that acquires a card transaction from a merchant and processes and enters the transaction into the credit card system for presentment to the card issuer. In the event of certain types of billing disputes between a cardholder and a merchant, the processor of the transaction assists the merchant in investigating and resolving the dispute. If the dispute is not resolved in favor of the merchant, the transaction is charged back to the merchant and that amount is credited or otherwise refunded to the cardholder. If the processor is unable to collect such amounts from the merchant's account, and if the merchant refuses or is unable due to bankruptcy or other reasons to reimburse the processor for the chargeback, the processor bears the loss for the amount of the refund paid to the cardholder. In cases in which the transaction is acquired by a processor other than the bank or other processing firm that will enter it into the credit card system, the processor is generally required by that bank or other firm to indemnify it against such losses. The Company has entered into such arrangements with the Bank pursuant to a sponsorship agreement. 20 Chargeback exposure can also result from fraudulent credit card transactions initiated by merchant customers. Examples of merchant fraud include logging fictitious sales transactions and falsifying transaction amounts on actual sales. The Company conducts a background review of its merchant customers, and on a daily basis monitors merchant transactions against standards it has developed in its efforts to prevent merchant fraud. The Company also can withhold or delay a merchant's daily settlement if fraudulent activity is suspected, thereby mitigating exposure to loss. However, there can be no assurance that the Company will not experience significant amounts of merchant fraud, which may have a material adverse effect on the Company's business, financial condition, and results of operations. The degree of exposure to chargebacks may also be adversely affected by the development of new transaction delivery channels, such as the Internet, which has yet to be fully evaluated. In certain cases, the Company, as a processor, bears the risk of merchant nonpayment of applicable interchange, assessment, and other fees. The Company receives payments for merchant transactions from a card association clearing bank less the fees retained by the card issuer (interchange fees). For those merchants which the Company bills on a periodic basis (usually monthly), the Company advances payment to the merchant for the gross amount of the merchant's transactions. The Company then bills the merchant periodically for the interchange fees and processing fees. Failure by the merchant to honor such invoices adversely affects the Company's net revenues. The Company is not exposed to card issuer credit losses unassociated with a dispute between the cardholder and the merchant as long as the transaction is properly processed and the merchant is not deemed by the credit card organizations to have excessive fraud or chargebacks. As a result of its exposure to potential liability for merchant fraud, employee fraud, chargebacks, and other losses created by its business, the Company views its risk management and fraud avoidance practices as integral to its operations and overall success. Through its credit review policy, the Company strives to minimize liabilities by employing various risk control measures. The Company's risk management policies involve three key components: Industry Screening. The Company generally does not approve merchant applicants whose types of businesses have traditionally resulted in higher- than-average financial losses. These businesses are primarily in those industries involved in the delivery of goods and services to customers at a future time from the date of the purchase transaction. When customers in such industries are approved, they generally have large well-established businesses and extensive banking relationships with BankAmerica. Merchant Credit Reviews. The Company conducts a thorough evaluation of the creditworthiness of each applicant. Included in this evaluation is a review of the projected volumes, credit history, financial statements, previous processor statements, on-site inventory, checking account status, and verification against the Visa(R)/MasterCard(R) terminated merchant file. The Company may require the establishment of a reserve account when a merchant's creditworthiness is below the Company's normal credit standards. A reserve account contains a fixed dollar amount deposited by the merchant. The Company may also reflect the increased risk associated with such customers in pricing adjustments for its services. Should the Company experience any losses while processing transactions for a merchant, the Company has the right to debit funds from the merchant's reserve account. For merchants with unsatisfactory, unverifiable, or otherwise impaired credit standing, the Company maintains a referral relationship with other merchant processors to which such merchants are referred. Exception Monitoring. By compiling data from public records, industry sources, and the more than 320 million transactions it processes annually, the Company captures information about approved and declined transactions, closed accounts, credit use history, and other proprietary and publicly available information. Sales activity is analyzed daily to detect unusually high deposit volumes, keyed transactions (e.g., transactions not entered into a POS terminal by swiping the card), and other types of activity that are considered exceptions to normal activity. Keyed transactions pose a higher degree of risk since the card and/or cardholders may not be present at the time of sale and there is a risk of error in keying in the number or that the person using the card is not the legitimate cardholder. When monitoring daily exception activity, the Company has the ability, should indicators warrant, to delay payment to merchants for their deposits. The ability to delay payment provides an extra period of time during which the Company can investigate the legitimacy of the unusual activity. 21 As a result of stringent credit evaluation and daily monitoring processes, the Company has experienced significant declines in losses that result from fraudulent or disputed transaction activity. During the years ended December 31, 1996, 1995, and 1994, such losses were approximately $0.7 million, $2.2 million, and $2.9 million, respectively, representing in such periods .003 percent, .012 percent, and .019 percent, respectively, of the Company's total credit card sales volume. NEW TRANSACTION SYSTEM AND FUTURE EFFECTS OF TECHNOLOGICAL CHANGE The Company is developing a new transaction processing system, called HostLink(TM), which will allow the Company to decrease its reliance on third- party vendors and provide the Company with greater ability to reduce and control costs. This system became operational in the first quarter of 1997. The Company expects to have higher than normal data processing and communications costs during the first six to nine months of 1997 while the systems run parallel. The Company does not expect to fully realize the benefits associated with this new system until 1998. The merchant processing industry in general requires the use of advanced computer hardware and software technology and has been characterized by the development of new products and services to meet increasingly complex and rapidly-changing client and regulatory requirements. FLUCTUATION IN QUARTERLY OPERATING RESULTS The merchant processing industry in general is prone to seasonal fluctuations in transaction activity. Although the Company generally experiences seasonality in its business, fluctuations are less pronounced than in the industry, due in part to its diverse merchant customer base. Those segments of merchants that are particularly sensitive to seasonal fluctuations, such as airlines, travel agencies, lodging, and mail order merchants, each represent relatively small percentages of the Company's processing business, as compared to those segments of the Company's customer base that are generally not subject to seasonality, such as general retail merchants, restaurants, supermarkets, and gas stations. The Company's net revenue is typically higher in the third and fourth calendar quarters and lower in the first calendar quarter. Increased tourism in California and other western states during the summer months and retail activity prior to the beginning of the school year contribute to higher third quarter net revenue, and holiday activity contributes to higher fourth quarter net revenue. The decline in retail activity following the holiday season results in lower first quarter net revenue. FORWARD-LOOKING STATEMENTS From time to time, the Company makes forward-looking statements. Forward- looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. The Company may include forward-looking statements in its periodic reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K, in its proxy statement, in other written materials, and in statements made by senior management to analysts, institutional investors, representatives of the media, and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risks exist that predictions, forecasts, projections, and other forward-looking statements will not be achieved. Actual results may differ materially due to a variety of factors. Among the uncertainties to which the Company's forward-looking statements are subject are credit risk, liquidity risk, and capital risk. In addition, various events can create uncertainties to which the Company's forward-looking statements are subject. These events include, but are not limited to, technological changes; the effects of competition or of legislative or regulatory developments (see "Competition" and "Supervision and Regulation" on pages 10 through 11); changes in fiscal monetary and tax policies of the United States and other countries in which the Company does business; political or social developments, including war, civil unrest or terrorist activity; and natural disasters (including earthquakes). When relying on forward-looking statements to make decisions with respect to the Company, 22 investors and others should carefully consider these and other uncertainties and events, whether or not the statements are described as forward-looking. Forward-looking statements made by the Company are intended to apply only at the time they are made, unless explicitly stated to the contrary. Moreover, whether or not stated in connection with a forward-looking statement, the Company undertakes no obligation to correct or update a forward-looking statement should the Company later become aware that it is not likely to be achieved. If the Company were to update or correct a forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections thereafter. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders BA Merchant Services, Inc. We have audited the accompanying consolidated balance sheets of BA Merchant Services, Inc. (as successor to the merchant processing businesses of BankAmerica Corporation as described in Note 1) as of December 31, 1996 and 1995 and the related consolidated statements of operations, changes in equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of BA Merchant Services, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BA Merchant Services, Inc. at December 31, 1996 and 1995 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Ernst & Young ---------------------------- San Francisco, California February 10, 1997, except for Note 6 as to which the date is March 5, 1997. 24 BA MERCHANT SERVICES, INC. CONSOLIDATED BALANCE SHEET
DECEMBER 31, ----------------- 1996 1995 -------- -------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents...................................... $138,398 $ 345 Drafts in transit.............................................. 87,803 71,368 Accounts receivable............................................ 35,282 24,565 -------- -------- Total current assets......................................... 261,483 96,278 Property and equipment, net...................................... 16,760 14,478 Other assets..................................................... 8,478 5,247 -------- -------- Total assets................................................. $286,721 $116,003 ======== ======== LIABILITIES AND EQUITY Current liabilities: Accounts payable............................................... $ 415 $ 134 Merchants payable.............................................. 14,092 5,906 Accrued liabilities............................................ 5,603 4,019 Accrued credit card association and interchange fees........... 5,060 3,884 Income taxes payable to affiliate ............................. 3,188 -- -------- -------- Total current liabilities.................................... 28,358 13,943 Other liabilities................................................ 6,238 2,892 -------- -------- Total liabilities............................................ 34,596 16,835 BAC's equity interest............................................ -- 99,168 Stockholders' equity: Class A Common Stock, par value $0.01 (authorized 200,000,000 shares; issued and outstanding 16,236,092 shares)............... 162 -- Class B Common Stock, par value $0.01 (authorized 50,000,000 shares; issued and outstanding 30,200,000 shares)............... 302 -- Additional paid-in capital....................................... 249,622 -- Retained earnings................................................ 2,039 -- -------- -------- Total stockholders' equity................................... 252,125 -- -------- -------- Total liabilities and equity................................. $286,721 $116,003 ======== ========
See Notes to Consolidated Financial Statements. 25 BA MERCHANT SERVICES, INC. CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 -------- -------- ------- (AMOUNTS IN THOUSANDS) Net revenue.......................................... $126,215 $109,928 $98,143 Operating expense (Note 10): Data processing and communications................. 29,078 27,815 24,570 Salaries and employee benefits..................... 25,438 22,338 20,517 General and administrative......................... 15,218 15,095 13,513 Depreciation....................................... 8,561 6,327 4,444 Employee stock exchange............................ 2,431 -- -- Occupancy.......................................... 1,916 1,923 2,270 Amortization of intangibles........................ 1,118 1,201 1,280 -------- -------- ------- Total operating expense.......................... 83,760 74,699 66,594 -------- -------- ------- Income from operations............................... 42,455 35,229 31,549 Net interest expense................................. 430 -- -- Provision for income taxes........................... 17,356 14,573 13,016 -------- -------- ------- Net income....................................... $ 24,669 $ 20,656 $18,533 ======== ======== =======
See Notes to Consolidated Financial Statements. 26 BA MERCHANT SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
DECEMBER 31, -------------------------- 1996 1995 1994 -------- ------- ------- (AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income......................................... $ 24,669 $20,656 $18,533 Adjustments to net income to arrive at cash provided by operating activities: Depreciation..................................... 8,561 6,327 4,444 Amortization of intangibles...................... 1,118 1,201 1,280 Benefit from deferred income taxes............... (1,297) (268) (332) Amortization of restricted stock................. 38 -- -- Employee stock exchange.......................... 2,431 -- -- Changes in operating assets and liabilities excluding the effects of the transfer of net assets from BAC: Increase in drafts in transit.................. (16,435) (7,646) (12,969) Increase in accounts receivable................ (10,717) (3,972) (4,340) Increase (decrease) in accounts payable........ 281 (869) 867 Increase in current income taxes payable to affiliate .................................... 3,188 -- -- Increase in merchants payable.................. 8,186 543 2,701 Increase (decrease) in accrued liabilities..... 1,584 (570) 193 Increase (decrease) in accrued credit card association and interchange fees.............. 1,176 160 (42) Other, net..................................... 294 (1,146) 2,466 -------- ------- ------- Net cash provided by operating activities.... 23,077 14,416 12,801 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment................. (10,843) (9,459) (7,741) -------- ------- ------- Net cash used for investing activities....... (10,843) (9,459) (7,741) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on revolving line of credit............. 174,500 -- -- Repayments on revolving line of credit............. (174,500) -- -- BAC's change in funding............................ (107,063) (5,518) (5,495) Net proceeds from initial public offering.......... 232,882 -- -- -------- ------- ------- Net cash provided by (used for) financing activities.................................. 125,819 (5,518) (5,495) -------- ------- ------- Increase (decrease) in cash and cash equivalents... 138,053 (561) (435) Cash and cash equivalents at beginning of period... 345 906 1,341 -------- ------- ------- Cash and cash equivalents at end of period......... $138,398 $ 345 $ 906 ======== ======= =======
See Notes to Consolidated Financial Statements. 27 BA MERCHANT SERVICES, INC. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
COMMON STOCK(1) ----------------- ADDITIONAL BAC'S PAID-IN RETAINED EQUITY SHARES AMOUNTS CAPITAL EARNINGS INTEREST -------- -------- ---------- -------- --------- (AMOUNTS IN THOUSANDS) BALANCE AT DECEMBER 31, 1993........................ -- $ -- $ -- $ -- $ 70,992 Net income................... -- -- -- -- 18,533 BAC's change in funding...... -- -- -- -- (5,495) -------- ------- -------- ------ --------- BALANCE AT DECEMBER 31, 1994........................ -- -- -- -- 84,030 Net income................... -- -- -- -- 20,656 BAC's change in funding...... -- -- -- -- (5,518) -------- ------- -------- ------ --------- BALANCE AT DECEMBER 31, 1995........................ -- -- -- -- 99,168 CHANGES IN EQUITY FOR THE PE- RIOD ENDED DECEMBER 3, 1996: Net income................... -- -- -- -- 22,630 BAC's change in funding...... -- -- -- -- (107,063) EFFECT OF REORGANIZATION: Transfer of net assets from BAC in exchange for Class B Common Stock................ 30,200 302 14,433 -- (14,735) Employee stock exchange for Class A Common Stock........ 2 -- 2,431 -- -- CHANGES IN EQUITY FOR THE PERIOD DECEMBER 4, 1996 THROUGH DECEMBER 31, 1996: Net income................... -- -- -- 2,039 -- Restricted stock issuances of Class A Common Stock........ 134 1 2,075 -- -- Unvested portion of re- stricted stock.............. -- -- (2,038) -- -- Net proceeds from the initial public offering of Class A Common Stock................ 16,100 161 232,721 -- -- -------- ------- -------- ------ --------- BALANCE AT DECEMBER 31, 1996........................ 46,436 $ 464 $249,622 $2,039 $ -- ======== ======= ======== ====== =========
- -------- (1) Refer to Note 1 on page 29 of the Notes to Consolidated Financial Statements for a discussion of Class A Common Stock and Class B Common Stock. See Notes to Consolidated Financial Statements. 28 BA MERCHANT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS BA Merchant Services, Inc. (the Company) was incorporated on October 11, 1996 and commenced operations December 4, 1996 upon the transfer by Bank of America NT&SA (the Bank) and Bank of America NW, National Association, (formerly Seattle-First National Bank) (BANW) of their respective United States merchant processing businesses to the Company in consideration for 30.2 million shares of Class B Common Stock (the Reorganization). At December 31, 1996, the Bank and BANW were wholly owned subsidiaries of BankAmerica Corporation (BAC). However, on January 1, 1997, BANW was merged into the Bank. References in 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 BANW, unless the context requires otherwise. BAC's transfer 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 contribution of net assets was SF Merchant Services, Inc. a wholly owned subsidiary of BANW. During December 1996, the Company issued 16.1 million shares of Class A Common Stock in underwritten initial public offerings (the Offerings) which generated gross proceeds of $249.6 million less the underwriters' discount and expenses totaling $16.7 million, resulting in net 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. Such borrowings had been used to finance operations between the Reorganization and the Offerings and reflected the level of the Company's business during the 1996 year-end holiday season. The Company has two classes of authorized common stock: Class A Common Stock and Class B Common Stock. Holders of the Class A Common Stock generally have identical rights to holders of Class B Common Stock, except that holders of Class A Common Stock are entitled to one vote per share while holders of the Class B Common Stock are entitled to ten votes per share on all matters submitted to a vote of stockholders. Upon completion of the Reorganization, BAC owned 100 percent of the Class B Common Stock, which subsequent to the Offerings represents 65.2 percent of the Company's common stock and 94.9 percent of the combined voting power of the Company's outstanding common stock. In connection with the Reorganization, the Company entered into various intercompany agreements with BAC which are described in Note 10 on page 36. The Company also entered into a definitive agreement with BAC to acquire the merchant processing businesses presently conducted by the Bank in the Philippines and Thailand (collectively, the Asian Acquisitions) and to work cooperatively to allow the Company to acquire BAC's merchant processing businesses in Taiwan and other countries in Asia subject to the approval in each such country of the local regulatory authorities. The Company provides an array of payment processing and related information products and services to merchants throughout the United States who accept credit, charge, and debit cards as payment for goods and services. The Company is one of the largest processors of merchant credit card transactions and the largest processor of debit card transactions in the United States. The Company's products and services include the processing of a wide variety of credit, charge, and debit card transactions and providing merchants with other related information, services, and product support. The Company provides its products and services to a merchant customer base in a wide variety of industries, including general retailers, restaurants, and supermarkets. The Company's customers are large multi-regional chains, middle- market merchants, and small merchants. The Company's sales force markets its products and services to merchants directly and through the BAC branch network and product distribution system. In addition, the Company uses agent banks and independent sales organizations (ISOs) that obtain customers on behalf of the Company. 29 BA MERCHANT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1996, more than half of the merchant locations served by the Company were located in the State of California. The Company estimates that approximately 40 percent of its charge volume processed for the year ended December 31, 1996 was derived from merchant locations in California. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation. The consolidated financial statements of the Company are prepared in conformity with generally accepted accounting principles and include the accounts of BA Merchant Services, Inc. and its wholly owned subsidiary, SF Merchant Services, Inc. Significant intercompany balances and transactions have been eliminated. 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 consolidated results of operations, assets and liabilities of the Company for the period from the date of the Reorganization through December 31, 1996, and the combined historical results of operations, assets and liabilities of the U.S. merchant processing businesses of the Bank and BANW for all periods prior to the Reorganization. For simplicity of presentation, these financial statements are referred to herein as Consolidated Financial Statements. Prior to the Reorganization, changes in BankAmerica's equity interest represented net income of the Company adjusted for net cash transfers to and from BankAmerica. Additionally, the financial statements include allocations of certain assets (primarily property and equipment) and expenses relating to the merchant processing businesses transferred from BankAmerica. Management believes these allocations are reasonable. Certain of the pre-Reorganization expenses in the Consolidated Financial Statements were 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, financial position, 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 BankAmerica 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. Cash and Cash Equivalents. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The amounts reflected on the balance sheet at December 31, 1996 and 1995 are held on deposit or invested through BankAmerica. Drafts in Transit. Drafts in transit represent those transactions for which merchants have been paid by the Company, but for which payment has not yet been received from the credit card associations or debit card networks. Payment from those entities is generally received within one to three days. Accounts Receivable. Accounts receivable primarily represents fee income earned but not collected under processing agreements with merchants, agent banks, and ISOs. Property and Equipment. Property and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which range from two to eight years for furniture and equipment and from three to five years for point-of-sale terminals. Identifiable Intangible Assets. Included in other assets are identifiable intangible assets related to customer base acquisitions and the buyout of a non-competition agreement which occurred in 1992. These assets are being amortized on a straight-line basis over a five-year period corresponding to the original life of the buyout agreement and the estimated period of benefit related to the customer bases acquired. 30 BA MERCHANT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Merchants Payable. Merchants payable represents those transactions for which the Company has been paid, but for which amounts have not yet been remitted to merchants. Net Revenue. Net revenue primarily includes fees earned from merchants related to the processing of transactions (including merchant discount fees), offset by interchange fees payable to credit card issuers and fees payable to credit card associations and debit card networks, and is recorded as services are performed. Net revenue also includes fees earned from the deployment of point of sale terminals. Provision for Income Taxes. The liability method of accounting is used for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between financial reporting and tax reporting bases of assets and liabilities, as well as for operating losses and tax credit carryforwards, using enacted tax laws and rates. Deferred tax expense represents the net change in the deferred tax asset or liability balance during the year. This amount, together with income taxes currently payable or refundable for the current year, represents the total income tax expense for the year. Historically, the Company has been included in the consolidated federal, and in certain consolidated and combined state and local returns filed by BAC. The Company settled its consolidated and combined tax liabilities by making payments to BAC. After the Offerings, the Company will file separate federal and certain separate state and local tax returns according to the taxable activity of its operations and will be included in certain consolidated and combined state and local tax returns filed by BAC. As a result, the Company's federal and separate state and local income tax provisions and related tax liabilities will be calculated on a stand-alone basis. In accordance with the Company's tax allocation agreement with BAC, the consolidated and combined state and local income tax provision and related tax liabilities and assets for the Company will be determined as though the Company had filed separate tax returns. If the Company is unable to fully recognize all of its state and local deferred tax assets on a separate return basis, the Company will recognize additional deferred tax assets to the extent they are expected to be realized in the consolidated and combined state and local returns. Tax payments related to excess losses or tax credits will be received by the Company if these deductions and credits are utilized in the consolidated and combined state and local returns. Recently Issued Accounting Standards. Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This standard requires that long- lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of the standard did not materially impact the Company's combined results of operations, financial condition, or cash flows since this standard was essentially the method the Company used in the past to measure and record asset impairments. In 1995, the Financial Accounting Standards Board released SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). This standard provides an alternative to Accounting Principles Board (APB) Opinion No. 25 and is effective for fiscal years beginning after December 15, 1995. The Company has elected to account for stock-based compensation plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations (APB Opinion 25) and to follow the pro forma net income, pro forma earnings per share, and stock-based compensation plan disclosure requirements set forth in SFAS No. 123. Accordingly, SFAS No. 123 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of drafts in transit and accounts receivable. 31 BA MERCHANT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Use of Estimates in the Preparation of Financial Statements. The preparation of the consolidated financial statements of the Company requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available as of the date of the financial statements. Therefore, actual results could differ from those estimates. 3. MERCHANT DEPOSITS Merchant deposits are restricted deposit accounts held at BankAmerica branches whose balances may be used by the Company to satisfy chargebacks and other disputes. When a credit card is used to initiate a transaction which is disputed by the cardholder, it is the responsibility of the card-accepting processor to see that the merchant resolves the dispute. If the merchant is unable or unwilling to do so, the processor may have to refund to the cardholder the purchase price of the disputed transaction. As protection against such liability, the Company may require certain merchants to maintain restricted deposit accounts in which the Company has a security interest. Because these deposits are legal liabilities of the respective BankAmerica branches, such deposits do not appear on the balance sheet of the Company. At December 31, 1996, merchant deposits were approximately $6.9 million. 4. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION During the year ended December 31, 1996, the Company exchanged 30.2 million shares of Class B Common Stock for BankAmerica's interest in certain assets and liabilities of its merchant processing operations excluding drafts in transit of $97.8 million, which had been previously funded by BankAmerica. In addition, the Company issued 134,000 shares of restricted stock to management personnel as described in Note 8 on page 33. During the years ended December 31, 1996, 1995 and 1994, the Company made net income tax payments to BAC of $15.5 million, $14.8 million, and $13.3 million, respectively. 5. PROPERTY AND EQUIPMENT The following is a summary of property and equipment:
DECEMBER 31 --------------- 1996 1995 ------- ------- (AMOUNTS IN THOUSANDS) Furniture and equipment..................................... $ 4,549 $ 3,180 Payment processing terminals................................ 43,170 34,174 ------- ------- 47,719 37,354 Less: Accumulated depreciation.............................. 30,959 22,876 ------- ------- $16,760 $14,478 ======= =======
6. REVOLVING LINE OF CREDIT On December 2, 1996, the Company entered into a $140 million revolving line of credit with Bank of America Texas, N.A. (an affiliate). As of March 5, 1997, the Company requested that the amount of the revolving line of credit be reduced to $75 million. The revolving line of credit, as revised, bears interest based on Bank of America Texas, N.A.'s reference rate, or LIBOR plus 50 basis points, at the Company's election, and includes a commitment fee of 0.125% on the unused portion of the line of credit. Interest and any commitment fees are payable quarterly. The revolving line of credit expires on December 31, 1997 and was unutilized as of December 31, 1996. During the year ended December 31, 1996, the Company paid interest of $492,000 on the line of credit and loan fees of $355,000. 32 BA MERCHANT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. INCOME TAXES The significant components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31 ------------------------- 1996 1995 1994 ------- ------- ------- (DOLLAR AMOUNTS IN THOUSANDS) Current: Federal............................................... $14,400 $11,431 $10,376 State and local....................................... 4,253 3,410 2,972 ------- ------- ------- 18,653 14,841 13,348 Deferred: Federal............................................... (1,065) (240) (345) State and local....................................... (232) (28) 13 ------- ------- ------- (1,297) (268) (332) ------- ------- ------- Total............................................... $17,356 $14,573 $13,016 ======= ======= ======= Effective tax rate...................................... 41.3% 41.4% 41.3%
The Company's provision for income taxes differs from amounts computed by applying the federal statutory tax rate of 35% due to state income taxes. The significant components of the Company's deferred income tax assets and liabilities are shown below:
DECEMBER 31 -------------- 1996 1995 ------ ------ (AMOUNTS IN THOUSANDS) Deferred income tax assets: Accrued expenses........................................... $2,183 $1,217 State taxes................................................ 1,338 1,155 ------ ------ Total deferred income tax assets............................. 3,521 2,372 Deferred income tax liabilities: Identifiable intangible assets............................. (180) (711) ------ ------ Total deferred income tax liabilities........................ (180) (711) ------ ------ Net deferred income tax assets............................... $3,341 $1,661 ====== ======
