<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended April 30, 1996
COMMISSION FILE NUMBER: 0-24420
PMT SERVICES, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1215125
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
TWO MARYLAND FARMS
SUITE 200
BRENTWOOD, TN 37027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 254-1539
NOT APPLICABLE
(Former name, former address and
former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
As of June 11, 1996, 21,145,212 shares of the Registrant's Common Stock, $.01
par value, were outstanding.
<PAGE>
PMT SERVICES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1996 1995
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $102,635,753 $ 60,786
Accounts receivable................................ 4,586,011 2,970,848
Inventory.......................................... 365,278 266,242
Deferred income taxes.............................. 225,765 262,966
Other current assets............................... 734,209 114,583
------------ -----------
Total current assets............................ 108,547,016 3,675,425
Purchased merchant portfolios, net of accumulated
amortization of $7,859,103 and $4,033,330....... 61,318,951 36,801,599
Property and equipment, net........................ 3,627,910 2,766,302
Deferred income taxes.............................. 1,185,265 614,420
Intangible and other assets........................ 5,929,034 6,067,770
------------ -----------
Total assets.................................... $180,608,176 $49,925,516
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................. $ 40,000 $ 92,000
Accounts payable................................... 1,469,731 1,670,252
Accrued liabilities................................ 1,699,560 2,073,429
Deferred revenues.................................. 166,209 285,728
------------ -----------
Total current liabilities....................... 3,375,500 4,121,409
------------ -----------
Long-term debt..................................... - 15,306,500
------------ -----------
Shareholders' equity:
Preferred stock, $0.01 par value, authorized:
10,000,000 shares; no shares outstanding
Common stock, $0.01 par value, authorized:
40,000,000 shares; issued and outstanding:
21,144,812 and 6,646,296 shares................... 211,448 66,463
Additional paid-in capital............................ 166,197,881 25,040,731
Accumulated earnings.................................. 10,823,347 5,390,413
------------ -----------
177,232,676 30,497,607
------------ ------------
Commitments and contingent liabilities (Notes 3
and 4)
Total liabilities and shareholders' equity............ $180,608,176 $49,925,516
============ ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
<PAGE>
PMT SERVICES, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
APRIL 30, APRIL 30,
----------------------------- ------------------------------
1996 1995 1996 1995
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues................................ $32,899,450 $17,185,257 $87,299,482 $52,472,602
Cost of revenues........................ 25,152,534 12,966,344 66,119,567 40,022,877
----------- ----------- ----------- -----------
Gross margin......................... 7,746,916 4,218,913 21,179,915 12,449,725
----------- ----------- ----------- -----------
Selling, general and administrative 2,671,088 2,194,184 7,519,204 5,751,410
expenses...............................
Depreciation and amortization expense... 1,972,532 737,293 5,002,139 2,080,383
Provision for merchant losses........... 151,890 94,114 408,143 354,704
Stock award compensation................ -- -- -- 241,477
----------- ----------- ----------- -----------
4,795,510 3,025,591 12,929,486 8,427,974
----------- ----------- ----------- -----------
Income from operations............... 2,951,406 1,193,322 8,250,429 4,021,751
Interest income......................... 278,064 116,955 695,264 248,941
Interest expense........................ -- -- (207,577) (58,419)
Income before provision for income 3,229,470 1,310,277 8,738,116 4,212,273
taxes...............................
