<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended January 31, 1997
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)
(615) 254-1539
(Registrant's telephone number, including zip code)
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 March 17, 1997, 37,279,003 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1997 1996
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 22,301,220 $106,329,848
Investments........................................ 72,393,934 --
Accounts receivable................................ 11,770,330 8,403,918
Inventory.......................................... 969,118 760,620
Deferred income taxes.............................. 214,165 265,661
Other current assets............................... 2,911,906 798,266
------------ ------------
Total current assets............................ 110,560,673 116,558,313
Purchased merchant portfolios, net of accumulated
amortization of $13,836,009 and $9,668,705...... 70,683,405 62,075,590
Property and equipment, net........................ 6,979,531 4,751,080
Deferred income taxes.............................. 1,695,832 1,343,867
Intangible and other assets........................ 8,065,080 6,219,235
------------ ------------
Total assets.................................... $197,984,521 $190,948,085
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................. $ 200,000 $ 40,000
Accounts payable................................... 4,592,662 4,736,939
Accrued liabilities................................ 3,134,925 4,937,445
Deferred revenues.................................. 247,858 230,496
------------ ------------
Total current liabilities....................... 8,175,445 9,944,880
Long-term debt..................................... 1,288,894 1,014,991
------------ ------------
Total liabilities.............................. 9,464,339 10,959,871
------------ ------------
Shareholders' equity:
Preferred stock, $0.01 par value, authorized:
10,000,000 shares; no shares outstanding
Common stock, $0.01 par value, authorized:
100,000,000 shares; issued and outstanding:
37,279,003 and 36,435,860 shares.................. 372,790 364,359
Additional paid-in capital........................... 169,142,477 166,637,622
Treasury stock....................................... (12,000) (12,000)
Accumulated earnings................................. 19,016,915 12,998,233
------------ ------------
188,520,182 179,988,214
------------ ------------
Commitments and contingent liabilities (Note 4)
Total liabilities and shareholders' equity........... $197,984,521 $190,948,085
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JANUARY 31, JANUARY 31,
--------------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues...................................... $61,312,821 $44,041,888 $125,685,455 $86,249,587
Cost of revenues.............................. 45,250,159 33,090,719 94,319,755 65,192,709
----------- ----------- ------------ -----------
Gross margin................................ 16,062,662 10,951,169 31,365,700 21,056,878
----------- ----------- ------------ -----------
Selling, general and administrative expenses.. 8,308,951 6,251,673 15,638,117 11,971,577
Depreciation and amortization expense......... 2,954,214 1,724,331 5,771,843 3,215,165
Nonrecurring operating expense, net........... 118,616 -- 584,753 --
Provision for merchant losses................. 291,448 354,871 584,837 743,254
----------- ----------- ------------ -----------
11,673,229 8,330,875 22,579,550 15,929,996
----------- ----------- ------------ -----------
Income from operations...................... 4,389,433 2,620,294 8,786,150 5,126,882
Interest income............................... 1,267,195 296,390 2,559,417 429,626
Interest expense.............................. (19,517) (53,814) (30,074) (305,281)
Other expense, net............................ (412,792) -- (533,710) --
----------- ----------- ------------ -----------
Income before provision for income taxes.... 5,224,319 2,862,870 10,781,783 5,251,227
Provision for income taxes.................... 1,950,763 1,149,561 4,025,918 2,136,016
----------- ----------- ------------ -----------
Net income.................................. $ 3,273,556 $ 1,713,309 $ 6,755,865 $ 3,115,211
=========== =========== ============ ===========
Net income per share.......................... $ 0.09 $ 0.05 $ 0.18 $ 0.10
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
--------- ------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1996......... $364,359 $166,637,622 $12,998,233 $ (12,000) $179,988,214
Stock Options exercised........ 3,431 2,508,855 2,512,286
Data Transfer Associates
Pooling....................... 5,000 (4,000) (115,762) (114,762)
Distributions to Subchapter S
Corporations, prior
to merger.................... (621,421) (621,421)
Net income for the period...... 6,755,865 6,755,865
-------- ------------ ----------- ---------- ------------
Balance at January 31, 1997...... $372,790 $169,142,477 $19,016,915 $ (12,000) $188,520,182
======== ============ =========== ========== ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
JANUARY 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 6,755,865 $ 3,115,211
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense................ 5,771,843 3,215,165
Gain on sale of property and equipment............... (47,875) --
Provision for merchant losses........................ 584,837 743,254
Deferred income taxes................................ (300,469) (420,559)
Changes in assets and liabilities:
Accounts receivable................................. (3,302,938) (4,516)
Inventory........................................... (103,229) 3,445
Other assets........................................ (1,635,933) 81,714