Management believes that the Company will fully realize its total deferred income tax assets based upon its total deferred income tax liabilities and its current level of operating income. Accordingly, no valuation allowance was established for any reporting period presented. 8. EMPLOYEE BENEFIT PLANS The Company participates in defined benefit pension plans, defined contribution plans, welfare benefit plans, and post-retirement and post- employment plans sponsored by BAC which cover substantially all salaried employees of the Company. The Company receives a monthly allocated charge from BAC for its share of pension costs in an amount equivalent to the employer expense of the employee benefit plans, health and dental insurance plans, workers' compensation insurance, and other compensation-related expenses for its employees participating in the plans. Employee benefits costs incurred by the Company are calculated by applying a benefit factor percentage, as determined by BAC, against employee base salaries for the defined benefit pension plan and defined contribution plans and a per employee charge for welfare benefits. For the years ended December 31, 1996, 1995, and 1994, the Company incurred a total expense of $3.9 million, $2.8 million, and $2.6 million, respectively, for its share of retirement and welfare plan expenses. 33 BA MERCHANT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Defined Benefit Plans. Eligible salaried employees of the Company are covered under the BankAmerica Pension Plan (the Pension Plan), which is a defined benefit cash balance plan. Prior to January 1, 1996, certain Company employees were covered by the Seafirst Corporation Retirement Plan (the Seafirst Plan), a final average pay defined benefit plan. Effective December 31, 1995, the Seafirst Plan was merged into the Pension Plan; however, the Seafirst plan benefit formula remained in effect for Seafirst employees through March 31, 1996. Benefits are based on the employees' length of service, level of compensation and, in the case of the Pension Plan, a specified interest rate (7.25%, 6.50%, and 8.50% for the years ending December 31, 1996, 1995 and 1994, respectively). Effective January 1, 1996, the benefit formula of the Pension Plan was amended such that eligible participants receive nonmatching employer contributions, called pay-based credits, of 7 percent of annual qualified earnings over one-half of the Social Security wage base. Contributions are made by the Company to BAC based on actuarial computations of the amount sufficient to fund the current service cost plus amortization of the unfunded actuarial accrued liability. Contributions are determined in accordance with Internal Revenue Service funding requirements and are invested in diversified portfolios, including fixed income and equity investments. Contributions expense to the Plan was $0.9 million, $0.3 million, and $0.3 million for the years ended December 31, 1996, 1995, and 1994, respectively. Defined Contribution Plans. The majority of salaried employees of the Company participate in the BankAmerica 401(k) Investment Plan. This defined contribution plan provides tax-deferred investment opportunities to salaried employees who have completed the required length of service. Employees may contribute to the plan up to certain limits prescribed by the Internal Revenue Service. A portion of these contributions is matched by the Company. Contributions are invested at the direction of the participant. Prior to April 1, 1996, certain Company employees participated in the Seafirst Corporation Employee Matched Savings Plan, also a defined contribution plan with matching employer contributions. Effective April 1, 1996, the Seafirst plan was merged into and replaced by the BankAmerica 401(k) Investment Plan. Effective January 1, 1996, the BankAmerica 401(k) Investment Plan was amended to provide eligible employees with pay-based credits equal to 3 percent or 7 percent of an eligible employee's annual qualified earnings up to one-half of the Social Security wage base, depending upon the employee's age or length of service. Contributions expense to BankAmerica's 401(k) Investment Plan was $0.6 million, $0.6 million, and $0.5 million for the years ended December 31, 1996, 1995 and 1994, respectively. Post-Retirement Health Care and Life Insurance Benefits. Currently, the Company provides certain defined health care and life insurance benefits under plans for certain retired employees sponsored by BAC. Retiree health care benefits are offered under self-insured arrangements, as well as through various health maintenance organizations. Retiree life insurance benefits are provided through an insurance company. BAC allocates the cost of post- retirement benefits to the Company as part of a per employee charge for welfare benefits. That charge is periodically reviewed and evaluated. The retiree's share is the remainder of the cost for the given coverage. BAC's policy is to fund the cost of medical benefits in amounts determined at the discretion of management. Employer contributions are invested in diversified portfolios, including fixed income and equity investments. Contributions expense to the Plan was $0.4 million for each of the three years ended December 31, 1996, 1995 and 1994. Stock Plans. During 1996, the Company adopted two stock-based compensation plans: the BA Merchant Services, Inc. Long-Term Incentive Plan (the LTIP) and the BA Merchant Services, Inc. Nonemployee Director Stock Plan (the Director Plan). Compensation expense related to these stock plans was $2.5 million in 1996, substantially all of which represents a one-time charge for the conversion of employee options from BAC shares to the Company shares, as discussed below. 34 BA MERCHANT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company offers shares of its common stock to certain officers and employees of the Company and its subsidiaries under the LTIP and to directors of the Company who are not also employees of the Company or BAC (nonemployee directors) under the Director Plan. Seven million shares of the Company's Class A Common Stock have been authorized for issuance through the LTIP and the Director Plan in the aggregate. Both plans are administered by the Executive Personnel and Compensation Committee of the Board of Directors (the Compensation Committee). The Compensation Committee may award a number of forms of stock-based compensation to eligible employees, including incentive and nonqualified stock options, stock appreciation rights, restricted stock, performance units, and performance shares, and may award nonqualified stock options to nonemployee directors. On December 19, 1996, contingent upon completion of the Offerings, the Company awarded to its executive officers stock options representing 257,000 shares of Class A Common Stock and 134,000 Class A Common Restricted Stock with a fair value at the date of grant of $15.50 per share. The transfer of stock was at no cost to the officers. The shares under option vest ratably over three years and have a maximum term of ten years after the grant date. All restricted shares issued by the Company were outstanding at December 31, 1996. One-third of the restricted shares vest three years after the date of grant. The remaining shares vest ratably thereafter over the next two years. The Company has adopted a program within the LTIP called Ownership Counts!(TM) under which substantially all employees of the Company receive periodic stock option grants for no more than 400 shares of the Company's Class A Common Stock annually. The shares under option vest ratably over three years and have a maximum term of five years after the date the options are granted. On December 31, 1996, certain employees of the Company who had received BAC stock options and restricted stock under BAC's management stock plans elected to exchange their BAC stock options and restricted stock for stock options representing 329,711 shares of the Company's Class A Common Stock and 2,092 shares of the Company's Class A Common Restricted Stock with a fair value at the date of exchange of $17.88, as provided by the LTIP agreement. The employee stock exchange resulted in a one-time charge of $2.4 million to compensation expense. Under the Director Plan, each nonemployee director is granted options to purchase shares of the Company's Class A Common Stock upon election to the Board of Directors and on the day following each annual meeting of the Company's stockholders. The shares under option vest on the day before the annual meeting of the Company's stockholders following the date of grant and have a ten-year term. At December 31, 1996, shares available for grant under the LTIP and Director Plan as either stock options or restricted stock were 6,205,143. Shares subject to options that are canceled become available for future grants. The following is a summary of the Company's stock option activity, and related information for the period ended December 31, 1996:
WEIGHTED-AVG. SHARES EXERCISE PRICE ------- -------------- Balance, beginning of year........................... -- -- Granted.............................................. 658,865 $13.06 Exercised............................................ -- -- Forfeited............................................ (100) 15.50 Expired.............................................. -- -- ------- ------ Balance, end of year................................. 658,765 $13.06 ======= ====== Exercisable at end of year........................... 132,570 $ 8.38 ======= ======
35 BA MERCHANT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1996, 329,711 options were outstanding with exercise prices ranging from $7.97 to $14.89 having a weighted-average remaining contractual life of 8.2 years, and 329,054 options were outstanding with exercise prices ranging from $15.50 to $17.88 having a weighted-average remaining contractual life of 9.0 years. Stock options exercisable at December 31, 1996 consisted of 132,570 options with a weighted average exercise price of $8.38, which were granted in the employee stock exchange transaction previously discussed. The table below reflects the Company's net income and pro forma earnings per share for the period ended December 31, 1996, as if compensation cost for the Company's stock plans had been determined based on the fair value at the grant dates for awards under those plans and expensed. Since pro forma compensation cost relates to all periods over which the awards vest, the initial impact on pro forma net income may not be representative of compensation cost in subsequent years, when the effect of the amortization of multiple awards would be reflected. Net income (in thousands)........................................ $24,614 Pro forma earnings per share..................................... 0.53
Fair values of the options were estimated at the date of grant using a variation of the Black-Scholes option pricing model, which includes the following assumptions used for the stock options awarded during 1996: weighted average risk-free interest rate of 6.13%, expected volatility of 23.0%, weighted average expected option life of the LTIP of 4.1 years and for the Director Plan of 10.0 years, and expected dividend yield of zero. The weighted-average grant date fair value of the options granted during 1996 was $4.67 per option. The exercise price of each option equals the market price of the Company's Class A Common Stock on the date of grant. Expiration dates for options outstanding at December 31, 1996 ranged from December 18, 2001 to December 31, 2006. 9. COMMITMENTS The Company has contractual agreements with third parties to receive merchant data processing services and data processing and card transactions services. Included in these contracts is an agreement with a third party who provides the primary processing service to the Company and with whom the Company has a long-term contract which expires in 2001. Future commitments under this contract are unknown as payment amounts vary with volumes processed. 10. 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 services 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. Fees paid for these services were approximately $8.3 million, $7.7 million, and $7.5 million, for the years ended December 31, 1996, 1995, and 1994, respectively. As part of the intercompany agreements, the Company paid BAC total rental expense of $1.9 million, $1.9 million, and $2.3 million, for the years ended December 31, 1996, 1995, and 1994, respectively. The Company leases its facilities from BAC under a five-year lease agreement which can be cancelled with six months notice. In addition, the Company paid BAC $15.5 million, $14.8 million and $13.3 million for the years ended December 31, 1996, 1995, and 1994 under the tax allocation agreements. 36 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 was unaffiliated with BAC. In connection with the Offerings, BAC and the Company also entered into a Non-Competition and Corporate Opportunities Allocation Agreement pursuant to which BAC will not compete with the Company for a period of five years with respect to payment processing for merchants to the extent that such payments arise in the use of credit, charge or debit cards for the purchase of goods and services and are authorized through an electronic medium originating at the point of sale in the United States and, following any transfer of the Bank's merchant processing business in an Asian country, in such Asian country. Any or all of the intercompany agreements may be terminated by BAC, if at any time it beneficially owns shares representing less than a majority of the voting power of the Company's outstanding common stock. 11. EARNINGS PER SHARE Historical earnings per share have not been presented since the Company had no outstanding stock as of December 1995 or 1994 and such information would not be meaningful. Pro forma earnings per share for the three years ended December 31, 1996 were computed by dividing net income by the weighted-average number of common shares outstanding and the additional dilutive effect of the stock rights and options outstanding assuming the Reorganization had occurred as of January 1, 1994 and the stock issued in the Reorganization and Offerings had been outstanding for the three years ended December 31, 1996:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 1994 ------- ------- ------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Net income......................................... $24,669 $20,656 $18,533 Average number of shares outstanding............... 46,305 46,300 46,300 Pro forma earnings per share (unaudited)........... $ 0.53 $ 0.45 $ 0.40 Pro forma earnings per share, as adjusted (unaudited)(a).................................... 0.66 0.55 0.48
- -------- (a) Pro forma earnings per share, as adjusted (unaudited), 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, and excludes the one-time expense to the employee stock exchange ($2.4 million) and interest expense ($492,000) from 1996 results. 12. PREFERRED STOCK The Company is authorized to issue, in one or more series, ten million shares of preferred stock and to fix the dividend rights, conversion rights, terms and rights of redemption, liquidation preferences and sinking fund terms. At December 31, 1996, no preferred stock was outstanding. 13. SUPPLEMENTAL PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) A supplemental unaudited pro forma condensed consolidated statement of operations for each of the three years in the period ended December 31, 1996, has not been presented since the effects of the Reorganization and the Offerings will not have a material impact on the Company's operating results. 37 BA MERCHANT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 14. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
QUARTER ENDED 1996 --------------------------------- DEC. 31 SEPT. 30 JUNE 30 MARCH 31 ------- -------- ------- -------- (AMOUNTS IN THOUSANDS) Net revenue................. $33,926 $32,617 $31,430 $28,242 Operating expense........... 23,116 21,798 20,350 18,496 ------- ------- ------- ------- Operating income............ 10,810 10,819 11,080 9,746 Net interest expense........ 430 -- -- -- Provision for income taxes...................... 4,286 4,468 4,577 4,025 ------- ------- ------- ------- Net income.................. $ 6,094 $ 6,351 $ 6,503 $ 5,721 ======= ======= ======= ======= QUARTER ENDED 1995 --------------------------------- DEC. 31 SEPT. 30 JUNE 30 MARCH 31 ------- -------- ------- -------- ......................... Net revenue................. $29,294 $28,556 $26,668 $25,410 Operating expense........... 20,031 19,624 18,291 16,753 ------- ------- ------- ------- Operating income............ 9,263 8,932 8,377 8,657 Net interest expense........ -- -- -- -- Provision for income taxes.. 3,833 3,694 3,471 3,575 ------- ------- ------- ------- Net income.................. $ 5,430 $ 5,238 $ 4,906 $ 5,082 ======= ======= ======= =======
38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors and executive officers of the Company is incorporated by reference from the text under the captions, "Proposal 1: Election of Directors," "Executive Officers of the Company," and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement for the Company's May 28, 1997 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated by reference from the text under the caption, "Executive Compensation" in the Proxy Statement for the May 28, 1997 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSHIP AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the text under the caption, "Ownership of Company Common Stock " in the Proxy Statement for the Company's May 28, 1997 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is incorporated by reference from the text under the captions, "Certain Transactions and Other Matters" and "Relationship with BankAmerica Corporation" in the Proxy Statement for the Company's May 28, 1997 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Exhibits. The following Exhibits are filed herewith and made a part hereof:
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- *3.1(i) Amended and Restated Certificate of Incorporation of the Registrant. *3.1(ii) Bylaws of the Registrant. *4.1 Specimen Certificate for the Class A Common Stock, par value $.01 per share, of Registrant. 4.2 Registration Rights Agreement dated as of December 3, 1996 among the Registrant, Bank of America NT&SA and Bank of America NW, National Association. 10.1 Lease Agreement dated as of December 3, 1996 among the Registrant, Bank of America NT&SA and Bank of America NW, National Association. 10.2 Sponsorship and Processing Agreement dated as of December 3, 1996 between the Registrant and Bank of America NT&SA. *10.3 Trademark License Agreement dated as of December 3, 1996 between the Registrant and BankAmerica Corporation. *10.4 Administrative and Support Services Agreement dated December 3, 1996 among the Registrant, Bank of America NT&SA and Bank of America NW, National Association.
39
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.5(i) Marketing Agreement dated as of December 3, 1996 among the Registrant, Bank of America NT&SA and Bank of America NW, National Association. 10.5(ii) Marketing Agreement dated as of December 3, 1996 among the Bank of America NA, Bank of America NW, National Association and the Registrant. 10.6 Tax Allocation Agreement dated as of December 3, 1996 between the Registrant and BankAmerica Corporation. *10.7 Merchant Card Services Agreement dated June 29, 1994 between the Registrant and Total System Services, Inc. *10.8 Asset Transfer Agreement dated as of December 3, 1996 among the Registrant, Bank of America NT&SA and Bank of America NW, National Association. *10.9 BA Merchant Services, Inc. Nonemployee Director Stock Plan. (a) *10.10 BA Merchant Services, Inc. Short-Term Incentive Plan. (a) *10.11 BA Merchant Services, Inc. Long-Term Incentive Plan. (a) 10.12 Asian Acquisition Agreement dated as of December 3, 1996 between the Registrant and Bank of America NT&SA relating to Asian businesses. *10.13 Non-Competition and Corporate Opportunities Allocation Agreement dated as of December 3, 1996 between the Registrant and BankAmerica Corporation. *10.14 Stockholders Agreement dated as of December 3, 1996 among the Registrant, Bank of America NT&SA and Bank of America NW, National Association. *10.15(i) Processing Services Agreement dated December 3, 1996 between the Registrant and Bank of America Texas, N.A. *10.15(ii) Processing Services Agreement dated December 3, 1996 between the Registrant and Bank of America, F.S.B. 10.16 Revolving Credit Agreement dated March 5, 1997 between the Registrant and Bank of America Texas, N.A. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP. 24.1 Powers of Attorney. 27.1 Financial Data Schedule.
- -------- * Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-13985). (a) Management contract or compensatory plan, contract, or arrangement. (b) Financial Statement Schedules. All schedules have been omitted because they are not applicable, not required, or the required information is included in the financial statements and notes thereto. (c) Reports on Form 8-K. None. 40 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. March 28, 1997 BA Merchant Services, Inc. /S/ JAMES H. WILLIAMS By __________________________________ (JAMES H. WILLIAMS, EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, CHIEF ACCOUNTING OFFICER, AND TREASURER) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE Principal Executive Officer and Director: /S/ SHARIF M. BAYYARI President and Chief Executive _____________________________________ Officer (SHARIF M. BAYYARI) Principal Financial or Accounting Officer: /S/ JAMES H. WILLIAMS Executive Vice President, Chief _____________________________________ Financial Officer, Chief Accounting (JAMES H. WILLIAMS) Officer, and Treasurer Directors: /S/ SHARIF M. BAYYARI Director _____________________________________ (SHARIF M. BAYYARI) THOMAS E. PETERSON* Chairman of the Board of Directors _____________________________________ (THOMAS E. PETERSON) BARBARA J. DESOER* Director _____________________________________ (BARBARA J. DESOER) DONALD R. DIXON* Director _____________________________________ (DONALD R. DIXON) JAMES G. JONES* Director _____________________________________ (JAMES G. JONES) WILLIAM E. FISHER* Director _____________________________________ (WILLIAM E. FISHER) A majority of the members of the Board of Directors. /S/ CHERYL SOROKIN *By _________________________________ (CHERYL SOROKIN, ATTORNEY-IN-FACT) Dated: March 28, 1997 41 [RECYCLED LOGO APPEARS HERE] Printed on Recycled Paper EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION OF DOCUMENT PAGE ------- ----------------------- ------------ Amended and Restated Certificate of Incorporation of *3.1(i) the Registrant. *3.1(ii) Bylaws of the Registrant. Specimen Certificate for the Class A Common Stock, *4.1 par value $.01 per share, of Registrant. 4.2 Registration Rights Agreement dated as of December 3, 1996 among the Registrant, Bank of America NT&SA and Bank of America NW, National Association. 10.1 Lease Agreement dated as of December 3, 1996 among the Registrant, Bank of America NT&SA and Bank of America NW, National Association. 10.2 Sponsorship and Processing Agreement dated as of December 3, 1996 between the Registrant and Bank of America NT&SA. *10.3 Trademark License Agreement dated as of December 3, 1996 between the Registrant and BankAmerica Corporation. *10.4 Administrative and Support Services Agreement dated December 3, 1996 among the Registrant, Bank of America NT&SA and Bank of America NW, National Association. 10.5(i) Marketing Agreement dated as of December 3, 1996 among the Registrant, Bank of America NT&SA and Bank of America NW, National Association. 10.5(ii) Marketing Agreement dated as of December 3, 1996 among the Bank of America NA, Bank of America NW, National Association and the Registrant. 10.6 Tax Allocation Agreement dated as of December 3, 1996 between the Registrant and BankAmerica Corporation. *10.7 Merchant Card Services Agreement dated June 29, 1994 between the Registrant and Total System Services, Inc. *10.8 Asset Transfer Agreement dated as of December 3, 1996 among the Registrant, Bank of America NT&SA and Bank of America NW, National Association. *10.9 BA Merchant Services, Inc. Nonemployee Director Stock Plan. *10.10 BA Merchant Services, Inc. Short-Term Incentive Plan. *10.11 BA Merchant Services, Inc. Long-Term Incentive Plan. 10.12 Asian Acquisition Agreement dated as of December 3, 1996 between the Registrant and Bank of America NT&SA relating to Asian businesses. *10.13 Non-Competition and Corporate Opportunities Allocation Agreement dated as of December 3, 1996 between the Registrant and BankAmerica Corporation. *10.14 Stockholders Agreement dated as of December 3, 1996 among the Registrant, Bank of America NT&SA and Bank of America NW, National Association. *10.15(i) Processing Services Agreement dated December 3, 1996 between the Registrant and Bank of America Texas, N.A. *10.15(ii) Processing Services Agreement dated December 3, 1996 between the Registrant and Bank of America, F.S.B. 10.16 Revolving Credit Agreement dated March 5, 1997 between the Registrant and Bank of America Texas, N.A. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP. 24.1 Powers of Attorney. 27.1 Financial Data Schedule
- -------- * Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-13985). EX-4.2 2 REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.2 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into as of this 3rd day of December, 1996 by and among BANK OF AMERICA NT & SA, ----------------------- a national banking association (the "Bank"), and BANK OF AMERICA NW, NATIONAL ---------------------------- ASSOCIATION, a national banking association ("BANW" and, collectively with the - ----------- Bank, the "Holders") and BA MERCHANT SERVICES, INC., a Delaware corporation -------------------------- ("BAMSI"). RECITALS A. The Holders. The Bank and BANW are each an existing national banking ----------- association duly organized and in good standing under the laws of the United States with their respective principal executive offices located in San Francisco, California and Seattle, Washington. B. BAMSI. BAMSI is an existing corporation, formed under the laws of the ----- State of Delaware, with its principal executive offices located in San Francisco, California. All of the outstanding Common Stock of BAMSI is currently owned by the Bank and BANW. C. Corporate Approvals. Each of the parties to this Agreement has ------------------- obtained all necessary corporate approvals for the execution and delivery of this Agreement. D. Arm's Length Relationship. The parties to this Agreement intend to ------------------------- conduct their relationships hereunder on an arm's length basis. E. BAC/BAMSI Transactions; The Offering. The Bank and BANW, each a ------------------------------------ subsidiary of BankAmerica Corporation ("BAC"), currently own 100% of the outstanding common stock of BAMSI. The Bank and BANW have entered into certain agreements with BAMSI (1) transferring the Bank's United States domestic merchant processing business and the BANW merchant processing business to BAMSI effective as of December 3, 1996 and (2) covering the contemplated transfer of the Philippine and Thailand merchant processing businesses of the Bank to BAMSI upon the receipt of certain governmental approvals (collectively, the "Asset Transfers"). BAMSI is contemplating the issuance of shares of BAMSI's Class A common stock, $.01 par value per share (the "Class A Common Stock"), in an initial public offering pursuant to a Registration Statement on Form S-1 (Registration No. 333-13985) (the "Offering") and following the Offering, the Bank and BANW will each be the beneficial and record owner of 25,670,000 shares and 4,530,000 shares, respectively, of BAMSI's Class B common stock, $.01 par value per share (the "Class B Common Stock"), convertible into 25,670,000 shares and 4,530,000 shares, respectively, of the Class A Common Stock. -1- F. Registration Rights. In consideration of the Asset Transfers and in ------------------- conjunction with the Offering, the Holders and BAMSI desire to enter into this Agreement to provide the Holders with certain registration rights as provided herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other good and valuable consideration had and received, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. As used herein, the following terms shall have the ----------- following respective meanings: "Affiliate" shall mean any Person that directly or indirectly controls, is controlled by, or is under common control with such Person. A Person shall be deemed to control another Person if such Person owns 50% or more of any equity interest in the "controlled" Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock or partnership interests, by contract, agreement or understanding (whether oral or written), or otherwise. "Class A Common Stock" shall have the meaning set forth in Recital E of this Agreement. "Class B Common Stock" shall have the meaning set forth in Recital E of this Agreement. "Designated Transferee" shall have the meaning set forth in Section 10 hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Holders" shall mean the Bank and BANW, any Affiliate of the Bank or BANW (other than BAMSI) and any Designated Transferees who are holders of record of any Registrable Shares, and any combination of one or more such Holders. "NASD" shall mean the National Association of Securities Dealers, Inc. "Other Holders" shall mean Persons who are holders of record of equity securities of BAMSI who subsequent to the date hereof acquire more than 5% of the outstanding shares of Class A Common Stock pursuant to a transaction with BAMSI and to whom BAMSI grants registration rights pursuant to a written agreement in connection with such transaction. -2- "Person" shall mean any individual, corporation, association, partnership, group (as defined in Section 13(d)(3) of the Exchange Act), limited liability company, joint venture, business trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Registrable Shares" shall mean (i) the 30,200,000 shares of Class A Common Stock which would result upon the conversion of the 30,200,000 shares of Class B Common Stock owned by the Holders on the date of this Agreement, and (ii) any shares of Class A Common Stock acquired by a Holder directly or upon exercise of conversion of any equity securities of BAMSI issued or distributed after the date of this Agreement to a Holder in respect of Registrable Shares by way of any stock dividend, stock split or other distribution or any recapitalization or reclassification. As to any particular Registrable Share, such Registrable Share shall cease to be a Registrable Share when (w) it shall have been sold, transferred or otherwise disposed of or exchanged pursuant to a registration statement under the Securities Act; (x) it shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act; (y) it shall have been sold or transferred to a Person other than a Designated Transferee in a private transaction effected other than pursuant to a registration statement; or (z) it shall have been sold, transferred or otherwise disposed of in violation of this Agreement. "Registration Expenses" shall have the meaning set forth in Section 7(a) hereof. "SEC" shall mean the Securities and Exchange Commission or any successor agency thereto. "Securities Act" shall mean the Securities Act of 1933, as amended. 2. Incidental Registrations ------------------------ (a) Right to Include Registrable Shares. Each time BAMSI shall determine ----------------------------------- to file a registration statement under the Securities Act in connection with a proposed offer and sale for cash of any equity securities (other than an offering of debt securities which are convertible into equity securities or an offering of equity securities in an amount not in excess of 5% of the number of shares of Class A Common Stock outstanding at such time) either by it or by any holders of its outstanding equity securities, BAMSI will give prompt written notice of its determination to each Holder and of such Holder's rights under this Section 2, at least 30 days prior to the anticipated filing date of such registration statement. Upon the written request of each Holder made within 21 days after the receipt of any such notice from BAMSI, (which request shall specify the Registrable Shares intended to be disposed of by such Holder), BAMSI will use its best efforts to effect the registration under the Securities Act of all Registrable Shares which BAMSI has been so requested to register by the Holders thereof, to the extent required to permit the disposition of the Registrable -3- Shares so to be registered; provided, however, that (i) if, at any time after -------- ------- giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, BAMSI shall determine for any reason not to proceed with the proposed registration of the securities to be sold by it, BAMSI may, at its election, give written notice of such determination to each Holder of Registrable Shares and thereupon shall be relieved of its obligation to register any Registrable Shares in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), and (ii) if such registration involves an underwritten offering, all Holders of Registrable Shares requesting to be included in BAMSI's registration must sell their Registrable Shares to the underwriters on the same terms and conditions as apply to BAMSI, with such differences, including any with respect to indemnification and liability insurance, as may be customary or appropriate in combined primary and secondary offerings. If a registration requested pursuant to this Section 2 involves an underwritten public offering, any Holder of Registrable Shares requesting to be included in such registration may elect, in writing prior to the effective date of the registration statement filed in connection with such registration, not to register such securities in connection with such registration. No registration effected under this Section 2 shall relieve BAMSI of its obligations to effect registrations upon request under Section 4 hereof. (b) Priority in Incidental Registration. If a registration pursuant to ----------------------------------- this Section 2 involves an underwritten offering and the managing underwriter(s) in good faith advise(s) BAMSI in writing that, in its opinion, the number of securities which BAMSI, the Holders and any other Persons intend to include in such registration exceeds the largest number of securities which can be sold in such offering without having an adverse effect on such offering (including the price at which such securities can be sold), then BAMSI will include in such registration (i) first, if the registration pursuant to this Section 2 was initiated by Other Holders exercising demand registration rights, 100% of the securities such Other Holders propose to sell (except to the extent the terms of such Other Holders' registration rights provide otherwise); (ii) second, 100% of the securities BAMSI proposes to sell for its own account; (iii) third, to the extent that the number of securities which such Other Holders exercising demand registration rights and BAMSI propose to sell is less than the number of securities which BAMSI has been advised can be sold in such offering without having the adverse effect referred to above, such number of Registrable Shares which the Holders have requested to be included in such registration pursuant to Section 2(a) hereof and which, in the opinion of such managing underwriter(s), can be sold without having the adverse effect referred to above; and (iv) fourth, to the extent that the number of securities which are to be included in such registration pursuant to clauses (i), (ii) and (iii) is, in the aggregate, less than the number of securities which BAMSI has been advised can be sold in such offering without having the adverse effect referred to above, such number of other securities requested to be included in the offering for the account of any Other Holders which, in the opinion of such managing underwriter(s), can be sold without having the adverse effect referred to above. -4- 3. Holdback Agreements. ------------------- (a) If any registration of Registrable Shares shall be in connection with an underwritten public offering, the Holders shall not effect any public sale or distribution (except in connection with such public offering), of any equity securities of BAMSI, or of any security convertible into or exchangeable or exercisable for any equity security of BAMSI (in each case, other than as part of such underwritten public offering), during the 90-day period (or such lesser period as the managing underwriter(s) beginning on the effective date of such registration, if, and to the extent, the managing underwriter(s) of any such offering determine(s) such action is necessary or desirable to effect such offering; provided, however, that each Holder has received the written notice -------- ------- required by Section 2(a) hereof; provided, however, that each Holder shall not -------- ------- be obligated to comply with such restrictions arising as a result of an underwritten public offering subject to Section 2 hereof more than once in any 12-month period. (b) If any registration of Registrable Shares shall be in connection with any underwritten public offering, BAMSI shall not effect any public sale or distribution (except in connection with such public offering) of any of its equity securities or of any security convertible into or exchangeable or exercisable for any of its equity securities (in each case other than as part of such underwritten public offering) during the 180-day period (or such lesser period as the managing underwriter(s) may permit) beginning on the effective date of such registration, and BAMSI shall use its best efforts to cause each member of the management of BAMSI who holds any equity security and each other holder of 5% or more of the outstanding shares of any equity security, or of any security convertible into or exchangeable or exercisable for any equity security, of BAMSI purchased from BAMSI (at any time other than in a public offering) to so agree. 4. Registration on Request. ----------------------- (a) Request by Holders. Upon the written request of the Holders of at ------------------ least 10% of the Registrable Shares (calculated on the based on the number in clause (i) of its definition) that BAMSI effect the registration under the Securities Act of all or part of such Holders' Registrable Shares, and specifying the amount (which shall not be less than 10% of the Registrable Shares (calculated on the based on the number in clause (i) of its definition) in the aggregate) and the intended method of disposition thereof, BAMSI will promptly give notice of such requested registration to all other Holders of Registrable Shares and, as expeditiously as possible, use its best efforts to effect the registration under the Securities Act of: (i) the Registrable Shares which BAMSI has been so requested to register by Holders of at least 10% of the Registrable Shares; and (ii) all other Registrable Shares which BAMSI has been requested to register by any other Holder thereof by written request received by BAMSI within 21 days after the giving of such written notice by BAMSI (which request shall specify the intended method of disposition of such Registrable Shares); provided, however, that BAMSI shall not be required to effect more than -------- ------- two registrations pursuant to this Section 4; provided, further, that BAMSI -------- ------- shall not be obligated to file a registration statement relating to a registration request under this Section 4 (x) if the registration request is delivered after delivery of a notice by BAMSI of an intended -5- registration and prior to the effective date of the registration statement referred to in such notice, or (y) within a period of 90 days after the effective date of any other registration statement of BAMSI requested by a Holder pursuant to this Section 4 or pursuant to which the Holders included Registrable Shares. The Holders initially requesting a registration pursuant to this Section 4 may, at any time prior to the effective date of the registration statement relating to such registration, revoke such request by providing a written notice to BAMSI revoking such request; provided, however, that, in the -------- ------- event the Holders shall have made a written request for a demand registration (I) which is subsequently withdrawn by the Holders after BAMSI has filed a registration statement with the SEC in connection therewith but prior to such demand registration being declared effective by the SEC or (II) which is not declared effective solely as a result of the failure of Holders to take all actions reasonably required in order to have the registration and the related registration statement declared effective by the SEC, then, in any such event, such demand registration shall be counted as a demand registration for purposes of this Section 4(a). Promptly after the expiration of the 21-day period referred to in clause (ii) above, BAMSI will notify all the Holders to be included in the registration of the other Holders and the number of shares of Registrable Shares requested to be included therein. (b) Registration Statement Form. If any registration requested pursuant to --------------------------- this Section 4 which is proposed by BAMSI to be effected by the filing of a registration statement on Form S-3 (or any successor or similar short-form registration statement) shall be in connection with an underwritten public offering, and if the managing underwriter(s) shall advise BAMSI in writing that, in its opinion, the use of another form of registration statement is of material importance to the success of such proposed offering, then such registration shall be effected on such other form. (c) Effective Registration Statement. A registration requested pursuant to -------------------------------- this Section 4 will not be deemed to have been effected unless it has become effective under the Securities Act and has remained effective for 270 days or such shorter period as all the Registrable Shares included in such registration have actually been sold thereunder. In addition, if within 180 days after it has become effective, the offering of Registrable Shares pursuant to such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court, such registration will be deemed not to have been effected for purposes of this Section 4. (d) Priority in Requested Registrations. If a requested registration ----------------------------------- pursuant to this Section 4 involves an underwritten offering and the managing underwriter(s) in good faith advise(s) BAMSI in writing that, in its opinion, the number of securities requested to be included in such registration (including securities of BAMSI which are not Registrable Shares) exceeds the largest number of securities which can be sold in such offering without having an adverse effect on such offering (including the price at which such securities can be sold), then BAMSI will include in such registration (i) first, 100% of the Registrable Shares requested to be registered pursuant to Section 4(a) hereof (provided that if the number of Registrable Shares requested to be registered pursuant to Section 4(a) hereof exceeds the number which BAMSI has been advised can be sold in such offering without having the adverse effect referred to above, the number of such Registrable Shares to be -6- included in such registration by the Holders shall be allocated pro rata among such Holders on the basis of the relative number of Registrable Shares each such Holder has requested to be included in such registration); (ii) second, to the extent that the number of Registrable Shares requested to be registered pursuant to Section 4(a) hereof is less than the number of securities which BAMSI has been advised can be sold in such offering without having the adverse effect referred to above, such number of shares of equity securities BAMSI requests to be included in such registration, and (iii) third, to the extent that the number of Registrable Shares requested to be included in such registration pursuant to Section 4(a) hereof and the securities which BAMSI proposes to sell for its own account are, in the aggregate, less than the number of equity securities which BAMSI has been advised can be sold in such offering without having the adverse effect referred to above, such number of other securities proposed to be sold by any Other Holder which, in the opinion of such managing underwriter(s), can be sold without having the adverse effect referred to above (provided that if the number of such securities of such Other Holder requested to be registered exceeds the number which BAMSI has been advised can be sold in such offering without having the adverse effect referred to above, the number of such securities to be included in such registration pursuant to this Section 4(d) shall be allocated pro rata among all such Other Holders on the basis of the relative number of securities each such Other Holder has requested to be included in such registration). (e) Additional Rights. If BAMSI at any time grants to any other holders of ----------------- equity securities of BAMSI any rights to request BAMSI to effect the registration of any such shares of equity securities on terms more favorable to such holders than the terms set forth in this Section 4 and in Section 5 hereof, the terms of this Section 4 and of Section 5 hereof shall be deemed amended or supplemented to the extent necessary to provide the Holders such more favorable rights and benefits. In no event shall BAMSI grant to any person any rights to request BAMSI to effect the registration of any shares of equity securities of BAMSI on terms which are adverse to rights of the Holders set forth in Section 2 and this Section 4. 