<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): September 24, 1998
NOVA CORPORATION
(Exact Name of Registrant as Specified in Charter)
Georgia 1-14342 58-2209575
(State or Other Jurisdiction (Commission File No.) (IRS Employer
of Incorporation) Identification No.)
One Concourse Parkway, Suite 300, Atlanta, Georgia 30328
(Address of Principal Executive Offices) (Zip Code)
(770) 396-1456
(Registrant's telephone number, including area code)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
The following financial statements of PMT Services, Inc. required
to be filed with the Commission pursuant to this Item 7(a) are
included in Exhibit 99 attached hereto and are incorporated by
reference herein:
Report of Independent Accountants;
Consolidated Balance Sheets at July 31, 1997 and July 31, 1998;
Consolidated Statements of Income, each of the three years
ended July 31, 1998;
Consolidated Statements of Changes in Shareholders' Equity,
each of the three years ended July 31, 1998;
Consolidated Statements of Cash Flows, each of the three years
ended July 31, 1998;
Notes to Consolidated Financial Statements
(c) Exhibits.
23 Consent of PricewaterhouseCoopers LLP relating to the
audited financial statements of PMT Services, Inc.
27.1 Restated Financial Data Schedule for NOVA Corporation for
the Year Ended December 31, 1995
27.2 Restated Financial Data Schedule for NOVA Corporation for
the Year Ended December 31, 1996
27.3 Restated Financial Data Schedule for NOVA Corporation for
the Three Months Ended March 31, 1997
27.4 Restated Financial Data Schedule for NOVA Corporation for
the Six Months Ended June 30, 1997
27.5 Restated Financial Data Schedule for NOVA Corporation for
the Nine Months Ended September 30, 1997
27.6 Restated Financial Data Schedule for NOVA Corporation for
the Year Ended December 31, 1997
27.7 Restated Financial Data Schedule for NOVA Corporation for
the Three Months Ended March 31, 1998
27.8 Restated Financial Data Schedule for NOVA Corporation for
the Six Months Ended June 30, 1998
99 Consolidated Financial Statements of PMT Services, Inc.
-2-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NOVA CORPORATION
(Registrant)
/s/ James M. Bahin
---------------------------------------------------------
James M. Bahin
Vice Chairman of the Board, Chief Financial and Secretary
Duly Authorized Officer
Date: December 8, 1998
-3-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
23 Consent of PricewaterhouseCoopers LLP relating to the
audited financial statements of PMT Services, Inc.
27.1 Restated Financial Data Schedule for NOVA Corporation for the
Year Ended December 31, 1995
27.2 Restated Financial Data Schedule for NOVA Corporation for the
Year Ended December 31, 1996
27.3 Restated Financial Data Schedule for NOVA Corporation for the
Three Months Ended March 31, 1997
27.4 Restated Financial Data Schedule for NOVA Corporation for the
Six Months Ended June 30, 1997
27.5 Restated Financial Data Schedule for NOVA Corporation for the
Nine Months Ended September 30, 1997
27.6 Restated Financial Data Schedule for NOVA Corporation for the
Year Ended December 31, 1997
27.7 Restated Financial Data Schedule for NOVA Corporation for the
Three Months Ended March 31, 1998
27.8 Restated Financial Data Schedule for NOVA Corporation for the
Six Months Ended June 30, 1998
99 Consolidated Financial Statements of PMT Services, Inc.
-4-
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-64681 and 333-64683) of NOVA Corporation of our
report dated September 25, 1998 relating to the consolidated financial
statements of PMT Services, Inc., which appears in the Current Report on
Form 8-K/A of NOVA Corporation dated December 8, 1998.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Nashville, Tennessee
December 8, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,939
<SECURITIES> 0
<RECEIVABLES> 43,568
<ALLOWANCES> 1,457
<INVENTORY> 2,212
<CURRENT-ASSETS> 36,039
<PP&E> 20,767
<DEPRECIATION> 7,901
<TOTAL-ASSETS> 150,153
<CURRENT-LIABILITIES> 38,995
<BONDS> 0
0
33,571
<COMMON> 234
<OTHER-SE> 26,142
<TOTAL-LIABILITY-AND-EQUITY> 150,153
<SALES> 285,779
<TOTAL-REVENUES> 285,779
<CGS> 216,143
<TOTAL-COSTS> 216,143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,514
<INCOME-TAX> (751)
<INCOME-CONTINUING> 11,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,265
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 150,763
<SECURITIES> 0
<RECEIVABLES> 62,824
<ALLOWANCES> 4,366
<INVENTORY> 2,205
<CURRENT-ASSETS> 194,559
<PP&E> 26,830
<DEPRECIATION> 9,689
<TOTAL-ASSETS> 341,323
<CURRENT-LIABILITIES> 49,164
<BONDS> 0
0
0
<COMMON> 766
<OTHER-SE> 267,374
<TOTAL-LIABILITY-AND-EQUITY> 341,323
<SALES> 520,417
<TOTAL-REVENUES> 520,417
<CGS> 400,077
<TOTAL-COSTS> 400,077
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 30,050
<INCOME-TAX> 10,904
<INCOME-CONTINUING> 19,148
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,148
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.32
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 144,210
<SECURITIES> 0
<RECEIVABLES> 68,330
<ALLOWANCES> 4,637
<INVENTORY> 2,316
<CURRENT-ASSETS> 193,194
<PP&E> 31,013
<DEPRECIATION> 11,098
<TOTAL-ASSETS> 354,845
<CURRENT-LIABILITIES> 55,256
<BONDS> 0
0
0
<COMMON> 774
<OTHER-SE> 273,249
<TOTAL-LIABILITY-AND-EQUITY> 354,845
<SALES> 149,486
<TOTAL-REVENUES> 149,486
<CGS> 115,104
<TOTAL-COSTS> 115,104
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,879
<INCOME-TAX> 4,141
<INCOME-CONTINUING> 7,738
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,738
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 47,090
<SECURITIES> 72,394
<RECEIVABLES> 79,054
<ALLOWANCES> 5,836
<INVENTORY> 2,178
<CURRENT-ASSETS> 250,598
<PP&E> 26,719
<DEPRECIATION> 4,629
<TOTAL-ASSETS> 364,383
<CURRENT-LIABILITIES> 58,498
<BONDS> 0
0
0
<COMMON> 768
<OTHER-SE> 282,031
<TOTAL-LIABILITY-AND-EQUITY> 364,383
<SALES> 307,623
<TOTAL-REVENUES> 307,623
<CGS> 234,554
<TOTAL-COSTS> 234,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,806
<INCOME-TAX> 9,030
<INCOME-CONTINUING> 15,676
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,676
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 30,675
<SECURITIES> 68,040
<RECEIVABLES> 80,465
<ALLOWANCES> 5,937
<INVENTORY> 2,435
<CURRENT-ASSETS> 160,711
<PP&E> 41,119
<DEPRECIATION> 14,331
<TOTAL-ASSETS> 372,929
<CURRENT-LIABILITIES> 59,546
<BONDS> 0
0
0
<COMMON> 776
<OTHER-SE> 291,991
<TOTAL-LIABILITY-AND-EQUITY> 372,929
<SALES> 476,315
<TOTAL-REVENUES> 476,315
<CGS> 362,438
<TOTAL-COSTS> 362,438
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 40,196
<INCOME-TAX> 14,307
<INCOME-CONTINUING> 25,889
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,889
<EPS-PRIMARY> $0.40
<EPS-DILUTED> $0.39
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 75,991
<SECURITIES> 0
<RECEIVABLES> 57,749
<ALLOWANCES> 2,822
<INVENTORY> 3,052
<CURRENT-ASSETS> 152,198
<PP&E> 46,789
<DEPRECIATION> 16,024
<TOTAL-ASSETS> 426,434
<CURRENT-LIABILITIES> 65,335
<BONDS> 0
0
0
<COMMON> 650
<OTHER-SE> 303,931
<TOTAL-LIABILITY-AND-EQUITY> 426,434
<SALES> 680,872
<TOTAL-REVENUES> 680,872
<CGS> 519,387
<TOTAL-COSTS> 519,387
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 58,461
<INCOME-TAX> 20,562
<INCOME-CONTINUING> 37,899
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,899
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.58
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 21,315
<SECURITIES> 39,257
<RECEIVABLES> 47,031
<ALLOWANCES> 5,513
<INVENTORY> 5,981
<CURRENT-ASSETS> 147,449
<PP&E> 64,590
<DEPRECIATION> 19,512
<TOTAL-ASSETS> 500,283
<CURRENT-LIABILITIES> 82,234
<BONDS> 0
0
0
<COMMON> 810
<OTHER-SE> 320,347
<TOTAL-LIABILITY-AND-EQUITY> 500,283
<SALES> 240,542
<TOTAL-REVENUES> 240,542
<CGS> 183,313
<TOTAL-COSTS> 183,313
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,257