Provision for income taxes.............. 1,228,278 500,349 3,305,182 1,608,561
----------- ----------- ----------- -----------
Net income........................... $ 2,001,192 $ 809,928 $ 5,432,934 $ 2,603,712
=========== =========== =========== ===========
Net income per share.................... $ 0.11 $ 0.06 $ 0.31 $ 0.19
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement
3
<PAGE>
PMT SERVICES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance at July 31, 1995........ $ 66,463 $ 25,040,731 $ 5,390,413 $ 30,497,607
Shares issued.............. 58,415 140,780,885 140,839,300
Stock options exercised.... 439 462,396 462,835
Stock split................ 86,131 (86,131) --
Net income for the period.. 5,432,934 5,432,934
---------- ------------ ----------- ------------
Balance at April 30, 1996....... $ 211,448 $166,197,881 $10,823,347 $177,232,676
========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE>
PMT SERVICES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
APRIL 30,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net cash received from merchants................... $ 25,840,557 $ 14,673,768
Cash paid to vendors and employees................. (14,408,657) (9,896,132)
Interest received.................................. 648,406 247,316
Interest paid...................................... (203,966) (58,419)
Income taxes paid.................................. (3,738,253) (951,013)
------------ ------------
Net cash provided by operating activities...... 8,138,087 4,015,520
------------ ------------
Cash flows from investing activities:
Purchase of merchant portfolios.................... (29,904,925) (3,192,073)
Purchase of property and equipment................. (1,286,332) (1,119,005)
------------ ------------
Net cash used in investing activities.......... (31,191,257) (4,311,078)
------------ ------------
Cash flows from financing activities:
Payments on long-term debt......................... (15,358,500) (12,827,002)
Proceeds from issuance of common stock............. 140,986,637 17,075,126
------------ ------------
Net cash provided by financing activities....... 125,628,137 4,248,124
------------ ------------
Net increase in cash and cash equivalents............. 102,574,967 3,952,566
Cash and cash equivalents at beginning of the period.. 60,786 1,589,363
------------ ------------
Cash and cash equivalents at end of the period........ $102,635,753 $ 5,541,929
============ ============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
In connection with the purchased merchant portfolios during the fiscal
nine month period ended April 30, 1995, the Company issued promissory notes
for $5,194,000.
In August 1994, the Company issued 112,500 shares of common stock as
additional consideration for a merchant portfolio purchased in March 1994.
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
APRIL 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net income........................................ $5,432,934 $2,603,712
Adjustments:
Depreciation and amortization expense........... 5,002,139 2,080,383
Provision for merchant losses................... 408,143 354,704
Stock award compensation........................ - 241,477
Deferred income taxes........................... (533,644) 112,697
Changes in assets and liabilities:
Accounts receivable.......................... (980,241) (448,041)
Inventory.................................... (99,036) 46,623
Other assets................................. (306,029) 56,542
Accounts payable............................. 115,351 (588,573)
Accrued liabilities.......................... (782,011) (667,603)
Deferred revenues............................ (119,519) 223,599
---------- ----------
Net cash provided by operating activities............. $8,138,087 $4,015,520
========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
5
<PAGE>
PMT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS:
The accompanying interim financial statements are unaudited, except
for the balance sheet at July 31, 1995. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although the
Company believes the disclosures included herein are adequate to make the
information presented not misleading. These interim financial statements should
be read in conjunction with the Company's financial statements for the fiscal
year ended July 31, 1995.
The accompanying interim financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position at April 30, 1996 and the
results of its operations and its cash flows for the fiscal nine month periods
ended April 30, 1996 and 1995. The results of operations for the interim
periods presented are not necessarily indicative of results for the full fiscal
year. The growth in the Company's income and profitability from fiscal year
1995 has resulted largely from purchase of merchant portfolios. Future growth
is dependent upon, among other factors, the Company's ability to continue to
consummate such purchases of merchant portfolios.
Net income per share for the fiscal three month periods ended April
30, 1996 and 1995 is calculated based on the weighted average number of shares
of common stock outstanding of 18,855,575 and 13,840,514, respectively. Net
income per share for the fiscal nine month periods ended April 30, 1996 and 1995
is calculated based on the weighted average number of shares of common stock
outstanding of 17,552,390 and 13,501,772, respectively.
On December 14, 1995 the Board of Directors approved a two for one
stock split of the Company's $0.01 par value common stock to be effected in the
form of a stock dividend. All earnings per share information has been adjusted
to give retroactive effect to the stock split for all periods presented. The
stock split was effective for shareholders of record on December 29, 1995 and
was paid on January 15, 1996.
On May 17, 1996, the Company's Board of Directors approved a three for two
stock split of the Company's $0.01 par value common stock 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 and distributed June 12, 1996.
The earnings per share information has not been adjusted to give effect of this
stock split.