Accounts payable.................................... (350,372) (81,689)
Accrued liabilities................................. (625,388) (153,859)
Deferred revenues................................... (90,622) (6,645)
------------ ------------
Net cash provided by operating activities........... (6,655,719) 6,491,521
------------ ------------
Cash flows from investing activities:
Purchase of merchant portfolios...................... (15,358,039) (9,217,082)
Purchase of Investments.............................. (72,393,934) --
Purchase of property and equipment................... (3,214,741) (1,554,100)
Proceeds from sale of equipment...................... 293,000 --
------------ ------------
Net cash used in investing activities............... (90,673,714) (10,771,182)
------------ ------------
Cash flows from financing activities:
Payments on long-term debt........................... -- (15,072,306)
Proceeds from issuance of common stock............... 610,788 41,294,266
Distributions to Subchapter S Corporations........... (621,421) (202,946)
------------ ------------
Net cash (used) provided by financing activities.... (10,633) 26,019,014
------------ ------------
Net increase (decrease) in cash and cash equivalents.. (84,028,628) 21,739,353
Cash and cash equivalents at beginning of the period.. 106,329,848 1,351,311
------------ ------------
Cash and cash equivalents at end of the period........ $ 22,301,220 $ 23,090,664
============ ============
Cash paid during the period for:
Interest............................................ $ 29,336 $ 229,681
Income taxes........................................ 2,588,588 2,769,657
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
In connection with the purchase of a merchant portfolio in August 1996, the
Company issued 500,000 shares of common stock. The acquisition was accounted for
as a pooling of interests which did not require retroactive restatement.
The accompanying notes are an integral part of this financial statement.
5
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS:
The accompanying interim consolidated financial statements are
unaudited, except for the balance sheet at July 31, 1996. 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 consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements for the fiscal year ended July 31, 1996.
The accompanying interim consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position at January 31, 1997 and
the results of its operations and its cash flows for the fiscal six month
periods ended January 31, 1997 and 1996. 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 1996 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.
The consolidated financial statements give retroactive effect to
certain acquisitions consummated in the fourth quarter of fiscal 1996 and the
second quarter of fiscal 1997 which were accounted for as poolings of interests
(Note 3).
The Company presents its consolidated statement of cash flows on the
indirect method as allowed by FAS 95. Certain amounts in the prior periods
presented have been reclassified to conform with this presentation.
Net income per share for the three month periods ended January 31,
1997 and 1996 is calculated based on the weighted average number of shares of
common stock outstanding of 38,483,877 and 31,929,999, respectively. Net income
per share for the fiscal six month periods ended January 31, 1997 and 1996 is
calculated based on the weighted average number of shares of common stock
outstanding of 38,479,344 and 30,014,862, respectively.
NOTE 2 - PUBLIC OFFERINGS:
In October 1995, the Company consummated a second public offering of
2,156,250 (6,468,750 post-splits) shares of common stock, 1,931,250 (5,793,750
post-splits) 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.
6
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company offered 3,910,000 (5,865,000 post-split) 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 - MERGERS AND ACQUISITIONS:
The Company 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 1996, the
Company consummated five acquisitions and in the six months ended January 31,
1997, the Company consummated eight acquisitions. In conjunction 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
noncompetition agreement.
The Company consummated one of the acquisitions in fiscal 1996 and
four of the acquisitions in the six months ended January 31, 1997 by issuing
common stock in exchange for all the outstanding common stock of the companies
acquired. These transactions were accounted for as poolings of interests and are
summarized below.
<TABLE>
<CAPTION>
COMPANY ACQUIRED DATE SHARES ISSUED
<S> <C> <C>
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
</TABLE>
PMT's consolidated financial statements have been restated to include the
accounts of MHA, Fairway, BSI and RPS for all periods prior to the mergers. In
addition to these transactions, the company completed a merger during the first
quarter of 1997 which was not considered material for retroactive restatement.
Fairway and RPS were Subchapter S Corporations for income tax purposes;
therefore, these entities did not pay U.S. federal income taxes. Fairway and RPS
will be included in the Company's U.S. federal income tax return effective
December 23, 1996 and January 30, 1997, respectively.
7
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Separate revenues, net income and related per share amounts of the merged
entities for the periods prior to the mergers are presented in the following
table. In addition, the table includes unaudited pro forma net income per share
amounts which reflect the elimination of the norecurring merger costs and
expenses in 1997 and pro forma adjustments to present income taxes on the basis
on which they will be reported in future periods.