<INCOME-TAX> 5,570
<INCOME-CONTINUING> 10,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,687
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 130,837
<SECURITIES> 13,680
<RECEIVABLES> 119,342
<ALLOWANCES> 6,947
<INVENTORY> 6,700
<CURRENT-ASSETS> 244,856
<PP&E> 77,728
<DEPRECIATION> 22,448
<TOTAL-ASSETS> 614,801
<CURRENT-LIABILITIES> 93,918
<BONDS> 0
0
0
<COMMON> 869
<OTHER-SE> 473,499
<TOTAL-LIABILITY-AND-EQUITY> 531,116
<SALES> 516,706
<TOTAL-REVENUES> 516,706
<CGS> 393,891
<TOTAL-COSTS> 393,891
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 36,858
<INCOME-TAX> 13,220
<INCOME-CONTINUING> 23,638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,638
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
</TABLE>
<PAGE>
EXHIBIT 99
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants................................................... 2
Consolidated Balance Sheets at July 31, 1997 and July 31, 1998...................... 3
Consolidated Statements of Income, each of the three years ended July 31, 1998...... 4
Consolidated Statements of Changes in Shareholders' Equity, each of the three
years ended July 31, 1998......................................................... 5
Consolidated Statements of Cash Flows, each of the three years ended July 31, 1998.. 6-7
Notes to Consolidated Financial Statements.......................................... 8-28
</TABLE>
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
September 25, 1998
To the Board of Directors
and Shareholders of PMT Services, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in shareholders' equity
and of cash flows present fairly, in all material respects, the financial
position of PMT Services, Inc. and its subsidiaries at July 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended July 31, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/S/PricewaterhouseCoopers LLP
Nashville, TN
2
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 26,084,161 $ 42,745,725
Investments............................................ 49,167,521 --
Accounts receivable.................................... 19,552,245 36,082,594
Current portion of net investment in finance leases.... 9,249,753 10,945,126
Inventory.............................................. 1,896,380 3,168,321
Deferred income taxes.................................. 1,543,379 2,350,683
Other current assets................................... 2,061,295 3,747,476
------------ ------------
Total current assets.................................. 109,554,734 99,039,925
Purchased merchant portfolios, net of accumulated
amortization of $18,689,846 and $30,654,918........... 84,343,006 103,966,442
Long-term portion of net investment in finance leases.. 24,636,881 31,385,683
Property and equipment, net............................ 9,747,565 18,096,161
Long-term note receivable.............................. 8,773,330 13,707,158
Deferred income taxes.................................. -- 285,200
Intangible and other assets............................ 18,848,234 21,137,228
------------ ------------
Total assets.......................................... $255,903,750 $287,617,797
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................... $ 14,611,730 $ 12,536,716
Accounts payable....................................... 9,814,645 17,515,946
Accrued liabilities.................................... 10,210,055 10,039,304
Deferred revenues...................................... 291,493 1,143,139
------------ ------------
Total current liabilities............................. 34,927,923 41,235,105
Long-term debt......................................... 18,705,236 20,417,670
Deferred income taxes.................................. 624,777 --
------------ ------------
Total liabilities..................................... 54,257,936 61,652,775
------------ ------------
Shareholders' equity:
Preferred stock, $0.01 par value, authorized:
10,000,000 shares; no shares issued or outstanding
Common stock, $0.01 par value, authorized:
100,000,000 shares; issued and outstanding:
50,326,918 and 52,655,884 shares..................... 503,269 526,559
Additional paid-in capital.............................. 171,202,596 173,445,394
Accumulated earnings.................................... 29,939,949 51,993,069
------------ ------------
201,645,814 225,965,022
------------ ------------
Commitments and contingent liabilities (Notes 13
and 16)
Total liabilities and shareholders' equity............ $255,903,750 $287,617,797
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended July 31,
-------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Revenues............................... $263,450,166 $355,010,297 $460,711,529
Cost of revenues....................... 188,423,042 254,386,573 324,344,602
------------ ------------ ------------
Gross margin....................... 75,027,124 100,623,724 136,366,927
------------ ------------ ------------
Selling, general and administrative
expenses........................... 42,595,060 49,013,409 64,206,728
Depreciation and amortization expense.. 8,012,663 12,944,769 17,569,290
Provision for merchant loss and bad
debt expense....................... 5,054,115 6,494,017 5,411,417
Non-recurring operating expense........ -- 593,626 --
------------ ------------ ------------
55,661,838 69,045,821 87,187,435
------------ ------------ ------------
Income from operations................. 19,365,286 31,577,903 49,179,492
Interest income........................ 2,108,283 5,260,915 4,479,708
Interest expense....................... (4,053,473) (4,105,081) (2,650,472)
Other income (expense), net............ 599,279 (2,579,611) (3,848,218)
------------ ------------ ------------
Income before provision for income
taxes.............................. 18,019,375 30,154,126 47,160,510
Provision for income taxes............. 6,138,504 9,639,747 16,080,491
------------ ------------ ------------
Net income......................... $ 11,880,871 $ 20,514,379 $ 31,080,019
============ ============ ============
Earnings per share - basic.............. $ 0.28 $ 0.42 $ 0.60
============ ============ ============
Earnings per share - diluted............ $ 0.27 $ 0.41 $ 0.59
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED TOTAL
COMMON PAID-IN TREASURY EARNINGS SHAREHOLDERS'
STOCK CAPITAL STOCK (DEFICIT) EQUITY
-------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1995................ $120,090 $ 26,062,286 $ (68,500) $ 7,816,673 $ 33,930,549
Shares issued......................... 58,520 140,746,488 140,805,008
Stock options exercised............... 448 157,659 158,107
Stock splits.......................... 299,295 (299,295) --
Tax benefit from non-qualified stock
options............................ 318,144 318,144
Purchase of treasury stock............ (2,093,152) (2,093,152)
Reissuance of treasury stock.......... (68,500) 68,500 --
Minority shareholders' contribution... 120,000 120,000
Martin Howe fiscal year conversion.... (356,914) (356,914)
Distributions of Subchapter S
Corporations, prior to poolings..... (1,504,242) (1,504,242)
Net income for the year............... 11,880,871 11,880,871
-------- ------------ ----------- ----------- -------------
Balance at July 31, 1996................ 478,353 166,916,782 (2,093,152) 17,956,388 183,258,371
Shares issued......................... 10 14,844 14,854
Stock options exercised............... 3,695 771,034 774,729
Tax benefit from non-qualified
stock options....................... 1,986,174 1,986,174
August 1996 pooling................... 5,000 (4,000) (115,762) (114,762)
March 1997 pooling.................... 8,000 (7,000) 141,303 142,303
May 1997 pooling...................... 16,000 1,074,821 213,098 1,303,919
Cancellation of treasury stock........ (7,789) (72,624) 2,093,152 (2,012,739) --
Minority shareholders'