NOTE 2 - PUBLIC OFFERINGS:
In August 1994, the Company consummated an initial public offering of
3,565,000 shares of common stock, 2,315,000 shares of which were offered by the
Company (the "Offering"). In
6
<PAGE>
PMT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
connection with the Offering, the Company received net proceeds of approximately
$15.9 million, after deducting underwriting discounts and commissions and
expenses of the Offering. The net proceeds were used to repay a $4.9 million
noninterest bearing note payable and all borrowings outstanding under the
Company's revolving line of credit and bridge loan. The remainder of the net
proceeds were used to fund merchant portfolio purchases, upgrade the Company's
information systems and for working capital needs.
In October 1995, the Company consummated a second 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 $40.8 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 a third
public offering in April, 1996. The Company received net proceeds of
approximately $100 million after deducting underwriting discounts and
commissions and estimated expenses of the offering.
NOTE 3 - PURCHASED MERCHANT PORTFOLIOS:
The Company has purchased certain merchant portfolios which provide the
Company the right to service specific merchants under contract to processing
banks for electronic authorization and payment processing. In fiscal years 1993
and 1994, the Company purchased five portfolios each year and nine in fiscal
year 1995. In the quarter ended October 31, 1995, the Company purchased one
merchant portfolio and in the quarter ended April 30, 1996, the company
purchased two merchant portfolios. In connection with the purchase of most of
the merchant portfolios, the Company enters into noncompetition agreements with
the sellers of the portfolios. A portion of the purchase price for each of
these merchant portfolios is allocated to the related noncompetiton agreement.
Significant purchase transactions are as follows:
ABC-April 1995 - The Company purchased a merchant portfolio from Bankcard
America, Inc. ("ABC") in April 1995 for a purchase price of $7,674,990. The
Company paid $2,600,000 in cash, issued a $400,000 note payable with interest at
3% due May 1, 1995 and issued a $4,700,000 note payable with interest at 3% due
July 1, 1995. The Company incurred direct costs and expenses related to the
purchase of approximately $1,300,000. the purchase agreement provided additional
consideration of $2,500,000 payable to the seller contingent upon the seller's
ability to negotiate the transfer of the merchant accounts from the seller's
current processing bank to the company's primary processing bank. In May 1995,
an agreement was entered into providing for transfer of the merchant accounts
and the company paid $2,500,000 representing additional purchase price for the
merchant portfolio.
7
<PAGE>
PMT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
In connection with the purchase, the Company signed a guaranty for a
$1,000,000 note payable to the current processing bank by ABC expiring May 9,
1998. The Company received a security interest in stock warrants to purchase
80,000 shares of the Company's common stock currently held by a shareholder of
ABC. Additionally, beginning June 1995, the Company's primary processing bank
required a security deposit of $1,500,000 for a period of six months due to the
conversion of other merchant portfolios to this bank. Approximately $1,000,000
plus accrued interest was returned to the Company in March, 1996. A sum of
$500,000 will remain on deposit with this primary processing bank as long as the
Company participates in the bank's Association Marketing Agreement. This amount
is reflected in other current assets on the Company's balance sheet.
TERMNET AND CPS - In July 1995, the Company purchased two additional
merchant portfolios which were financed under the Company's credit facility. The
Company paid $6,200,000 to TermNet Merchant Services, Inc. ("TermNet") for a
merchant portfolio and inventory. The Company paid $5,951,000 to Consumer
Payment Services, Inc. ("CPS") for the second purchase in July 1995. In addition
to the CPS merchant portfolio, the company also purchased from CPS a merchant
equipment lease portfolio, inventory and other office assets.
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. Operating results of the
merchant portfolio are included in the Company's Financial Statements beginning
October 1, 1995, the effective date of the purchase.
UMB - 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. Operating results of the merchant
portfolio are included in the Company's financial statements beginning March 1,
1996, the effective date of the purchase.
Unaudited pro forma operating results are presented below to provide
additional information relative to the potential effect upon the Company's
operating results of these significant acquisitions and have been prepared
assuming ABC-April 1995, TermNet, CPS, Imperial and UMB acquisitions occurred as
of August 1, 1994. These unaudited pro forma results have been prepared for
comparative purposes and do not purport to be indicative of what would have
occurred had the acquisitions in fact been made as of August 1, 1994, or of
results which may occur in the future.