<TABLE>
<CAPTION>
Three month period ended Six month period ended
January 31, January 31,
---------------------------- -------------- -------------
1997 1996 1997 1996
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues
PMT $49,306,971 $27,697,712 $101,122,607 $54,400,032
BSI 6,195,404 5,233,569 12,218,404 10,431,987
Other 5,810,446 11,110,607 12,344,444 21,417,568
----------- ----------- ------------ -----------
Revenues, as reported $61,312,821 $44,041,888 $125,685,455 $86,249,587
=========== =========== ============ ===========
Net income (loss)
PMT $ 2,413,395 $ 1,908,961 $ 5,273,711 $ 3,431,742
BSI 480,531 (88,244) 745,665 (29,541)
Other 379,630 (107,408) 736,489 (286,990)
----------- ----------- ------------ -----------
Net income, as reported $ 3,273,556 $ 1,713,309 $ 6,755,865 $ 3,115,211
Merger costs and expenses 412,792 533,710
Tax effect of Subchapter S
Corporations (147,609) 14,045 (285,903) 15,892
----------- ----------- ------------ -----------
Pro forma net income $ 3,538,739 $ 1,727,354 $ 7,003,672 $ 3,131,103
=========== =========== ============ ===========
Net income per share
As reported $ 0.09 $ 0.05 $ 0.18 $ 0.10
Pro forma $ 0.09 $ 0.05 $ 0.18 $ 0.10
=========== =========== ============ ===========
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES:
In connection with the purchase of a merchant portfolio from Bankcard
America, Inc. ("ABC") in April 1995, 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
120,000 shares of the Company's common stock currently held by a shareholder of
ABC.
8
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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. Generally, 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 a
substantial portion 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. The
discount 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.
Acquisitions and Mergers
In fiscal year 1996, the Company purchased five merchant portfolios
consisting of approximately 34,500 merchants. One of these purchases,
consisting of approximately 5,000 merchants, was consummated in the first
quarter of fiscal year 1996. In the third quarter of fiscal year 1996 the
Company purchased approximately 22,000 merchants through two merchant portfolio
acquisitions. Additionally, the Company acquired two merchant portfolios, in
the fourth quarter of fiscal year 1996, one of which was accounted for as a
pooling of interests.
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
merchant accounts 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.
In the fourth quarter of fiscal 1996, the Company acquired two
merchant portfolios consisting of approximately 7,500 merchant accounts. The
Company accounted for the larger of these two acquisitions as a pooling of
interests. On July 1, 1996 the Company issued 594,011 shares of its common
stock in exchange for all the outstanding common stock of MHA. The Company's
consolidated financial statements have been restated to include the accounts of
MHA for all periods prior to the merger.
10
<PAGE>
In the first quarter of fiscal 1997, the Company acquired three
merchant portfolios consisting of approximately 13,500 merchant accounts. On
August 2, 1996, the Company issued 500,000 shares of its common stock in
exchange for all the outstanding stock of Data Transfer Associates, Inc.
("DTA"). The acquisition was accounted for as an immaterial pooling of
interests. The shares were issued to the shareholders of DTA in reliance upon
the exemption provided by Section 4(2) of the Securities Act of 1933 (the
"Act").
The other two merchant portfolio acquisitions accounted for
approximately 9,500 merchant accounts and operating results of the merchant
portfolios have been included in the Company's financial statements beginning
August 1, 1996, the effective date of the purchases.
In addition to these acquisitions, on September 16, 1996, the Company
paid cash and issued warrants to purchase 10,000 shares of the Company's common
stock as consideration in a transaction related to the purchase of certain
rights and obligations with respect to the solicitation and maintenance of a
merchant portfolio. The warrants were issued to the two individual sellers in
reliance upon the exemption provided by Section 4(2) of the Act. The warrants
are currently fully exercisable, at an exercise price of $17.00 per share, and
expire September 16, 2006.
In the second quarter of fiscal 1997, the Company consummated five
acquisitions representing approximately 19,000 merchant accounts. Three of the
acquisitions in fiscal 1997 were accounted for as poolings of interests. On
December 23, 1996 the Company issued 424,999 shares of its common stock in
exchange for all the outstanding common stock of Fairway. On January 27, 1997,
3,131,250 shares of the Company's common stock were issued in exchange for all
the outstanding common stock of BSI. On January 30, 1997 the Company issued
567,519 shares of its common stock in exchange for all the outstanding common
stock of RPS. The other two acquisitions' operating results have been included
in the Company's financial statements beginning November 1, 1996 and December 1,
1996, the effective dates of the transactions.