contribution....................... 522,565 522,565
Distributions of Subchapter S
Corporations, prior to
poolings........................... (6,756,718) (6,756,718)
Net income for the year............... 20,514,379 20,514,379
-------- ------------ ----------- ----------- -------------
Balance at July 31, 1997................ 503,269 171,202,596 -- 29,939,949 201,645,814
Shares issued........................... 14 20,915 20,929
Stock warrants exercised................ 1,200 148,800 150,000
Stock options exercised................. 1,035 761,327 762,362
Tax benefit from non- qualified
stock options......................... 1,064,470 1,064,470
September 1997 pooling.................. 2,327 (143,994) (141,667)
November 1997 pooling................... 12,064 87,936 666,353 766,353
February 1998 pooling................... 6,650 159,350 (2,799,459) (2,633,459)
Distributions of Subchapter S
Corporations, prior to
poolings.............................. (6,749,799) (6,749,799)
Net income for the year................. 31,080,019 31,080,019
-------- ------------ ----------- ----------- -------------
Balance at July 31, 1998................ $526,559 $173,445,394 $ -- $51,993,069 $225,965,022
======== ============ =========== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended July 31,
---------------------------------------------
1996 1997 1998
--------------- ------------- -------------
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net income.......................................................... $ 11,880,871 $ 20,514,379 $ 31,080,019
Martin-Howe fiscal year conversion................................. (356,914) -- --
Adjustments:
Depreciation and amortization expense............................. 8,549,490 13,552,412 17,745,569
Provision for merchant losses and bad debt expense................ 5,054,115 6,494,017 5,411,417
Deferred income taxes............................................. (306,163) (954,971) (1,717,281)
Changes in assets and liabilities, excluding the effects of
non-restated acquisitions:
Accounts receivable............................................ (3,511,693) (9,613,693) (14,220,220)
Inventory....................................................... (90,459) (314,031) (1,055,523)
Other assets.................................................... 32,958 (6,886,597) (3,315,845)
Accounts payable............................................. (16,136) 4,095,716 5,611,281
Accrued liabilities............................................. 814,907 (2,013,289) (2,661,005)
Deferred revenues............................................ (59,105) (46,987) (318,743)
------------ ------------ ------------
Net cash provided by operating activities..................... 21,991,871 24,826,956 36,559,669
Cash flows from investing activities:
Purchase of merchant portfolios................................... (32,036,760) (33,393,964) (28,124,385)
Purchase of property and equipment, net........................... (2,819,157) (5,424,563) (11,792,927)
Purchase of equipment for leasing................................. (20,865,015) (19,296,806) (25,273,761)
Purchase of (proceeds from) matured investments................... -- (49,167,521) 49,167,521
Proceeds from receivable securitization........................... -- 1,076,317 --
Amounts received on leases, net of amortized
unearned income............................................. 12,252,928 14,042,820 13,948,966
------------ ------------ ------------
Net cash used in investing activities......................... (43,468,004) (92,163,717) (2,074,586)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.......................... 36,017,752 34,188,572 19,660,865
Payments on long-term debt........................................ (46,363,034) (38,137,335) (26,734,048)
Proceeds from issuance of common stock............................ 140,963,115 789,583 933,291
Issuance of long-term note receivable............................. -- (8,773,330) (4,933,828)
Payments to repurchase treasury stock............................. (629,463) -- --
Proceeds from minority shareholders' contributions................ 120,000 -- --
Distributions of Subchapter S Corporations........................ (1,504,242) (5,083,074) (6,749,799)
------------ ------------ ------------
Net cash provided by (used in) financing activities........... 128,604,128 (17,015,584) (17,823,519)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.................. 107,127,995 (84,352,345) 16,661,564
Cash and cash equivalents at beginning of year........................ 3,308,511 110,436,506 26,084,161
------------ ------------ ------------
Cash and cash equivalents at end of year.............................. $110,436,506 $ 26,084,161 $ 42,745,725
============ ============ ============
6
</TABLE>
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
Year ended July 31,
---------------------------------------
1996 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for income taxes......................... $5,465,514 $9,412,556 $16,579,615
Cash paid for interest............................. 3,453,909 3,565,659 2,487,316
</TABLE>
Supplemental schedule of noncash activities:
In connection with the purchase of merchant portfolios in fiscal 1996, 1997
and 1998, the Company issued promissory notes totaling $80,500, $433,100 and
$157,000, respectively. In addition, the Company issued a warrant during fiscal
1997 to purchase 10,000 shares of common stock at $17.00 per share in
conjunction with the purchase of residual agency rights.
The Company recognized a tax benefit of $318,144, $1,986,174 and $1,064,470
for the years ended July 31, 1996, 1997 and 1998, respectively, for the excess
of the fair market value at the exercise date over that at the award date for
stock options exercised.
Prior to acquisition, an operating business purchased approximately 550,000
shares of treasury stock in exchange for notes payable totaling $1,463,689 in
fiscal 1996.
Prior to acquisition, an operating business sold its office building in
fiscal 1997 to an entity owned by shareholders of the acquired operating
business. The buyer assumed the note payable of $846,972 and issued the
acquired operating business a promissory note in the amount of $420,184.
Prior to acquisition, an operating business issued a note payable in fiscal
1997 to its majority shareholder in the amount of $1,673,644 related to a
distribution of accumulated earnings.
In connection with three separate operating business acquisitions in fiscal
1997 and three separate operating business acquisitions in fiscal 1998, the
Company issued 2,900,000 and 2,104,076 shares of common stock, respectively.
The acquisitions were accounted for as poolings of interests, but were not
material for restatement.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations
PMT Services, Inc. (the "Company") markets and services electronic credit
card authorization and payment systems to merchants, including sale and leasing
of related equipment. The Company provides these services to merchants pursuant
to contracts between the Company and various processing banks. Generally, the
Company's agreements with the processing banks contain certain aspects of both
marketing and service. Although the marketing portion of the agreements is
limited as to time, the service portion of substantially all of these agreements
is not. The marketing aspects expire at various dates unless renewed
automatically, if applicable, or extended by the parties. There can be no
assurance that PMT's contractual arrangements with its processing banks will be
renewed or that PMT will be able to obtain favorable replacement arrangements,
whether upon expiration, termination or otherwise.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All material intercompany balances and
transactions are eliminated.