5. Registration Procedures. ----------------------- (a) If and whenever BAMSI is required by the provisions of Section 2 or 4 hereof to use its best efforts to effect or cause the registration of Registrable Shares, BAMSI shall as expeditiously as possible: (i) prepare and, in any event within 60 days after the end of the period within which a request for registration may be given to BAMSI, file with the SEC a registration statement with respect to such Registrable Shares and use its best efforts to cause such registration statement to become effective; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period not in excess of 270 days and to comply with the provisions of the Securities -7- Act, the Exchange Act, and the rules and regulations promulgated thereunder with respect to the disposition of all the securities covered by such registration statement during such period in accordance with the intended methods of disposition by the Holders thereof set forth in such registration statement; provided, however, that (A) before filing a -------- ------- registration statement (including an initial filing) or prospectus, or any amendments or supplements thereto, BAMSI will furnish to one counsel selected by the Holders of a majority of the Registrable Shares covered by such registration statement copies of all documents proposed to be filed, which documents will be subject to the review and comment of such counsel, and (B) BAMSI will notify each Holder of Registrable Shares covered by such registration statement of any stop order issued or threatened by the SEC, any other order suspending the use of any preliminary prospectus or of the suspension of the qualification of the registration statement for offering or sale in any jurisdiction, and take all reasonable actions required to prevent the entry of such stop order, other order or suspension or to remove it if entered; (iii) furnish to each Holder and each underwriter, if applicable, of Registrable Shares covered by such registration statement such number of copies of the registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and summary prospectus), in conformity with the requirements of the Securities Act, and such other documents as each Holder of Registrable Shares covered by such registration statement may reasonably request in order to facilitate the disposition of the Registrable Shares by such Holder; (iv) use its best efforts to register or qualify such Registrable Shares covered by such registration statement under the state securities or blue sky laws of such jurisdictions as each Holder of Registrable Shares covered by such registration statement and, if applicable, each underwriter, may reasonably request, and do any and all other acts and things which may be reasonably necessary to consummate the disposition in such jurisdictions of the Registrable Shares owned by such Holder, except that BAMSI shall not for any purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction where, but for the requirements of this clause (iv), it would not be obligated to be so qualified; (v) use its best efforts to cause such Registrable Shares covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the Holders thereof to consummate the disposition of such Registrable Shares; (vi) if at any time when a prospectus relating to the Registrable Shares is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus as then in effect -8- would include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, immediately give written notice thereof to each Holder and the managing underwriter or underwriters, if any, of such Registrable Shares and prepare and furnish to each such Holder a reasonable number of copies of an amended or supplemental prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (vii) use its best efforts to list any portion of such Registrable Shares not already listed on any securities exchange on which similar securities of BAMSI are then listed, and enter into customary agreements including a listing application and indemnification agreement in customary form, provided that the applicable listing requirements are satisfied, and provide a transfer agent and registrar for such Registrable Shares covered by such registration statement not later than the effective date of such registration statement; (viii) enter into such customary agreements (including an underwriting agreement in customary form) and take such other actions as each Holder of Registrable Shares being sold or the underwriter or underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Shares, including customary indemnification and opinions; (ix) use its best efforts to obtain a "cold comfort" letter or letters from BAMSI's independent public accountants in customary form and covering matters of the type customarily covered by "cold comfort" letters as the Holders of the Registrable Shares being sold or the underwriters retained by such Holders shall reasonably request; (x) make available for inspection by representatives of any Holder of Registrable Shares covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by such Holders or any such underwriter, all financial and other records pertinent corporate documents and properties of BAMSI and its subsidiaries' officers, directors and employees to supply all information and respond to all inquiries reasonably requested by such Holders or any such representative, underwriter, attorney, accountant or agent in connection with such registration statement; (xi) promptly prior to the filing of any document which is to be incorporated by reference into the registration statement or the prospectus (after initial filing of the registration statement), provide copies of such document to counsel to the Holders of Registrable Shares covered by such -9- registration statement and to the managing underwriter(s), if any, make BAMSI's representatives available for discussion of such document and make such changes in such document prior to the filing thereof as counsel for such Holders or underwriter(s) may reasonably request; (xii) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable after the effective date of the registration statement, an earning statement which shall satisfy the provisions of Section 11(a) of the Securities Act and the rules and regulations promulgated thereunder; (xiii) not later than the effective date of the applicable registration statement, use its best efforts to provide a CUSIP number for any portion of such Registrable Shares not already included in a CUSIP number for similar securities of BAMSI, and provide the applicable transfer agents with printed certificates for the Registrable Shares which are in a form eligible for deposit with the Depository Trust Company; (xiv) notify counsel for the Holders of Registrable Shares included in such registration statement and the managing underwriter or underwriters, if any, immediately and confirm the notice in writing, (A) when the registration statement, or any post-effective amendment to the registration statement, shall have become effective, or any supplement or amendment to the prospectus shall have been filed, (B) of the receipt of any comments from the SEC and (C) of any request of the SEC to amend the registration statement or amend or supplement the prospectus or for additional information; and (xv) cooperate with each seller of Registrable Shares and each underwriter, if any, participating in the disposition of such Registrable Shares and their respective counsel in connection with any filings required to be made with the NASD. (b) Each Holder of Registrable Shares hereby agrees that, upon receipt of any notice from BAMSI of the happening of any event of the type described in Section 5(a)(vi) hereof, such Holder shall forthwith discontinue disposition of such Registrable Shares covered by such registration statement or related prospectus until such Holder's receipt of the copies of the supplemental or amended prospectus contemplated by Section 5(a)(vi) hereof, and, if so directed by BAMSI, such Holder will deliver to BAMSI (at BAMSI's expense) all copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Shares at the time of receipt of such notice. In the event BAMSI shall give any such notice, the period mentioned in Section 5(a)(ii) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 5(a)(vi) hereof and including the date when such Holder shall have received the copies of the supplemental or amended prospectus contemplated by Section 5(a)(vi) hereof. If for any other reason the -10- effectiveness of any registration statement filed pursuant to Section 4 hereof is suspended or interrupted prior to the expiration of the time period regarding the maintenance of the effectiveness of such Registration Statement required by Section 5(a)(ii) hereof so that Registrable Shares may not be sold pursuant thereto, the applicable time period shall be extended by the number of days equal to the number of days during the period beginning with the date of such suspension or interruption to and ending with the date when the sale of Registrable Shares pursuant to such registration statement may be recommenced. (c) Each Holder hereby agrees to provide BAMSI, upon receipt of its request, with such information about such Holder to enable BAMSI to comply with the requirements of the Securities Act and to execute such certificates as BAMSI may reasonably request in connection with such information and otherwise to satisfy any requirements of law. 6. Underwritten Registrations. Subject to the provisions of Sections 2, -------------------------- 3 and 4 hereof, any of the Registrable Shares covered by a registration statement may be sold in an underwritten offering at the discretion of the Holder thereof. In the case of an underwritten offering pursuant to Section 2 hereof, the managing underwriter(s) that will administer the offering shall be selected by BAMSI; provided, however, that such managing underwriter(s) shall be -------- ------- reasonably satisfactory to the Holders of a majority of the Registrable Shares to be registered. In the case of any underwritten offering pursuant to Section 4 hereof, the managing underwriter(s) that will administer the offering shall be selected by the Holders of a majority of the Registrable Shares to be registered; provided, however, that such underwriter(s) shall be reasonably -------- ------- satisfactory to BAMSI. 7. Expenses. -------- (a) Subject to Section 7(b), BAMSI shall pay all fees, costs and expenses of all registrations pursuant to Section 2 hereof, including all SEC and stock exchange or NASD registration and filing fees and expenses, reasonable fees and expenses of any "qualified independent underwriter" and its counsel as may be required by the rules of the NASD, fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel for the underwriters, if any, in connection with blue sky qualifications of the Registrable Shares), rating agency fees, printing expenses (including expenses of printing certificates for Registrable Shares and prospectuses), messenger, telephone and delivery expenses, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange or national market system on which similar securities issued by BAMSI are then listed, fees and disbursements of counsel for BAMSI and all independent certified public accountants (including the expenses of any annual audit, special audit and "cold comfort" letters required by or incident to such performance and compliance), the fees and disbursements of the underwriters customarily paid by issuers or sellers of securities (including expenses relating to "road shows" and other marketing activities), the reasonable fees and expenses of special experts required to be retained by BAMSI in connection with such registration, and the reasonable fees and expenses of other Persons required to be retained by BAMSI (collectively, "Registration Expenses"); provided, however, that Registration Expenses shall not include (i) any - -------- ------- allocation of the overhead of BAMSI, including any allocation of the compensation -11- or benefits of employees of BAMSI that assist in a registration, or (ii) any other expense to the extent it would have been incurred by BAMSI in the absence of any sale of securities in connection with a registration pursuant to this Agreement (including the cost of BAMSI's annual audit). (b) The Holders shall pay the following: (i) all fees, costs and expenses of all registrations effected pursuant to Section 4 hereof including all Registration Expenses, (ii) any underwriting discounts or commissions or transfer taxes, if any, attributable to the sale of Registrable Shares by the Holders pursuant to this Agreement and (iii) all fees, costs and expenses of counsel to the Holders pursuant to this Agreement in connection with any registration pursuant to this Agreement. 8. Indemnification. --------------- (a) Indemnification by BAMSI. In the event of any registration of any ------------------------ securities of BAMSI under the Securities Act pursuant to Section 2 or 4 hereof, BAMSI will, and it hereby does, indemnify and hold harmless, to the extent permitted by law, each of the Holders of any Registrable Shares covered by such registration statement, each Affiliate of such Holder (other than BAMSI) and their respective directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Holder or any such underwriter within the meaning of the Securities Act (collectively, the "Indemnified Parties"), against any and all losses, claims, damages or liabilities, joint or several, and expenses (including any amounts paid in any settlement effected with BAMSI's consent, which consent shall not be unreasonably withheld) to which any Indemnified Party may become subject under the Securities Act, state securities or blue sky laws, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof, whether or not such Indemnified Party is a party thereto) or expenses arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary, final or summary prospectus contained therein, or any amendment or supplement thereof, (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any violation by BAMSI of any federal, state or common law rule or regulation applicable to BAMSI and relating to action required of or inaction by BAMSI in connection with any such registration, and BAMSI will reimburse such Indemnified Party for any legal or any other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, -------- however, that BAMSI shall not be liable to any Indemnified Party in any such - ------- case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or amendment or supplement thereof or in any such preliminary, final or summary prospectus in reliance upon and in conformity with written information with respect to such Holder furnished to BAMSI by such Holder specifically for use in the preparation thereof. Such indemnity shall remain in full force and -12- effect regardless of any investigation made by or on behalf of such Holder or any Indemnified Party and shall survive the transfer of such securities by such Holder. (b) Indemnification by the Holders and the Underwriters. BAMSI may --------------------------------------------------- require, as a condition to including any Registrable Shares in any registration statement filed in accordance with Section 2 or 4 hereof, that BAMSI shall have received an undertaking reasonably satisfactory to it from the Holders of such Registrable Shares or any underwriter to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 8(a) hereof) BAMSI with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary, final or summary prospectus contained therein, or any amendment or supplement, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information with respect to the Holders of the Registrable Shares being registered or such underwriter furnished to BAMSI by such Holders or such underwriter specifically for use in the preparation of such registration statement, preliminary, final or summary prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing; provided, however, that no such Holder shall be liable for any indemnity claims - -------- ------- in excess of the amount of the net proceeds received by such Holder from the sale of Registrable Shares. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of BAMSI or any of the Holders, or any of their respective Affiliates (other than BAMSI), directors, officers or controlling Persons, and shall survive the transfer of such securities by such Holder. (c) Notices of Claims, Etc. Promptly after receipt by an indemnified party ---------------------- hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 8, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of the -------- ------- indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 8, except to the extent that the indemnifying party is actually materially prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; provided, however, that the indemnified party shall have the -------- ------- right, at the sole cost and expense of the indemnifying party, to employ counsel to represent the indemnified party and its respective controlling persons, directors, officers, employees or agents who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the indemnified party against such indemnifying party under this Section 8 if (i) the employment of such counsel shall have been authorized in writing by such indemnifying party in connection with the defense of such action, (ii) the indemnifying party shall not have promptly employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action or counsel, or (iii) any indemnified party shall have reasonably -13- concluded that there may be defenses available to such indemnified party or its respective controlling persons, directors, officers, employees or agents which are in conflict with or in addition to those available to an indemnifying party; provided, further, that the indemnifying party shall not be obligated to pay for - -------- ------- more than the expenses of one firm of separate counsel for the indemnified party (in addition to the reasonable fees and expenses of one firm serving as local counsel). No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) If the indemnification provided for in this Section 8 shall for any reason be unavailable to any indemnified party under Section 8(a) or 8(b) hereof or is insufficient to hold it harmless in respect of any loss, claim, damage or liability, or any action in respect of any loss, claim, damage or liability, or any action in respect thereof referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the indemnified party and indemnifying party or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the indemnified party and indemnifying party with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. Notwithstanding any other provision of this Section 8(d), no Holder of Registrable Shares shall be required to contribute an amount greater than the dollar amount of the proceeds received by such Holder with respect to the sale of any such Registrable Shares. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) Other Indemnification. Indemnification similar to that specified in --------------------- the preceding subdivisions of this Section 8 (with appropriate modifications) shall be given by BAMSI and each Holder of Registrable Shares with respect of any required registration or other qualification of securities under any federal or state law or regulation other than the Securities Act. (f) Non-Exclusivity. The obligations of the parties under this Section 8 --------------- shall be in addition to any liability which any party may otherwise have to any other party. 9. Rule 144. BAMSI covenants that it will file in a timely manner the -------- reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder (or, if BAMSI is not required to file such reports, it will, upon the request of any Holder of Registrable Shares, make publicly available such information), and it will take such further action as any Holder of Registrable Shares may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Shares without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be -14- amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Holder of Registrable Shares, BAMSI will deliver to such Holder a written statement as to whether it has complied with such requirements. 10. Assignability. This Agreement shall be binding upon and shall inure ------------- to the benefit of the parties hereto and their respective successors and permitted assigns. Except as provided herein, no party may assign any of its rights or delegate any of its duties under this Agreement without the express consent of the other parties hereto. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than BAMSI shall also be for the benefit of and enforceable by any subsequent Holder of any Registrable Shares, subject to the provisions contained herein. Any Holder may assign any of its rights or delegate any of its duties under this Agreement, in whole or in part, without any prior consent of BAMSI only to a Person (a "Designated Transferee") (a) who is an Affiliate of the Bank or BANW or (b) who is a transferee of Registrable Shares (whether through purchase, share exchange, bequest or otherwise) and who agrees to be bound by the terms of this Agreement. Any purported assignment in violation of this Section 10 shall be void. 11. Notices. Any and all notices, designations, consents, offers, ------- acceptances or any other communications shall be given in writing by either (a) personal delivery to and receipted for by the addressee or by (b) telecopy or registered or certified mail which shall be addressed, in the case of BAMSI, to: BA Merchant Services, Inc., One South Van Ness Avenue, 5th Floor, San Francisco, California 94103, attention: General Counsel #3710; in the case of Holders, to the address or addresses thereof appearing on the books of BAMSI or of the transfer agent and registrar for its Class A Common Stock. All such notices and communications shall be deemed to have been duly given and effective: when delivered by hand, if personally delivered; two business days after being deposited in the mail, postage prepaid, if mailed; and when receipt is acknowledged, if telecopied. 12. No Inconsistent Agreements. BAMSI will not hereafter enter into any -------------------------- agreement with respect to its securities which is inconsistent with the rights granted to the Holders in this Agreement. 13. Specific Performance. BAMSI acknowledges that the rights granted to -------------------- the Holders in this Agreement are of a special, unique and extraordinary character, and that any breach of this Agreement by BAMSI could not be compensated for by damages. Accordingly, if BAMSI breaches its obligations under this Agreement, the Holders shall be entitled, in addition to any other remedies that they may have, to enforcement of this Agreement by a decree of specific performance requiring BAMSI to fulfill its obligations under this Agreement. BAMSI consents to personal jurisdiction in any such action brought in the United States District Court for the Northern District of California or any such other court and to service of process upon it in the manner set forth in Section 11 hereof. 14. Severability. If any provision of this Agreement or any portion ------------ thereof is finally determined by a court of competent jurisdiction to be unlawful or unenforceable, such provision or portion thereof shall in no way affect any other provision of this -15- Agreement, the application of any such provision and any other circumstances, and any portion of such invalidated provision that is not invalidated by such a determination shall remain in full force and effect. 15. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original and all of which, together, shall constitute one and the same instrument. 16. Defaults. A default by any party to this Agreement in such party's -------- compliance with any of the conditions or covenants hereof or performance of any of the obligations of such party hereunder shall not constitute a default by any other party. 17. Amendments, Waivers. This Agreement may not be amended, modified or ------------------- supplemented and no waivers of or consents to or departures from the provisions hereof may be given unless consented to in writing by BAMSI and the holders of a majority of the Registrable Shares; provided, however, that no such amendment, -------- ------- supplement, modification or waiver shall deprive any Holder of any rights under Section 2 or 4 hereof without the consent of such Holder. 18. Construction. The captions contained in this Agreement are for ------------ reference purposes only and shall not constitute a part of this Agreement. Unless the context requires otherwise, the use of the masculine shall include the feminine, and the use of the singular shall include the plural. The word "including" shall mean "including, without limitation." 19. Attorneys' Fees. In any action or proceeding brought to enforce any --------------- provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. 20. Third Party Beneficiaries. Except as expressly provided in this ------------------------- Agreement, the parties hereto intend that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto. 21. Entire Agreement. This Agreement contains the entire agreement among ---------------- the parties hereto with respect to the transactions contemplated herein and understandings among the parties relating to the subject matter hereof. Any and all previous agreements and understandings between or among the parties hereto regarding the subject matter hereof are, whether written or oral, superseded by this Agreement. -16- 22. Governing Law. This Agreement is made pursuant to and shall be ------------- construed in accordance with the laws of the State of California without regard to that state's conflicts of laws principles. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective authorized officers as of the date first written above. BANK OF AMERICA NT & SA By /s/ Barry L. Pyle ------------------------------------------- Name: Barry L. Pyle ------------------------------------ Title: Senior Vice President ------------------------------------ BANK OF AMERICA NW, NATIONAL ASSOCIATION By /s/ Stanley A. Carlson -------------------------------------------- Name: Stanley A. Carlson ------------------------------------- Title: Senior Vice President and Secretary ------------------------------------- BA MERCHANT SERVICES, INC. By /s/ Sharif M. Bayyari -------------------------------------------- Name: Sharif M. Bayyari ------------------------------------- Title: President and Chief Executive Officer ------------------------------------- -17- EX-10.1 3 LEASE AGREEMENT DATED AS OF DECEMBER 3, 1996 Exhibit 10.1 LEASE AGREEMENT This Lease is made as of December 3, 1996 between Bank of America National Trust and Savings Association and Bank of America NW, National Association, both national banking associations, as lessors (together the "Lessors" and each individually a "Lessor"), and BA Merchant Services, Inc. ("BAMSI"), a corporation organized under the laws of the State of Delaware, as lessee. 1. FACILITIES, SERVICES AND COMPENSATION A. The Lessors shall provide BAMSI office space for the transaction of its business at the locations indicated on the attached Schedule A. B. BAMSI will pay to the Lessors monthly rental in an amount equal to one twelfth the annual rent for each property as shown on the attached Schedule A, payable monthly in advance by the fifth business day of each month, which payment will include compensation for office space, utilities and access to other portions of the premises where BAMSI is located as may be required for the needs of BAMSI. C. The rental payments are intended to be fair and reasonable compensation for the facilities in accordance with payments for comparable facilities, and shall be reasonably adjusted from time-to- time by mutual consent of the parties, to result in continued fair and reasonable compensation to the Lessors. D. The Lessors shall provide BAMSI with additional office space under such terms and conditions as may be mutually agreed by the Lessor and BAMSI from time to time. E. The Lessors will also provide BAMSI with access to limited space (e.g. a desk or conference room) in other premises without additional compensation, it being understood that the rental payments indicated on Schedule A include compensation for such additional space. Any such additional space will be subject to availability and such reasonable limitations or conditions that may be imposed by the Lessors. 1 2. INDEPENDENT CONTRACTOR: In performing the services called for under this Lease, the Lessors are for all purposes an independent contractor of BAMSI, each with exclusive control over its employees and agents engaged in the performance of the services provided by the Lessors under this Lease. 3. INDEMNIFICATION: BAMSI must defend and indemnify the Lessors against and hold each harmless from any and all claims made by third parties for loss or damage arising directly or indirectly from any and all services provided by the Lessors pursuant to this Lease, except that due to the knowing and willful misconduct of a Lessor. In the foregoing sentence the words "loss or damage" include, but are not limited to, loss or damage arising directly or indirectly from any actions or omissions of any employee or authorized representative of NT&SA or NW. 4. CONFIDENTIALITY: All information disclosed by any party to the another under the terms of this Lease, except such information as may be generally available to the public or the banking industry, is and will be kept confidential unless its disclosure is required by law or is required to be submitted to the regulatory supervisor(s) of either party. 5. TERMS OF THE LEASE: A. Unless sooner terminated as hereinafter provided, this Lease is in effect for 5 years from the date hereof. At the expiration of the 5- year term, and of any succeeding 5-year term, this Lease is automatically renewed and extended for another 5-year term, unless a Lessor or the Lessee gives at least 6 months notice in writing of its intention not to renew or extend. B. A Lessor or the Lessee may terminate this Lease with respect to any covered location at any time upon 6 months prior written notice to the other party. C. The foregoing notwithstanding, this Lease terminates immediately if at any time a majority of the voting securities of BAMSI is not owned, directly or indirectly, by BankAmerica Corporation. 6. NOTICES: All notices relating to this Lease must be in writing and will be considered to have been given by either party to the other party upon personal delivery 2 to a party's designated representative or upon the mailing thereof to the other party by registered or certified mail at its address set forth on the signature page of this Lease, or to such other address as the other party may specify in writing. 7. BREACH: Upon the breach of any obligation under this Lease by either party, the aggrieved party must give to the defaulting party notice of such breach which notice must specify the exact nature of the breach. If this Lease is terminated, the right of the aggrieved party to any damages for such breach shall not be prejudiced. 8. INTEGRATION: This Lease supersedes all oral communications and prior writings in respect of the subject matter hereof. In the event of any conflict between the terms, conditions and provisions of this Lease and those of any other prior agreements, documents or communications, the terms and conditions of this Lease shall prevail. 9. CHOICE OF LAW: This Lease is governed by and construed in accordance with the laws of the State where the real property is located. 10. SUBLEASE: If this Lease is a sublease "Lessor" means the tenant of the master landlord under a master lease (a copy of which has been previously provided) and "BAMSI" means the subtenant under the master lease for the premises specified in paragraph 1.A. above. BAMSI takes such premises subject to and agrees to abide by all of the provisions of the master lease. BA MERCHANT SERVICES, INC. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Sharif Bayyari By: /s/ Tom Esperance ------------------------- --------------------------- Sharif Bayyari Tom Esperance Vice President By: /s/ James H. Williams By: /s/ Barry L. Pyle ------------------------- --------------------------- James H. Williams Barry L. Pyle Senior Vice President Address: Address: One South Van Ness Avenue 315 Montgomery Street - ----------------------------- ------------------------------ San Francisco, CA 94103 San Francisco, CA 94104 - ----------------------------- ------------------------------ BANK OF AMERICA NW, NATIONAL 3 ASSOCIATION By: /s/ Josef E. Gray --------------------------------- Josef E. Gray President, Seafirst Bank Division By: /s/ Stanley A. Carlson --------------------------------- Stanley A. Carlson Secretary Address: 701 Fifth Avenue ------------------------------ Floor 56 ------------------------------ Seattle, WA 98104 ------------------------------ 4 SCHEDULE A
===================================================================================== LOCATION SQ. FT. ANNUAL OWNED/ LESSOR RENT LEASED ===================================================================================== 1130 S. Figueroa Bldg 5,538 $98,134 O NT&SA Los Angeles, California - ------------------------------------------------------------------------------------- One South Van Ness 58,336 $1,436,167 O NT&SA San Francisco, California - ------------------------------------------------------------------------------------- 11070 White Rock Road 1,742 $39,927 L NT&SA Rancho Cordova, California - ------------------------------------------------------------------------------------- 241 E. Gladstone Street 7,935 $153,304 L NT&SA Azusa, California 91702 - ------------------------------------------------------------------------------------- 1163 Triton Drive 6,788 $180,018 L NT&SA Foster City, California 94404 - ------------------------------------------------------------------------------------- 27982 La Paz Road 1,169 $28,898 L NT&SA Laguna Niguel, California - ------------------------------------------------------------------------------------- 3756 Mission Avenue 360 $12,355 O NT&SA Oceanside, California 92054 - ------------------------------------------------------------------------------------- 1510 The Alameda 1,500 $52,380 L NT&SA San Jose, California - ------------------------------------------------------------------------------------- 400 Fourth Street 360 to be O NT&SA Lake Oswego, Oregon 97034 determined - ------------------------------------------------------------------------------------- 1616 S. Rustle 7,000 $106,540 O NW Spokane, Washington 99204 - ------------------------------------------------------------------------------------- 777 108th Avenue, N.E. 10,700 $225,984 L NW Bellevue, Washington 98004 - ------------------------------------------------------------------------------------- Fifth Avenue Plaza 4,500 $125,505 L NW 800 5th Avenue Seattle, Washington 98124 =====================================================================================