The growth in the Company's revenues and profitability from fiscal
year 1996 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.
11
<PAGE>
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 Six Month Period Percentage/Increase
Ended January 31, (Decrease) Ended January 31, (Decrease)
-------------------- -------------- -------------------------- --------------------
1997 1996 1997 1996
---------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 39.2% 100.0% 100.0% 45.7%
Cost of revenues 73.8 75.1 36.7 75.0 75.6 44.7
------ ----- ----- -----
Gross margin 26.2 24.9 46.7 25.0 24.4 49.0
Selling, general and
administrative expenses 13.5 14.3 32.9 12.4 13.9 30.6
Deprec. and amortization 4.8 3.9 71.3 4.6 3.7 79.5
Non-recurring expense 0.2 -- -- 0.5 -- --
Provision for merchant losses 0.5 0.8 (17.9) 0.5 0.8 (21.3)
------ ----- ----- -----
Income from operations 7.2 5.9 67.5 7.0 6.0 71.4
Interest (income) expense, net (2.0) (0.6) 414.3 (2.0) (0.1) --
Other expense, net 0.7 -- -- 0.4 -- --
------ ----- ----- -----
Income before provision for
taxes 8.5 6.5 82.5 8.6 6.1 105.3
Provision for income taxes 3.2 2.6 69.7 3.2 2.5 88.5
------ ----- ----- -----
Net Income 5.3% 3.9% 91.1% 5.4% 3.6% 116.9%
====== ===== ===== =====
</TABLE>
- -- = Not meaningful
Revenues
Revenues for the second quarter of fiscal year 1997 increased to $61.3
million, an increase of 39.2% over the same period last year. For the first six
months of fiscal year 1997, the Company reported revenues of $125.7 million,
45.7% higher than revenues of $86.2 million for the same period in the last
fiscal year. The growth in revenues has resulted in an increase in the
Company's accounts receivable. The increase in revenues resulted primarily from
the purchase of merchant portfolios, revenue enhancement programs, growth from a
Visa and MasterCard sales solicitation program launched in fiscal year 1995 with
one of the Company's major association relationships and growth generated from
new merchants added through internal sales. The fiscal year 1996 and 1997
merchant portfolio purchases accounted for 75.5% of the increase in revenues in
the second quarter of fiscal year 1997 and 70.5% of the increase in the first
six months of fiscal year 1997.
Cost of Revenues
Cost of revenues increased from $33.1 million in the second quarter of
fiscal year 1996 to $45.3 million in the second quarter of fiscal year 1997.
Additionally, for the six month period ended January 31, 1997, cost of revenues
increased to $94.3 million or 44.7% from $65.2 million for the same period in
fiscal year 1996. Cost decreased as a percentage of revenues in both periods
principally as a result of revenue enhancement programs including approximately
$1.1 million in annual fees charged to merchants and earned in December, 1996.
In December 1995, the Company charged to and earned from to merchants
approximately $382,000 in annual fees.
12
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $8.3 million in the
second quarter of fiscal year 1997 and $6.3 million for the second quarter of
fiscal year 1996. This reflects a 32.9% increase over the same period in fiscal
year 1996. For the first six months of fiscal year 1997, selling, general and
administrative expenses were $15.6 million or 30.6% higher than the same period
in fiscal year 1996. As a percentage of revenues, selling, general and
administrative expenses have decreased for the second quarter of fiscal year
1997 and for the six month period ended January 31, 1997 when compared to the
same periods in fiscal year 1996. 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. The addition of
revenues from purchased merchant portfolios have not caused a proportionate
increase in selling, general and administrative expenses. Additionally, the
Company's selling expenses decreased as a result of the Company's purchase of
agent residual rights thereby lowering referral compensation.
Depreciation and Amortization
Depreciation and amortization expense increased from $1.7 million for
the quarter ended January 31, 1996 to $3.0 million for the quarter ended January
31, 1997 which represents a 71.3% increase. For the first six months of fiscal
1997, depreciation and amortization increased 79.5% to $5.8 million from $3.2
million for the same period in fiscal year 1996. The increase in depreciation
and amortization was primarily the result of additional expenditures related to
the Company's management information systems and amortization of purchased
merchant portfolios.