Basis of presentation
Certain financial statement items, in prior periods, have been reclassified
to conform to the current year's presentation. The consolidated financial
statements give retroactive effect to certain acquisitions of operating
businesses which were accounted for as poolings of interests (Note 3).
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and cost recognition
Revenues derived from the electronic processing of transactions (merchant
discount rate and related fees) on the credit card authorization equipment are
recognized at the time the merchants' transactions are processed. Related
commission expense and processing charges are also recognized at that time.
8
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenues related to the direct sale of credit card authorization equipment
are recognized when the equipment is shipped. Installation fees related to both
the direct sale and the marketing of this equipment are recognized when
installation is completed. Fees received in advance of shipment or installation
are not recognized as revenue until earned.
Revenue related to direct finance leasing of point-of-sale processing
equipment are recognized over the term of the lease agreement using the
effective interest method.
Cost of revenues includes interchange fees paid to the credit card-issuing
bank and fees paid to the network service provider, VISA and MasterCard and the
processing bank. These costs are recognized at the time the merchants'
transactions are processed and the related revenue is recorded.
The Company recognizes as revenue in its statement of income the full
discount rate and fees collected from its merchants. The various costs incurred
by the Company, including amounts paid to the card-issuing bank, the processor
and network service provider, are reflected as costs of revenues. In accordance
with the Company's contracts with its processing banks, all of the funds
collection and most of the disbursement function is performed on behalf of the
Company by its processing banks. At month end, the processing banks collect the
total discount rate and fees from its merchants and disburse to each of the
service providers their fees. Disbursements for the interchange fee paid to the
card-issuing banks are made daily. Shortly after month end, the processing
banks disburse to the Company the remainder of the funds collected from its
merchants which represents a significant portion of the Company's gross margin.
Cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Investments
The Company's investments of $49,167,521 at July 31, 1997 are in United
States Government Treasury notes for a term less than one year. These
investments are classified as held-to-maturity according to Statement of
Financial Accounting Standard No. 115 - Accounting for Certain Debt and Equity
Securities (SFAS No. 115) and carried at amortized cost as determined by
specific identification. The fair value of these investments was $49,198,891 at
July 31, 1997. No investments were outstanding at July 31, 1998.
9
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Financial instruments
The Company has various financial instruments, including cash, time
deposits, receivables, accounts payable, revolving credit facilities, accrued
liabilities and notes payable. Cash, time deposits, receivables, accounts
payable and accrued liabilities are settled within a year and are not subject to
market rate fluctuations. Revolving credit facilities are at variable
market rates. The carrying value of these financial instruments approximates
their fair market values. Notes payable with a carrying amount of $33,316,966
at July 31, 1997 and $32,954,386 at July 31, 1998 had a market value of
$33,963,585 and $33,141,887, respectively, using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Accounts receivable
Accounts receivable primarily comprise amounts due from processing banks
which represent the discount rate and fees earned, after related interchange
fees and other processing costs, on transactions processed during the month
ending on the balance sheet date. Such balances are received from processing
banks approximately 20 days following the end of each month.
Financing leases
The Company provides direct financing leases and sales-type leases to its
customers. The significant difference between the two types of leases is dealer
profit recognized by the Company in a sales-type lease. At inception of a lease
of point-of-sale equipment, the Company records an investment in direct
financing leases which is equal to the total of future lease rentals and the
estimated residual value of the leased equipment, less unearned income. The
unearned income is the difference between the cost of the equipment and the
total of future lease rentals plus the estimated residual value of the leased
equipment. Residual value is the estimated proceeds from the sale or lease of
the asset at the end of the lease term. Amortization of unearned income is
recorded on the effective interest method. The Company's investment in
financing leases is reduced by an allowance for rental payments that are
expected to be uncollectible.
Inventory
Inventory of credit card authorization equipment is stated at the lower of
cost or market, with cost being determined by specific identification.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed
using straight-line and accelerated methods over the estimated useful lives of
the assets ranging from 3 to 10 years.
10
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Purchased merchant portfolios
Purchased merchant portfolios are recorded at acquired cost and amortized
on a straight-line basis over 10 years. Management evaluates purchased merchant
portfolios and other long-lived assets, including goodwill, for impairment at
each balance sheet date through review of projected undiscounted cash flows in
relation to the unamortized cost of each long-lived asset. If upon review, an
impairment of the value of the long-lived asset is indicated, amortization will
be accelerated to recognize the diminution in value.
Reserve for chargebacks and merchant fraud
Disputes between a cardholder and a merchant periodically arise as a result
of cardholder dissatisfaction with merchandise quality or merchant services and
the disputes may not be resolved in the merchant's favor. In these cases, the
transaction is "charged back" to the merchant and the purchase price is refunded
by the merchant. If the merchant is unable to grant a refund, the Company or,
under limited circumstances, the Company and the processing bank, must bear the
credit risk for the full amount of the transaction. The Company evaluates its
risk and estimates its potential loss for chargebacks based on historical
experience. A provision for these estimated losses is provided in the same
period as the related revenues.
Income taxes
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. The tax benefit of deductible temporary differences
is reflected within the various components of deferred tax assets and recognized
if the realization thereof is more likely than not (Note 15).
Earnings per share
Earnings per share for fiscal 1996, 1997 and 1998 is calculated based on
the following number of weighted average shares of common stock outstanding:
Year Ended Year Ended Year Ended
July 31, 1996 July 31, 1997 July 31, 1998
------------- ------------- -------------
Basic 41,905,903 48,541,821 51,854,652
Diluted 43,284,835 49,723,254 53,110,041
The difference between basic and diluted earnings per share is attributable
to stock options and warrants.
11
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock splits
On May 17, 1996, the Board of Directors approved a three-for-two stock
split to be effected in the form of a stock dividend. The stock split was
effective for shareholders of record at the close of business on May 28, 1996.
The earnings per share information included in the consolidated financial
statements has been adjusted to give retroactive effect to the stock split
during fiscal 1996. Additionally, all share information stated in Note 10 has
been adjusted to give retroactive effect to the stock split.
NOTE 2 - STOCK OFFERINGS:
In October 1995, the Company consummated a public offering of 2,156,250
shares of common stock, 1,931,250 of which were offered by the Company. The
Company received net proceeds of approximately $41 million, after deducting
underwriting discounts and commissions and expenses of the offering, and repaid
all borrowings outstanding under its revolving line of credit.
The Company offered 3,910,000 shares of its common stock in another public
offering consummated in April 1996. The Company received net proceeds of
approximately $100 million after deducting underwriting discounts and
commissions and expenses of the offering.
NOTE 3 - ACQUISITIONS:
Operating Business Acquisitions
During fiscal 1996, the Company began issuing common stock to acquire
businesses with both existing merchant portfolios and sales organizations
capable of generating new accounts.