<TABLE>
<CAPTION>
Pro forma Pro forma
nine months ended nine months ended
April 30, 1996 April 30, 1995
----------------- -----------------
<S> <C> <C>
Revenues $107,630,813 $112,545,026
Net income $ 5,511,588 $ 1,442,635
Net income per share $ 0.31 $ 0.10
</TABLE>
8
<PAGE>
PMT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
In the third quarter of fiscal year 1996, the Company purchased a
portfolio which has approximately 7,000 merchant accounts. Operating results of
the merchant portfolio are included in the Company's financial statements
beginning April 1, 1996, the effective date of the purchase.
NOTE 4- COMMITMENTS AND CONTINGENCIES:
In addition to the third-party debt guaranty described in Note 3 above, the
Company is subject to the following commitments and contingencies described
herein.
The Company entered into an agreement in July 1995 to purchase the rights
to service merchant accounts to be generated by another independent sales and
service provider ("service provider") under a contract with the Company's
primary processing bank. The Company's option to purchase may be exercised upon
the earlier of default by the service provider under its loan agreement with a
third party or December 1, 1997 and expires on January 31, 1998. The purchase
price will be derived as a multiple of average monthly cash flow generated by
the merchant accounts for the three months immediately prior to the purchase.
The Company's agreement with its primary processing bank was amended to
require the Company to purchase the service provider's merchant accounts by
January 31, 1998. Additionally, the Company has indemnified the processing bank
for any losses incurred by the processing bank with respect to the service
provider's merchant accounts.
In connection with the option agreement, the Company has guaranteed the
service provider's loan to a third party in the amount of $250,000. The Company
has also entered into a service agreement whereby the Company will provide
customer service, processing equipment deployment and related services to the
service provider's merchant accounts for a monthly fee of $4.75 per merchant
account. At April 30, 1996, the service provider was a newly developed entity
without significant merchant accounts generated.
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 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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
PMT Services, Inc. is an independent service organization which markets and
services electronic credit card authorization and payment systems to retail
merchants located throughout the United States. The Company's principal sources
of revenues are discount and merchant service fees. The remaining revenues
consist of rentals, commissions and sales relating to credit card processing
equipment and installation fees. The Company initiates the credit card
processing relationship with a merchant and negotiates a "discount rate," within
the terms of the Company's agreements with processing banks, which is a
percentage of the dollar amount of each credit card transaction.
Revenues derived from the electronic processing of transactions are recognized
at the time the merchants' transactions are processed. Revenues related to the
direct sale of credit card authorization equipment are recognized when the
equipment is shipped. Fees related to both the direct sale and marketing of
this equipment are recognized when installation is completed. Fees received in
advance of shipment or installation are deferred until realized.
Merchant Portfolio Purchases
In fiscal year 1995, the Company purchased nine merchant portfolios consisting
of approximately 21,100 merchants. Two of these purchases, consisting of
approximately 300 merchants, were consummated in the first quarter of fiscal
year 1995. In the second and third quarters of fiscal year 1995 the Company
purchased approximately 7,900 merchants through two merchant portfolio
acquisitions. Additionally, the Company purchased five merchant portfolios, in
the fourth quarter of fiscal year 1995 consisting of approximately 12,900
merchants.
In April 1995, the Company purchased a merchant portfolio of approximately
7,700 merchants from American Bankcard, Inc. ("ABC") for a purchase price of
$7.7 million. The Company paid $2.6 million in cash, issued a 3% interest
bearing note for $400,000 due May 1, 1995 and issued a $4.7 million note bearing
interest at 3% due July 1, 1995. The Company incurred direct costs and expenses
related to the purchase of the merchant portfolio of approximately $1.3 million.
The purchase agreement provided additional consideration of $2.5 million payable
to the seller contingent upon the seller's ability to negotiate the transfer of
the merchant accounts from the current processing bank to the Company's primary
processing bank.
In the fourth quarter of fiscal year 1995 an agreement was entered into
providing for transfer of the merchant accounts, and the Company paid $2.5
million representing additional purchase price for the merchant portfolio. The
Company also signed a guaranty relating to a $1.0 million note of ABC payable to
the current processing bank of the purchased merchant portfolio. Additionally,
beginning June 1995, the Company's amended processing agreement with its primary
processing bank required a $1 million security deposit for a six month period
due to the conversion of other merchant portfolios to this processing bank. This
deposit plus accrued interest was returned to the Company in March 1996. A sum
of $500,000 will remain on deposit with this bank as long as the Company
participates in the bank's Association Marketing Agreement.