Nonrecurring Operating Expense
In the second quarter of fiscal 1997, and the six months year to date,
the Company incurred nonrecurring duplicative net costs of approximately
$119,000 and $585,000, respectively. These net costs relate to a sales force
included in a merchant portfolio acquisition.
Interest Expense
For the second quarter of fiscal year 1997, the Company recognized
$1.2 million net interest income. For the same quarter in fiscal year 1996, the
Company recognized approximately $243,000 net interest income. For the six
month period ended January 31, 1997 and 1996, the Company recognized $2.5
million and approximately $124,000 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.
13
<PAGE>
Income Tax
Income tax expense increased in the second quarter and year-to-date
periods of fiscal 1997 in relation to the comparable periods in the prior
fiscal year, principally as a result of the Company's increased profitability in
fiscal 1997. For the six months ended January 31, 1997, the income tax expense
of $4.0 million represented an effective income tax rate of 37.3% as compared to
the income tax expense of $2.1 million (40.7% effective income tax rate) in the
first six months of fiscal 1996. The principal reasons for the decrease in
effective rate were losses without a corresponding income tax benefit incurred
by a subsidiary of MHA prior to its combination with PMT, partially offset by
income generated in the restated prior year by Subchapter S corporations which
were not taxed at the corporate level.
Liquidity and Capital Resources
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. The Company's management invests excess cash in
overnight investments and U.S. Government Treasury notes and bills.
The Company's cash flow is generated by collecting monthly revenues
from the merchants. Payments to suppliers and vendors are typically paid within
30 days, except for interchange which is paid daily to the card-issuing banks.
Historically the Company's primary uses of its capital resources include debt
service, acquisitions of merchant portfolios, capital expenditures and working
capital.
The Company expects that cash generated from operations and the excess
cash on hand will be adequate to meet the Company's immediate cash needs. In
addition, on January 31, 1997 the Company amended and restated its credit
facility with First Union National Bank of Tennessee to provide a $20.0 million
revolving credit .
Working Capital
Net cash flow provided by operating activities was $6.7 million for
the first half of fiscal year 1997 as compared to net cash flow provided by
operating activities of $6.5 million for the first half of fiscal year 1996.
Merchant portfolio purchases and increased interest income as a result of the
Company's public offerings accounted for most of the increase in cash provided
by operating activities. However, this increase was partially offset by
increased income tax payments in fiscal year 1997.
14
<PAGE>
Capital Expenditures and Investing Activities
Cash used in investing activities was approximately $90.7 million for
the six month period ended January 31, 1997 as compared to $10.8 million for the
same period in fiscal year 1996. During fiscal 1997 approximately $72.4 million
of the net proceeds received in the third public offering in April 1996 have
been reinvested in U.S. Treasury securities. Following the consummation of the
second public offering in October 1995, the Company purchased a merchant
portfolio from Imperial Bank. In the first six months of fiscal 1997, the
Company purchased three merchant portfolios. The increase in capital
expenditures was also attributable to additional expenditures related to the
upgrade of the Company's management information systems and the purchase of
additional credit card terminal and peripheral equipment for lease to
merchants.
Financing Activities
Net cash provided by financing activities for the first six months of
fiscal 1996 was $26.0 million, which reflects the net proceeds of the
public offering after retirement of the Company's outstanding indebtedness to
First Union National Bank of Tennessee. For the first six months of fiscal 1997
the Company did not complete an equity offering.
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 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 1997. 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. 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 1997 to increase the facility to $20.0
million. The current amendment expires January 31, 1998. Borrowings under the
new credit facility will be used to finance future purchases of merchant
portfolios and equipment and for general corporate purposes.
15
<PAGE>
This report contains certain forward-looking statements.
Specifically, the forward-looking statements relate to future growth through
portfolio acquisitions and the availability of capital to support such
acquisitions. The ability of the Company to achieve the expectations expressed
in these forward-looking statements will be subject to several factors that
could cause actual results to differ materially from those expressed in the
forward-looking statements, such as merchant attrition, difficulties in
integrating newly acquired businesses and portfolios, the availability of
capital, the cost of acquired businesses and portfolios, the Company's continued
ability to account for acquisitions as poolings of interests, industry price
increases and the ability of the Company's processing banks to process merchant
transactions effectively. Results actually achieved thus may differ materially
from the expectations expressed in such statements.
16
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Company held on December
16, 1996, the following proposals were adopted by the vote specified:
1. Richardson M. Roberts and Leslie D. Coble were elected to serve on
the Board of Directors of the Company for a term of three years.