In the three years ended July 31, 1998, the Company consummated 15
operating business acquisitions by issuing common stock in exchange for all of
the outstanding common stock of the companies acquired. These transactions were
accounted for as poolings of interests. These consolidated financial statements
have been prepared to reflect the restatement of all periods presented. Nine of
these transactions were considered material for restatement of prior period
consolidated financial statements and are summarized below:
12
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company Acquired Date Shares Issued
- ---------------- ---- -------------
Martin-Howe Associates (MHA) July 1, 1996 594,011
Fairway Marketing Group (Fairway) December 23, 1996 424,999
Bancard Systems, Inc. (BSI) January 27, 1997 3,131,250
Retail Payment Services, Inc. (RPS) January 30, 1997 567,519
Eric Krueger, Inc. (Krueger) June 3, 1997 579,000
LADCO Financial Group (LFG) July 14, 1997 1,463,414
Bancard, Inc. (BCI) October 2, 1997 3,870,968
MBN National, Inc. (MBN) May 14, 1998 987,500
Superior Bankcard Service, Inc. (Superior) July 30, 1998 3,720,930
PMT's consolidated financial statements have been restated to include the
accounts of the above named entities for all periods presented by including the
historical results of these entities. The historical results of these nine
pooled entities reflect each of their actual operating cost structures and, as a
result, do not necessarily reflect the cost structure of the newly combined
entity. Significant, unusual or non-recurring costs affecting fiscal 1996
operating results of the pooled entities include a single fraud loss of
$890,000, recognition of $400,000 in asset impairment and executive bonuses of
$330,000. In addition, a pooled entity incurred a separate fraud loss of
$2,300,000 which impacted fiscal 1996 and 1997. Although PMT incurs merchant
fraud losses each year and recognizes an accrual each year for such
possibilities, the Company's annual loss experience historically has been
significantly less than the loss referred to above. The historical results do
not purport to be indicative of results which may occur in the future.
MHA had a calendar year end and, accordingly, the MHA statement of income
for the year ended December 31, 1995 has been combined with the Company's
statement of income for the fiscal year ended July 31, 1996. In order to
conform MHA's year end to the Company's fiscal year end, results of operations
for MHA for the six-month period ended June 30, 1996 have been excluded from the
consolidated statement of income for the fiscal year ended July 31, 1996.
Accordingly, an adjustment has been made in fiscal 1996 to retained earnings for
the exclusion of the net loss of $356,914 for such six-month period. MHA's
results of operations for this six-month period include revenues of $10,743,645,
expenses of $11,022,698 and net loss before provision of income taxes of
$279,053.
Fairway, RPS, Krueger, Bancard, MBN and Superior were Subchapter S
Corporations for income tax purposes; therefore, these entities did not pay U.S.
federal income taxes. These entities will be included in the Company's U.S.
federal income tax return effective from the date of each merger.
13
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Separate revenues, net income (loss) and related earnings per share amounts
of the acquired operating businesses for the periods prior to each of the
mergers are presented in the following table. In addition, the table includes
unaudited pro forma net income and earnings per share amounts which reflect pro
forma adjustments to present income taxes on the basis on which they will be
reported in future periods.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 31, 1996 July 31, 1997 July 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
PMT $136,254,139 $240,756,047 $412,187,516
MHA 13,585,887 -- --
Fairway 19,524,072 7,125,352 --
BSI 21,540,196 12,218,404 --
LFG 11,008,144 12,881,617 --
BCI 31,851,486 40,827,025 8,164,612
MBN 8,788,388 12,651,402 11,838,203
Superior 7,919,066 17,318,438 28,521,198
Other 12,978,788 11,232,012 --
------------ ------------ ------------
Revenues, as reported $263,450,166 $355,010,297 $460,711,529
============ ============ ============
Net income (loss):
PMT $ 8,952,399 $ 13,805,887 $ 25,423,076
MHA (327,023) -- --
Fairway (858,125) 183,262 --
BSI 287,669 745,665 --
LFG 1,024,212 1,318,778 --
BCI 1,179,624 2,655,698 850,848
MBN (118,164) (1,041,022) 897,119
Superior 593,868 2,500,951 3,908,976
Other 1,146,411 345,160 --
------------ ------------ ------------
Net income, as reported 11,880,871 20,514,379 31,080,019
Pro forma tax effect of Subchapter
S Corporations (754,417) (1,798,811) (2,325,568)
------------ ------------ ------------
Pro forma net income $ 11,126,454 $ 18,715,568 $ 28,754,451
============ ============ ============
Earnings per share basic:
As reported $ 0.28 $ 0.42 $ 0.60
Pro forma $ 0.27 $ 0.39 $ 0.55
Earnings per share diluted:
As reported $ 0.27 $ 0.41 $ 0.59
Pro forma $ 0.26 $ 0.38 $ 0.54
</TABLE>
14
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In addition to these transactions, the Company completed six separate
operating business acquisitions during fiscal 1997 and 1998 with six unrelated
entities by issuing an aggregate of 5,004,076 shares of its common stock in
exchange for all the outstanding stock of the six entities. On an individual
basis these transactions were not considered material for retroactive
restatement of the consolidated financial statements.
Asset Purchases
The Company purchases merchant portfolios which provide the Company the
right to service specific merchants under contract to processing banks for
electronic authorization and payment processing. These acquisitions were
accounted for as purchase transactions, and accordingly, the operating results
of the merchant portfolios are included in the Company's results of operations
from the effective dates of the acquisitions.
In connection with the purchase of merchant portfolios, the Company may
enter into a noncompetition agreement with the sellers of the portfolios. In
such cases, a portion of the purchase price of each merchant portfolio is
allocated to the related noncompetition agreement (Note 7). Amortization
expense related to purchased merchant portfolios was $5,642,084, $8,886,428 and
$11,455,716 in fiscal 1996, 1997 and 1998, respectively.
Third-parties have varying claims, referred to as residual agency rights,
to a portion of the revenue generated from the Company's merchant base. From
time to time the Company offers these third-parties a one-time, lump sum payment
to purchase these residual agency rights. Such payments are accounted for
similar to a merchant base acquisition.
Individually significant purchase transactions are as follows:
Imperial Bank - In October 1995, the Company purchased a merchant portfolio
from Imperial Bank ("Imperial") for $8,650,000 with a portion of the proceeds
from the Company's second public offering.
UMB Bank - In March 1996, the Company purchased a merchant portfolio from
UMB Bank ("UMB") for $13,500,000 with a portion of the proceeds from the
Company's second public offering. Additionally, the Company purchased merchant
equipment inventory from UMB in the transaction.
Unaudited pro forma operating results are presented below to provide
additional information relative to the effect upon the Company's operations of
significant acquisitions. Pro forma information is provided only for
acquisitions meeting certain size and other requirements set forth by the
Securities and Exchange Commission. Each of the above acquisitions meet these
requirements and are included in the unaudited pro forma summary for the periods
specified below. There were no asset purchases which met the significance
requirements in fiscal 1997 and 1998.
15
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Effective Included in
Date of Pro forma Results
Purchases Beginning Fiscal Year
--------- ---------------------
Imperial October 1, 1995 1996
UMB March 1, 1996 1996
These unaudited pro forms results have been prepared for comparative
purposes and do not purport to be indicative of what would have occurred had the
purchases been made at the beginning of fiscal 1996 or of results which may
occur in the future.
Pro Forma
Year Ended
July 31, 1996
-------------
Pro forma revenues $283,781,497
Pro forma net income $ 11,976,182
Pro forma earnings per share - basic $ 0.29
Pro forma earnings per share - diluted $ 0.28
Actual results during fiscal 1997 and 1998 were not materially different than
pro forma results.