1 EX-10.2 4 SPONSORSHIP AND PROCESSING AGREEMENT Exhibit 10.2 SPONSORSHIP AND PROCESSING AGREEMENT ------------------------------------ THIS SPONSORSHIP AND PROCESSING AGREEMENT is made as of December 3rd, 1996 between BA MERCHANT SERVICES, INC. ("BAMSI") and BANK OF AMERICA NATIONAL TRUST -------------------------- ------------------------------ & SAVINGS ASSOCIATION (the "Bank"). - --------------------- RECITALS A. The Bank. The Bank is an existing national banking association duly -------- organized and in good standing under the laws of the United States with its principal executive offices located in San Francisco, California and a member in good standing of Visa U.S.A., Inc. ("Visa") and a member in good standing of MasterCard International, Incorporated ("MasterCard"). B. BAMSI. BAMSI is an existing corporation formed under the laws of the ----- State of Delaware with its principal executive offices located in San Francisco, California, which provides data processing, settlement and authorization services for merchants who participate in the Visa and MasterCard and other bankcard programs (such activities being referred to as "Merchant Bankcard Business"). C. Corporate Approvals. Each of the parties to this Agreement has ------------------- obtained all necessary corporate approvals for the execution and delivery of this Agreement. D. Arm's Length Relationship. The parties to this Agreement intend to ------------------------- conduct their relationships hereunder on an arm's length basis. E. BAC/BAMSI Transactions. The Bank and Bank of America NW, National ---------------------- Association ("BANW"), each a subsidiary of BankAmerica Corporation, a Delaware corporation ("BAC"), currently own 100% of the outstanding common stock of BAMSI. The Bank and BANW have entered or will enter into certain agreements with BAMSI (1) transferring the Bank's United States domestic merchant processing businesses and the BANW merchant processing business to BAMSI and (2) covering the contemplated transfer of the Philippine and Thailand merchant processing businesses of the Bank to BAMSI upon the receipt of certain governmental approvals (collectively, the BAC/BAMSI Transactions"). BAMSI is currently considering an initial public offering of shares of its Class A common stock, $.01 par value per share. F. Related Agreements. BAMSI has entered or will enter into (1) a Non- ------------------ Competition and Corporate Opportunities Allocation Agreement of even date herewith between BAC and BAMSI (the "Corporate Opportunities Agreement"), (2) a Marketing Agreement of even date herewith among BAMSI, the Bank and BANW (the "Marketing Agreement"), (3) Processing Services Agreements of even date herewith between BAMSI and other subsidiary banking institutions of BAC (the "Affiliate Bank Processing Agreements"), (4) an Administrative Services Agreement of even date herewith between the -1- Sponsorship Agreement Bank and BAMSI (the "Administrative Services Agreement"), (5) a Trademark License Agreement of even date herewith between BAC and BAMSI (the "License Agreement"), (6) a Registration Rights Agreement to be entered into among BAMSI, the Bank and BANW (the "Registration Rights Agreement"), and (7) a Tax Allocation Agreement of even date herewith between BAC and BAMSI (the "Tax Agreement"). The Corporate Opportunities Agreement, the Marketing Agreement, the Affiliate Bank Processing Agreement, the Administrative Services Agreement, the Trademark Agreement, the Registration Rights Agreement and the Tax Agreement are herein collectively referred to as the "Related Agreements." G. Sponsorship and Services. BAMSI and the Bank have concluded that it ------------------------ is in their mutual best interests for (1) the Bank to sponsor BAMSI as a member of Visa and MasterCard, (2) BAMSI to act as an agent of the Bank for purposes of providing data processing, settlement and authorization services for merchants with respect to their Visa and MasterCard transactions, and (3) BAMSI to use the Bank for certain banking relationships. NOW, THEREFORE, in consideration of the premises, the representations, acknowledgments, and mutual agreements set out in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are acknowledged by the parties, BAMSI and the Bank agree as follows: ARTICLE I MERCHANT PROCESSING, SETTLEMENT ------------------------------- AND AUTHORIZATION SERVICES -------------------------- 1.1 Applicability of Article I. The Bank and BAMSI agree and acknowledge -------------------------- that, depending on various factors, including Merchant (as hereinafter defined) location and the requirements of Visa or MasterCard rules and regulations, to the extent such rules and regulations are applicable, BAMSI shall act as the Bank's Member Service Provider (as defined in such rules and regulations) with respect to certain Merchants in connection with the provision of Merchant Processing Services (as hereinafter defined) and the provisions of this Article I shall operate to govern such relationship. 1.2 Appointment as Agent. The Bank appoints BAMSI, and BAMSI agrees to -------------------- serve, to the extent required or necessary under the Visa or MasterCard rules and regulations or any official interpretations thereof, as the Bank's sole agent (i) to provide authorization, processing and settlement services with respect to credit, debit and charge card transactions under the Visa, MasterCard, Diners Club, AMEX, JCB, Carte Blanche, Discover, Interlink and other programs ("Merchant Processing Services") to merchants who desire to receive Merchant Processing Services from the Bank or BAMSI ("Merchants") and (ii) to enter into contracts with merchants ("Merchant Contracts") for the provision of Merchant Processing Services as agent of the Bank. The Bank agrees that BAMSI may use the Bank's name and -2- Sponsorship Agreement its BIN, ICA and any other Visa and MasterCard identification numbers to the extent necessary or appropriate to perform the Merchant Processing Services. 1.3 Performance by BAMSI. BAMSI shall have full responsibility for the -------------------- proper performance of the Merchant Processing Services under each Merchant Contract except for the obligations and responsibilities which the Bank assumes hereunder. Without limiting the foregoing, BAMSI shall provide authorization services to the Merchants, perform data capture services with respect to all credit, debit and charge card transactions by the Merchants, submit such data to the applicable Interchange (as hereinafter defined), process retrievals and chargebacks, and direct the settlement of such transactions. In providing Merchant Processing Services, BAMSI agrees to comply with (i) all Visa and MasterCard Bylaws, Manuals, Operating Regulations and other written materials as they may from time to time be amended which bind or apply to the Bank as a member of Visa and MasterCard with respect to Merchant Processing Services or to BAMSI as a third party processor with respect to Merchant Processing Services ("Rules"), (ii) all agreements between Merchants and the Bank with respect to Merchant Processing Services, and (iii) all applicable laws and regulations, whether state or federal. BAMSI agrees to enter into any agreements with Visa and MasterCard necessary to perform this Agreement in accordance with its terms, subject to the rights of BAMSI to terminate this Agreement pursuant to Section 6.2. Without in any way limiting the foregoing, BAMSI agrees as follows: (a) any material containing any of the Visa Card Program Marks used by it in performing this Agreement will prominently identify the Bank by name and city adjacent to such marks and, in identifying BAMSI, will specify that BAMSI is acting as agent or representative of the Bank; (b) any solicitation material used by BAMSI shall clearly disclose that BAMSI is acting as agent or representative of the Bank; and (c) BAMSI acknowledges that it does not have authority to permit the use of Visa Card Program Marks by any of its own agents. BAMSI and the Bank agree that the foregoing clauses shall be deemed modified from time to time to reflect any changes in Visa's requirements applicable to BAMSI's use of Visa Card Program Marks and solicitation material or to the terms required herein. 1.4 Merchant Contracts. BAMSI, as agent of the Bank, shall be ------------------ responsible for establishing the terms and conditions of the Merchant Contracts, including all changes thereunder, subject to Section 1.7 below. Without in any way limiting the authority granted in Section 1.1, the Bank hereby authorizes BAMSI to use the Bank's name to the extent necessary or appropriate in accordance with the terms of this Agreement to enter into and to renew Merchant Contracts, to modify Merchant Contracts to the extent necessary to assign them to the Bank, to perform the Merchant Contracts and to take other necessary or appropriate actions with respect to the Merchant Contracts, all in accordance with requirements of Visa and MasterCard. As between BAMSI and the Bank, BAMSI shall be responsible for all credit, fraud and other risks associated with each Merchant Contract. 1.5 Authorization Services. BAMSI, or its designated third parties, ---------------------- shall provide the Merchants with telephonic or electronic authorization for all Visa and MasterCard transactions exceeding any floor amount specified pursuant to such Merchant's contract. -3- Sponsorship Agreement 1.6 Processing and Submission to Interchange. BAMSI shall process all ---------------------------------------- data received by it reflecting the Visa and MasterCard sales transactions and any related return credits by the Merchants and shall submit to the applicable Visa or MasterCard interchange networks ("Interchange") "Settlement Files" reflecting such transactions and directing the applicable Interchange to pay the net amount due to an account established by the Bank for the purpose of receiving all settlement amounts paid by Visa and MasterCard with respect to the transactions processed by BAMSI pursuant to this Agreement and effecting appropriate payments to the Merchants and BAMSI in accordance with this Agreement (the "Bank Account"). 1.7 Account Settlement. ------------------ (a) Payment Instructions. BAMSI shall prepare and transmit to the -------------------- Bank, in a mutually acceptable format, instructions specifying the payments to be made from the Bank Account to the Merchants and to BAMSI pursuant to this Agreement (the "Payment Instructions"). Payment Instructions shall be delivered to the Bank in accordance with the schedule and procedures established from time to time by the parties. (b) Payment. In accordance with the Payment Instructions, the Bank ------- shall pay the Merchants on a timely basis the net settlement amounts due to them and shall credit BAMSI's account at the Bank for the fees due to BAMSI hereunder. Such payments to Merchants shall be effected through mutually acceptable procedures which are consistent with the payment procedures established pursuant to the Merchant Contracts. BAMSI shall perform on the Bank's behalf all of the administrative and bookkeeping functions necessary to effect payment in such manner. 1.8 Due Diligence by the Bank; BAMSI's Standards. -------------------------------------------- (a) Due Diligence Prior to Execution of Agreement. Senior management --------------------------------------------- officials of BAMSI have met with the Bank and have discussed with the Bank officials the credit and financial review procedures and standards used by BAMSI in deciding whether to accept or retain Merchants as customers for Merchant Processing Services, as well as BAMSI's experience with respect to any losses resulting from financial failures or fraud by its merchant customers. Schedule A attached hereto outlines the credit and financial review procedures and standards currently used by BAMSI. (b) Continuing Due Diligence: BAMSI's Risk Standards. BAMSI shall ------------------------------------------------- keep the Bank advised of any material changes in the credit and financial review procedures and standards and of any material exceptions to such procedures and standards which may from time to time be made with respect to particular Merchants. BAMSI shall not make any such changes or exceptions until its senior management has approved such changes or exceptions after carefully evaluating the relative advantages and disadvantages -4- Sponsorship Agreement expected to result from such changes or exceptions. BAMSI also shall continue to advise the Bank on a timely basis with respect to any substantial loss (meaning any loss of $1,000,000 or more in the aggregate in any twelve month period) incurred by BAMSI as a result of any financial failures or fraud by its merchant customers. If the Bank reasonably determines from time to time that any changes are needed in BAMSI's credit and financial review procedures and standards or in the implementation thereof in order to avoid any significant increase in BAMSI's losses from financial failures or fraud by its merchant customers, then the Bank shall so notify BAMSI in writing, and BAMSI and the Bank shall mutually agree upon, and BAMSI shall implement appropriate changes. (c) Due Diligence by the Bank for BAMSI Pricing Standards. Senior ----------------------------------------------------- management officials of BAMSI have met with the Bank and have discussed with the Bank officials the pricing procedures and standards used for Merchants as customers for Merchant Processing Services. BAMSI shall keep the Bank advised of any material changes in its pricing procedures and standards and of any material exceptions to such procedures and standards which may from time to time be made with respect to particular Merchants. BAMSI shall not make any such changes or exceptions until its management committee has approved such changes or exceptions after carefully evaluating the relative advantages and disadvantages expected to result from such changes or exceptions. If the Bank reasonably determines from time to time that any changes are needed in BAMSI's pricing procedures and standards or in the implementation thereof, then the Bank shall so notify BAMSI in writing, and BAMSI and the Bank shall mutually agree upon, and BAMSI shall implement appropriate changes. ARTICLE II BANKING SERVICES ---------------- 2.1 Merchant Processing. As soon as practicable after the Effective Date ------------------- BAMSI shall enter into agreements or make other mutually acceptable arrangements with the Bank pursuant to which the Bank will provide those banking services which are necessary for BAMSI to provide the Merchant Processing Services and which the parties wish the Bank to provide. 2.2 Authority to Establish Bank Accounts. BAMSI shall have authority to ------------------------------------ establish at the Bank or any other mutually acceptable financial institution any deposit accounts on behalf of the Bank as may be necessary to provide some or all of the Merchant Processing Services contemplated by this Agreement for such periods as the Bank and BAMSI agree. No provision of this Agreement authorizes or shall be construed to authorize BAMSI to incur any debt to the Bank or any other financial institution, or to create any overdraft, which the Bank is obligated directly or indirectly to repay. -5- Sponsorship Agreement 2.3 Loans and Overdrafts. Nothing in this Agreement shall be deemed to -------------------- create any obligation on the part of the Bank to loan or advance to BAMSI any amounts in connection with Merchant Processing Services for any period of time. ARTICLE III FEES AND EXPENSES ----------------- 3.1 Charges to Merchants. As between BAMSI and the Bank, BAMSI shall -------------------- receive all fees, discounts and other amounts payable by Merchants for Merchant Processing Services with respect to Merchant Contracts. 3.2 Expenses. BAMSI shall bear all expenses of maintaining facilities -------- and connections necessary to provide Merchant Processing Services, except for the facilities and connection maintained by the Bank for purposes of effecting payments pursuant to Section 1.6(b). In addition, BAMSI agrees to pay or reimburse the Bank in full all interchange or issuer reimbursement fees on outgoing merchant sales volume, as well as all fee assessments or charges imposed on the Bank by Visa or MasterCard as a result of the Merchant Processing Services performed by BAMSI. Such fees shall be paid by BAMSI directly when due or shall be paid by BAMSI to the Bank on the banking day immediately prior to the day on which the Bank must pay such fees. All such fees, assessments and charges for which the Bank seeks payment by BAMSI shall upon request be documented to BAMSI's reasonable satisfaction as being attributable to BAMSI's Merchant Processing Services. ARTICLE IV INDEMNIFICATION --------------- 4.1 Indemnification. BAMSI agrees to indemnify, defend and save the Bank, --------------- its directors, officers and employees harmless from all losses, claims, judgments, awards, penalties, expenses and other amounts of any nature arising out of: (a) BAMSI's failure to perform this Agreement in accordance with its terms including but not limited to the failure to pay expenses, charges and other amounts in accordance with the provisions of this Agreement; (b) the negligent exercise of or the exceeding by any Joint Officer of the authority granted pursuant to this Agreement to act an officer of the Bank; or (c) the Bank's grant of authority to BAMSI pursuant to this Agreement. -6- Sponsorship Agreement including, but not limited to, all court costs, investigation expenses and the reasonable fees and expenses of separate counsel for the Bank selected by the Bank, provided, however, that the Bank shall not be entitled to indemnification as to amounts arising from the negligence or willful misconduct of the Bank. ARTICLE V COMPLIANCE MODIFICATIONS ------------------------ 5.1 Compliance Modifications. In the event that: ------------------------ (a) the laws, rules and/or regulations or any official interpretations thereof applicable to the Bank as a national bank or the Visa or MasterCard rules and/or regulations or any official interpretations thereof applicable to the Bank and the matters covered by this Agreement are modified such that: (i) Any modification in the relationship or transactions contemplated hereby between the Bank and BAMSI or in the provisions of this Agreement are needed to comply with any such laws, rules, regulations or official interpretations thereof; or (ii) some or all of the activities contemplated by this Agreement are prohibited; or (b) Visa or MasterCard requires, as a condition to performance of this Agreement, that BAMSI enter into an agreement with Visa or MasterCard that BAMSI considers unacceptable; then at BAMSI's request, the parties will cooperate in making any modifications to this Agreement and to the parties' relationship hereunder to the extent any such modifications will permit BAMSI to continue processing, settling and authorizing bankcard transactions (or continue performing some of such functions) in compliance with the laws, rules, regulations or any official interpretations thereof applicable to the Bank as a National Bank and the Visa and MasterCard rules, regulations, and interpretations thereof and any contractual terms required by Visa or Mastercard and acceptable to BAMSI (any such modifications being referred to as "Compliance Modifications"), provided that such Compliance Modifications are reasonable and are not unduly burdensome to the Bank, and BAMSI reimburses the Bank for any additional costs reasonably incurred by the Bank in connection with such Compliance Modifications. 5.2 Failure to Make Compliance Modification. If BAMSI does not request --------------------------------------- any Compliance Modifications or the parties cannot agree upon the terms of any Compliance Modifications, then either party may terminate this Agreement upon prior written notice to the other party effective at the later of: (a) the deadline imposed by Visa or MasterCard for complying with any such rule, regulation, official interpretation or contract requirement or -7- Sponsorship Agreement (b) 120 days after actual notice to BAMSI of such rule, regulation, interpretation or contract requirement. ARTICLE VI TERM AND TERMINATION -------------------- 6.1 Term. The term of this Agreement shall be five years commencing on ---- the Effective Date and ending at the close of business on the fifth anniversary of the Effective Date. This Agreement shall automatically renew for successive one-year terms unless one party gives the other party written notice of non- renewal at least six months prior to automatic renewal. 6.2 Termination. Either party may terminate this Agreement without ----------- penalty and without prejudice to any claims arising prior to termination as follows: (a) Upon the written agreement of both parties. (b) Upon the other party's breach of this Agreement provided the terminating party has given written notice of the breach to the other party specifying the breach, the action necessary to cure the breach and the breaching party has not cured the breach within 30 days after notice is given of any failure by BAMSI to provide any funds required hereunder to be provided by BAMSI to pay Merchants or within thirty business days after notice is given of any other breach. (c) By the Bank immediately upon BAMSI's voluntary filing of any petition or complaint seeking relief under any federal or state bankruptcy or other debt relief statute or upon any involuntary petition in bankruptcy being filed against BAMSI if such petition is not dismissed within 90 days after it is filed. (d) By BAMSI immediately in the event that any agreements between the Bank and Visa and/or MasterCard or the Bank's membership in either such bankcard association shall be terminated or materially limited which termination or material limitation would impair the ability of BAMSI to authorize, process or settle merchant bankcard transactions. (e) By the Bank in the event BAC and its affiliates (other than BAMSI) beneficially own less than a majority of the voting power of the outstanding common stock of BAMSI. 6.3 Survival. The provisions of Sections 2.3, 3.2, 4.1, 7.1 and 9.6 of -------- this Agreement shall survive any termination. No termination shall prejudice any claim or rights of any party which accrued prior to termination. -8- Sponsorship Agreement ARTICLE VII CONFIDENTIALITY --------------- 7.1 Confidentiality. In performing this Agreement, each party will have --------------- access to confidential information of the other. Each party agrees to hold in confidence and to instruct its employees and agents to hold in confidence all information and materials, in whatever form, reasonably designated as confidential by the party requesting confidentiality. BAMSI agrees to comply with all laws and regulations relating to confidentiality of customer lists and other information which are applicable to the Bank and its agents or to BAMSI. The Bank agrees to comply with all contractual obligations of BAMSI actually known to the Bank and all laws and regulations applicable to the Bank or BAMSI relating to confidentiality of customer lists and other information. ARTICLE VIII NOTICES ------- 8.1 Notices. All notices which are required or permitted by this ------- Agreement shall be in writing and shall be (i) delivered personally to the designated addressee, (ii) sent by the United States Mail addressed to the designated person by certified mail, return receipt requested, all postage prepaid, or (iii) sent by overnight delivery service addressed to the designated person, all charges prepaid, or (iv) by other means such as facsimile machine if the designated addressee acknowledges receipt in writing. Notices shall be addressed as follows: If to BAMSI: BA Merchant Services, Inc. One South Van Ness Avenue 5th Floor San Francisco, CA 94103 Attn: General Counsel #3710 If to the Bank: Bank of America NT & SA 555 California Street 6th Floor San Francisco, CA 94104 Attn: Corporate Secretary #3018 With a copy to: BankAmerica Corporation 555 California Street 8th Floor San Francisco, CA 94104 Attn: General Counsel #3017 -9- Sponsorship Agreement Notices personally delivered are given when received. Notices sent by United States Mail, certified mail, return receipt requested, are given five business days after delivery to the United States Postal Service unless prior actual receipt by the addressee is proven. Notice sent by overnight delivery service is deemed given one business day after delivery to and acceptance by overnight delivery service for next day delivery. Notices sent by other means and acknowledged are deemed given when acknowledged in writing. ARTICLE IX MISCELLANEOUS ------------- 9.1 Headings. The headings are for information and are not part of this -------- Agreement. 9.2 Entire Agreement, Modification. This Agreement and the attachments to ------------------------------ it represent the entire agreement of the parties with respect to the subject matter of the Agreement. This Agreement may not be modified except by a written agreement which expressly refers to the Agreement and is signed by both parties. 9.3 Severability. If any section of this Agreement is deemed void illegal ------------ or unenforceable, that section shall be severed and the balance shalt remain in effect. 9.4 Governing Law; Arbitration. -------------------------- (a) This Agreement and its interpretation shall be governed by the laws of the State of California without regard to conflicts of laws rules. (b) Any dispute, controversy or claim between the Bank and BAMSI arising out of or relating to this Agreement, the Merchant Processing Services or any agreements or instruments relating hereto or delivered in connection herewith, will be resolved by arbitration conducted in San Francisco, California under the auspices and according to the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement. 9.5 Binding Agreement, Assignment Prohibited. This Agreement shall bind ---------------------------------------- the parties, their successors and permitted assigns. Neither party shall assign this Agreement or any rights under it except with the prior written consent of the other. 10.6 Supervision and Regulation. The Bank is an insured institution -------------------------- subject to regulation and supervision by the Office of the Comptroller of the Currency (the "OCC") and various of the services under this Agreement may constitute bank services under 12 U.S.C. (S)1867(c). To the extent required by law or regulation, the parties will advise the OCC of the existence of this Agreement and will cooperate with any examination which the OCC or any other governmental regulatory agency may conduct in connection with this Agreement or the services provided thereunder. -10- Sponsorship Agreement 10.7 Relationship. Nothing in this Agreement shall be deemed to create a ------------ partnership, joint venture or agency relationship between the parties. Both parties are independent contractors and neither party is to be considered the agent or legal representative of the other for any purpose whatsoever. 10.8. Third Party Beneficiaries. Except as expressly provided in this ------------------------- Agreement, the parties hereto intend that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person other than the parties hereto. 10.9 Monitoring by the Bank. BAMSI shall admit properly identified and ---------------------- authorized the Bank employees and agents onto its premises for purposes of monitoring BAMSI's compliance with this Agreement. It is understood that such monitoring will occur during normal business hours, will be preceded by reasonable notification to BAMSI, and must not interfere with BAMSI's normal operations. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the Effective Date. BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: /s/ Thomas E. Peterson ---------------------------- Thomas E. Peterson Vice Chairman BA MERCHANT SERVICES, INC. By: /s/ Sharif M. Bayyari ---------------------------- Sharif M. Bayyari President -11- Sponsorship Agreement EX-10.5(I) 5 MARKETING AGREEMENT I Exhibit 10.5(i) MARKETING AGREEMENT Bank of America NT&SA and NW This Agreement, made as of December 3, 1996, is between Bank of America NT&SA, a national banking association ("BofA"), and Bank of America NW, N.A., a national banking association ("BANW") (collectively referred to as the "Bank"), and BA Merchant Services, Inc., a Delaware corporation ("BAMSI"). Recitals -------- A. The Bank has been a processor of credit card, charge card, ATM card and debit card transactions for merchants accepting any combination of credit cards, charge cards, ATM cards and debit cards and a provider of check verification services for payment at point of sale ("Merchant Services"). B. The parties desire that BAMSI and the Bank cooperate and work together in joint marketing opportunities, account-acquisition channels and related services and support. C. The parties intend to conduct their relationships under this Agreement on an arm's length basis. D. BofA and BANW, each a subsidiary of BankAmerica Corporation ("BAC"), a Delaware corporation, currently own 100% of the outstanding common stock of BAMSI and have entered into certain agreements with BAMSI as of the date shown above: (1) transferring BofA's U.S. domestic Merchant Services businesses and BANW's Merchant Services business to BAMSI; and (2) covering the contemplated transfer of Bank of America's Philippines, Taiwan and Thailand Merchant Services businesses to BAMSI upon receipt of certain government approvals. BAMSI is currently considering an initial public offering of shares of its Class A common stock, $0.01 par value per share. BANW and BofA intend for BANW to merge into BofA, effective January 1, 1997. E. Concurrently with the execution and delivery of this Agreement, BAMSI has entered into, as of the date shown above: (1) a Non-Competition and Corporate Opportunities Allocation Agreement between BAC and BAMSI (the "Corporate Opportunities Agreement"), (2) a Sponsorship and Processing Service Agreement between BAMSI and the Bank (the "Sponsorship and Processing Agreement"), (3) a Processing Service Agreement between BAMSI and certain other BAC affiliates, (4) a Trademark License Agreement between BAMSI and BAC (the "Trademark License Agreement"), (5) a Registration Rights Agreement among BAMSI, BofA and BANW (the Registration Rights Agreement"), and (6) a -1- Tax Allocation Agreement between BAC and BAMSI (the "Tax Agreement"). NOW, THEREFORE, for valuable consideration, the parties hereby agree as follows: Agreement --------- 1. Marketing and Promotions. ------------------------ (a) BAMSI Services. -------------- (1) During the term of this Agreement, the Bank and BAMSI will cooperate and work together to market, promote and sell Merchant Services that are provided by or may be transferred to BAMSI ("BAMSI Services") to existing and prospective Merchant Services customers (collectively "Customers") according to standards or requirements which the parties may establish from time to time by mutual agreement. Except as provided in the Corporate Opportunities Agreement, during the term of this Agreement, the Bank will not promote or offer Merchant Services other than BAMSI Services. BAMSI Services which the Bank will promote will include, among other things, authorization and processing services for credit cards, charge cards, ATM cards and debit cards, check verification and recovery services, and other Merchant Services products or services which BAMSI develops or which an Association (defined below) develops and BAMSI offers. (2) The Bank will give BAMSI access to the Bank's retail and commercial solicitation and distribution channels which include, without limitation, direct mail, statement inserts, telemarketing, Internet and other on-line media and cross-sell databases. If, through expansion, merger, acquisition or any other means, the Bank acquires or adds new branches, commercial, corporate or wholesale offices or sales forces, the Bank will give BAMSI access to any new or additional solicitation and distribution channels available through the Bank's new branches, offices or sales forces. (b) Bank Services. ------------- (1) During the term of this Agreement, the Bank and BAMSI will cooperate and work together to market and promote the products and services of the Bank or its affiliates ("Bank Services") to Customers. Bank Services will include, without limitation, deposit-related accounts, credit-related products, ATM sales and distribution, Business Banking, Commercial Cards (including Corporate Cards and Purchasing Cards), interactive banking and home banking. BAMSI will not promote banking products and services other than Bank Services and will market -2- and promote Bank Services according to standards or requirements which the parties may establish from time to time by mutual agreement. (2) BAMSI will give the Bank access to BAMSI's retail and commercial solicitation and distribution channels which include, without limitation, direct mail, statement inserts, telemarketing, Internet and other on-line media and cross-sell databases. If, through expansion, merger or acquisition, BAMSI acquires or adds new businesses, offices or sales forces, BAMSI will give the Bank access to any new or additional solicitation and distribution channels available through BAMSI's new businesses, offices or sales forces. 2. Sales Training and Support. -------------------------- (a) To facilitate the Bank's promotion of BAMSI Services, BAMSI, at BAMSI's expense, will: (1) from time to time and as product changes warrant, supply the Bank with sales and promotional information, literature and related materials in any appropriate medium, which the Bank, to the extent reasonably possible, will display and distribute to Customers, and (2) provide training and related support services for the Bank's sales personnel. To facilitate BAMSI's promotion of Bank Services, the Bank, at the Bank's expense, will: (1) from time to time and as product changes warrant, supply BAMSI with sales and promotional information, literature and related materials in any appropriate medium, which BAMSI, to the extent reasonably possible, will distribute to Customers, and (2) provide training and related support services for BAMSI's sales personnel. (b) The Bank and BAMSI will coordinate and cooperate with each other to conduct joint promotions, including joint and contemporaneous sales calls to Customers, to complement the features and benefits of each other's products and services. 3. Information Access. ------------------ The Bank will give BAMSI direct, on-line access to any account and related information on each Customer on which the Bank has a record, including access to checking-account balances for BAMSI's check verification services and access to information needed for payment authorization services, to the extent legally permissible. BAMSI will maintain the confidentiality of all such information in accordance with Section 8 below. 4. Compensation. ------------ (a) Fees or Credit. BAMSI will pay, credit or -------------- -3- reimburse the Bank in accordance with the Compensation Schedule (attached as Appendix A to this Agreement) for each Merchant Services application which the Bank refers to BAMSI and which results in the acquisition of a new Customer. The Bank will pay, credit or reimburse BAMSI in accordance with the Compensation Schedule for each Bank product or service sold as a result of the referral or promotion efforts of BAMSI. The rates of compensation in the Compensation Schedule take into account the benefits and value which the Bank and BAMSI each derive from joint and cooperative marketing efforts under this Agreement. The parties may change the terms and rates of compensation from time to time by mutual agreement. Each component of compensation between the parties will be based on mutually agreeable and market-competitive pricing terms. (b) Reports. As part of the compensation to the Bank for the Bank's ------- marketing services, BAMSI will furnish the Bank with MIS reports on Customer information on Customers acquired through the Bank, to the extent legally permissible and operationally feasible for BAMSI. (c) Payment. Unless the parties agree to use BAC's intercompany ------- accounting system, each party will pay the other party by electronic transfer or by check for the other party's services within 30 days following receipt of the other party's itemized invoice. 5. Marks. ----- (a) The Bank hereby authorizes BAMSI, in accordance with the Trademark License Agreement, to use the Bank's trademarks, tradenames and service marks (the "Bank's Marks") to market and promote the Bank's Services or BAMSI Services. The Bank's Marks include, without limitation, Bank of America(R), BankAmericard(R), Versatel(R) and Versateller(R). (b) BAMSI hereby authorizes the Bank, in accordance with the Trademark License Agreement, to use BAMSI's trademarks, tradenames and service marks ("BAMSI's Marks") to market and promote BAMSI Services or Bank Services. BAMSI's Marks include, without limitation, BA Merchant Services and PayLink. 6. Term; Termination. ----------------- (a) The term of this Agreement will start as of the date first shown above and continue without interruption for 5 years. After the initial 5-year term, the term will automatically renew for 1-year terms unless either party gives at least 6 months' advance written notice of termination. However, the Bank may terminate this Agreement at any time upon 6 months' advance written notice if BAC and its affiliates (other than BAMSI) beneficially own shares representing less -4- than a majority of the voting power of the outstanding common stock of BAMSI. (b) If a party materially fails to perform an obligation under this Agreement, the other party may give written notice describing the failure to perform, and if the failure is not corrected within 30 days, the notifying party may terminate the Agreement immediately and will have the right to all available remedies. 7. Independent Contractor. ---------------------- (a) Each party, in performing services under this Agreement, will be an independent contractor of the other party, with exclusive control over its own employees and agents who perform the terms under this Agreement. (b) Each party is solely responsible for determining the terms and conditions of employment between itself and its employees and agents, including, without limitation, hiring, termination, hours of work, rates and payment of compensation, and for the payment, reporting, collection and withholding of taxes and similar contributions. 