10
<PAGE>
The Company purchased a merchant portfolio from Imperial Bank consisting of
approximately 5,000 merchant accounts effective October 1, 1995. The Company
paid $8,650,000 for the portfolio from proceeds of the Company's second public
offering. In the third quarter of fiscal year 1996 the Company purchased two
merchant portfolios. The Company purchased approximately 15,000 from UMB Bank,
N.A. ("UMB") for a purchase price of $13,500,000 effective March 1, 1996.
Effective April 1, 1996 the Company purchased approximately 7,000 merchant
accounts from Bankcard America, Inc. ("ABC") for a purchase price of $6,300,000.
The growth in the Company's revenues and profitability from fiscal year 1995
has resulted largely from the purchase of merchant portfolios. Future growth is
dependent upon, among other factors, the Company's ability to continue to
consummate such purchases of merchant portfolios. There can be no assurance that
the Company will be able to make successful portfolio acquisitions or that the
attrition of merchants from acquired portfolios will not exceed anticipated
attrition, thus resulting in lower revenues from the purchased portfolios.
See pro forma operating results in Note 3 to the financial statements for
information relative to the potential effect of these acquisitions on the
Company's operations. Management believes the pro forma operating results
reflected in Note 3 are not indicative of what would have occurred had the
purchases been made at the beginning of fiscal year 1995, or of results which
may occur in the future, because the revenue and cost structures of the acquired
portfolios are not directly comparable to the Company's.
Results of Operations
The following table presents, for the periods indicated, the percentage of
revenues represented by certain line items in the Company's statement of income:
<TABLE>
<CAPTION>
Three Month Period Percentage/Increase Nine Month Period Percentage/Increase
Ended April 30, (Decrease) Ended April 30, (Decrease)
-------------------- -------------------- ------------------- --------------------
1996 1995 1996 1995
---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues 100.0 % 100.0% 91.4% 100.0% 100.0% 66.4%
Cost of revenues 76.5 75.5 94.0 75.7 76.3 65.2
------ ----- ----- -----
Gross margin 23.5 24.5 83.6 24.3 23.7 70.1
Selling, general and
administrative expenses 8.1 12.8 21.7 8.6 11.0 30.7
Deprec. and amortization 6.0 4.3 167.5 5.7 4.0 140.4
Provision for merchant losses 0.4 0.5 61.4 0.5 0.7 15.1
Stock award compensation 0.0 0.0 - 0.0 0.4 (100.0)
------ ----- ----- -----
Income from operations 9.0 6.9 147.3 9.5 7.6 105.1
Interest expense, net (0.8) (0.7) 137.8 (0.5) (0.4) 156.0
------ ----- ----- -----
Income before provision for
taxes 9.8 7.6 146.5 10.0 8.0 107.4
Provision for income taxes 3.7 2.9 145.5 3.8 3.0 105.5
------ ----- ----- -----
Net Income 6.1 4.7 147.1 6.2 5.0 108.7
====== ===== ===== =====
</TABLE>
11
<PAGE>
Revenues
Revenues for the third quarter of fiscal year 1996 increased to $32.9
million, an increase of 91.4% over the same period last year. For the first nine
months of fiscal year 1996, the Company reported revenues of $87.3 million,
66.4% higher than revenues of $17.2 million for the same period last fiscal
year. The increase resulted primarily from the purchase of merchant portfolios,
revenue enhancement programs and the growth from a Visa and MasterCard sales
solicitation program launched in fiscal year 1995 with one of the Company's
major association relationships. The fiscal year 1995 and 1996 merchant
portfolio purchases accounted for 84.1% of the increase in revenues in the third
quarter of fiscal year 1996 and 78.9% of the increase in the first nine months
of fiscal year 1996.
Cost of Revenues
Cost of revenues increased from $13.0 million in the third quarter of
fiscal year 1995 to $25.2 million in the third quarter of fiscal year 1996.