NOTE 4 - NET INVESTMENT IN DIRECT FINANCE LEASES:
JULY 31,
---------------------------
1997 1998
------------ ------------
Minimum lease payments...................... $ 48,501,795 $ 56,578,979
Residual values - unguaranteed.............. 5,725,153 8,829,464
Allowance for doubtful accounts............. (2,481,981) (2,967,007)
------------ ------------
Net minimum lease payments receivable....... 51,744,967 62,441,436
Unearned income............................. (17,858,333) (20,110,627)
------------ ------------
Net investment in direct financing leases... $ 33,886,634 $ 42,330,809
============ ============
Changes in the allowance for doubtful accounts were as follows:
Year Ended July 31,
-----------------------------------------
1996 1997 1998
------------ ------------ -----------
Balance at beginning of year $ 1,017,459 $ 1,659,203 $ 2,481,981
Provision for bad debt expense 2,132,542 2,389,962 2,880,620
Charged off lease contracts (1,637,744) (2,043,331) (2,647,390)
Bad debt recoveries 146,946 476,147 251,796
------------ ------------ -----------
Balance at end of year $ 1,659,203 $ 2,481,981 $ 2,967,007
============ ============ ===========
16
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At July 31, 1998, minimum lease payments receivable, including estimated
residual values receivable, are due as follows:
Unguaranteed
Minimum residual
lease payments values
receivable receivable
-------------- ------------
1999 $23,375,055 $ 562,489
2000 17,425,059 2,155,642
2001 11,197,253 2,501,729
2002 4,350,868 3,347,503
Thereafter 230,744 262,101
----------- ----------
$56,578,979 $8,829,464
=========== ==========
The Company's experience indicates a portion of the leases will terminate
at dates other than the end of the contractual lease period. Accordingly, the
foregoing table should not be regarded as a forecast of future collections.
NOTE 5 - PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
JULY 31,
---------------------------
1997 1998
------------- ------------
<S> <C> <C>
Office equipment................................... $10,103,268 $15,039,429
Credit card terminals held for lease............... 4,043,489 10,016,527
Office furniture and fixtures...................... 856,104 1,999,703
Leasehold improvements............................. 265,818 399,785
----------- -----------
15,268,679 27,455,444
Less: accumulated depreciation and amortization.. (5,521,114) (9,359,283)
----------- -----------
$ 9,747,565 $18,096,161
=========== ===========
</TABLE>
In addition to the direct financing leases described in Note 4, the Company
leases point-of-sale terminals to merchants under operating leases on a month-
to-month basis. Depreciation expense on all of the Company's property and
equipment totaled $1,352,369, $2,224,156 and $3,776,788 in fiscal 1996, 1997 and
1998, respectively.
NOTE 6 - NOTE RECEIVABLE:
The Company entered into a leasing arrangement in March 1997 for a portion
of the office space in a building, that serves as the Company's corporate
headquarters, which was substantially completed in September 1997. The Company
has advanced funds to an independent developer who purchased the building and is
responsible for its renovation. The loan provided by the Company has a maximum
available balance of $13,800,000 which bears interest at 5% (comparable to
invested funds), payable monthly in arrears. The loan amount is being advanced
in various draws by the building owner based on certain achieved milestones in
the renovation. The outstanding principal balance at July 31, 1998 is
$13,707,158. The Company's note receivable is secured by a first lien on
17
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the property and has a term of ten years. The Company obtained an independent
appraisal of the property in determining its fair value for the purpose of
classifying the related leasing transaction in accordance with Statement of
Financial Accounting Standards No. 13 "Accounting for Leases." The lease has a
term of ten years and is classified as an operating lease. The Company's
minimum lease commitment related to the property is included in Note 13 -
Leases.
NOTE 7 - INTANGIBLE AND OTHER ASSETS:
July 31,
------------------------
1997 1998
----------- -----------
Noncompetition agreements, net......... $ 4,068,352 $ 3,521,838
Goodwill, net.......................... 382,931 2,322,636
Restricted cash........................ 8,426,160 9,578,759
Notes receivable from shareholders..... 2,981,403 2,025,538
Prepaid processing costs............... 1,307,330 672,648
Deferred finance costs................. 526,666 350,387
Other.................................. 1,155,392 2,665,422
----------- -----------
$18,848,234 $21,137,228
=========== ===========
Intangible and other assets include noncompetition agreements with various
sellers of merchant portfolios purchased by the Company (Note 3).
Amortization expense related to noncompetition agreements was $860,323,
$1,243,676 and $1,396,194 in fiscal 1996, 1997 and 1998, respectively.
Accumulated amortization of noncompetition agreements was $2,947,356 and
$4,343,550 at July 31, 1997 and 1998, respectively.
Amortization expense related to goodwill was $0, $4,304 and $63,426 in
fiscal 1996, 1997 and 1998, respectively. Accumulated amortization of goodwill
was $4,304 and $84,566 at July 31, 1997 and 1998, respectively.
Restricted cash represents funds on deposit with certain processing banks
pursuant to processing agreements to cover potential merchant losses or by
lending institutions pursuant to loan agreements to provide additional
collateral.
In addition to the notes receivable from shareholders above, the Company
loaned $1,600,000 during fiscal 1998 to shareholders that was repaid prior to
July 31, 1998. The loans had market interest rates.
Amortization of deferred finance costs included in interest expense was
$536,827, $607,643 and $176,278 in fiscal 1996, 1997 and 1998, respectively.
Accumulated amortization of deferred finance costs was $2,020,988 and $2,197,266
at July 31, 1997 and 1998, respectively.
18
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 - ACCRUED LIABILITIES:
July 31,
------------------------
1997 1998
----------- -----------
Income taxes payable................ $1,127,754 $2,092,726
Compensation and payroll taxes...... 2,170,076 2,733,504
Reserves for merchant losses........ 5,326,536 3,837,907
Professional services............... 332,560 94,334
Accrued processing costs............ 236,640 134,584
Sales and property taxes payable.... 285,505 327,543
Interest payable on long-term debt.. 82,179 69,056
Other............................... 648,805 749,650
----------- -----------
$10,210,055 $10,039,304
=========== ===========
In addition to the Income taxes payable amounts listed above, at July 31,
1998 an income tax receivable of $811,287 is included in "Other Current Assets."
NOTE 9 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
July 31,
-----------------------
1997 1998
----------- ----------
<S> <C> <C>
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash,
principal and interest at a variable rate based
on the one month Commercial Paper rate then
in effect (6.03% - 6.38% at July 31, 1998), are payable
monthly, with all unpaid principal and interest
due by May 2003........................................... $ 5,258,258 $20,372,632
Notes payable, secured by the remaining payment
stream on certain leases and restricted cash, principal
and interest at rates ranging from 10.11% to 12.21%
per annum are payable monthly, with all unpaid
principal and interest due by April 2000................. 5,084,577 1,243,742
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash, principal
and interest at 7.22% per annum, are payable monthly,
with all unpaid principal and interest due by March 2002.. 18,760,944 11,102,688
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash, principal
and interest at 12.00% per annum are payable monthly,
with all unpaid principal and interest due by
March 1999................................................ 481,204 65,008
</TABLE>
19
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
July 31,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Revolving line of credit obligation (maximum
available balance of $3,000,000), secured by the
remaining payment stream of certain leases and
restricted cash, principal and interest at a variable
rate based on the prime rate (9.5% at July 31, 1997),
are payable monthly, with all unpaid principal and
interest due on demand 1,290,048 --
Revolving line of credit obligation (maximum
available balance of $1,500,000), secured by the
remaining payment stream of certain leases and
restricted cash, principal and interest at a variable
rate based on the prime rate (10.0% at July 31, 1997),
are payable monthly, with all unpaid principal and
interest due by May 1998................................ 346,457 --
Other debts repaid in 1998 or subsequent to
acquisitions............................................ 1,909,583 --
Other..................................................... 185,895 170,316
------------ ------------
Total long-term debt...................................... 33,316,966 32,954,386
Less: current portion.............................. (14,611,730) (12,536,716)
------------ ------------
$ 18,705,236 $ 20,417,670
============ ============
</TABLE>
The Company has a $20,000,000 revolving line of credit agreement. The
current amendment expires January 31, 1999. There were no borrowings
outstanding at July 31, 1997 and 1998. Borrowings, if any, under the new line
of credit facility may be used to finance future purchases of merchant
portfolios and equipment and for general corporate purposes.