8. Confidentiality. --------------- (a) BAMSI will treat as strictly confidential and as the Bank's exclusive proprietary property all documents and information concerning the Bank's marketing plans, marketing data, pricing plans, customer names or account numbers, and related material which BAMSI receives in connection with this Agreement (collectively the "Bank Information"). Except as authorized by the Bank in a signed writing, BAMSI will not sell or disclose Bank Information, directly or indirectly, to a third party. BAMSI will ensure that any agent which BAMSI employs or retains to work with Bank Information will adhere to this restriction of non-disclosure. This section does not apply to Bank Information placed in the public domain other than by virtue of BAMSI's wrongful act or omission. (b) The Bank will treat as strictly confidential and as BAMSI's exclusive proprietary property all documents and information concerning BAMSI's marketing plans, marketing data, pricing plans, customer names or account numbers, and related material which the Bank receives in connection with this Agreement (collectively "BAMSI Information"). Except as authorized by BAMSI in a signed writing, the Bank will not sell or disclose BAMSI Information, directly or indirectly, to a third party. The Bank will ensure that any agent which the Bank employs or retains to work with BAMSI Information will adhere to this restriction of non-disclosure. This section -5- does not apply to BAMSI Information placed in the public domain other than by virtue of the Bank's wrongful act or omission. (c) If either party receives a subpoena or other legal process which specifically seeks to discover Information created by or belonging to the other party or which constitutes the other party's proprietary property, the party served with the subpoena or process will notify the other party immediately and will cooperate at the other party's expense to contest the subpoena or process if that is the desire of the other party. (d) Each party will provide a secure environment to protect the Information of the other party, and will take reasonable precautions to prevent its disclosure, loss or damage. (e) Upon expiration or termination of this Agreement, each party will return or destroy within 5 business days all written Information and marketing materials in its possession relating to the other party or the other party's products and services through a mutually agreeable method. (f) This Section 8 will survive expiration or termination of this Agreement. 9. Indemnification. --------------- (a) By the Bank. The Bank will defend, indemnify and hold BAMSI and ----------- each of its officers, directors, employees and agents harmless from and against each liability, claim, demand, cost, damage, loss and cause of action (collectively "Claim") arising from the Bank's failure to perform its obligations under this Agreement, except in the case of BAMSI's gross negligence or willful misconduct. (b) By BAMSI. BAMSI will defend, indemnify and hold the Bank and each -------- of its officers, directors, employees and agents harmless from and against each Claim arising from BAMSI's failure to perform its obligations under this Agreement, except in the case of the Bank's gross negligence or willful misconduct. (c) Notice. Either party seeking indemnification under this Agreement ------ will give prompt written notice to the other party of any Claim for which indemnification is sought. (d) Taxes. Each party will indemnify, reimburse and hold the other ----- party harmless from and for any applicable sales or use taxes arising from the indemnifying party's performance of the terms of this Agreement. -6- (e) This Section 9 will survive expiration or termination of this Agreement. 10. Supervision and Regulation. -------------------------- (a) The Bank is an insured institution subject to regulation and supervision by the Office of the Comptroller of the Currency (OCC), and BAMSI is a subsidiary of the Bank. Some of the services under this Agreement constitute bank services under 12 U.S.C. (S)1867(c). To the extent required by law or regulation, the parties will advise the OCC of the existence of this Agreement and will cooperate with any examination which the OCC may wish to conduct in connection with this Agreement or in connection with BAMSI's ongoing operations. (b) This Section 10 will survive expiration or termination of this Agreement. 11. Arbitration. ----------- (a) Any dispute, controversy or claim between the the Bank and BAMSI arising from or relating to this Agreement, BAMSI Services or Bank Services or any related agreements or instruments will be resolved by arbitration conducted in San Francisco, California, under the auspices, and in accordance with the Commercial Arbitration Rules, of the American Arbitration Association, and in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice-of-law provision in this Agreement. (b) This Section 11 will survive termination of this Agreement. 12. Notices. ------- Each notice under this Agreement will be in writing and signed and will be deemed effective when one party delivers it in person or transmits it electronically, or 3 days after the notice is mailed by registered or certified mail, to the designated representative of the other party at the applicable address below. To the Bank: ----------- Bank of America NT&SA 555 California Street San Francisco, CA 94104 Attention: Corporate Secretary #3018 -7- w/copy to: General Counsel #3017 BankAmerica Corporation 555 California Street, 8th floor San Francisco, CA 94104 To BAMSI: -------- BA Merchant Services, Inc. #3710 One South Van Ness Avenue San Francisco, CA 94103 Attention: Director of Product/ Strategy/Technology Support 13. Assignment. Neither party may assign this Agreement without the ---------- written consent of the other party. Upon consent, this Agreement will be binding on and inure to the benefit of the parties' respective successors and assigns. 14. Governing Law. ------------- The lf the State of California will govern this Agreement, and any provisions on conflict of laws will have no effect. 15. Third-Party Beneficiaries. ------------------------- Except as expressly provided in this Agreement, the parties to this Agreement intend that this Agreement will not benefit or create any right or cause of action in or on behalf of any person other than the parties to this Agreement. 16. Entire Agreement. ---------------- This Agreement, including the attached Appendices, sets forth the entire agreement between the parties relating to the subject matter of this Agreement, superseding all prior written or oral understandings. This Agreement may not be amended or modified without a writing signed by both parties. IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the first date shown above. BANK OF AMERICA NT&SA BA MERCHANT SERVICES, INC. By __________________________ By ___________________________ Thomas E. Peterson Sharif M. Bayyari Vice Chairman President & Chief Executive Officer BANK OF AMERICA NW, N.A. By ______________________________ Josef E. Gray President, Seafirst Bank Division -8- APPENDIX A TO MARKETING AGREEMENT Compensation Schedule Compensation to the Bank. - ------------------------ The Bank's compensation for marketing and promotional services described in Section 1 above are: Retail Branches --------------- For each BAMSI Customer location acquired from referral by a branch: . $55 reimbursement paid to the retail branch's region (if in the U.S.) or to the branch (if outside the U.S.) for each Customer location up to a maximum of 50 Customer locations for each Customer Commercial Banking ------------------ For each BAMSI Customer location acquired from referral by a Commercial Banking Officer: . $55 reimbursement to the Commerical Banking Office for each Customer location up to a maximum of 50 Customer locations for each Customer Compensation to BAMSI. - --------------------- Float From Immediate Sales-Draft Credits. To the extent that a BAMSI ---------------------------------------- Customer has a demand deposit account with the Bank to which BAMSI deposits same-day credit for processed credit-card and debit-card sales drafts of the BAMSI Customer, the Bank will pay BAMSI each month the average interest revenue earned as a result of the float period from the date of BAMSI's deposit to the date that BAMSI collects the amounts of those -9- sales drafts through the applicable Association settlement system, calculated as follows: Paper and Electronic merchant sales will be retrieved from the merchant database at the branch level. - Paper sales float days for the average monthly sales is set at 2.95 days. - Electronic sales float days for average monthly sales is set at 2.20 days. On the 5th day of each month, BAC Corporate Treasury's three-year pool rate for the prior calendar month will be applied to the calculated float-days sales during the prior calendar month to arrive at the monthly float amount. Example: Monthly float = ((Electronic sales x 2.20 days) + (Paper sales x 2.95 days)) x .00623/365 -10- EX-10.5(II) 6 MARKETING AGREEMENT II Exhibit 10.5 (ii) MARKETING AGREEMENT Bank of America NA This Agreement, made as of December 3, 1996, is between Bank of America NA, a national banking association and Bank of America NW, N.A., a national banking association (collectively the "Bank"), and BA Merchant Services, Inc., a Delaware corporation ("BAMSI"). Recitals -------- A. The Bank is in the business of marketing, offering, issuing and servicing consumer, business, corporate and purchasing credit cards bearing the Visa(R) or MasterCard(R) brand which the Bank develops, which are transferred to the Bank or which an Association (defined below) develops and the Bank offers ("Bank Products"). B. BAMSI is in the business of marketing, offering and providing merchant authorization and processing services for credit card, charge card, debit card and ATM card transactions, and check verification and recovery services, and other merchant services which BAMSI develops, which are transferred to BAMSI or which an Association (defined below) develops and BAMSI offers ("BAMSI Services"). C. The parties desire that BAMSI and the Bank cooperate and work together in joint marketing opportunities, account-acquisition channels and related services and support. D. The parties intend to conduct their relationships under this Agreement on an arm's length basis. E. Bank of America NT&SA ("BofA") and Bank of America NW, N.A. ("BANW"), each a subsidiary of BAC, a Delaware corporation, currently own 100% of the outstanding common stock of BAMSI and have entered into certain agreements with BAMSI as of the date shown above: (1) transferring BofA's U.S. domestic Merchant Services businesses and BANW's Merchant Services business to BAMSI as of the date shown above; and (2) covering the contemplated transfer of Bank of America's Philippines, Taiwan and Thailand Merchant Services businesses to BAMSI upon receipt of certain government approvals. BAMSI is currently considering an initial public offering of shares of its Class A common stock, $0.01 par value per share. BANW and BofA intend for BANW into merge into BofA, effective January 1, 1997. F. Concurrently with the execution and delivery of this Agreement, BAMSI has entered into, as of the date shown above: (1) a Non-Competition and Corporate Opportunities -1- Allocation Agreement between BAMSI and BAC (the "Corporate Opportunities Agreement"), (2) a Sponsorship and Processing Service Agreement between BAMSI and BofA and Seafirst (the "Sponsorship and Processing Agreement"), (3) a Processing Service Agreement between BAMSI and certain other BAC affiliates, and (4) a Trademark License Agreement between BAMSI and BAC. NOW, THEREFORE, for valuable consideration, the parties hereby agree as follows: Agreement --------- 1. Marketing and Promotions. ------------------------ (a) BAMSI Services. -------------- (1) During the term of this Agreement, the Bank and BAMSI will cooperate and work together to market, promote and sell Merchant Services that are provided by BAMSI or are transferred to BAMSI ("BAMSI Services") to existing and prospective Merchant Services customers (collectively "Customers") according to standards or requirements which the parties may establish from time to time by mutual agreement. Except as provided in the Corporate Opportunities Agreement, during the term of this Agreement, the Bank will not promote or offer Merchant Services other than BAMSI Services. BAMSI Services which the Bank will promote will include, among other things, authorization and processing services for credit cards, charge cards, ATM cards and debit cards, check verification and recovery services, and other Merchant Services products or services which BAMSI develops or which an Association (defined below) develops and BAMSI offers. (2) To the extent legally permissible, the Bank will give BAMSI access to the Bank's solicitation and distribution channels and resources which include, without limitation, direct mail, statement inserts, telemarketing, Internet and other on-line media and cross-sell databases. If, through expansion, merger, acquisition or other means, the Bank acquires or adds new credit card portfolios, business partners, clients or sales forces, the Bank will give BAMSI access to any new or additional solicitation and distribution channels available through the Bank's new portfolios, business partners, clients or sales forces. (b) Bank Products. ------------- (1) During the term of this Agreement, the Bank and BAMSI will cooperate and work together to market and promote Bank Products to Customers. Bank Products will include, -2- without limitation, consumer credit, business, corporate and purchasing cards. Except as provided in the Corporate Opportunities Agreement, BAMSI will not promote banking products and services other than Bank Products and will market and promote Bank Services according to standards or requirements which the parties may establish from time to time by mutual agreement. (2) To the extent legally permissible, BAMSI will give the Bank access to BAMSI's retail and commercial solicitation and distribution channels and resources which include, without limitation, direct mail, statement inserts, telemarketing, Internet and other on-line media and cross-sell databases. If, through expansion, merger, acquisition or other means, BAMSI acquires or adds new businesses, offices or sales forces, BAMSI will give the Bank access to any new or additional solicitation and distribution channels available through BAMSI's new businesses, offices or sales forces. 2. Sales Training and Support. -------------------------- (a) To facilitate the Bank's promotion of BAMSI Services, BAMSI, at BAMSI's expense, may from time to time and as product changes warrant: (1) supply the Bank with sales and promotional information and literature and related materials in any appropriate medium to inform the Bank of BAMSI Services, and (2) provide training and related support services for the Bank's personnel. To facilitate BAMSI's promotion of Bank Services, the Bank, at the Bank's expense, may from time to time and as product changes warrant: (1) supply BAMSI with sales and promotional information and literature and related materials in any appropriate medium to inform BAMSI of Bank Products, and (2) provide training and related support services for BAMSI's personnel. (b) The Bank and BAMSI will coordinate and cooperate with each other to conduct joint promotions, including joint and contemporaneous sales calls to Customers, to complement the features and benefits of each other's products and services. 3. Information Access. ------------------ To the extent legally permissible, each party to this Agreement will give the other party access to any account and related information on each Customer to enable the other party to solicit the Customer for BAMSI Services or Bank Products, as applicable. Each party will maintain the confidentiality of all such information in accordance with Section 8 below. -3- 4. Compensation. ------------ (a) On a Customer-by-Customer or project-by-project basis, the parties will mutually agree on the compensation each party will receive for marketing services under this Agreement. For each Customer or project, the parties will enter into an amendment to this Agreement which, by reference, will become a part of this Agreement and which will describe the marketing services to be performed and the compensation to be paid. Compensation under this Agreement will be based on market-competitive pricing terms. (b) Reports. As part of the compensation under this Agreement, each ------- party will furnish the other party with MIS reports on Customers' account information and transaction data, to the extent legally permissible and operationally feasible. (c) Payment. Unless the parties agree to use BAC's intercompany ------- accounting system, each party will pay the other party by electronic transfer or by check for the other party's services within 30 days following receipt of the other party's itemized invoice. 5. Marks. ----- (a) The Bank hereby authorizes BAMSI, in accordance with the Trademark License Agreement, to use the Bank's trademarks, tradenames and service marks (the "Bank's Marks") to market and promote Bank Products or BAMSI Services. The Bank's Marks include, without limitation, Bank of America(R) and BankAmericard(R). (b) BAMSI hereby authorizes the Bank, in accordance with the Trademark License Agreement, to use BAMSI's trademarks, tradenames and service marks ("BAMSI's Marks") to market and promote BAMSI Services or Bank Services. BAMSI's Marks include, without limitation, BA Merchant Services and PayLink/TM/. 6. Term; Termination. ----------------- (a) The term of this Agreement will start as of the date first shown above and continue without interruption for 5 years. After the initial 5-year term, the term will automatically renew for 1-year terms unless either party gives at least 6 months' advance written notice of termination. However, the Bank may terminate this Agreement at any time upon 6 months' advance written notice if BAC and its affiliates (other than BAMSI) beneficially own shares representing less than a majority of the voting power of the outstanding common stock of BAMSI. -4- (b) If a party materially fails to perform an obligation under this Agreement, the other party may give written notice describing the failure to perform, and if the failure is not corrected within 30 days, the notifying party may terminate the Agreement immediately and will have the right to all available remedies. 7. Independent Contractor. ---------------------- (a) Each party, in performing services under this Agreement, will be an independent contractor of the other party, with exclusive control over its own employees and agents who perform the terms under this Agreement. (b) Each party is solely responsible for determining the terms and conditions of employment between itself and its employees and agents, including, without limitation, hiring, termination, hours of work, rates and payment of compensation, and for the payment, reporting, collection and withholding of taxes and similar contributions. 8. Confidentiality. --------------- (a) BAMSI will treat as strictly confidential and as the Bank's exclusive proprietary property all documents and information concerning the Bank's marketing plans, marketing data, pricing, customer names or account numbers, and related material which BAMSI receives in connection with this Agreement (collectively the "Bank Information"). Except as authorized by the Bank in a signed writing, BAMSI will not sell or disclose Bank Information, directly or indirectly, to a third party. BAMSI will ensure that any agent which BAMSI employs or retains to work with Bank Information will adhere to this restriction of non-disclosure. This section does not apply to Bank Information placed in the public domain other than by virtue of BAMSI's wrongful act or omission. (b) The Bank will treat as strictly confidential and as BAMSI's exclusive proprietary property all documents and information concerning BAMSI's marketing plans, marketing data, pricing, customer names or account numbers, and related material which the Bank receives in connection with this Agreement (collectively "BAMSI Information"). Except as authorized by BAMSI in a signed writing, the Bank will not sell or disclose BAMSI Information, directly or indirectly, to a third party. The Bank will ensure that any agent which the Bank employs or retains to work with BAMSI Information will adhere to this restriction of non-disclosure. This section does not apply to BAMSI Information placed in the public domain other than by virtue of the Bank's wrongful act or omission. -5- (c) If either party receives a subpoena or other legal process which specifically seeks to discover Information created by or belonging to the other party or which constitutes the other party's proprietary property, the party served with the subpoena or process will notify the other party immediately and will cooperate at the other party's expense to contest the subpoena or process if that is the desire of the other party. (d) Each party will provide a secure environment to protect the Information of the other party, and will take reasonable precautions to prevent its disclosure, loss or damage. (e) Upon expiration or termination of this Agreement, each party will return or destroy within 5 business days all written Information and marketing materials in its possession relating to the other party or the other party's products and services through a mutually agreeable method. (f) This Section 8 will survive expiration or termination of this Agreement. 9. Indemnification. --------------- (a) By the Bank. The Bank will defend, indemnify and hold BAMSI and ----------- each of its officers, directors, employees and agents harmless from and against each liability, claim, demand, cost, damage, loss and cause of action (collectively "Claim") arising from the Bank's failure to perform its obligations under this Agreement, except in the case of BAMSI's gross negligence or willful misconduct. (b) By BAMSI. BAMSI will defend, indemnify and hold the Bank and each -------- of its officers, directors, employees and agents harmless from and against each Claim arising from BAMSI's failure to perform its obligations under this Agreement, except in the case of the Bank's gross negligence or willful misconduct. (c) Notice. Either party seeking indemnification under this Agreement ------ will give prompt written notice to the other party of any Claim for which indemnification is sought. (d) Taxes. Each party will indemnify, reimburse and hold the other ----- party harmless from and for any applicable sales or use taxes arising from the indemnifying party's performance of the terms of this Agreement. (e) This Section 9 will survive expiration or termination of this Agreement. -6- 10. Supervision and Regulation. -------------------------- (a) The Bank is an insured institution subject to regulation and supervision by the Office of the Comptroller of the Currency (OCC), and BAMSI is a subsidiary of the Bank. Some of the services under this Agreement constitute bank services under 12 U.S.C. (S)1867(c). To the extent required by law or regulation, the parties will advise the OCC of the existence of this Agreement and will cooperate with any examination which the OCC may wish to conduct in connection with this Agreement or in connection with BAMSI's ongoing operations. (b) This Section 10 will survive expiration or termination of this Agreement. 11. Arbitration. ----------- (a) Any dispute or controversy between the parties will be resolved by arbitration conducted in San Francisco, California, under the auspices, and in accordance with the Commercial Rules, of the American Arbitration Association, and in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice-of-law provision in this Agreement. (b) This Section 11 will survive termination of this Agreement. 12. Notices. ------- Each notice under this Agreement will be in writing and signed and will be deemed effective when one party delivers it in person or transmits it electronically, or 3 days after the notice is mailed by registered or certified mail, to the designated representative of the other party at the applicable address below. To the Bank: ----------- Bank of America NA #5060 1825 East Buckeye Road Phoenix, AZ 85034 Attention: President and CEO w/copy to: Bank of America General Counsel #3017 555 California Street, 8th floor San Francisco, CA 94104 -7- To BAMSI: -------- BA Merchant Services, Inc. #3710 One South Van Ness Avenue San Francisco, CA 94103 Attention: General Counsel #3710 13. Assignment. Neither party may assign this Agreement without the ---------- written consent of the other party. Upon consent, this Agreement will be binding on and inure to the benefit of the parties' respective successors and assigns. 14. Governing Law. ------------- The laws of the State of California will govern this Agreement, and any provisions on conflict of laws will have no effect. 15. Third-Party Beneficiaries. ------------------------- Except as expressly provided in this Agreement, the parties to this Agreement intend that this Agreement will not benefit or create any right or cause of action in or on behalf of any person other than the parties to this Agreement. 16. Entire Agreement. ---------------- This Agreement, including the attached Appendices, sets forth the entire agreement between the parties relating to the subject matter of this Agreement, superseding all prior written or oral understandings. This Agreement may not be amended or modified without a writing signed by both parties. IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the first date shown above. BANK OF AMERICA NA BA MERCHANT SERVICES, INC. By __________________________ By ___________________________ James G. Jones Sharif M. Bayyari Chairman President & Chief Executive Officer -8- EX-10.6 7 TAX ALLOCATION AGREEMENT EXHIBIT 10.6 TAX ALLOCATION AGREEMENT BETWEEN BAC AND BA MERCHANT SERVICES, INC. This Tax Allocation Agreement ("Agreement"), made this 3rd day of December 1996, by and between BankAmerica Corporation ("BAC") and BA Merchant Services, Inc. ("BAMSI"). Whereas, a consolidated U.S. federal income tax return ("Consolidated Return") is filed which includes BAC and all domestic, Canadian and certain Mexican subsidiaries ("Consolidated Group"). BAC will include BAMSI in its consolidated federal income tax return relating to periods during which the members of the Consolidated Group own 80 percent of the voting power and 80 percent of the value of the stock of BAMSI within the meaning of section 1504 of the Internal Revenue Code. Whereas, consolidated, combined, joint or unitary income tax and franchise tax returns on income ("Combined Returns") are also filed, as required by certain state and local jurisdictions, including California. Whereas, certain direct and indirect subsidiaries of BAC join in filing Consolidated and/or Combined Returns (the "BAC Group") Whereas, there will be periods during which BAMSI will join BAC in filing either Consolidated or Combined Returns or both ("Affiliation Periods"). Whereas, BAMSI anticipates that it will sell 14,000,000 shares of its Class A Common Stock to the public in an initial public offering (the "IPO") (16,100,000 if the underwriters exercise their over-allotment option) and that as a result, BAMSI will thereafter cease to be included in the Consolidated Group (although BAMSI may continue to be included in certain Combined Returns); Whereas, the parties wish to set forth in this Agreement the agreement between BAC and BAMSI with respect to the allocation and settlement of the federal, state and local taxes of the BAC Group and the agreement between BAC and BAMSI with respect to the resolution of tax controversies; Now, therefore, in consideration of the mutual covenants contained herein, the parties agree as follows: 1. Filing of Returns ----------------- With respect to each Affiliation Period, BAC shall file, and BAMSI shall agree to join in the filing of, Consolidated Returns and/or Combined Returns on behalf of the BAC Group. BAMSI shall execute and file such consents, elections and other documents as BAC reasonably requests with respect to the filing of the BAC Group's Consolidated and Combined Returns and shall timely provide to BAC such information as may be necessary for the filing of such returns or for the determination of amounts due under this Agreement. BAMSI acknowledges and agrees that the rights conferred upon BAC in connection with the filing of the BAC Group's returns include, without limitation, the right to reasonably determine the allocation of income (or loss) of BAC and BAMSI between the last Affiliation Period and the next taxable period (including the allocation of tax liability with respect to the date of the IPO). BAMSI shall file all required federal, state, local and foreign tax returns with respect to all periods for which BAMSI is not includible on a return of BAC, and BAMSI shall be responsible for the payment of all taxes in connection therewith. BAMSI shall file any such tax returns in a manner consistent with the manner in which BAC filed its returns for Affiliation Periods (except as required by law or to the extent any inconsistency would not adversely affect the returns of the BAC Group). For purposes of any Affiliation Period and any taxable period for which BAMSI is included in any Consolidated Return or any Combined Returns, BAC and BAMSI will settle taxes on income in the manner described below. BAC and BAMSI will use the same settlement procedure for payments made between BAC and BAMSI after BAMSI ceases to be a member of the BAC Group, which are attributable to adjustments made to Affiliation Periods. 2. Allocation and Settlement of U.S. Federal Consolidated and Combined State ------------------------------------------------------------------------- Income Taxes ------------ BAMSI will determine and settle its share of the Consolidated/Combined income taxes based upon income taxes currently payable on a separate return basis as modified below. BAMSI will receive tax payments in the current year for its net operating loss, its net capital loss, and its excess foreign tax credits and general business credits (hereinafter referred to as "Tax Benefit Items"), as computed on a separate return basis, provided these Tax Benefit Items can be carried back on a separate return basis. If BAMSI's Tax Benefit Items cannot be carried back on a separate return basis, but are utilized in the Consolidated/Combined Returns, BAMSI will receive a tax payment equal to the reduction of the Consolidated/Combined tax liability relating to the utilization of BAMSI's Tax Benefit Items. 2. If more than one corporation has Tax Benefit Items which cannot be carried back on a separate return basis and the full amount of such items are not utilized in the Consolidated/Combined Returns, each corporation receives a pro- rata tax payment equal to the reduction of the Consolidated/Combined tax liability relating to the utilization of the corporation's Tax Benefit Items. Any such Tax Benefit Items not utilized in the Consolidated/Combined Return are carried forward. The specific ordering rules prescribed by the taxing authorities are applied in computing the utilization of Tax Benefit Items. Tax Benefit Items utilized in the Consolidated/Combined Returns for which a tax payment was received by BAMSI will be excluded from the computation of BAMSI's tax liability on a separate return basis for any succeeding year. 3. Controlled Group Tax Benefits ----------------------------- Controlled group tax items, including apportionment of rate brackets, minimum tax exemption, environmental tax exemption, and other similar items, are determined on a Consolidated/Combined basis. The controlled group tax items are allocated to each corporation in the BAC Group on an equitable and consistent basis if such items are claimed on a Consolidated/Combined return. 4. Alternative Minimum Tax ("AMT") and Alternative Minimum Tax Credit ("AMTC") --------------------------------------------------------------------------- AMT is determined on a Consolidated/Combined basis and allocated to each corporation on an equitable and consistent basis. The allocation is based upon each corporation's tax preferences, tax adjustments and other items causing the AMT in the Consolidated/Combined return. AMT is not allocated to any corporation that does not have any tax preferences, positive tax adjustment items or other items causing AMT. The total amount of AMT allocated to each corporation cannot exceed the Consolidated AMT and the Combined AMT, for any given state, in any tax year. In future years, as any Consolidated/Combined return AMTC is utilized, AMTC is allocated to each corporation on an equitable and consistent basis. This allocation is based upon the amount of AMT that had been previously allocated to each corporation. To the extent that AMTC would otherwise be allocated to BAMSI, if BAMSI had not left the BAC Group, due to an allocation of AMT to BAMSI during an Affiliation Period, BAMSI shall be entitled to a payment from BAC in an amount equivalent to such AMTC. The total amount of AMTC allocated to each corporation cannot exceed the consolidated AMTC claimed in any tax year. 3. 5. Combined State and Local Income and Franchise Taxes on Income ------------------------------------------------------------- The tax liability of Combined Returns is calculated by applying BAMSI's apportionment factors, as computed on a separate return basis, to BAMSI's separate return taxable income using the tax accounting method applicable to the state or local tax jurisdictions. 6. Tax Settlement Payments ----------------------- In addition to settlements required by paragraphs 7 and 8, tax settlement payments between BAC and BAMSI are made as follows: (a) BAMSI will pay or receive its current year estimated tax liability or refund, as computed on a separate return basis, at the respective quarterly installment due dates, including the original return due date. (b) BAMSI will pay BAC the amount of taxes or receive tax overpayments, as computed on a separate return basis, (less previous settlements, if any) on the extended due dates of the Consolidated/Combined Returns. (c) BAMSI will receive a refund from BAC in the current Consolidated/Combined year of previously paid taxes for Tax Benefit Items that can be carried back on a separate return basis. (d) BAMSI will receive a payment from BAC in the current year for the reduction in the Consolidated/Combined tax liability that results from the utilization of its Tax Benefit Items not utilized previously on a separate or Consolidated/Combined basis. (e) Federal and Combined taxes attributable to or from each foreign subsidiary or branch of BAMSI will be settled directly with BAMSI. (f) BAMSI will settle all taxes of separately filed tax returns directly with the individual tax jurisdictions. 7. Restructuring Taxes ------------------- Notwithstanding any other provision of this agreement, any amount payable with respect to Restructuring Taxes and any related costs imposed upon any member of the BAC Group shall be allocated in the year determined between the BAC Group and BAMSI in accordance with Schedule A. "Restructuring Taxes" shall mean any taxes resulting from transactions contemplated by the transfer of assets to BAMSI by other BAC Group members or the 4. assumption by BAMSI of liabilities of such other BAC Group members in connection with such transfers. 8. Subsequent Return Adjustments ----------------------------- In the event the Consolidated or Combined Returns are amended or adjusted (whether by reason of the filing of an amended return, a claim for refund, or otherwise) the liability of BAMSI will be redetermined, adjusted and settled on a separate return basis consistent with the above provisions. In the event the Consolidated or Combined tax liability is redetermined or adjusted pursuant to an audit or challenge by the taxing authorities, or if a voluntary tax payment is made to limit the accrual of interest on audit issues, the tax liability of BAMSI will be redetermined, adjusted and settled, as appropriate. Payments reflecting such redeterminations or adjustments shall be made when (a) a settlement (evidenced in writing or by the payment of taxes) is entered into with the taxing authority, (b) a decision of a court having jurisdiction in the matter becomes final and is not subject to appeal, or (c) BAC makes a voluntary tax payment on behalf of the BAC Group with respect to the Consolidated or Combined Returns. BAC may allocate the liability for any redetermination or adjustment on a tentative basis among the member corporations and BAMSI in accordance with its estimate of each corporation's liability on a separate return basis. The tentative allocations will be revised and settled when return adjustments are finalized. 9. Penalties and Interest ---------------------- If penalties or interest are imposed by the taxing authorities, or if a voluntary interest payment is made, the payment is allocated to and made by each responsible corporation. If any interest from the taxing authorities is received by BAC or its subsidiaries included in the Consolidated or Combined Returns, such interest shall be allocated and refunded to the attributable corporation. 10. Billing ------- The Tax Department of Bank of America NT&SA determines the tax settlements and provides written notification of the tax payments and refunds at the respective installment due dates for estimated tax payments and at the original and extended due dates of the Consolidated/Combined Returns. In addition, written notification of any tax payment or overpayment for adjustments reflected in amended returns and tax audits and of any Restructuring Taxes will also be provided by the Tax Department, as appropriate. 5. Payments of income taxes, penalties and interest are payable within thirty (30) days of billing. If payment is not made within the thirty-day period, interest is charged from the date of billing to the date of payment. Interest accrues on the late payment at the same rate used by the taxing authorities on late payments during such period. 11. Determinations and Disputes --------------------------- Subject to section 12 of this Agreement, in the event that any dispute must be settled under this Agreement, the parties hereto agree to submit the issue in writing to the Tax Advisory Committee ("Committee") for its review and recommendation, with the final decision to be made by the Chief Accounting Officer. The Committee consists of the Director of Tax and representatives from Corporate Finance and Corporate Treasury. The Committee shall permit a representative of BAMSI to participate in the review as appropriate. In the event that reasonable mutual satisfaction cannot be reached between BAC and BAMSI with respect to a final decision of the Chief Accounting Officer, the dispute may be submitted to arbitration as described below. Any dispute, controversy or claim between BAC and BAMSI arising out of or relating to this Agreement, or any agreements or instruments relating hereto or delivered in connection herewith, will be resolved by arbitration conducted in San Francisco, California under the auspices and according to the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement. 