Withhold
For Authority
----- -----------
Richardson M. Roberts 29,695,572 220,282
Leslie D. Coble 29,379,962 535,892
2. The Shareholders voted to amend the Company's 1994 Incentive Stock
Plan by increasing the number of shares that may be issued thereunder from
2,295,000 to 3,795,000 by a vote of 28,528,977 for, 1,353,560 against and 33,317
abstentions.
3. The Shareholders voted to amend the Company's Amended and Restated
Charter increasing the amount of authorized shares of Common Stock of the
Company from 40,000,000 shares to 100,000,000 shares by a vote of 23,832,501
for, 5,977,594 against and 25,235 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4 Second Amendment to the Amended and Restated Loan Agreement dated as
of January 31, 1997, between the Company and First Union National
Bank of Tennessee.
27 Financial Data Schedule
17
<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/Clay M. Whitson
--------------------
Clay M. Whitson
Chief Financial Officer
Date: March 17, 1997
<PAGE>
EXHIBIT 4
SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT
This Second Amendment to Amended and Restated Loan Agreement ("Amendment") is
dated as of the 31st day of January, 1997, by and between PMT SERVICES, INC.
("Borrower"), a Tennessee corporation, and FIRST UNION NATIONAL BANK OF
TENNESSEE ("Lender"), a national banking association.
WITNESSETH:
WHEREAS, Borrower and Lender have previously executed that certain Amended
and Restated Loan Agreement dated as of May 31, 1995, as amended by that First
Amendment to Amended and Restated Loan Agreement dated as of July 18, 1996 (as
amended, the "Loan Agreement") (capitalized terms not otherwise defined herein
have the meaning assigned in the Loan Agreement); and
WHEREAS, Borrower and Lender wish to further amend the Loan Agreement in
certain respects;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. The Loan Agreement is hereby amended by revising the reference to "three
months" in the first line of Section 1.29 to read "three, six or nine months, as
elected by Borrower in its notice of borrowing".
2. The Loan Agreement is hereby amended by revising it to read in full as
follows:
"Note" means that Fourth Amended and Restated Promissory Note made by
Borrower dated as of January 31, 1997, in the principal amount of $20,000,000
payable to the order of Lender and all modifications, extensions, renewals,
amendments and restatements thereof.
3. The Loan Agreement is hereby amended by adding a Section 1.40(a) thereto,
reading in full as follows:
"Permitted Acquisition" means any acquisition by Borrower of a Permitted
Subsidiary or all or substantially all of the operating assets of any Person,
or assets which constitute all or substantially all of the
<PAGE>
assets of a division or a separate or separable line of business or operating
unit, provided that:
(i) Borrower or a Permitted Subsidiary, as the case may be, is the
surviving entity in any acquisition involving a merger, reorganization or
recapitalization;
(ii) the Person or line of business acquired is in the same line of
business as that of Borrower;
(iii) no Event of Default or Unmatured Default shall exist at the time of
such acquisition or would result on a pro forma basis after completion of such
acquisition;
(iv) the acquisition must have been approved by the Board of Directors or
other similar governing authority of the seller or acquiree;
(v) Lender must have issued its prior written consent in the case of any
acquisition which (x) singly or in the aggregate with other acquisitions from
the same seller or affiliated sellers has a purchase price (including all
consideration, however denominated, in connection with the acquisition, and
valuing contingent consideration on a basis acceptable to Lender) in excess of
$15,000,000.00, or which (y) taken together with all other acquisitions for
the same fiscal year, brings the total consideration paid for all such
acquisitions, determined in the manner set forth in the preceding sentence, to
any amount in excess of $50,000,000.00; provided, however, that for the
purpose of this section (y), as long as there are no amounts outstanding under
the Revolving Credit Loan, consideration paid for acquisitions by the issuance
of Borrower's own stock shall not be counted in calculating the total
consideration paid for acquisitions.
4. The Loan Agreement is hereby amended by changing the value "$25,000" in the
third line of Section 1.42.9 thereof to read "$500,000".