Maturities of long-term debt are as follows as of July 31, 1998:
Year Ending
July 31,
-----------
1999 $12,536,716
2000 8,400,675
2001 5,832,956
2002 3,583,696
2003 2,035,050
Thereafter 565,293
-----------
$32,954,386
===========
20
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 - SHAREHOLDERS' EQUITY:
Changes in the shares of the Company's common stock are as follows:
OUTSTANDING AT JULY 31, 1995....... 12,009,008
Shares issued.................... 5,851,961
Exercise of options............. 44,805
Stock dividend................... 29,929,550
----------
OUTSTANDING AT JULY 31, 1996....... 47,835,324
Shares issued.................... 2,900,966
Exercise of options.............. 369,468
Cancellation of treasury shares.. (778,840)
----------
OUTSTANDING AT JULY 31, 1997....... 50,326,918
Shares issued.................... 2,105,519
Exercise of options.............. 103,447
Exercise of warrants............. 120,000
----------
OUTSTANDING AT JULY 31, 1998....... 52,655,884
==========
Shares of common stock issued in operating business acquisitions accounted
for as poolings of interests, for which the financial statements have been
restated, have been reflected as outstanding on a pre-split basis for all
periods presented above.
NOTE 11 - STOCK OPTIONS AND WARRANTS:
The Company has four incentive stock option plans, the 1994 Stock Option
Plan, the 1994 Non-Employee Director Stock Option Plan, the 1997 Executive Stock
Incentive Plan and the 1997 Non-Qualified Stock Option Plan whereby the Company
has reserved for issuance upon exercise of stock options a maximum of 5,145,000
shares of the Company's common stock under these four plans. In addition to
certain other provisions, the plan provides for the option price of the shares
to be determined by the Board of Directors or their designees at the date of the
grant provided, however, that in the case of incentive stock options, the option
price shall be no less than 100% of the fair market value of the common stock on
such date (110% in the case of an individual who owns more than 10% of the total
combined voting power of all classes of stock of the Company). In the case of
nonstatutory stock options, the option price shall be no less than 85% of the
fair market value of the common stock on the date of grant.
The options expire at such times as determined by the Board of Directors at
the time of the grant, which shall be no later than ten years from the grant
date (five years in the case of an individual who owns more than 10% of the
total combined voting power of all classes of stock of the Company). The
Company is authorized to loan, or guarantee loans for, the purchase price of
shares issuable upon exercise of options granted under the plan.
21
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company adopted Statement of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" ("SFAS No. 123") as of August 1, 1996.
The Company has chosen to continue to account for stock-based compensation using
the intrinsic value method permitted in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, the Company does not recognize compensation costs as all options
granted during the three years ended July 31, 1998 were issued at the quoted
market price on the date of grant. If the Company had elected to recognize
compensation costs based on the fair value at grant date of options awarded
during the three years ended July 31, 1998 as prescribed by SFAS No. 123,
net income and earnings per share would have been reduced to the pro forma
amounts indicated in the table below:
1996 1997 1998
----------- ----------- -----------
Net income as reported $11,880,871 $20,514,379 $31,080,019
Pro forma net income 11,248,437 19,153,337 27,827,865
Earnings per share - basic:
As reported $ 0.28 $ 0.42 $ 0.60
Pro forma $ 0.27 $ 0.39 $ 0.54
Earnings per share - diluted:
As reported $ 0.27 $ 0.41 $ 0.59
Pro forma $ 0.26 $ 0.39 $ 0.52
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following assumptions:
1996 1997 1998
---------- ---------- ----------
Expected dividend yield 0% 0% 0%
Expected stock price volatility 42.5% 47.4% 55.8%
Risk-free interest rate 5.7%-6.8% 6.3%-6.9% 5.2%-5.8%
Expected life of options 6.7 years 6.7 years 6.3 years
The weighted average fair value at date of grant for options granted during
fiscal 1996, 1997 and 1998 was $5.88, $9.45 and $8.62 per option, respectively.
22
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
----------------- ----------------
<S> <C> <C>
Outstanding at July 31, 1995.. 1,750,356 $ 2.31
Granted..................... 551,500 10.79
Exercised................... (119,775) 1.26
Terminated.................. (265,052) 2.73
---------
Outstanding at July 31, 1996.. 1,917,029 $ 4.76
Granted..................... 410,500 16.29
Exercised................... (369,468) 2.12
Terminated.................. (77,640) 9.66
---------
Outstanding at July 31, 1997.. 1,880,421 $ 7.59
Granted..................... 1,435,754 14.46
Exercised................... (103,447) 7.44
Terminated.................. (115,420) 13.89
---------
Outstanding at July 31, 1998.. 3,097,308 $10.25
=========
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
- ------------- ----------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.83-$1.13 66,850 3.7 $ 0.96 66,850 $ 0.96
$2.67-$3.54 861,516 6.0 $ 2.67 519,788 $ 2.67
$5.96-$8.78 116,230 7.3 $ 8.00 39,010 $ 8.39
$9.17-$13.25 765,708 8.5 $ 12.04 186,585 $10.56
$14.31-$21.00 1,245,504 9.3 $ 15.42 814,379 $14.58
$22.25-$23.50 41,500 8.0 $ 22.30 17,500 $22.36
--------- ---------
3,097,308 1,644,112
========= =========
</TABLE>
23
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In fiscal 1997, the Company granted warrants to purchase 10,000 shares of
its common stock, at an exercise price of $17.00 per share, in conjunction with
the purchase of residual agency rights. These warrants expire September 16,
2006. In fiscal 1998, a warrant to purchase 120,000 shares of common stock was
exercised.
NOTE 12 - RETIREMENT PLANS:
The Company initiated the PMT Services, Inc. 401(k) Retirement Plan in
fiscal 1996. Following the initial enrollment, employees become eligible for
participation in the plan on the semi-annual enrollment date following the
employee completing 12 consecutive months of employment and 1,000 hours of
service or more. The Company contributes an amount equal to 50% of employee
voluntary contributions up to a maximum of 6% of the employee's annual
compensation. The plan expense for fiscal 1996, 1997 and 1998 was $64,015,
$114,720 and $103,891, respectively.