12. Procedural Matters ------------------ (a) To the extent that BAMSI remains part of the Consolidated Return for federal income tax purposes or part of a Combined Return, the Tax Department will prepare and file Consolidated and Combined Returns, along with any other documents or statements that are required to be filed with the taxing authorities for the U.S. federal, state or local purposes, related to Consolidated and Combined Returns. In its sole discretion, with respect to any Consolidated/Combined Return which it has filed or will file, BAC has the right to (i) Determine: 1) The manner in which such returns, documents or statements are prepared and filed including, without limitation, the manner in which any item of income gain, loss, deduction or credit shall be reported; 2) The manner in which the Consolidated or Combined tax liability will be allocated for the purpose of 6. determining the taxable earnings and profits of each corporation; 3) Whether any extensions may be requested; and 4) The elections that are made by any corporation included in BAC's Consolidated/Combined Returns. (ii) Except as otherwise expressly provided in (b) and (c), contest, compromise or settle any adjustment or deficiency proposed, asserted or assessed as a result of any audit of such returns by the taxing authorities; (iii) File, prosecute, compromise or settle any claim for refund; and (iv) Determine whether any refunds to which BAC and its subsidiaries may be entitled are paid by way of refund or credited against the tax liability of BAC and its subsidiaries. Without limiting its rights and obligations, BAMSI hereby irrevocably appoints BAC as its agent and attorney-in-fact to take such action (including the execution of documents) as BAC may deem appropriate to effect the foregoing. Filing positions taken in the Consolidated/Combined Returns may adversely impact the computation of separate return tax liabilities of certain corporations. Accordingly, the Tax Department will calculate each corporation's separate return tax liability or refund using the different filing basis that would be available to the corporation had it filed a separate return, if it results in a material difference in computing the corporation's separate tax liability. (b) If any party receives notice of a tax examination, audit or challenge involving amounts subject to this Agreement, such party shall timely notify the other party of the information and shall provide the other party with a written copy of any relevant letters, forms or schedules received from any taxing authority or otherwise in its possession and shall provide notice and information relating to all material proceedings in connection therewith. In any audit conference or other proceeding with any taxing authority or in any judicial proceedings concerning the determination of the tax liabilities of the BAC Group or any of its members, including BAMSI, the BAC Group and each of its members shall be represented by persons selected by BAC, except that BAMSI shall select its own representative; provided however, the settlement and terms of settlement of any issues relating to such audits shall be in the sole discretion of BAC. In the event that BAMSI can show, by clear and convincing evidence, that any such settlement or the terms of such settlement unreasonably and adversely affects BAMSI, the resulting dispute between BAC and BAMSI may be submitted to arbitration as described above in Section 11. 7. BAC shall have the right to review BAMSI's separate returns and records relating thereto with respect to issues which are relevant for BAC's returns. Such access shall be provided on a reasonable basis. BAC shall have a right to participate in audits of BAMSI's separate returns with respect to issues which are relevant for BAC's returns; provided however, the settlement and terms of settlement of any issues relating to such audits shall be in the sole discretion of BAMSI. In the event that BAC can show, by clear and convincing evidence, that such settlement or the terms of such settlement unreasonably and adversely affect BAC, the resulting dispute between BAC and BAMSI may be submitted to arbitration as described above in Section 11. (c) Notwithstanding (b), so long as any proposed deficiency solely involves a tax issue of BAMSI, BAC shall contest such issue to the extent requested in writing by BAMSI and shall permit BAMSI, at BAMSI's expense, to participate in all conferences and meetings with taxing authorities with respect to the issue; provided, however, that if (and so long as) the controversy also involves a tax issue of BAC or member of the BAC Group other than BAMSI (whether for the taxable year in question or another taxable year), BAC shall be entitled to the choice of forum for the proceedings and shall have the right to make any decision as to settlement of the contest or any issue; further, in no event shall BAC be required to take any action requested by BAMSI unless and until (i) BAMSI shall have given BAC an indemnity in a form satisfactory to BAC for any liability, expense or loss arising out of or relating to BAMSI issues involved in the dispute or contest (including, without limitation, all out-of-pocket expenses solely of BAMSI (including internal computation costs of BAC Group employees), costs, losses, reasonable disbursements, penalties, interest and additions to tax relating to such issues, but excluding any expense of BAC incurred for the purpose of monitoring the BAMSI issues) and (ii) if such contest is to be conducted in a manner requiring payment of a proposed tax deficiency, BAMSI shall have advanced to BAC on an interest-free basis an amount attributable to the issue, together with any required interest or penalties. 13. Termination ----------- This Agreement between BAC and BAMSI shall terminate if BAC and BAMSI agree, in writing, to terminate this Agreement. In addition, BAC shall have the right to terminate this Agreement at any time upon 30 days' prior written notice to BAMSI, if BAC and its affiliates beneficially own less than a majority of the voting power of the outstanding common stock of BAMSI. With respect to BAC and BAMSI, notwithstanding the termination of this Agreement, the provisions herein remain in effect for any tax year in which Consolidated/Combined Returns have been filed. 8. Upon the departure of BAMSI from the BAC Group, BAC will pay BAMSI for any previously unpaid tax benefits relating to Tax Benefit Items that were utilized in the Consolidated/Combined Returns. 14. Indemnity --------- BAMSI will be indemnified by BAC for any joint and several federal income tax liability incurred during an Affiliation Period which is not attributable to BAMSI. 15. Miscellaneous Provisions ------------------------ This agreement embodies the entire understanding and agreement of BAC and BAMSI with respect to the allocation and settlement of income taxes. 16. Effective Date -------------- This agreement is effective for 1996 and all subsequent years. In Witness Whereof, the undersigned parties have caused this Agreement to be executed as of the date first above written. BankAmerica Corporation By /s/ Barry L. Pyle ---------------------------------- Barry L. Pyle Senior Vice President BA Merchant Services, Inc. By /s/ Sharif M. Bayyari ---------------------------------- Sharif M. Bayyari President and Chief Executive Officer 9. EX-10.12 8 ASIAN ACQUISITION AGREEMENT EXHIBIT 10.12 ASIAN ACQUISITION AGREEMENT THIS ASIAN ACQUISITION AGREEMENT (this "Agreement") made this 3rd day of December, 1996 by and between BANK OF AMERICA NATIONAL TRUST & SAVINGS ---------------------------------------- ASSOCIATION, a national banking association ("Bank"), and BA MERCHANT SERVICES, - ----------- --------------------- INC., a Delaware corporation ("BAMSI"): - ---- RECITALS A. Bank. Bank is an existing national banking association duly organized ---- and in good standing under the laws of the United States with its principal executive offices located in San Francisco, California. B. BAMSI. BAMSI is an existing corporation, formed under the laws of the ----- State of Delaware, with its principal executive offices located in San Francisco, California. C. Corporate Approvals. Each of the parties to this Agreement has ------------------- obtained all necessary corporate approvals for the execution and delivery of this Agreement. D. Arm's Length Relationship. The parties to this Agreement intend to ------------------------- conduct their relationships hereunder on an arm's length basis. E. BAC/BAMSI Transactions. Bank and Bank of America NW, National ---------------------- Association ("BANW"), each a subsidiary of BankAmerica Corporation, a Delaware corporation ("BAC"), currently own 100% of the outstanding common stock of BAMSI. Bank and BANW have entered into certain agreements dated as of December 3, 1996 with BAMSI transferring Bank's domestic processing businesses and BANW's merchant processing business to BAMSI effective as of such date. BAMSI is currently considering an initial public offering of shares of its Class A common stock, $.01 par value per share ("Class A Common Stock"). F. Related Agreements. BAMSI has entered or will enter into (1) a Non- ------------------ Competition and Corporate Opportunities Allocation Agreement dated as of December 3, 1996 between BAC and BAMSI (the "Corporate Opportunities Agreement"), (2) a Marketing Agreement dated as of December 3, 1996 among BAMSI, Bank and BANW (the "Marketing Agreement"), (3) Processing Services Agreements dated as of December 3, 1996 between BAMSI and other subsidiary banking institutions of BAC (the "Affiliate Bank Processing Agreements"), (4) an Administrative Services Agreement dated as of December 3, 1996 between Bank and BAMSI (the "Administrative Services Agreement"), (5) a Trademark License Agreement dated as of December 3, 1996 between BAC and BAMSI (the "License Agreement"), (6) a Registration Rights Agreement to be entered into among BAMSI, Bank and BANW (the "Registration Rights Agreement"), (7) a Tax Allocation Agreement dated as of December 3, 1996 between BAC and BAMSI (the "Tax Agreement") and (8) a Sponsorship Processing Agreement dated as of December 3, 1996 between Bank and BAMSI (the "Sponsorship Agreement"). The Corporate Opportunities Agreement, the -1- Marketing Agreement, the Affiliate Bank Processing Agreements, the Administrative Services Agreement, the Trademark Agreement, the Registration Rights Agreement, the Tax Agreement and the Sponsorship Agreement are herein collectively referred to as the "Related Agreements." G. Asian Merchant Processing Businesses. Bank owns and operates merchant ------------------------------------ processing businesses in Thailand (the "Thailand Business") and the Philippines (the "Philippines Business" and together with the Thailand Business, the "Asian Businesses" and individually, each an "Asian Business"), Taiwan (the "Taiwan Business"), India (the "Indian Business") and South Korea (the "Korean Business"). In addition, Bank has established a program to operate a merchant processing business in The Peoples Republic of China (the "PRC Business") and has applied for a license or has explored opportunities to conduct a merchant processing business in Indonesia (the "Indonesian Business") and Vietnam (the "Vietnamese Business" and together with the Taiwan Business, the Indian Business, the Korean Business and the Indonesian Business, the "Additional Asian Businesses" and individually, each an "Additional Asian Business"). H. Acquisition of Asian Businesses. Pursuant to the terms and conditions ------------------------------- set forth in this Agreement, (i) Bank desires to transfer each of the Asian Businesses to BAMSI, and BAMSI desires to acquire each of the Asian Businesses, by purchasing the Assets (as hereinafter defined) in exchange for shares of Class B Common Stock, par value $.01 per share ("Class B Common Stock") of BAMSI and the assumption by BAMSI of the Assumed Liabilities (as hereinafter defined) as set forth herein, and (ii) Bank and BAMSI desire to work cooperatively to enable BAMSI to acquire the Additional Asian Businesses in the future. NOW, THEREFORE, in consideration of the premises, representations, warranties, mutual covenants and agreements hereinafter set forth, and for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Bank and BAMSI hereby covenant and agree as follows: ARTICLE I TRANSFER OF ASSETS ------------------ Section 1.1 Transferred Assets. At each Closing (as hereinafter defined) ------------------ for an Asian Business, Bank shall sell, assign, grant, convey, transfer and deliver to BAMSI, and BAMSI shall acquire from Bank, all of Bank's right, title and interest in and to all of the tangible and intangible assets primarily related to and used primarily by such Asian Business, as they exist as of the Closing (as hereinafter defined) for such Asian Business, together with all accrued benefits and rights pertaining thereto (collectively, the "Assets"), other than the Excluded Assets (as hereinafter defined), including, without limitation: -2- (a) Receivables. All accounts receivable, drafts in transit, notes ----------- receivable, prepayments by or on behalf of such Asian Business, advances by or on behalf of such Asian Business and outstanding at the Closing; (b) Claims. All claims, demands and causes of action in favor of Bank ------ arising primarily out of such Asian Business; (c) Inventories. All raw materials, work-in-process, finished goods, ----------- supplies and other inventories in each case intended for use or sale by such Asian Business; (d) Real Property. Those certain premises or parcels of land, in each case ------------- leased by Bank and used in the conduct of the Business as listed on Schedule l.l(d) ("Real Property"), together with any and all buildings, plants and other structures and improvements thereon, any and all rights and privileges pertaining thereto, including, without limitation, ownership interests, leasehold interests, easements, transferable permits, licenses, rights of way, leases, and purchase and option agreements with respect to any such Real Property and, any and all fixtures, machinery, equipment and other property appurtenant thereto; (e) Personal Property. Any and all machinery, furniture, tools, spare ----------------- parts, automobiles and other vehicles, office and computer equipment and other personal property in each case used exclusively in the operation of such Asian Business; (f) Contracts. Subject to Section 7.1, all contracts, agreements, leases --------- and offers open for acceptance of any nature, whether written or oral, exclusively relating to such Asian Business, including, without limitation, all assignable merchant customer agreements for the provision of merchant processing services by such Asian Business ("Merchant Agreements") and all other customer contracts, leases of personal property and purchase orders; (g) Merchant Accounts. All security interests in each demand deposit or ----------------- current or similar account, either with Bank or another financial institution, linked to a customer under a Merchant Agreement, in accordance with Section 5.3; (h) Operating Permits. Subject to Section 7.1, all licenses, permits and ----------------- authorizations, environmental or otherwise, in each case exclusively used to operate such Asian Business; (i) Computer Programs. All interests of such Asian Business in the ----------------- software and computer programs and documentation used exclusively in conducting such Asian Business, including flow charts, diagrams, descriptive texts and programs, computer printouts, underlying tapes, computer data bases and similar items; (j) Books and Records. All books and records exclusively relating to such ----------------- Asian Business, including, without limitation, all customer and supplier lists, accounts and records, forms and office supplies, advertising and promotional literature and price lists, all manuals and reports and other publications relating exclusively to such Asian Business; -3- (k) Cash balances for such Asian Business existing on the date of Closing; (l) Any employee plan assets ("Plan Assets") maintained by Bank for the benefit of the employees of any of the Asian Business (collectively, the "Employee Benefit Plans"); and (m) In the case of the Philippines Business, certificates evidencing all of the outstanding shares of BA Card Services, Inc., a Philippines corporation ("BA Card Services"), owned by Bank. Without limiting the foregoing, the Assets shall consist of all assets relating to such Asian Business that would be reflected on a consolidated balance sheet prepared on the date of Closing in accordance with generally accepted accounting principles consistent with the audited balance sheet of BA Merchant Services (Asia) at December 31, 1995 and the unaudited balance sheet of BA Merchant Services (Asia) at September 30, 1996. Section 1.2 Assets Held by Affiliates. Bank shall, prior to each Closing ------------------------- for an Asian Business, acquire from its Affiliates and sell, assign, convey or transfer to BAMSI, without additional consideration from BAMSI, and BAMSI shall, at each such Closing, acquire from Bank, subject to transfer at the Closing, all of such Affiliates' right, title and interest, if any, in any of the Assets related to such Asian Business. For purposes of this Agreement, "Affiliate" means any person directly or indirectly controlling or controlled by or under direct or indirect "common" control with the Bank (including without limitation, their respective officers, directors and employees); provided, that in no event shall BAMSI or the Business be treated as an Affiliate of Bank, nor shall any person directly or indirectly controlled by BAMSI (including without limitation for this purpose, its officers, directors and employees) as a result of such person's relationship with BAMSI be treated as an Affiliate of Bank. For this purpose, "control" means the power to direct the management and policies of a person through the ownership of securities, by contract or otherwise and the terms "controlling" and "controlled" have meanings correlative to the foregoing. Section 1.3 Excluded Assets. Notwithstanding anything contained herein to --------------- the contrary, the Assets shall not include, and Bank will not, and will not cause any Affiliate to, transfer to BAMSI and BAMSI will not accept any of the following (collectively, the "Excluded Assets"): (a) Books of original financial entry and internal accounting documents and records relating to any Asian Business and any other books and records relating to any Asian Business that Bank is required to retain pursuant to statute, rule or regulation, but BAMSI in such event shall have the right to inspect and copy for any proper purpose; (b) Any assets of employee benefit plans, other than the Plan Assets; (c) All rights to refunds of all federal, state, local, foreign and provincial income, capital gains, gross receipts, profits, property, transfer, sales, mercantile, value added, capital stock, franchise or other taxes, including estimated taxes relating thereto and any interest -4- and penalties imposed thereon (collectively, "Taxes") relating to the Assets or the Asian Businesses to the extent such Taxes relate to a period commencing prior to the Closing and were not paid by BAMSI; (d) Any of the right, title and interest in the bank accounts of the Asian Businesses, subject to Section 5.3; (e) Policies of insurance, fidelity, surety or similar bonds and the coverages afforded thereby; (f) Any assets of Bank or any Affiliate thereof not primarily related to or used primarily by an Asian Business as conducted prior to the Closing for such Asian Business; and (g) All rights, causes of action and claims to the extent arising out of any of the Excluded Assets described in paragraphs (a) through (g) hereof or any of the Retained Liabilities (as hereinafter defined), including, without limitation, any rights to reimbursement for damages, fees or expenses. Section 1.4 Terms Related to the Transfer of Assets. Title to and risk of --------------------------------------- loss or damage to the Assets for each Asian Business shall pass to BAMSI at the Closing for such Asian Business. Bank's insurance coverage for such Asian Business and the related Assets shall cease as of such Closing as to losses arising from events occurring on or after the date thereof. Section 1.5 Warranty. -------- (a) Bank represents and warrants that at each Closing (i) the Assets constitute all of the assets necessary for the conduct of the business of such Asian Business as contemplated by the Registration Statement (No. 333-13985) relating to the proposed offering of shares of Class A Common Stock of BAMSI and (ii) Bank will have transferred to BAMSI good and marketable title to or a valid leasehold interest in all personal property and other assets relating to such Asian Business, free and clear of all liens, encumbrances and defects except such as are described in such Registration Statement or such as do not materially affect the value of such assets and do not materially interfere with the use made and proposed to be made of such Assets by BAMSI. (b) Bank agrees to assign to BAMSI such rights as Bank may have the right to assign under any warranty made by any vendor, manufacturer or contractor with respect to any of the Assets. Except as otherwise provided herein, all of the Assets shall remain "as is" and "where is" on the date of this Agreement through such Closing. -5- ARTICLE II ASSUMPTION OF LIABILITIES ------------------------- Section 2.1 Assumed Liabilities and Obligations. At each Closing for ----------------------------------- an Asian Business, Bank shall delegate to BAMSI, and BAMSI shall assume and agree to thereafter pay, satisfy, perform and discharge, as if such Asian Business had been operated by BAMSI from the commencement thereof and had never been owned by Bank, all of the obligations and liabilities to the extent arising out of or relating to such Asian Business or the related Assets, known or unknown, accrued, absolute, contingent or otherwise, whether arising from pending or threatened claims against Bank related to such Asian Business or the related Assets, including, without limitation, environmental liabilities, whether arising as a result of the transactions contemplated hereby, whether existing at such Closing or arising at any time or from time to time after the Closing, and whether based on circumstances, events or actions arising theretofore or thereafter, and whether or not such obligations and liabilities shall have been disclosed herein or reflected on the books and records of such Asian Business (collectively, the "Assumed Liabilities"), other than the Retained Liabilities (as hereinafter defined). Section 2.2 Retained Liabilities and Obligations. The Assumed ------------------------------------ Liabilities shall not include, and Bank will not assign to BAMSI, and BAMSI will not assume any of the following (collectively, the "Retained Liabilities"): (a) Any liability to the employees of an Asian Business prior to or as of the Closing for such Asian Business to provide benefits to such employees under those employee benefit plans which provide medical, dental, disability or life insurance coverage (collectively, "Employee Insurance Plans") for claims arising from occurrences (as defined in the relevant plan) prior to the Closing for such Asian Business; (b) Any liability for vested benefits under the Employee Benefit Plans which have accrued to any employee of an Asian Business as of the Closing for such Asian Business, as if such employee was terminated as of such Closing; (c) Liabilities for which an insurer has liability under a Bank insurance policy, to the extent of actual coverage under such policy, and to the extent arising out of occurrences (as defined in such policy) prior to Closing; provided that, notwithstanding the foregoing, Bank shall not retain any environmental liabilities of any Asian Business whether based on circumstances, events or actions arising before or after the Closings or whether arising under present or future laws or any actual or alleged contractual obligations of Bank or BAMSI or any Asian Business; (d) Liabilities solely for Taxes relating to the Assets or the Asian Businesses to the extent such Taxes relate to any period prior to the respective Closing dates; (e) Liabilities exclusively arising out of or related to any of the Excluded Assets; and -6- (f) With respect to liabilities that are required to be reflected on a balance sheet prepared in accordance with generally accepted accounting principles, those liabilities that would not be reflected on a consolidated balance sheet prepared on the date of Closing in accordance with generally accepted accounting principles consistent with the audited balance sheet of BA Merchant Services (Asia) at December 31, 1995 and the unaudited balance sheet of BA Merchant Services (Asia) at September 30, 1996. ARTICLE III PURCHASE PRICE -------------- Section 3.1 Purchase Price. With respect to each Asian Business, -------------- BAMSI will assume the Assumed Liabilities and will deliver shares of its Class B Common Stock to Bank as consideration for Bank's selling, granting, assigning, conveying, transferring and delivering to BAMSI all of its right, title and interest in and to the Assets relating to such Asian Business as follows: Thailand Business 150,000 shares (the "Thailand Consideration") Philippines Business 550,000 shares (the "Philippines Consideration") ARTICLE IV REPRESENTATIONS AND WARRANTIES ------------------------------ Section 4.1 Representations and Warranties of Bank. Bank hereby -------------------------------------- represents and warrants to BAMSI that: (a) Incorporation and Good Standing. Bank is a national banking ------------------------------- association duly organized, validly existing and in good standing under the laws of the United States of America, with requisite corporate power to own and operate the Assets and to carry on the Asian Businesses as now being conducted. (b) Authorization. The execution, delivery and performance by Bank of this ------------- Agreement are within the corporate power of Bank, has been duly authorized by all necessary corporate action and does not contravene or constitute a default under any provision of the articles of association or by-laws of Bank. To the knowledge of Bank, except for the Fed Approval (as hereinafter defined) and the Asian Approvals (as hereinafter defined), the execution, delivery and performance by Bank of this Agreement requires no action by or in respect of, or filing with, any governmental body, agency or official, and no consents or approvals of any public body or authority. This Agreement constitutes a valid and binding agreement of Bank, enforceable against Bank in accordance with its terms. -7- (c) Absence of Restrictions. To the knowledge of Bank, the execution and ----------------------- delivery of this Agreement by Bank and the performance by Bank of its obligations hereunder does not and will not contravene, constitute a default under, or give rise to or result in any right of termination, cancellation or acceleration or in the creation of any lien under, any material agreement, judgment, injunction, order, decree or other instrument to which Bank or BA Card Services is a party. (d) Litigation. To the knowledge of Bank, there is no action, proceeding ---------- or investigation pending or threatened against Bank or BA Card Services which questions or challenges the validity of this Agreement or any action taken or to be taken by Bank or BA Card Services pursuant to this Agreement or in connection with the transactions contemplated hereby. (e) Compliance With Laws. To the knowledge of Bank, neither Bank nor BA -------------------- Card Services is in violation of any applicable federal, state, or local law, regulation or order or any other requirement of any governmental, regulatory or administration agency or authority or court or other tribunal relating specifically to the Assets or the Asian Businesses, where such violation could reasonably be expected to have a material adverse effect on such Assets, such Asian Businesses or Bank's ability to transfer the Asian Businesses to BAMSI. (f) Financial Statements. The audited financial statements of BA Merchant -------------------- Services (Asia) at and for the year ended December 31, 1995 and the unaudited financial statements of BA Merchant Services (Asia) at and for the nine months ended September 30, 1996 have been prepared in accordance with generally accepted accounting principles on a consistent basis and fairly present the financial position and results of operations of the Asian Businesses and the Taiwan Business on a combined basis and reflect all assets and liabilities that are part of such businesses. Section 4.2 Representations and Warranties of BAMSI. BAMSI hereby --------------------------------------- represents and warrants to Bank that: (a) Incorporation and Good Standing. BAMSI is a corporation duly ------------------------------- incorporated, validly existing and in good standing under the laws of the State of Delaware with requisite corporate power to own and operate its assets and properties and to carry on its business as now being conducted and as proposed to be conducted. BAMSI is duly qualified to do business and is in good standing as a foreign corporation in the State of California. (b) Authorization. The execution, delivery and performance of this ------------- Agreement by BAMSI is within BAMSI's corporate power and has been duly authorized by all necessary corporate action and does not contravene or constitute a default under any provision of BAMSI's certificate of incorporation or by-laws. To the knowledge of BAMSI, except for the Fed Approval and the Asian Approvals, BAMSI's execution, delivery and performance of this Agreement requires no action by or in respect of, or filing with, any governmental body, agency or official, and no consents or approvals of any public body or authority. This -8- Agreement constitutes a valid and binding agreement of BAMSI, enforceable against BAMSI in accordance with its terms. (c) Absence of Restrictions. To the knowledge of BAMSI, the execution and ----------------------- delivery of this Agreement and the performance by BAMSI of its obligations hereunder does not and will not contravene, constitute a default under, or give rise to or result in any right of termination, cancellation or acceleration or in the creation of any lien under, any material agreement, judgment, injunction, order, decree or other instrument to which BAMSI is a party. (d) Litigation. To the knowledge of BAMSI, there is no action, proceeding ---------- or investigation pending or threatened against or involving BAMSI, which questions or challenges the validity of this Agreement or any action taken or to be taken by BAMSI pursuant to this Agreement or in connection with the transactions contemplated hereby. (e) Compliance With Laws. To the knowledge of BAMSI, BAMSI is not in -------------------- violation of any applicable federal, state, or local law, regulation or order or any other requirement of any governmental, regulatory or administration agency or authority or court or other tribunal relating to it, where such violation could reasonably be expected to have a material adverse effect on its ability to carry out the transactions contemplated under this Agreement. ARTICLE V COVENANTS OF BANK ----------------- Section 5.1 Pre-Closing Activities. From and after the date of this ---------------------- Agreement until the earlier of the Closing for each Asian Business or until this Agreement shall terminate pursuant to Article XI, except as otherwise agreed in writing, Bank will use reasonable commercial efforts (a) to conduct such Asian Businesses in the ordinary course and in a manner consistent with past practices, except as may otherwise be permitted hereby, or (b) as necessary or appropriate to consummate the transactions contemplated hereby. Section 5.2 Approvals and Consents. ---------------------- (a) Bank shall use reasonable commercial efforts to obtain any governmental or regulatory approvals or consents, including the Fed Approvals and the Asian Approvals, and make or cause to be made (or assist BAMSI in making) any declarations, filings and registrations with governmental or regulatory authorities, which are necessary for Bank to consummate the sale of each of the Asian Businesses; provided, however, that Bank shall not be obligated to pay any consideration therefor (except for filing fees and other similar charges). (b) Bank shall use reasonable commercial efforts to obtain any consent, substitution, approval or amendment required to novate or assign all agreements, leases, -9- licenses and other rights of any nature whatsoever relating to the Asian Businesses; provided, however, that Bank shall not be obligated to pay any consideration therefor (except for filing fees and other similar charges) to the third party from whom such consents, approvals, substitutions and amendments are requested. Section 5.3 Bank Accounts and Powers; Merchant Accounts. ------------------------------------------- (a) As of the Closing for each Asian Business, Bank will close all of the bank accounts of such Asian Business and revoke, and shall hereby be deemed to have revoked, all guarantees by Bank made with respect to such bank accounts and the related Assets, and will revoke, and shall hereby be deemed to have revoked, authorizations and powers of attorney of employees of such Asian Business to act on behalf of such Asian Business, except (i) with respect to the accounts listed on Schedule 5.3 as to which Bank will use reasonable efforts to transfer to BAMSI's name at such Closing, subject to agreement by the relevant financial institution if not Bank, and (ii) any such accounts shall remain open and any funds contained in such accounts at the Closing shall remain on deposit therein to the extent necessary pursuant to the following sentence. Bank agrees that any outstanding claims against funds contained in those accounts at the Closing due to checks or drafts written against such funds in the ordinary course of business consistent with past practice but not yet cleared by the financial institution shall be paid when presented for payment to the appropriate financial institution, in the order in which presented up to but not in excess of the amount of funds contained in the respective accounts at the Closing. (b) As a part of the Closing for each Asian Business, Bank will, at BAMSI's reasonable request and without further consideration, except for reimbursement of out-of-pocket expenses, execute such additional security agreements, instruments or other documents as BAMSI may require to effect the assignment and transfer to BAMSI of Bank's security interest in each Merchant Account pursuant to Section 1.1(g). Section 5.4 Further Assurances. After the Closing for each Asian ------------------ Business, Bank will, at BAMSI's reasonable request and without further consideration, except for reimbursement of out-of-pocket expenses, execute such additional instruments of conveyance and transfer and provide to BAMSI such additional documents as BAMSI may require to effect or evidence the transfer of such Asian Business and related Assets to BAMSI. Section 5.5 Employee Benefit Plans and Employee Insurance Plans. Bank --------------------------------------------------- agrees that with respect to the employee benefit plans listed on Schedule 1.3(b), benefits accrued to employees of each Asian Business who participate in those plans will become vested on the Closing date for such Asian Business, and, for purposes of such plans, such employees will cease to be employees of Bank as of the Closing for such Asian Business and will be treated as "terminated" as of the Closing. ARTICLE VI COVENANTS OF BAMSI ------------------ -10- Section 6.1 Approvals and Consents. ---------------------- (a) BAMSI shall use reasonable commercial efforts to obtain all governmental or regulatory approvals and consents, including the Fed Approval and the Asian Approvals, and make or cause to be made (or assist Bank in making) any declarations, filings and registrations with governmental or regulatory authorities which are necessary for BAMSI to consummate the purchase and sale of each of the Asian Businesses. (b) BAMSI shall use reasonable commercial efforts to obtain any consent, substitution, approval or amendment required for the assignment or novation of all agreements, leases, licenses and other rights of any nature whatsoever relating to the Asian Businesses. Section 6.2 Further Assurances. After the Closing for each Asian ------------------ Business, BAMSI will, at Bank's reasonable request, and without further consideration, except for reasonable out-of-pocket expenses, execute such additional instruments of assumption and provide to Bank such additional documents as Bank may require to effect or ensure the proper assignment and assumption of the Assumed Liabilities by BAMSI. Section 6.3 Preservation of Books and Records Post-Closing Access. From ----------------------------------------------------- and after the Closing Date for each Asian Business, BAMSI agrees that it shall preserve and keep the books and records of such Asian Business delivered to it hereunder for such period of time as may be required by any government agency or ongoing investigation, litigation or proceeding, and shall make its books, records and employees available to Bank as may be reasonably required in connection with any legal proceedings against or governmental investigations of Bank, in connection with any tax examination or filing of Bank, or for any other reasonable business purpose arising from or relating to the Assumed Liabilities or the Retained Liabilities. Section 6.4 Employees. Effective as of the Closing for each Asian --------- Business, all employees of such Asian Business will cease to be employees of Bank. BAMSI agrees that it will offer employment to every employee of such Asian Business. All current employees are listed on Schedule 6.4, which schedule shall be updated by Bank as of such Closing. ARTICLE VII FURTHER COVENANTS OF THE PARTIES -------------------------------- Section 7.1 Non-assignable Contracts and Permits. Nothing in this ------------------------------------ Agreement shall be construed as an attempt to assign to BAMSI any contract, commitment, or other agreement or permit, license or authorization which is by law or its terms nonassignable or the assignment of which would constitute a violation of statute, rule, regulation, contract, commitment or other agreement. If, as of the Closing for any Asian Business, an attempted assignment of any contract, commitment or other agreement would be ineffective or would affect Bank's rights thereunder so that BAMSI would not in fact receive all such rights, Bank shall cooperate with BAMSI in a mutually acceptable arrangement, at BAMSI's cost, -11- to provide for BAMSI the benefit (including the economic benefit) of such contract, commitment or other agreement (other than legal title). If and so long after the Closing as such assignment shall not have been made, Bank will (a) to the extent that such action will not result in a violation of such contract, commitment or other agreement, transfer to BAMSI all assets and rights, including all monies, received in respect of such contract and hold such contract, commitment or other agreement in trust for BAMSI and (b) to the extent that the provisions of clause (a) above are not sufficient to transfer all of the benefits (including the economic benefit) of such contract, commitment or other agreement (other than legal title), or any of such contract, commitment or other agreement has been canceled as a result of the attempted assignment, take such actions (which, without limitation, may include entering into subcontracting arrangements with BAMSI, but in no event shall Bank be obligated to enter into a commercially unreasonable arrangement) as are necessary to provide all of the benefits (or the equivalent thereof, including the economic benefit) of such contract, commitment or other agreement (other than legal title) to BAMSI. BAMSI shall obtain, at its own expense, as of the Closing or as soon thereafter as practicable, all permits, licenses or authorizations required by any governmental agency with respect to such Asian Business or related Assets without any guaranty or liability of Bank with respect thereto, except for those permits, licenses or authorizations which can be assigned by Bank at the Closing without the consent of any third party. Subsequent to the Closing, Bank shall have the right to cancel any permits, licenses or authorizations and bonds or guarantees related thereto which are applicable to such Asian Business or related Assets but are unable to be assigned within 90 days from the Closing. BAMSI shall reimburse Bank for any and all costs associated with the assignment or failure to cancel any such non-assignable contracts, commitments or other agreements (including, without limitation, the costs of providing to BAMSI the benefits thereunder) or permits, licenses or authorizations. Section 7.2 Conduct of Litigation. BAMSI and Bank shall cooperate fully --------------------- in the prosecution or defense of any action, proceeding or claim arising out of or relating to the Retained Liabilities, on the one hand, and the Assumed Liabilities, on the other hand, and shall consult and confer with one another with respect thereto, at no cost to BAMSI, on the one hand, or Bank, on the other hand. Section 7.3 Modification of Marketing Agreement. As a part of the Closing ----------------------------------- for each Asian Business, BAMSI and Bank shall modify the Marketing Agreement and the Administrative Services Agreement to provide for the inclusion of such Asian Business within the provisions thereof on mutually agreeable terms. Section 7.4 Additional Asian Businesses. During the term of this --------------------------- Agreement, Bank and BAMSI agree to work cooperatively and use their reasonable commercial efforts to enable BAMSI to acquire the Additional Asian Businesses. In addition, Bank and BAMSI agree to work cooperatively and evaluate the possibility of entering into an outsourcing or other arrangement that would permit the Company to participate meaningfully in Bank's merchant processing business in Taiwan. Bank will assist BAMSI in obtaining any governmental or regulatory approvals or consents and in making any declarations, filings and registrations with governmental or regulatory authorities which are necessary to transfer each of the Additional Asian Businesses to BAMSI; provided, however, that, -12- notwithstanding anything to the contrary contained herein, Bank shall not be obligated to (a) pay any consideration, fees or incur any other costs in obtaining such approvals or consents, or (b) maintain, pursue, expand or develop a merchant processing business in any Additional Asian Country. The purchase price to be paid by BAMSI to acquire an Additional Asian Business will be mutually agreed upon by BAMSI and Bank prior to any such acquisition, and may consist of cash, Common Stock of BAMSI or any combination thereof. ARTICLE VIII TAX MATTERS ----------- Section 8.1 Cooperation. BAMSI will cooperate with the Bank in connection ----------- with any audit by the United States Internal Revenue Service or any other tax authority of any tax return in connection with the operations of the Asian Businesses prior to any of the Closing Dates. Section 8.2 Tax Agreement. Bank and BAMSI agree that the Tax Agreement ------------- shall govern all tax matters between them following the Closings. -13- ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF BANK AND BAMSI FOR EACH CLOSING ---------------------------------------------- The obligations of Bank and BAMSI to be discharged under this Agreement on or prior to each Closing are subject only to receipt of (a) the United States regulatory approval set forth in Section 9.1 and (b) the local regulatory approvals (collectively, the "Asian Approvals"), as set forth for the Asian Businesses in Sections 9.2 and 9.3. Section 9.1 Closing of the Purchase and Sale of each Asian Business. BAC ------------------------------------------------------- and Bank shall have received approval from the Board of Governors of the Federal Reserve System to establish the non-United States operations of BAMSI (the "Fed Approval"). Section 9.2 Closing of the Purchase and Sale of the Thailand Business. --------------------------------------------------------- Bank and/or BAMSI shall have received the following (collectively, the "Thailand Approvals"): (a) Approval from the Thai Ministry of Finance to establish a branch of BAMSI in Thailand; (b) Registration by BAMSI of its branch under the U.S.