Additionally, for the nine month period ended April 30, 1996, cost of revenues
increased to $66.1 million or 65.2% from $40.0 million for the same period in
fiscal year 1995. Cost increased as a percentage of revenues in the quarter
ended April 30, 1996 as a result of merchant portfolio purchases with a higher
percentage of cost of revenues. However, cost of revenues decreased as a
percentage of revenues for the nine months ended April 30, 1996 as a result of
other merchant portfolio purchases, profit enhancement programs and
approximately $382,000 in annual fees charged to merchants and earned in
December, 1995.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.7 million in the
third quarter of fiscal year 1996 and $2.2 million for the third quarter of
fiscal year 1995. This reflects a 21.7% increase over the same period in fiscal
year 1995. For the first nine months of fiscal year 1996, selling, general and
administrative expenses were $7.5 million or 30.7% over the same period in
fiscal year 1995. As a percentage of revenues, selling, general and
administrative expenses has decreased for the third quarter of fiscal year 1996
and the nine month period ended April 30, 1996 when compared to the same periods
in fiscal year 1995. The decrease in selling, general and administrative
expenses as a percentage of revenues continues to reflect the Company's overall
improvement in utilization of personnel and the addition of revenues from
purchased merchant portfolios, which do not cause a proportionate increase in
selling, general and administrative expenses.
Depreciation and Amortization
Depreciation and amortization expense increased from $737,000 for the
quarter ended April 30, 1995 to $1,973,000 for the quarter ended April 30, 1996
which represents a 167.5% increase. For the first nine months of fiscal year
1996, depreciation and amortization increased 140.4% to $5,022,000 from
$2,080,000 for the same period in fiscal year 1995. The increase in depreciation
and amortization was primarily the result of amortization of purchased merchant
portfolios.
12
<PAGE>
The Company repaid all outstanding indebtedness on its revolving credit
facility in October 1995 with a portion of the proceeds from the second public
offering. The credit facility expires November 1, 1996 if there is no
outstanding indebtedness and the Company elects to not extend the facility.
Stock Award Compensation
No stock award compensation was recognized in the third quarter or the
first nine months of fiscal year 1996. For the first nine months of fiscal year
1995 stock award compensation was $241,000. The Company recognizes noncash
compensation expense based on the vesting of certain stock awards. The vesting
of awarded shares accelerated upon completion of the initial public offering. As
a result, the remaining unearned compensation expense was recognized in August
1994.
Interest Expense
For the third quarter of fiscal year 1996, the Company recognized $278,000
net interest income. For the same quarter in fiscal year 1995 the Company
recognized $117,000 net interest income. For the nine month periods ended April
30, 1996 and 1995, the Company recognized $488,000 and $191,000 net interest
income, respectively. The Company consummated an initial public offering in
August 1994, a second public offering in October 1995 and a third public
offering in April 1996. The Company received net proceeds from the initial,
second and third public offerings of approximately $15.9 million, $40.8 million
and $100 million (after deducting underwriting discounts and commissions and
expenses of the offerings), respectively. With the first two offerings, the
Company repaid all borrowings outstanding under its credit facility. The Company
received interest income from the investment of the remaining net proceeds from
the initial and second offerings and on the total net proceeds from the April
1996, offering.
Income Tax
As a result of Company's increased profitability for the third quarter and
the first nine months of fiscal year 1996 income tax expense has increased.
Income tax expense increased from $500,000 in the third quarter of fiscal year
1995 to $1,228,000 in the third quarter of fiscal year 1996. In the first nine
months of fiscal year 1996, income tax expense increased 105.5% to $3,305,000
from $1,609,000 for the first nine months in fiscal year 1995. The Company's
effective income tax rate is approximately 38% for all periods.
Liquidity and Capital Resources
The Company recognizes as revenue in its statement of income the full
discount rate collected from the merchant. The various costs incurred by the
Company, including amounts paid to the card-issuing bank, the processing bank,
and the 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 the processing bank. At month end the processing bank collects
the total discount rate from the merchants and disburses to each of the service
providers their fees, except disbursements for interchange fees which are paid
to the card-issuing bank daily. Shortly after month end, the processing bank
disburses to the Company the remainder of the funds collected from the merchant
(which represents a significant portion of the Company's gross margin).