5. The Loan Agreement is hereby amended by adding a Section 1.42(a) thereto
reading in full as follows:
-2-
<PAGE>
"Permitted Subsidiary" means any Person (i) of which Borrower directly owns
at least a majority of the voting equity interests, determined on a fully
diluted basis, (ii) that is a Borrower under this Agreement or a guarantor of
the Obligations, as Lender may specify, (iii) that is owned by Borrower in a
proportion sufficient to allow Borrower to Control the Person, including the
right to cause the Person to make lawful distributions of income, and the
financial interest of Borrower therein is freely alienable by Borrower through
a security interest granted therein or otherwise, (iv) as to which Borrower
has granted to Lender as additional security for the Obligations, a first
priority perfected security interest in its stock or other equity interest in
the Person pursuant to documentation in form and substance acceptable to
Lender and its counsel, with the validity and perfection of the security
interest and other matters as Lender may reasonably require confirmed to
Lender by an opinion of Borrower's outside counsel satisfactory to Lender in
all respects, and with all expenses related to such documentation (including,
but not limited to, filing fees and taxes and the reasonable fees and expenses
of Lender and its attorneys) to be paid by Borrower, and (v) only if so
requested by Lender, which has granted to Lender a first priority perfected
security interest in its assets pursuant to documentation in form and
substance acceptable to Lender and its counsel, with the validity and
perfection of the security interest and other matters as Lender may reasonably
require confirmed to Lender by an opinion of Borrower's outside counsel
satisfactory to Lender in all respects, and with all expenses related to such
documentation (including, but not limited to, filing fees and taxes and the
reasonable fees and expenses of Lender and its attorneys) to be paid by
Borrower.
6. Section 2.1 of the Loan Agreement is amended by replacing the words and
figures "Seventeen Million Five Hundred Thousand and No/100 Dollars
($17,500,000.00)" with the words and figures "Twenty Million and No/100 Dollars
($20,000,000.00)."
7. The Loan Agreement is hereby amended by revising Sections 2.2.1 and 2.2.2
thereof to read in full as follows:
-3-
<PAGE>
2.2.1 LIBOR Loans shall bear interest at the rate of one hundred
twenty-five (125) basis points above the Adjusted LIBOR Rate, which
shall remain fixed for each LIBOR Interest Period.
2.2.2 Prime Rate Loans shall bear interest at the rate of one-
half of one percent (0.50%) below the Prime Rate, as it may change from
time to time.
8. Sections 2.4 and 2.5.3 are amended by replacing the date "November 1,
1996" with "January 31, 1998".
9. The Loan Agreement is hereby amended by deleting the period at the
end of the third sentence thereof and replacing it with the phrase ", and the
requested LIBOR Interest Period, if applicable."
10. The Loan Agreement is hereby amended by revising Section 2.8.1
thereof to read in full as follows:
2.8.1 Amounts converted to a term loan shall bear interest, at
Borrower's election, at either the Prime Rate or Adjusted LIBOR Rate
option described in Section 2.2 hereof, or at a fixed rate equal to 200
basis points in excess of the bond equivalent bid side yield of the U.S.
Treasury Note with a maturity closest to January 31, 2002.
11. The Loan Agreement is hereby amended by revising Section 2.8.3 to
read in full as follows:
2.8.3 All remaining principal and interest shall be due and
payable on January 31, 2002.
12. The Loan Agreement is hereby amended by deleting the text of Section
3.1.9 and replacing it with the phrase "[intentionally left blank]," it being
the intention by this deletion that the life insurance requirement set forth
therein shall no longer apply. Accordingly, the life insurance presently held by
Lender to secure the Obligations shall be released.
13. The Loan Agreement is hereby amended by adding the following as a
new final sentence in Section 5.2.5 thereof:
Without limiting the foregoing, Borrower shall deliver its 10K prepared
pursuant to applicable securities laws within ninety (90) days after the
end of each fiscal year
-4-
<PAGE>
and shall deliver its 10Q, similarly prepared, within forty-five (45)
days after the end of each fiscal quarter.
14. The Loan Agreement is hereby amended by revising Section 6.1 thereof
to include the words "shall not" before the word "exceed" in the first line
thereof.
15. The Loan Agreement is hereby amended by revising the ratio required
in Section 6.2 thereof from 2.00:1.00 to 1.75:1.00.
16. The Loan Agreement is hereby amended by deleting the text of Section
6.4 thereof and substituting the phrase "[intentionally left blank]", it being
the intention that the net income requirement no longer apply.
17. The Loan Agreement is hereby amended by revising the text of Section
7.1 to include additional Sections 7.1.7 and 7.1.8 providing in full as follows:
7.1.7 CERTAIN GUARANTIES. Guaranty obligations (i) in existence as of
March , 1997, as disclosed to Lender in a written schedule dated as of that
date, (ii) with respect to Bankcard America in an amount of up to $1,000,000,
(iii) with respect to Money Transfer Systems in an amount of up to $250,000,
and (iv) other guaranty obligations incurred in the ordinary course of business
in favor of processing banks with regard to processing operations or in favor of
Sirrom Capital Corporation or its Affiliates with regard to other payment
servicing companies, subject to the limitations that no guaranty obligation
shall be permitted under this Subsection 7.1.7(iv) in excess of the amount of
$1,000,000 as to any individual primary obligor and the aggregate guaranty
obligations permitted under this Subsection 7.1.7(iv) shall not exceed
$25,000,000.