-Thai Treaty of Amity and Economic Relations; and (c) Such other governmental approvals and consents as are necessary for Bank to transfer the Thailand Business to BAMSI. Section 9.3 Closing of the Purchase and Sale of the Philippines Business. ------------------------------------------------------------ Bank and/or BAMSI shall have received the following (collectively, the "Philippine Approvals"): (a) Approval from the Philippines Securities and Exchange Commission to establish a branch office of BAMSI in the Philippines; (b) Receipt of a favorable ruling from the Philippines Bureau of Internal Revenue regarding the transfer by Bank of the Philippines Business to BAMSI; and (c) Such other governmental approvals and consents as are necessary for Bank to transfer the Philippines Business to BAMSI. Section 9.4 Conditions Independent of One Another. Except for receipt of ------------------------------------- the Fed Approval under Section 9.1, none of the closing conditions in this Article IX are dependent upon any other closing condition. -14- ARTICLE X CLOSINGS -------- Section 10.1 The Closings. ------------ (a) The consummation of the purchase and sale of each Asian Business (each a "Closing") contemplated by this Agreement shall take place at 10:00 a.m. local time on a date determined in accordance with Sections 10.1(b), (c) and (d) at the offices of Bank, 555 California Street, San Francisco, California 94104, or at such other time, date and place as the parties hereto may agree. (b) The Closing for the purchase and sale of the Thailand Business and the related Assets shall take place on a date as soon as practicable following satisfaction of the conditions set forth in Sections 9.1 and 9.2, but in no event later than the Final Closing Date. (c) The Closing for the purchase and sale of the Philippines Business and the related Assets shall take place on a date as soon as practicable following satisfaction of the conditions set forth in Sections 9.1 and 9.3, but in no event later than the Final Closing Date. (d) Notwithstanding anything to the contrary contained herein, in no event shall any Closing be consummated after December 31, 1997 (the "Final Closing Date"). Section 10.2 Deliveries at the Closings. -------------------------- (a) At each of the Closings, Bank and BAMSI shall deliver or cause to be delivered, the following documents duly executed by the appropriate parties and acknowledged where appropriate: (i) in the case of the Closing for the Thailand Business, delivery by BAMSI to Bank of the Thailand Consideration; (ii) in the case of the Closing for the Philippines Business, delivery by BAMSI to Bank of the Philippines Consideration; (iii) a Bill of Sale in the form of Exhibit A, executed by Bank; (iv) an Instrument of Assumption of Liabilities in the form of Exhibit B, executed by BAMSI; (v) in the case of the Closing for the Philippines Business, certificates evidencing all of the outstanding shares of BA Card Services owned by Bank, executed by Bank; and -15- (vi) such other documents, certificates and instruments as are required to assign and transfer the Assets to BAMSI and to effect the assumption of the Assumed Liabilities by BAMSI, including such documents, certificates and instruments that may be required under applicable local laws and regulations. (b) The delivery of all documents and the performance of all acts at each Closing shall be deemed to have occurred or to have been taken simultaneously. ARTICLE XI NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES --------------------------------------------- Section 11.1 Survival. The representations, warranties and covenants made -------- by Bank and BAMSI, including, without limitation, statements contained in any certificate or Schedule or Exhibit delivered by Bank to BAMSI pursuant to this Agreement, shall not survive the Closings. ARTICLE XII TERMINATION ----------- Section 12.1 Termination. This Agreement and the transactions ----------- contemplated hereby may be terminated as to any Asian Business at any time prior to the Closing therefor and as to any Additional Asian Business (a) by mutual agreement of Bank and BAMSI in writing, or (b) by Bank or BAMSI on or after December 31, 1997, provided that, with respect to any such Asian Business, one or more of the conditions provided in Article IX of this Agreement shall not yet have been fulfilled by December 31, 1997. No such termination shall affect a Closing which shall have been previously consummated. Section 12.2 Nondisclosure. If this Agreement is terminated, BAMSI will ------------- not, for a period of five years from the date of this Agreement, use in any manner or disclose to any third party any documents or information regarding the Asian Business or the transactions contemplated by this Agreement, without Bank's prior written consent. Upon any such termination, BAMSI will immediately return to Bank all such documents. ARTICLE XIII MISCELLANEOUS ------------- Section 13.1 Amendments. BAMSI and Bank may only amend, modify or ---------- supplement this Agreement in such manner as may be agreed upon by both of them in writing. -16- Section 13.2 Waivers. Either BAMSI or Bank may, by written notice to the ------- other, (i) waive any of the conditions to its obligations hereunder or extend the time for the performance of any of the obligations or actions of the other, (ii) waive any inaccuracies in the representations of the other contained in this Agreement or in any documents delivered pursuant to this Agreement, (iii) waive compliance with any of the covenants of the other contained in this Agreement, and (iv) waive or modify performance of any of the obligations of the other. No action taken pursuant to this Agreement, including without limitation any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representation, warranty, condition or agreement contained herein. Waiver of the breach of any one or more provisions of this Agreement shall not be deemed or construed to be a waiver of other breaches or subsequent breaches of the same provisions. Section 13.3 Public Announcements. Neither of the parties shall make, -------------------- issue or release any oral or written public announcement or statement concerning, or acknowledge the existence of, or reveal the terms, conditions and status of, the transactions contemplated by this Agreement, without the other party's prior approval of, or concurrence in, the contents of such announcement, acknowledgment or statement. Section 13.4 Notices. Any notice, request, instruction or other document ------- to be given hereunder shall be in writing and delivered personally or sent by telecopy or prepaid overnight courier: if to BAMSI, BA Merchant Services, Inc., One South Van Ness Avenue, 5th Floor, San Francisco, CA 94103, attention: General Counsel #3710; and if to Bank, Bank of America NT & SA, 555 California Street, 6th Floor, San Francisco, CA 94104, attention: Corporate Secretary #3018, with a copy to BankAmerica Corporation, 555 California Street, 8th Floor, San Francisco, CA 94104, attention: General Counsel #3017. Any notice or other communication transmitted in accordance with this Section 13.4 shall for all purposes of this Agreement be treated as given or effective, if personally delivered, upon receipt, or, if sent by courier, upon the earlier of receipt or the end of the business day following the date of delivery to such courier, or, if telecopied, upon transmission and confirmation of receipt. Section 13.5 Entire Agreement. The Schedules and Exhibits are ---------------- incorporated into this Agreement by reference. This Agreement and the Schedules and Exhibits hereto embody the entire agreement between the parties and any and all prior oral or written agreements, representations or warranties, contracts, understandings, correspondence, conversations, and memoranda, whether written or oral, between BAMSI and Bank or between or among any agents, representatives, parents, subsidiaries, affiliates, predecessors in interest or successors in interest, with respect to the subject matter hereof, are merged herein and replaced hereby. Section 13.6 Assignability; Third Party Rights. Neither this Agreement --------------------------------- nor any of the party's rights hereunder shall be assignable by either party hereto without the prior written consent of the other party. In the event that any such assignment is made, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Nothing in this Agreement, express or implied, shall -17- be deemed to confer upon any other person, including without limitation, employees of any of the Asian Businesses, any rights or remedies under, or by reason of, this Agreement; provided, that such other persons shall not be deemed to include Affiliates, successors or permitted assigns of any party. Section 13.7 Governing Law; Arbitration. -------------------------- (a) This Agreement shall be construed in accordance with the laws of the State of California without giving effect to principles of conflict of laws. (b) Any dispute, controversy or claim between Bank and BAMSI arising out of or relating to this Agreement or any agreements or instruments relating hereto or delivered in connection herewith, if unable to be resolved by mutual agreement of the parties, will be resolved by arbitration conducted in San Francisco, California under the auspices and according to the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement. Section 13.8 Expenses of Agreement. Each party shall pay its own costs --------------------- and expenses incident to the negotiation, preparation and execution of this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, attorneys' and accounting fees, whether or not the transactions contemplated herein are consummated. Bank and BAMSI shall share equally the cost of any sales, transfer, use or value added taxes, plus any interest or penalties related thereto, payable with respect to the sale, conveyance and transfer of the Assets and the transactions contemplated by this Agreement. Section 13.9 Limitation on Liability. Neither BAMSI nor Bank shall have ----------------------- any liability to the other for costs, loss of anticipated profits or otherwise if the transactions contemplated by this Agreement are terminated pursuant to the provisions of this Agreement. Section 13.10 Headings, Definitions. The section and other headings --------------------- contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. Wherever in this Agreement words indicating the plural number appear, such words shall be considered as words indicating the singular number and vice versa where the context indicates the propriety of such use. -18- Section 13.11 Counterparts. This Agreement may be executed in ------------ counterparts, each of which when so executed shall be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, BAMSI and Bank have each caused this Agreement to be executed as of the date first above written. BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: /s/ Barry L. Pyle ---------------------------------- Name: Barry L. Pyle ---------------------------- Title: Senior Vice President --------------------------- BA MERCHANT SERVICES, INC. By: /s/ Sharif M. Bayyari ---------------------------------- Name: Sharif M. Bayyari ------------------------------ Title: President & Chief Executive Officer ----------------------------------- -19- EX-10.16 9 REVOLVING CREDIT AGREEMENT EXHIBIT 10.16 [BofA LOGO APPEARS HERE] Restated Business Loan Agreement ================================================================================ This Agreement, dated as of March 5, 1997, is between Bank of America Texas, N.A., a national banking association (the "Bank") and BA Merchant Services, Inc., a Delaware corporation (the "Borrower"). Pursuant to that certain Business Loan Agreement dated as of December 2, 1996, by and between the Bank and the Borrower (the "Existing Loan Agreement"), the Bank has extended credit to the Borrower in the form of a revolving line of credit of up to $140,000,000.00 (the "Revolving Facility"). Loans under the Revolving Facility are currently evidenced by a Promissory Note dated as of December 2, 1996, in the original principal amount of $140,000,000.00, made by the Borrower payable to the order of the Bank (the "Existing Note"). The Borrower has requested that the Bank revise and restate the Existing Loan Agreement, reduce the maximum principal amount under the Existing Note, and renew and extend the maturity of the Existing Note. The Bank is willing to do so upon the terms and conditions set forth in this Agreement. ACCORDINGLY, for adequate and sufficient consideration, the Bank and Borrower agree as follows: 1. LINE OF CREDIT AMOUNT AND TERMS 1.1 LINE OF CREDIT AMOUNT. (a) During the availability period described in Section 1.2 below, the Bank will provide a line of credit to the Borrower. The amount of the line of credit (the "Commitment") is Seventy-Five Million Dollars ($75,000,000.00). (b) This is a revolving line of credit. During the availability period, the Borrower may repay principal amounts and reborrow them. (c) Each advance must be for at least Five Hundred Thousand Dollars ($500,000.00), or for the amount of the remaining available line of credit, if less. (d) The Borrower agrees not to permit the outstanding principal balance of the line of credit to exceed the Commitment. 1.2 AVAILABILITY PERIOD. The line of credit is available between the date of this Agreement and December 31, 1997 (the "Expiration Date") unless the Borrower is in default. If the Borrower is in default, the Bank may, in addition to the Bank's other remedies, terminate the availability period and require the Borrower to repay any amounts outstanding under the line of credit immediately under Section 9 below. 1.3 INTEREST RATE. (a) Unless the Borrower elects one of the optional interest rates described in Sections 1.6 through 1.8 below, the interest rate is the lesser of (a) the maximum lawful rate of interest permitted under applicable usury laws, now or hereafter enacted (the "Maximum Rate"), or (b) the rate (the "Basic Rate") that is equal to the Bank's Reference Rate. (b) The Reference Rate is the rate of interest publicly announced from time to time by the Bank in Irving, Texas, as its Reference Rate. The Reference Rate is set by the Bank based on various factors, including its costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above, or below the Reference Rate. Any change in the Reference Rate will take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Reference Rate. 1.4 REPAYMENT TERMS. (a) The Borrower will pay interest (i) on the portion of the line of credit bearing interest at the Basic Rate, on the last day of each quarter, commencing on March 31, 1997 and continuing through the Expiration Date, and (ii) on each portion of the line of credit bearing interest at the Eurodollar Rate, the Offshore Rate, or the Cost of Funds Rate, on the last day of the applicable interest period, or, if such interest period is greater than 90 days, then on the 90th day of such interest period and on the last day of such interest period. (b) Notwithstanding any of the above to the contrary, the Borrower will repay in full all principal and any accrued and unpaid interest or other charges outstanding under the line of credit on the Expiration Date. (c) The Borrower may prepay the loan in full or in part at any time. 1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the Bank's Reference Rate, the Borrower may elect to have all or portions of the line of credit (during the availability period) bear interest at the rate(s) described below during an interest period agreed to by the Bank and the Borrower; provided, however, that the Borrower shall not have the option or right to elect to have all or any portion of the line of credit bear interest at the rate(s) described below when such rate(s) exceeds the Maximum Rate. Each interest rate is a rate per year. At the end of any interest period, the interest rate will revert to the rate based on the Reference Rate, unless the Borrower has designated another optional interest rate for the portion. 1.6 LIBOR RATE. The Borrower may elect to have all or portions of the principal balance of the line of credit bear interest at the LIBOR Rate plus 0.50 percentage points (the "Eurodollar Rate"). Election of a Eurodollar Rate portion is subject to the following requirements: (a) The interest period during which the Eurodollar Rate will be in effect will be 30, 60, 90 or 180 days. The last day of the interest period will be determined by the Bank using the practices of the London inter-bank market, and in no event will any such interest period extend beyond the Expiration Date. (b) Each Eurodollar Rate portion will be for an amount not less than Five Hundred Thousand Dollars ($500,000). - 2 - (c) The Borrower shall irrevocably request a Eurodollar Rate portion no later than 10:00 a.m. San Francisco time three (3) Banking Days before the commencement of the interest period. (d) The "LIBOR Rate" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by the Bank as of the first day of the interest period.) London Rate LIBOR Rate = -------------------------- (1.00 - Reserve Percentage) Where, (i) "London Rate" means the interest rate (rounded upward to the nearest 1/16th of one percent) at which the Bank's London Branch, London, Great Britain, would offer U.S. dollar deposits for the applicable interest period to other major banks in the London inter-branch market at approximately 11:00 a.m. London time two (2) Banking Days prior to the commencement of the interest period. (ii) "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in the Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special and other reserve percentages. (e) The Borrower may not elect a Eurodollar Rate with respect to any portion of the principal balance of the line of credit which is scheduled to be repaid before the last day of the applicable interest period. (f) Any portion of the principal balance of the line of credit already bearing interest at the Eurodollar Rate will not be converted to a different rate during its interest period. (g) Each prepayment of a Eurodollar Rate portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid; and a prepayment fee equal to the amount (if any) by which: (i) the additional interest which would have been payable on the amount prepaid had it not been paid until the last day of the interest period, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the London inter-bank market for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such portion. (h) The Bank will have no obligation to accept an election for a Eurodollar Rate portion if any of the following described events has occurred and is continuing: (i) Dollar deposits in the principal amount, and for periods equal to the interest period, of a Eurodollar Rate portion are not available in the London inter-bank market; or - 3 - (ii) the Eurodollar Rate does not accurately reflect the cost of a Eurodollar Rate portion. (i) If at any time during any applicable interest period the Eurodollar Rate shall exceed the Maximum Rate and thereafter the Eurodollar Rate shall become less than the Maximum Rate, the rate of interest payable shall be the Maximum Rate until the Bank shall have received the amount of interest it otherwise would have received if the interest payable had not been limited by the Maximum Rate during the period of time the Eurodollar Rate exceeded the Maximum Rate. 1.7 IBOR RATE. The Borrower may elect to have all or portions of the principal balance of the line of credit bear interest at the IBOR Rate (as hereinafter defined) plus 0.50 percentage points (the "Offshore Rate"). Election of an Offshore Rate portion is subject to the following requirements: (a) The interest period during which the Offshore Rate will be in effect will be for the number of days the Borrower elects, so long as such interest period does not exceed 180 days, and such interest period does not extend beyond the Expiration Date. (b) Each Offshore Rate portion will be for an amount not less than Five Hundred Thousand Dollars ($500,000.00). (c) The "IBOR Rate" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent (All amounts in the calculation will be determined by Bank as of the first day of the interest period.) Grand Cayman Rate IBOR Rate = --------------------------- (1.00 - Reserve Percentage) Where: (i) "Grand Cayman Rate" means the interest rate (rounded upward to the nearest 1/16th of one percent) at which Bank of America National Trust and Savings Association's Grand Cayman Branch, Grand Cayman, British West Indies, would offer U.S. dollar deposits for the applicable interest period to other major banks in the offshore dollar inter-bank markets; and (ii) "Reserve Percentages" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. (d) The Borrower may not elect an Offshore Rate with respect to any portion of the indebtedness outstanding hereunder which is scheduled to be repaid before the last day of the applicable interest period. (e) Borrower may not elect an Offshore Rate with respect to any portion of the indebtedness outstanding hereunder when the Offshore Rate exceeds the Maximum Rate. - 4 - (f) If at any time during any applicable interest period the Offshore Rate shall exceed the Maximum Rate and thereafter the Offshore Rate shall become less than the Maximum Rate, the rate of interest payable shall be the Maximum Rate until the Bank shall have received the amount of interest it otherwise would have received if the interest payable had not been limited by the Maximum Rate during the period of time the Offshore Rate exceeded the Maximum Rate. 1.8 FED-FUNDS RATE. The Borrower may elect to have all or portions of the principal balance of the line of credit bear interest at the Fed-Funds Rate (as hereinafter defined) plus 0.50 percentage points (the "Cost of Funds Rate"). Election of a Cost of Funds Rate portion is subject to the following requirements: (a) The interest period during which the Cost of Funds Rate will be in effect will be for the number of days the Borrower elects, so long as such interest period does not exceed 30 days, and such interest period does not extend beyond the Expiration Date. (b) Each Cost of Funds Rate portion will be for an amount not less than Five Hundred Thousand Dollars ($500,000.00). (c) The "Fed-Funds Rate" means, for any day, the annual rate, rounded upward to the nearest 1/100 of one percent, determined by the Bank to be equal to (a) the weighted average of the rates on overnight federal-funds transactions with member banks of the Federal Reserve System arranged by federal-funds brokers on that day, as published by the Federal Reserve Bank of New York on the next Business Day, or (b)if those rates are not published for any day, the average of the quotations at approximately 10:00 a.m. received by the Bank from three federal-funds brokers of recognized standing selected by the Bank in its sole discretion. (All amounts in the calculation will be determined by Bank as of the first day of the interest period.) (d) The Borrower may not elect a Cost of Funds Rate with respect to any portion of the indebtedness outstanding hereunder which is scheduled to be repaid before the last day of the applicable interest period. (e) Borrower may not elect a Cost of Funds Rate with respect to any portion of the indebtedness outstanding hereunder when the Cost of Funds Rate exceeds the Maximum Rate. (f) If at any time during any applicable interest period the Cost of Funds Rate shall exceed the Maximum Rate and thereafter the Cost of Funds Rate shall become less than the Maximum Rate, the rate of interest payable shall be the Maximum Rate until the Bank shall have received the amount of interest it otherwise would have received if the interest payable had not been limited by the Maximum Rate during the period of time the Cost of Funds Rate exceeded the Maximum Rate. 2. FEES AND EXPENSES. 2.1 FEES. (a) UNUSED COMMITMENT FEE. Subject to the provisions of Section 2.4 of this Agreement, the Borrower agrees to pay a fee on any difference between the Commitment and the amount of credit it actually uses, determined by the weighted average loan balance maintained by the specified period. The fee will be calculated at 0.125% per year. - 5 - This fee is due and payable on the last day of each fiscal quarter of the Borrower, commencing on March 31, 1997, and continuing through and including the Expiration Date. (b) WAIVER FEE. Subject to Section 2.4 of this Agreement, if the Bank, at its discretion, agrees to waive or amend any terms of this Agreement, then the Borrower will pay the Bank a fee for each waiver or amendment. Nothing in this paragraph shall imply that the Bank is obligated to agree to any waiver or amendment requested by the Borrower. The Bank may impose additional requirements as a condition to any waiver or amendment. (c) FACILITY FEE. Subject to the provisions of Section 2.4 of this Agreement, the Borrower agrees to pay, on the date of any renewal or extension of this Agreement, a facility fee in an amount mutually agreed to by the Borrower and the Bank. 2.2 EXPENSES. (a) The Borrower agrees to immediately repay the Bank for expenses that include, but are not limited to, filing, recording and search fees, and documentation fees. (b) The Borrower agrees to reimburse the Bank for any expenses it incurs in the preparation of this Agreement and any agreement or instrument required by this Agreement. Expenses include, but are not limited to, reasonable attorneys' fees. 2.3 DEPOSITS. The Borrower shall not be required to maintain any compensating balances as a condition to the loan facilities provided herein. 2.4 NO EXCESS FEES. Notwithstanding anything to the contrary in this Section 2, in no event shall any sum payable under this Section 2 (to the extent, if any, constituting interest under any applicable laws), together with all amounts constituting interest under applicable laws and payable in connection with the credit evidenced hereby, exceed the Maximum Rate or the maximum amount of interest permitted to be charged, taken, reserved, received or contracted for under applicable usury laws. 3. COLLATERAL. [Intentionally Blank]. 4. DISBURSEMENTS, PAYMENTS AND COSTS 4.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made in writing in a manner acceptable to the Bank, or by another means acceptable to the Bank. 4.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each payment by the Borrower will be: (a) made at the Bank's principal office in Irving, Texas; (b) made in immediately available funds, or such other type of funds selected by the Bank; (c) evidenced by records kept by the Bank. In addition, the Bank may, at its discretion, require the Borrower to sign a promissory note to evidence the borrowings hereunder. 4.3 TELEPHONE AUTHORIZATION. - 6 - (a) The Bank may honor telephone instructions for advances or repayments or for the designation of optional interest rates given by any one of the individual signer(s) of this Agreement or a person or persons authorized by any one of the signer(s) of this Agreement. (b) Advances will be deposited in and repayments will be withdrawn from the Borrower's accounts with the Bank as designated in writing by the Borrower. (c) The Borrower will provide written confirmation to the Bank of any telephone instructions within one day. If there is a discrepancy and the Bank has already acted on the telephone instructions, the telephone instructions will prevail over the written confirmation. (d) The Borrower indemnifies and excuses the Bank (including its officers, employees, and agents) from all liability, loss, and costs in connection with any act resulting from telephone instructions it reasonably believes are made by a signer of this Agreement or a person authorized by a signer. This indemnity and excuse will survive this Agreement's termination. 4.4 BANKING DAYS. Unless otherwise provided in this Agreement, a "Banking Day" is a day other than a Saturday or a Sunday on which the Bank is open for business in Texas. For amounts bearing interest at the Eurodollar Rate, a Banking Day is a day other than a Saturday or a Sunday on which the Bank is open for business in Texas and Bank of America, National Trust and Savings Association ("BofA California") in San Francisco, California and dealing in dollars in the London inter-bank market. All payments and disbursements which would be due on a day which is not a Banking Day will be due on the next Banking Day. All payments received on a day which is not a Banking Day will be applied to the credit on the next Banking Day. 4.5 TAXES. The Borrower will not deduct any taxes from any payments it makes to the Bank. If any government authority imposes any taxes on any payments made by the Borrower, the Borrower will pay the taxes or charges. Upon request by the Bank, the Borrower will confirm that it has paid the taxes by giving the Bank official tax receipts (or notarized copies) within 30 days after the due date. However, the Borrower will not pay the Bank's net income taxes. 4.6 ADDITIONAL COSTS. Subject to the provisions of Section 2.4 hereof, the Borrower will pay the Bank, on demand, for the Bank's costs or losses arising from any statute or regulation, or any request or requirement of a regulatory agency which is applicable to all national banks or a class of all national banks. The costs and losses will be allocated to the loan in a manner determined by the Bank, using any reasonable method. The costs include the following: (a) any reserve or deposit requirements; and (b) any capital requirements relating to the Bank's assets and commitments for credit. Notwithstanding the foregoing, in no event shall any sum payable under this Section 4.7 (to the extent, if any, constituting interest under applicable laws), together with all amounts constituting interest under applicable laws and payable in connection with the credit evidenced hereby, exceed the Maximum Rate or the maximum amount of interest permitted to be charged, taken, reserved, received or contracted for under any applicable usury laws. - 7 - 4.7 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all interest and fees, if any, will be computed on the basis of a 360 day year and the actual number of days elapsed. Notwithstanding the foregoing, interest at the Maximum Rate will always be computed on the basis of a 365-day year and the actual number of days elapsed. 4.8 INTEREST ON LATE PAYMENTS. At the Bank's sole option in each instance, any amount not paid when due under this Agreement (including interest) shall bear interest from the due date at the lesser of (a) the Maximum Rate or (b) the Bank's Reference Rate plus three (3) percent per annum. The Maximum Rate is the maximum lawful rate of interest permitted under applicable usury laws, now or hereafter enacted and the Reference Rate is the rate of interest publicly announced from time to time by the Bank in Irving, Texas, as its Reference Rate. The Reference Rate is set by the Bank based on various factors, including its costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above, or below the Reference Rate. Any change in the Reference Rate will take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Reference Rate. 4.9 DEFAULT RATE. Upon the occurrence and during the continuation of any default under this Agreement, advances under this Agreement will at the option of the Bank bear interest at the lesser of (a) the Maximum Rate and (b) a rate per annum which is three (3) percent higher than the rate of interest otherwise provided under this Agreement. This will not constitute a waiver of any default. 5. CONDITIONS The Bank must receive the following items, in form and content acceptable to the Bank, before it is required to extend any credit to the Borrower under this Agreement: 5.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance by the Borrower of this Agreement and any instrument or agreement required under this Agreement have been duly authorized. 5.2 LEGAL OPINION. A written opinion from the Borrower's legal counsel, covering such matters as the Bank may require. The legal counsel and the terms of the opinion must be acceptable to the Bank. 5.3 CONDITIONS TO EACH ADVANCE. Before each extension of credit, including the first: (a) a request for such advance, in accordance with Section 4.1 of this Agreement, and for Eurodollar Rate advances, in accordance with Section 1.6(c) of this Agreement; (b) certification from the Borrower (which certification shall be true and correct) that the representations and warranties in this Agreement are true and correct in all material respects as if made on the date of such advance; and (c) certification from the Borrower (which certification shall be true and correct) that no default under this Agreement exists, and no condition that, with the passage of time or giving of notice or both, would constitute a default under this Agreement, exists. - 8 - 5.4 OTHER ITEMS. Any other items that the Bank reasonably requires. 6. REPRESENTATIONS AND WARRANTIES When the Borrower signs this Agreement, and until the Bank is repaid in full, the Borrower makes the following representations and warranties. Each request for an extension of credit constitutes a renewed representation. 6.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and existing under the laws of the state where organized. 6.2 AUTHORIZATION. This Agreement, and any instrument or agreement required hereunder, are within the Borrower's powers, have been duly authorized, and do not conflict with any of its organizational papers. 6.