13
<PAGE>
Although the Company's revenues reflect the full discount rate collected,
the cash flow statement is prepared using the "direct method" as provided in
Statement of Financial Accounting Standards 95, "Statement of Cash Flows," and
reflects cash received from merchants at the net amount collected as the cash
flows received by the Company from processing banks are net of the amounts
disbursed to the other parties described above. This presentation follows the
flow of funds to the Company.
Working Capital
Net cash flow provided by operating activities was $8.1 million for the
first nine months of fiscal year 1996 as compared to net cash flow provided by
operating activities of $4.0 million for the first nine months of fiscal year
1995. Merchant portfolio purchases account for the significant increase in cash
provided by operating activities. However, this increase was partially offset by
increased income tax payments and payments to vendors and employees in fiscal
year 1996.
Capital Expenditures and Investing Activities
Capital expenditures were approximately $31.2 million for the nine month
period ended April 30, 1996 as compared to $4.3 million for the same period in
fiscal year 1995. Following the consummation of the second public offering in
October 1995, the Company purchased merchant portfolios from Imperial Bank, UMB
and ABC. The increase in capital expenditures was also attributable to
additional expenditures related to the upgrade of the Company's management
information system, the purchase of additional credit card terminals, and the
purchase of peripheral equipment for lease to merchants.
Financing Activities
The significant increase in cash for fiscal year 1996 resulted primarily
from the consummation of the Company's two public offerings in October 1995 and
April 1996. Net cash provided by financing activities for the first nine months
of fiscal year 1996 was $125.6 million, which reflects the net proceeds of the
public offerings after retirement of the Company's outstanding indebtedness to
First Union National Bank of Tennessee. Cash provided by financing activities
for the first nine months of fiscal year 1995 was $4.2 million and reflects the
net proceeds of the Company's initial public offering after retirement of
outstanding indebtedness.
Future Capital Needs
Management believes that significant expenditures for the purchase of
additional merchant portfolios may be required for the Company to sustain its
growth in the future. Management expects to fund such purchases through cash on
hand, cash generated from operations and additional bank borrowings. The Company
believes that the combination of these sources will be sufficient to meet the
Company's anticipated liquidity needs and its growth plans through fiscal year
1996. The Company, however, may pursue additional expansion opportunities,
including merger agreements accounted for as poolings requiring the issuance of
additional shares of stock. Additionally, the Company may make purchases of
additional merchant portfolios, which may require additional capital, and the
Company may incur, from time to time, additional short-term and long-term
indebtedness or issue, in public or private transactions, equity or debt
securities, the availability and terms of which will depend upon then prevailing
market and other conditions.
14
<PAGE>
There can be no assurance that any such financing will be obtained on terms
acceptable to the Company.
In October 1995, the Company repaid all indebtedness on its revolving
credit facility to First Union National Bank of Tennessee from the proceeds of
its second public offering. The revolving credit facility was amended and
restated during fiscal year 1995 to increase the line of credit to $17,500,000
which is currently available. The amended agreement expires November 1, 1996
with all amounts then outstanding under the agreement due on November 1, 1996,
unless the agreement is extended or the outstanding amounts have been converted
to a term loan requiring equal monthly payments for 48 months.
Borrowings under the amended revolving credit facility will be used to
finance future purchases of merchant portfolios and equipment and for working
capital purposes. Borrowings are secured by substantially all the Company's
assets and life insurance policies on the lives of two of the Company's
executive officers.
This report contains certain forward-looking statements, including those
relating to future growth through portfolio acquisitions and the availability of
capital to support such acquisitions, each of which is accompanied by specific,
cautionary language.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated March 27, 1996
discussing the Company's purchase of a merchant portfolio from UMB
Bank, N.A.
The Company filed a Current Report on Form 8-K dated April 3, 1996
discussing a lawsuit in which the Company is a defendant.
On April 16, 1996 the Company filed a Form 8-K/A amending the March
27, 1996 Form 8-K. This report included the report of independent
accountants, statement of merchant revenues and operating expenses and
the notes to these statements. Additionally, the Company included the
required pro forma financial statements.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PMT SERVICES, INC.
By:/s/Vickie G. Johnson
--------------------
Vickie G. Johnson
Chief Accounting Officer
(principal accounting officer)
Date: June 13, 1996
17
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