7.1.7 ADDITIONAL GUARANTIES. Additional guaranty obligations incurred in
the ordinary course of business in an amount not exceeding $5,000,000 in the
aggregate.
18. The Loan Agreement is hereby amended by revising the text of Section
7.2 thereof to provide that only Richardson M. Roberts and Gregory S. Daily are
covered by the restriction on change in management.
19. The Loan Agreement is hereby amended by deleting the text of Section
7.3 thereof and substituting the phrase "[intentionally left blank]", it being
the intention that the capital expenditure limit no longer apply.
-5-
<PAGE>
20. The Loan Agreement is hereby amended by revising each of Sections
7.5 and 7.8 by deleting the final periods thereof and adding the phrase
", except for Permitted Acquisitions."
21. Concurrently with the execution hereof, Borrower shall pay Lender a
$25,000 commitment fee, which fee is neither refundable nor proratable. Borrower
shall also pay all recording costs, attorneys' fees and other fees and expenses
incurred in connection with this Amendment.
22. Borrower warrants to Lender that, after giving effect to this
Amendment, no Event of Default or Unmatured Event of Default exists under the
Loan Agreement, except as follows. Borrower is a party to certain litigation
that needs to be reported to Lender and has guaranteed certain obligations for
which Lender's consent is required. On or before March 31, 1997, Borrower shall
provide Lender with information sufficient to enable Lender to assess these
matters and to issue any necessary consents, should Lender so elect.
Additionally, as of the execution of this Amendment, Borrower has several
Subsidiaries that are not "Permitted Subsidiaries" under the definition provided
above in this Amendment. Lender hereby waives noncompliance with the above
requirements as to Subsidiaries until the funding of any advance under the
Revolving Credit Loan.
23. Prior to and as a condition to the funding of any advance under the
Revolving Credit Loan, Borrower shall cause Lender to receive (i) the disclosure
items referred to in Section 22 above, (ii) stock pledges, guaranties, corporate
charters, resolutions and such other documents as Lender may require in
connection with the qualification of Subsidiaries as "Permitted Subsidiaries,"
and (iii) such other amendments, resolutions of Borrower's Board of Directors,
opinions of Borrower's counsel and other documents as Lender or its counsel may
reasonably require to evidence and secure the Obligations consistent with the
requirements of the Loan Agreement as amended hereby. In order to allow time for
the preparation and execution of such documentation, Borrower agrees to submit
its initial borrowing request under the Loan Agreement at least thirty (30) days
prior to the requested disbursement date.
24. The provisions hereof shall control provisions of the Loan Agreement
to the extent the two documents may conflict. The validity and construction
hereof shall be determined in accordance with the substantive laws of the State
of Tennessee.
-6-
<PAGE>
Executed as of the date first written above.
PMT SERVICES, INC.
By: /s/ Clay Whitson
-------------------------------
Title: Chief Financial Officer
----------------------------
FIRST UNION NATIONAL BANK OF
TENNESSEE
By: /s/ Orville W. Kronk
-------------------------------
Title: Vice President
-----------------------------
-7-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PMT SERVICES, INC. FOR THE QUARTER ENDED
JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 22,301,220
<SECURITIES> 72,393,934
<RECEIVABLES> 11,770,330
<ALLOWANCES> 0
<INVENTORY> 969,118
<CURRENT-ASSETS> 110,560,673
<PP&E> 9,653,567
<DEPRECIATION> 2,674,036
<TOTAL-ASSETS> 197,984,521
<CURRENT-LIABILITIES> 8,175,445
<BONDS> 0
0
0
<COMMON> 372,790
<OTHER-SE> 188,147,392
<TOTAL-LIABILITY-AND-EQUITY> 197,984,521
<SALES> 125,685,455
<TOTAL-REVENUES> 125,685,455
<CGS> 94,319,755
<TOTAL-COSTS> 94,319,755
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 584,837
<INTEREST-EXPENSE> 30,074
<INCOME-PRETAX> 10,781,783
<INCOME-TAX> 4,025,918
<INCOME-CONTINUING> 6,755,865
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,755,865
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0
</TABLE>