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, and any instrument or agreement required hereunder, when executed and delivered, will be similarly legal, valid, binding and enforceable. 6.4 GOOD STANDING. The Borrower is duly incorporated and in good standing in the State of Delaware, and has qualified to transact business, and is in good standing, in the State of California. 6.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement, or obligation by which the Borrower is bound. 6.6 FINANCIAL INFORMATION. All financial and other information that has been or will be supplied to the Bank, including the Borrower's financial statement dated as of December 31, 1995 is: (a) sufficiently complete to give the Bank accurate knowledge of the Borrower's financial condition; (b) in form and content required by the Bank; and (c) in compliance with all government regulations that apply. Since the date of the financial statement specified above, there has been no material adverse change in the assets or the financial condition of the Borrower. 6.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or threatened against the Borrower, which, if lost, would materially impair the Borrower's financial condition or ability to repay the loan, except as have been disclosed in writing to the Bank. 6.8 PERMITS, FRANCHISES. The Borrower possesses all material permits, memberships, franchises, contracts and licenses required and all trademark rights, trade name rights, patent rights and fictitious name rights necessary to enable it to conduct the business in which it is now engaged or in which it proposes to engage. 6.9 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. 6.10 INCOME TAX RETURNS. Tax returns (if any) required to be filed by Borrower in any jurisdiction have been filed and all taxes (if any) upon - 9 - Borrower or its properties, income or franchises have been paid prior to the time that such taxes could give rise to a lien thereon. 6.11 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse of time or both would be, a default under this Agreement. 6.12 ERISA PLANS. (a) The Borrower has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and has not incurred any liability with respect to any Plan under Title IV of ERISA. (b) No reportable event has occurred under Section 4043(b) of ERISA for which the PBGC requires 30 day notice. (c) No action by the Borrower to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 of ERISA. (d) No proceeding has been commenced with respect to a Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. (e) The following terms have the meanings indicated for purposes of this Agreement: (i) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (ii) "ERISA" means the Employee Retirement Income Act of 1974, as amended from time to time. (iii) "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. (iv) "Plan" means any employee pension benefit plan maintained or contributed to by the Borrower and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. 6.13 LOCATION OF BORROWER. The Borrower's place of business (or, if the Borrower has more than one place of business, its chief executive office) is located at the address listed under the Borrower's signature on this Agreement. 6.14 INVESTMENT COMPANY. The Borrower is not an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, and is not controlled by such a company. 6.15 FULL DISCLOSURE. The Borrower's reports filed pursuant to the Securities Exchange Act of 1934 before the date of this Agreement do not contain any untrue statements of material fact and do not omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. All information previously furnished to the Bank by or at the direction of the Borrower's chairman, president, chief executive officer, chief financial officer, or treasurer (each, a "Responsible Officer") in connection with this Agreement was, and all information furnished to the Bank in the future by or at the direction of a Responsible Officer or general counsel of the Borrower will be, true and accurate in all material respects or based on reasonable estimates on the date the information is stated or certified. - 10 - 7. COVENANTS The Borrower agrees, so long as credit is available under this Agreement and until the Bank is repaid in full: 7.1 USE OF PROCEEDS. To use the proceeds of the credit only for the Borrower's working capital purposes and other lawful, general corporate purposes of Borrower; provided, however, that none of the proceeds will be used for the purpose of purchasing or carrying any "margin stock" as defined in Regulation U of the Board of Governors of the Federal Reserve Board, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin stock, and Borrower will not use proceeds of the line of credit to acquire any security in any transaction which is subject to Sections 13 or 14 of the Securities Exchange Act of 1934. 7.2 FINANCIAL INFORMATION. To provide the following financial information and statements and such additional information as requested by the Bank from time to time: (a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual financial statements. These financial statements must be audited by a Certified Public Accountant ("CPA") acceptable to the Bank. The statements shall be prepared on a consolidated and consolidating basis. (b) Within 45 days of the period's end, the Borrower's quarterly financial statements. These financial statements may be Borrower prepared. The statements shall be prepared on a consolidated and consolidating basis. (c) Copies of the Borrower's Form l0-K Annual Report within 10 days after the date of filing with the Securities and Exchange Commission, and Form l0-Q Quarterly Report within 10 days after the date of filing with the Securities and Exchange Commission. (d) Within 45 days of the period's end, a certificate from the Borrower, substantially in the form of Exhibit A attached hereto, certifying as to the Borrower's compliance with the terms, covenants, and other agreements contained in this Agreement. (e) After Borrower's registration statement, pertaining to shares of stock to be issued by Borrower in an initial public offering, has been approved by the Securities and Exchange Commission, a copy of such registration statement and all exhibits attached thereto, including without limitation, all letters and opinions prepared on behalf of Borrower by its CPA. 7.3 PROFITABILITY. To maintain Net Income for any fiscal quarter of the Borrower of at least $1.00. "Net Income" shall mean the net earnings (after income taxes) of the Borrower for such quarter, determined in accordance with generally accepted accounting principles, but excluding (i) any gain or loss arising from the sale of assets, (ii) any gain arising from write-up of assets, and (iii) earnings of any other entity or person, substantially all of the assets of which have been acquired by the Borrower, to the extent that such earnings were realized by such other person prior to the date of such acquisition. - 11 - 7.4 MINIMUM CAPITAL. To maintain Tangible Net Worth, as of the end of any fiscal quarter of the Borrower, of at least One Hundred Seventy-Five Million Dollars ($175,000,000.00). "Tangible Net Worth" shall mean, as of any date, the total shareholder's equity (including capital stock, additional paid-in capital and retained earnings after deducting treasury stock) which would appear on a balance sheet of Borrower prepared as of such date in accordance with generally accepted accounting principles, less the aggregate book value of intangible assets shown on such balance sheet. 7.5 DEBT TO TOTAL CAPITAL RATIO. To maintain a ratio of Debt to Total Capital, as of the end of any fiscal quarter of the Borrower, not exceeding 0.55:1.00. "Debt" means the aggregate amount of all outstanding interest bearing indebtedness of the Borrower. "Total Capital" means the total shareholder's equity (including capital stock, additional paid-in capital and retained earnings after deducting treasury stock) which would appear on a balance sheet of Borrower prepared as of such date in accordance with generally accepted accounting principles, plus Debt. 7.6 OTHER DEBTS. Not to have outstanding or incur any direct or contingent debts (other than those to the Bank), become liable for the debts of others, or sell or discount (except for compromises extended in the ordinary course of business) any of its accounts receivable without the Bank's written consent. This does not prohibit: (a) Acquiring goods, supplies, or merchandise on normal trade credit. (b) Endorsing negotiable instruments received in the usual course of business. (c) Obtaining surety bonds in the usual course of business. 7.7 OTHER LIENS. Not to create, assume, or allow any security interest or lien (including judicial liens) on property the Borrower now or later owns, except: (a) Deeds of trust and security agreements in favor of the Bank. (b) Liens for taxes not yet due. (c) Liens outstanding on the date of this Agreement disclosed in writing to the Bank. 7.8 INVESTMENTS. The Borrower may not make any investments except in the following: (a) To the extent they mature within one year from the date in question readily marketable (i) direct full faith and credit obligations of the United States of America or obligations guaranteed by the full faith and credit of the United States of America, and (ii) obligations of an agency or instrumentality of, or corporation owned, controlled, or sponsored by, the United States of America that are generally considered in the securities industry to be implicit obligations of the United States of America ("Government Securities"). (b) Readily marketable direct obligations of any state of the United States of America given on the date of such investment a credit - 12 - rating of at least A by Moody's Investors Service, Inc., or A by Standard & Poor's Corporation, in each case due within one year from the making of the investment. (c) Certificates of deposit issued by, bank deposits in, eurocurrency deposits through, bankers' acceptances of, and repurchase agreements covering Government Securities executed by (i) the Bank or (ii) any domestic bank or any domestic branch or office of a foreign bank, in either case having on the date of the investment a short-term certificate of deposit credit rating of at least P-2 by Moody's Investors Service, Inc., or A-2 by Standard & Poor's Corporation, in each case due within one year after the date of the making of the investment. (d) Repurchase agreements covering Government Securities executed by a broker or dealer registered under Section 15(b) of the 1934 Act having on the date of the investment capital of at least $100,000,000, due within 30 days after the date of the making of the investment, so long as the maker of the investment receives written confirmation of the transfer to it of record ownership of the Government Securities on the books of a "primary dealer" in the Government Securities as soon as practicable after the making of the investment. (e) Readily marketable commercial paper of domestic corporations doing business in the United States of America or any of its states or of any corporation that is the holding company for a bank described in clause (c) above and having on the date of the investment a credit rating of at least P-1 by Moody's Investors Service, Inc., or A-1 by Standard & Poor's Corporation, in each case due within 90 days after the date of the making of the investment. (f) "Money market preferred stock" issued by a domestic corporation given on the date of the investment a credit rating of at least Aa by Moody's Investors Services, Inc., and AA by Standard & Poor's Corporation, in each case having an investment period not exceeding 50 days. (g) A readily redeemable "money market mutual fund" sponsored by a bank described in clause (c) above, or a registered broker or dealer described in clause (d) above, that has and maintains an investment policy limiting its investments primarily to instruments of the types described in clauses (a) through (f) above and has on the date of those investment total assets of at least $1,000,000,000. 7.9 SUBSIDIARIES. To notify the Bank of the identity of any Subsidiary created or acquired by the Borrower; and (to the extent applicable) cause its Subsidiaries to comply with the covenants contained in Sections 7.6, 7.7, 7.8, 7.10, 7.11, 7.12, 7.13, 7.14, 7.15, 7.16, 7.18, and 7.19 of this Agreement. The term "Subsidiary" shall mean any corporation, joint venture, partnership or limited liability company fifty percent (50%) or more of the Voting Shares (or equivalent equity interests) of which is owned, directly or indirectly, by Borrower. 7.10 LIQUIDATION, MERGERS, CONSOLIDATIONS AND DISPOSITIONS OF ASSETS. Not to (a) dissolve or liquidate, (b) sell, transfer, lease or otherwise dispose of all or any substantial part of its property, assets or business, or (c) become a party to any merger or consolidation with any other entity, unless (i) the Borrower is the surviving entity, (ii) the Borrower owns at least fifty-one percent (51%) of the Voting Shares of the surviving entity, and (iii) no default under this Agreement shall occur as a result of such merger or consolidation. - 13 - 7.11 LINES OF BUSINESS. Not to directly or indirectly engage in any business other than the merchant credit card business and related business. 7.12 NOTICES TO BANK. To promptly notify the Bank in writing of: (a) any lawsuit over One Million Dollars ($1,000,000) against the Borrower. (b) any substantial dispute between the Borrower and any government authority. (c) any failure to comply with this Agreement. (d) any material adverse change in the Borrower's financial condition or operations. (e) any change in the Borrower's name, legal structure, place of business, or chief executive office if the Borrower has more than one place of business. 7.13 BOOKS AND RECORDS. To maintain adequate books and records. 7.14 AUDITS. To allow the Bank and its agents to inspect the Borrower's properties and examine, audit, and make copies of books and records at any reasonable time. If any of the Borrower's properties, books or records are in the possession of a third party, the Borrower authorizes that third party to permit the Bank or its agents to have access to perform inspections or audits and to respond to the Bank's requests for information concerning such properties, books and records. 7.15 COMPLIANCE WITH LAWS. To comply with the laws, (including any fictitious name statute), regulations, and orders of any government body with authority over the Borrower's business. 7.16 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges, and franchises that the Borrower now has or that may be necessary for the Borrower to conduct its business. 7.17 COOPERATION. To take any action reasonably requested by the Bank to carry out the intent of this Agreement. 7.18 GENERAL BUSINESS INSURANCE. To maintain insurance as is usual for the business it is in. 7.19 ERISA PLANS. To give prompt written notice to the Bank of: (a) The occurrence of any reportable event under Section 4043(b) of ERISA for which the PBGC requires 30 day notice. (b) Any action by the Borrower to terminate or withdraw from a Plan or the filing of any notice of intent to terminate under Section 4041 of ERISA. (c) Any notice of noncompliance made with respect to a Plan under Section 4041(b) of ERISA. (d) The commencement of any proceeding with respect to a Plan under Section 4042 of ERISA. 7.20 INDEMNIFICATION. To indemnify Bank, and its officers, directors, agents and attorneys, from and against any and all liabilities, obligations, losses, damages, costs and expenses which may be imposed on, or incurred by, or asserted against, any of such parties in any way - 14 - relating to or arising out of this Agreement or the loan governed hereby; provided that Borrower shall not be liable for any portion of such items resulting from Bank's own gross negligence or willful misconduct. IT IS EXPRESS INTENT OF BANK AND BORROWER THAT THE FOREGOING INDEMNITY SHALL INDEMNIFY BANK, AND THE OTHER PARTIES DESCRIBED ABOVE, FROM ALL SUCH ITEMS ARISING OR RESULTING FROM BANK'S OR SUCH PARTIES', SOLE, JOINT OR CONTRIBUTORY NEGLIGENCE. 8. HAZARDOUS WASTE. [Intentionally Blank]. 9. DEFAULT. If any of the following events occur, the Bank may do one or more of the following: (i) declare the Borrower in default, (ii) stop making any additional credit available to the Borrower, (iii) exercise any and all rights and remedies as may be available to the Bank under the terms of any collateral documents, security instruments, debt instruments or any other document or instrument executed in connection herewith or in any way related hereto, (iv) exercise any and all rights and remedies as may be available to the Bank at law or in equity, and (v) declare the entire debt created and evidenced hereby to be immediately due and payable in full, whereupon the entire unpaid principal indebtedness evidenced hereby, and all accrued unpaid interest thereon, shall at once mature and become due and payable without presentment, demand, protest, grace or notice of any kind (including, without limitation, notice of intent to accelerate, notice of acceleration or notice of protest), all of which are hereby severally waived by the Borrower. If a bankruptcy petition is filed with respect to the Borrower, the entire debt outstanding under this Agreement will automatically become due immediately. 9.1 FAILURE TO PAY. The Borrower fails to make a payment under this Agreement within 10 days after the date when due. 9.2 FALSE INFORMATION. The Borrower has given the Bank false or misleading information or representations. 9.3 OWNERSHIP AND CONTROL. If at any time less than fifty-one percent (51%) of the Voting Shares of the Borrower shall be owned by BankAmerica Corporation or BofA California. "Voting Shares" of any corporation or bank shall mean shares of any class or classes (however designated) having ordinary voting power for the election of the members of the Board of Directors of such corporation or bank, other than shares having such power only by reason of the happening of a contingency. 9.4 BANKRUPTCY. The Borrower files a bankruptcy petition, a bankruptcy petition is filed against the Borrower, or the Borrower makes a general assignment for the benefit of creditors. The default will be deemed cured if any bankruptcy petition filed against the Borrower is dismissed within a period of 60 days after the filing; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during that period. 9.5 RECEIVER. A receiver or similar official is appointed for the Borrower's business, or the business is terminated. - 15 - 9.6 JUDGMENTS. Any judgments or arbitration awards are entered against the Borrower, or the Borrower enters into any settlement agreements with respect to any litigation or arbitration, in an aggregate amount of One Million Dollars ($1,000,000) or more. 9.7 GOVERNMENT ACTION. Any government authority takes action that the Bank believes materially adversely affects the Borrower's financial condition or ability to repay the loan. 9.8 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the financial condition, properties or prospects of the Borrower or BofA California, or the Borrower's ability to repay the loan. 9.9 NON-COMPLIANCE. The Borrower fails to meet the conditions of, or fails to perform any obligation under, any agreement the Borrower has with the Bank or any affiliate of the Bank. 9.10 CROSS-DEFAULT. Any default occurs under any agreement in connection with any credit the Borrower has obtained from anyone else, or which the Borrower has guaranteed, in the amount of One Million Dollars ($1,000,000) or more in the aggregate. 9.11 ERISA PLANS. The occurrence of any one or more of the following events with respect to the Borrower, provided such event or events could reasonably be expected, in the judgment of the Bank, to subject the Borrower to any tax, penalty or liability (or any combination of the foregoing) which, in the aggregate, could have a material adverse effect on the financial condition of the Borrower with respect to a Plan: (a) A reportable event shall occur with respect to a Plan which is, in the reasonable judgment of the Bank, likely to result in the termination of such Plan for purposes of Title IV of ERISA. (b) Any Plan termination (or commencement of proceedings to terminate a Plan) or the Borrower's full or partial withdrawal from a Plan. 9.12 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions of, or fails to perform any obligation under, any term of this Agreement not specifically referred to in this Article. 9.13 SUBSIDIARIES. If Borrower creates or acquires any Subsidiary, then the defaults described in Sections 9.4, 9.5, 9.6, and 9.10 of this Agreement shall also apply to each Subsidiary. 10. ENFORCING THIS AGREEMENT; MISCELLANEOUS 10.1 GAAP. Except as otherwise stated in this Agreement, all financial information provided to the Bank will be prepared and all financial covenants will be calculated under generally accepted accounting principles, consistently applied. If Borrower creates or acquires any Subsidiary, whose financial attributes and results are consolidated with those of Borrower under generally accepted accounting principles, financial statements required hereunder shall be prepared on a consolidated basis and financial tests required to be satisfied hereunder (e.g., those contained in Sections 7.3 and 7.4) shall be determined on a consolidated basis. - 16 - 10.2 GOVERNING LAW. This Agreement is governed by the substantive laws of the State of California. 10.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and the Bank's successors and assignees. The Borrower agrees that it may not assign this Agreement without the Bank's prior consent. The Bank may sell participations in or assign this loan, and may exchange financial information about the Borrower with actual or potential participants or assignees. If a participation is sold or the loan is assigned, the purchaser will have the right of set-off against the Borrower. 10.4 ARBITRATION. (a) This paragraph concerns the resolution of any controversies or claims between the Borrower and the Bank, including but not limited to those that arise from: (i) This Agreement (including any renewals, extensions or modifications of this Agreement); (ii) Any document, agreement or procedure related to or delivered in connection with this Agreement; (iii) Any violation of this Agreement; or (iv) Any claims for damages resulting from any business conducted between the Borrower and the bank, including claims for injury to persons, property or business interests (torts). (b) At the request of the Borrower or the bank, an such controversies or claims will be settled by arbitration in accordance with the United States Arbitration Act. THE UNITED STATES ARBITRATION ACT WILL APPLY EVEN THOUGH THIS AGREEMENT PROVIDES THAT IT IS GOVERNED BY CALIFORNIA LAW. (c) Arbitration proceedings will be administered by the American Arbitration Association and will be subject to its commercial rules of arbitration. (d) For purposes of the application of the statute of limitations, the filing of an arbitration pursuant to this paragraph is the equivalent of the filing of a lawsuit, and any claim or controversy which may be arbitrated under this paragraph is subject to any applicable statutes of limitations. The arbitrators will have the authority to decide whether any such claim or controversy is barred by the statute of limitations and, if so, to dismiss the arbitration on that basis. (e) If there is a dispute as to whether an issue is arbitratable, the arbitrators will have the authority to resolve any such dispute. (f) The decision that results from an arbitration proceeding may be submitted to an authorized court of law to be confirmed and enforced. (g) This provision does not limit the right of the Borrower or the Bank to: (i) exercise self-help remedies such as setoff; - 17 - (ii) foreclose against or sell any real or personal property collateral; or (iii) act in a court of law before, during or after the arbitration proceeding to obtain: (A) an interim remedy; and/or (B) additional or supplementary remedies. (h) The pursuit of a successful action for interim, additional or supplementary remedies, or the filing of a court action, does not constitute a waiver of the right of the Borrower or the Bank, including the suing party, to submit the controversy or claim to arbitration of the other party contests the lawsuit. 10.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. The Bank retains all rights, even if it makes a loan after default. If the Bank waives a default, it may enforce a later default. Any consent or waiver under this Agreement must be in writing. 10.6 COSTS. If the Bank incurs any expenses in connection with administering or enforcing this Agreement, or if the Bank takes collection action under this Agreement, it is entitled to costs and reasonable attorneys' fees, including any allocated costs of in-house counsel. 10.7 ATTORNEYS' FEES. In the event of a lawsuit or arbitration proceeding, the prevailing party is entitled to recover costs and reasonable attorneys' fees (including any allocated costs of in-house counsel) incurred in connection with the lawsuit or arbitration proceeding, as determined by the court or arbitrator. 10.8 NOTICES. All notices required under this Agreement shall be personally delivered or sent by first class mail, postage prepaid, to the addresses on the signature page of this Agreement, or to such other addresses as the Bank and the Borrower may specify from time to time in writing. 10.9 HEADINGS. Article and paragraph headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. 10.10 COUNTERPARTS. This Agreement may be executed in as many counterparts as necessary or convenient, and by the different parties on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. 10.11 USURY LAWS. It is the intention of the parties to comply with applicable usury laws; accordingly, it is agreed that notwithstanding any provisions to the contrary in this Agreement or in any of the documents evidencing or securing payment hereof or otherwise relating hereto, in no event shall this Agreement or such instruments or documents require or permit the payment, contracting for, charging, taking, reserving or receiving any sums constituting interest, as defined under applicable usury laws, in excess of the maximum amount permitted by such laws. If any such excess of interest is contracted for, paid, charged, taken, - 18 - reserved or received under this Agreement or under any of the documents evidencing or securing payment hereof or otherwise relating hereto, on the amount of principal actually outstanding from time to time shall exceed the maximum amount of interest permitted by applicable usury laws, then in any such event, (i) the provisions of this Section shall govern and control; (ii) any such excess shall be canceled automatically to the extent of such excess, and shall not be collected or collectible; (iii) any such excess which is or has been received shall be credited against the unpaid principal balance hereof or refunded to the Borrower, at the Bank's option; and (iv) the effective rate of interest shall be automatically reduced to the maximum lawful rate allowed under applicable laws as construed by courts having jurisdiction hereof or thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest calculated for, paid, charged, taken, reserved or received under this Agreement or under such other documents or instruments that are made for the purpose of determining whether such rate exceeds the maximum lawful rate of interest, shall be made, to the extent permitted by applicable usury laws, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the indebtedness, all interest at any time contractor for, paid, charged, taken, reserved or received from the Borrower or otherwise by the holder or holders thereof. The terms of this section shall be deemed to be incorporated in every loan document, security instrument, debt instrument, and communication relating to this Agreement and the law evidenced hereby. The term "applicable usury laws" shall mean such law of the State of California or the laws of the United States; whichever laws allow the higher rate of interest, as such laws now exist; provided, however, that if such laws shall hereafter allow higher rates of interest, then the applicable usury laws shall be the laws allowing the higher rate to be effective as of the effective date of such laws. To the extent that (notwithstanding the foregoing choice of law) TEX. REV. STAT. ANN. art 5069-1.04, as amended (the "Act"), is relevant to the Bank for the purposes of determining the Maximum Rate, the parties elect to determine the Maximum Rate under the Act pursuant to the "indicate rate ceiling" from time to time in effect, as referred to and defined in article 1.04(a)(1) of the Act; subject, however, to any right the Bank may have subsequently under applicable law, to change the method of determining the Maximum Rate. 10.12 NO ORAL AGREEMENTS. This Agreement and any related security or other agreements required by this Agreement, collectively: (a) represent the sum of the understandings and agreements between the Bank and the Borrower concerning this credit; (b) replace any prior oral or written agreements between the Bank and the Borrower concerning this credit; and (c) are intended by the Bank and the Borrower as the final, complete and exclusive statement of the terms agreed to by them. In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail. - 19 - THIS WRITTEN AGREEMENT AND THE INSTRUMENTS AND DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. - 20 - This Agreement is executed as of the date stated at the top of the first page. BANK OF AMERICA TEXAS, N.A. Address where notices to the Bank are to be sent: Bank of America Texas, N.A. By: Attn: Commercial Loan Services ------------------------------ 333 Clay Street, Ste. 3600 Joanne K. Bramanti Houston, Texas 77002 Vice President BA MERCHANT SERVICES, INC. Address where notices to the Borrower are to be sent: BA Merchant Services, Inc. By:/s/ James H. Williams Attn: Shirley Yan ------------------------------ One South Van Ness Avenue James H. Williams San Francisco, CA 94103 Treasurer By:/s/ Sharif M. Bayyari ------------------------------ Sharif M. Bayyari President and CEO - 21 - EXHIBIT A --------- COMPLIANCE CERTIFICATE ---------------------- FOR THE FISCAL QUARTER ENDED____________________ (the "Subject Period") BANK: Bank of America Texas, N.A. DATE: ____________________ BORROWER: BA Merchant Services, Inc. ================================================================================ This certificate is delivered under the Restated Business Loan Agreement (as renewed, extended, amended, or restated, the "Loan Agreement") dated as of March 5, 1997, between Borrower and Bank, all defined terms in which have the same meanings when used -- unless otherwise defined -- in this certificate. In my capacity as the undersigned officer of -- and on behalf of -- Borrower, I certify to Bank on the date of this certificate that (a) Borrower's financial statements attached to this certificate were prepared in accordance with generally accepted accounting principles and present fairly Borrower's financial condition and results of operations as of, and for the fiscal period ended on, the last day of the Subject Period, (b) a review of the activities of Borrower during the Subject Period has been made under my supervision with a view to determining whether, during the Subject Period, Borrower performed and complied with all of its obligations under the Loan Agreement, and, during the Subject Period, to my knowledge (i) Borrower performed, and complied with all of its obligations under the Loan Agreement (except for the deviations, if any, described on the schedule to this certificate) in all material respects, and (ii) no default, or any event which, with the passage of time, the giving of notice, or both, would cause a default (a "Potential Default"), has occurred that has not been cured or waived (except such defaults or Potential Defaults, if any, described on the schedule to this certificate), and (c) to my knowledge, the status of compliance by Borrower with Sections 7.3, 7.4, and 7.5 of the Loan Agreement at the end of the Subject Period is as described on the schedule to this certificate. By _________________________________ Name _________________________________ Title* _________________________________ *Must be an authorized officer. - 22 - SCHEDULE TO COMPLIANCE CERTIFICATE ---------------------------------- (For Fiscal Quarter Ended _________________) A. Describe deviations from performance or compliance with covenants, if any, pursuant to clause (b)(i) of the attached certificate. If none, so state. B. Describe defaults and Potential Defaults, if any, pursuant to clause (b)(ii) of the attached certificate. If none, so state. C. Reflect compliance with Sections 7.3, 7.4, and 7.5 at the end of the Subject Period pursuant to clause (c) of the attached certificate. Table 1 -------
____________________________________________________________________________________________________________________________________ COVENANT AT END OF SUBJECT PERIOD ____________________________________________________________________________________________________________________________________ (S)7.3 PROFITABILITY (a) Net earnings of Borrower during Subject Period $ (b) Gains from sales of assets $ (c) Losses from sales of assets $ (d) Line (b) minus Line (c) $ (e) Gains from write-up of assets $ (f) Earnings of acquired entities during Subject Period to the extent realized prior to acquisition date $ (g) Net Income -- Line (a) minus Line (d) minus Line (e) minus Line (f) $ MINIMUM NET INCOME REQUIRED $1.00 - ----------------------------------------------------------------------------------------------------------------------
- 23 - Table 2 -------
- ---------------------------------------------------------------------------------------- COVENANT AT END OF SUBJECT PERIOD - ---------------------------------------------------------------------------------------- 7.4 MINIMUM CAPITAL (a) Shareholders' equity $ (b) Aggregate book value of intangible assets $ (c) Tangible Net Worth -- Line (a) minus Line (b) $ (d) MINIMUM TANGIBLE NET WORTH REQUIRED $175,000,000.00 - ----------------------------------------------------------------------------------------
Table 3 -------
- ---------------------------------------------------------------------------------------- COVENANT AT END OF SUBJECT PERIOD - ---------------------------------------------------------------------------------------- 7.5 DEBT TO TOTAL CAPITAL (a) Total amount of interest bearing indebtedness $ (b) Shareholders' equity $ (c) Line (a) plus Line (b) $ (e) Ratio of Line (a) to Line (c) _____ to 1.00 (f) Maximum Ratio Allowed 0.55 to 1.00 - ----------------------------------------------------------------------------------------
- 24 - EX-21.1 10 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 The Company wholly owns Seafirst Merchant Services, Inc., a corporation existing under the laws of the State of Delaware. EX-23.1 11 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-20195) pertaining to the Long Term Incentive Plan of BA Merchant Services, Inc. of our report dated February 10, 1997, except for Note 6 as to which the date is March 5, 1997, with respect to the consolidated financial statements of BA Merchant Services, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. March 27, 1997 EX-24.1 12 POWERS OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY ----------------- I hereby appoint SUSAN LAU and CHERYL SOROKIN, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as a Director of BA Merchant Services, Inc. and file with the Securities and Exchange Commission the Corporation's Form 10-K annual report for 1996, and any amendments. DATED: March 20, 1997 /s/William E. Fisher -------------------- William E. Fisher POWER OF ATTORNEY ----------------- I hereby appoint SUSAN LAU and CHERYL SOROKIN, and each of them, my attonorneys-in-fact, each with full power of substitution, to sign for me as a Director of BA Merchant Services, Inc. and file with the Securities and Exchange Commission the Corporation's Form 10-K annual report for 1996, and any amendments. DATED: March 20, 1997 -- /s/James G. Jones ----------------- James G. Jones POWER OF ATTORNEY ----------------- I hereby appoint SUSAN LAU and CHERYL SOROKIN, and each of them, my attoneys-in-fact, each with full power of substitution, to sign for me as a Director and Chairman of the Board of BA MErchant Services, Inc. and file with the Securities and Exchange Commission the Corporation's Form 10-K annual report for 1996, and any amendments. DATED: March 20, 1997 -- /s/Thomas E. Peterson ------------------------ Thomas E. Peterson Chairman of the Board POWER OF ATTORNEY ----------------- I hereby appoint SUSAN LAU and CHERYL SOROKIN, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as a Director of BA Merchant Services, Inc. and file with the Securities and Exchange Commission the Corporation's Form 10-K annual report for 1996, and any amendments. DATED: March 19, 1997 /s/Barbara J. Desoer -------------------- Barbara J. Desoer POWER OF ATTORNEY ----------------- I hereby appoint SUSAN LAU and CHERYL SOROKIN, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as a Director of BA Merchant Services, Inc. and Corporation's Form 10-K annual report for 1996, and any amendments. DATED: March 20, 1997 -- /s/Donald R. Dixon ------------------ Donald R. Dixon POWER OF ATTORNEY ----------------- I hereby appoint SUSAN LAU and CHERYL SOROKIN, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as a Director President and Chief Executive Officer of BA Merchnt Services, Inc. and file with the Securities and Exchange Commission the Corporation's Form 10-K annual report for 1996, and any amendments. DATE: March 19, 1997 -- /s/Sharif M. Bayyari ---------------------- Sharif M. Bayyari President and Chief Executive Officer POWER OF ATTORNEY ----------------- I hereby appoint SUSAN LAU and CHERYL SOROKIN, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as Executive Vice President, Chief Financial Officer and Treasurer of BA Merchant Services, Inc. and file with the Securities and Exchange Commission the Corporation's Form 10-K annual report for 1996, and any amendments. DATED: March 19, 1997 -- /s/James H. Williams ---------------------------- James H. Williams Executive Vice President, Chief Financial Officer, and Treasurer EX-27.1 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FROM PAGES 24 THROUGH 38 OF THE FORM 10-K. 1,000 12-MOS 12-MOS DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 138,398 345 0 0 123,085 95,933 0 0 0 0 261,483 96,278 47,719 37,354 (30,959) (22,876) 286,721 116,003 28,358 13,943 0 0 0 0 0 0 464 0 0 0 286,721 116,003 0 0 126,215 109,928 0 0 0 0 83,760 74,699 0 0 430 0 0 0 17,356 14,573 24,669 20,656 0 0 0 0 0 0 24,669 20,656 0 0 0 0
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