NOTE 13 - LEASES:
The Company leases equipment and office space under noncancellable
operating leases. Rent expense approximated $1,360,848, $1,885,105 and
$2,692,271 during fiscal 1996, 1997 and 1998, respectively. In March 1997, the
Company entered into a leasing arrangement for a portion of the office space in
a building that serves as the Company's corporate headquarters (Note 6). Future
minimum payments under all noncancellable leases with terms greater than one
year at July 31, 1998 are as follows:
Year Ending
July 31,
-----------
1999 $ 4,178,097
2000 4,179,243
2001 3,525,096
2002 2,697,430
2003 1,622,806
Thereafter 6,692,398
-----------
22,895,070
Less: Sublease rentals (2,789,925)
------------
$20,105,145
===========
NOTE 14 - OTHER INCOME (EXPENSE) - NET:
The Company recorded a non-taxable gain of $1,000,000 for the receipt of
insurance proceeds on the life of a former officer of the Company. This gain is
included in other income during fiscal 1996.
24
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During fiscal 1997, LFG recorded a non-recurring charge of $367,000 related
to the buyout of a consulting agreement due to the death of an officer. This
charge occurred prior to the effective date of the merger with LFG and is
included in "Other Expense" on a restated basis. Also during fiscal 1997, BCI
recorded a non-recurring charge of $690,000 related to the settlement of
litigation with a former officer. The settlement of the litigation occurred
prior to the effective date of the merger with BCI, and the resulting charge is
included in "Other Expense."
During fiscal 1998, Superior recorded a non-recurring charge of $1,350,000
related to the settlement of litigation with a former officer. The settlement
of the litigation occurred prior to the effective date of the merger with
Superior, and the resulting charge is included in other expense.
Additionally, the Company has included in other expense all non-recurring
transaction costs related to mergers which were accounted for as poolings of
interests.
NOTE 15 - INCOME TAXES:
The provision for income taxes comprises the following:
<TABLE>
<CAPTION>
Year Ended July 31,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Current tax expense:
Federal............ $5,395,173 $ 8,955,619 $15,607,888
State.............. 1,049,495 1,639,099 2,189,884
---------- ----------- -----------
6,444,668 10,594,718 17,797,772
---------- ----------- -----------
Deferred tax benefit:
Federal............ (470,526) (935,449) (1,500,150)
State.............. (30,469) (19,522) (217,131)
---------- ----------- -----------
(500,995) (954,971) (1,717,281)
---------- ----------- -----------
Increase in valuation
allowance.......... 194,831 -- --
---------- ----------- -----------
$6,138,504 $ 9,639,747 $16,080,491
========== =========== ===========
</TABLE>
25
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's effective tax rate differs from the statutory rate as follows:
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Federal tax at statutory rate...... 34.0% 35.0% 35.0%
Increase (decrease) in taxes
resulting from:
State income taxes (net
of federal tax benefit).. 3.8 3.7 2.7
Subchapter S
Corporations income
not subject to tax....... (4.1) (5.7) (4.3)
Valuation allowance........ 1.1 -- --
Other...................... (0.7) (1.0) 0.7
---- ---- ----
34.1% 32.0% 34.1%
==== ==== ====
</TABLE>
Deferred income taxes under Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" (SFAS No. 109), reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets at July 31, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
JULY 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Current deferred tax assets:
Compensation liabilities....... $ 31,645 $ 80,012
Loss reserves.................. 1,386,971 1,966,159
Other.......................... 124,763 304,512
---------- ----------
Net current deferred tax assets.. $1,543,379 $2,350,683
========== ==========
</TABLE>
26
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
JULY 31,
-------------------------
1997 1998
---------- ----------
<S> <C> <C>
Noncurrent deferred tax assets:
Leased equipment.................. 12,799,951 11,812,225
Unearned income................... 8,005,899 7,153,223
Merchant portfolio amortization... 3,345,402 4,574,810
Operating loss carryforwards and
AMT credits...................... 1,299,321 1,329,694
Other............................. 182,442 278,055
---------- ----------
25,633,015 25,148,007
Valuation allowance.................. (332,119) (332,119)
Noncurrent deferred tax liabilities:
Gross lease receivable............. (21,743,354) (19,100,005)
Residual values.................... (2,566,975) (2,980,662)
Depreciation....................... (517,919) (1,331,318)
Residual value of sold portfolios.. (788,371) (649,073)
Other.............................. (309,054) (469,630)
------------ ------------
(25,925,673) (24,530,688)
------------ ------------
Net noncurrent deferred tax assets
(liabilities)...................... $ (624,777) $ 285,200
============ ============
</TABLE>
As of July 31, 1998, the Company has approximately $950,000 of federal and
state net operating loss carryforwards and $960,000 of AMT credits available to
offset future taxable income of certain subsidiaries of the Company. These
cumulative net operating loss carryforwards expire in varying amounts through
fiscal 2013. A valuation allowance has been established for certain of these
net operating losses and AMT credits as utilization is not reasonably assured by
the applicable subsidiaries.
NOTE 16 - COMMITMENTS AND CONTINGENCIES:
The Company is subject to the following commitments and contingencies
described herein.
VISA and MasterCard require merchants accepting VISA and MasterCard credit
cards to contract directly with a processing bank that is a member bank of the
VISA or MasterCard associations. The Company is not a party to the merchant
processing agreements and is therefore dependent upon its contractual
arrangements with its processing banks in order to continue to service its
merchant portfolio. The Company has a contractual right to receive revenues
derived from the discount rate and fees earned on its merchant portfolio so long
as the merchant continues to process transactions on the processing bank's
system and the Company provides adequate service to the
27
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
merchant and remains in compliance under its agreement with the processing bank.
Under the terms of the Company's agreement with its primary processing bank, the
Company is permitted to transfer merchants to another processing bank subject to
time limitations and termination fees. This agreement provides mobility for
substantially all of the Company's merchant base. However, in order to transfer
merchant contracts, the Company must pay the processing bank a fee determined by
a formula related to the annualized aggregate transaction volume of the
merchants transferred.
The Company is in the process of implementing a strategy to be fully
compliant with Year 2000 issues related to its computer systems. Management
does not believe that the costs related to completing this process will be
material to the results of operations of the Company.
NOTE 17 - SUBSEQUENT EVENTS:
On September 24, 1998, both the shareholders of the Company and the
shareholders of NOVA Corporation ("NOVA") approved a plan to merge in a
transaction to be accounted for as a pooling of interests. The transaction was
affected by the exchange of 0.715 shares of NOVA for each share of PMT Common
Stock outstanding as of such date. Because NOVA has internal processing
capabilities, the Company intends to terminate its processing agreements with
each of its third-party providers. Under the terms of its processing
agreements, PMT is required to pay its third-party providers fees to terminate
its processing agreements prior to their contractual termination. Management
believes that these negotiated fees will not exceed $30 million. Through
September 25, 1998, the Company has paid $11.6 million in such termination fees.
The effects of these termination fees are not reflected in the accompanying
financial statements.
In addition to these termination fees, the Company expects to incur
expenses directly attributable to the merger of $5.3 million including
investment banking, legal and accounting fees. These fees will be expensed in
the period the merger is approved. As of July 31, 1998, the Company had
incurred and deferred $0.6 million of these expenses in "Other Current Assets."
Management also believes that the combined companies will provide certain
employees early termination benefits and will incur certain charges related to
the elimination of duplicate facilities and systems. The magnitude of these
additional expenses has not yet been determined by management of the combined
companies.
28
