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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required) for the fiscal year ended July 31, 1997, or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period from
____________ to ____________.
COMMISSION FILE NO.: 0-24420
PMT SERVICES, INC.
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(Exact name of registrant as specified in its charter)
TENNESSEE 62-1215125
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3841 GREEN HILLS VILLAGE DRIVE, NASHVILLE, TN 37215
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 254-1539
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the shares of Common Stock (based upon the
closing price of these shares in the over-the-counter market on October 24,
1997) of the registrant held by nonaffiliates on October 24, 1997 ($17.3125 per
share), was $728,906,716.
As of October 24, 1997, 42,102,915 shares of the registrant's Common Stock
were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference and the part of Form 10-K into which
the document is incorporated:
Portions of the Registrant's Proxy
Statement Relating to the Annual
Meeting of Shareholders to be held
on December 19, 1997............................... Part III
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PART I
Item 1. BUSINESS
GENERAL
PMT Services, Inc., conducting business directly and through its operating
subsidiaries (collectively, "PMT" or the "Company"), is an independent service
organization which markets and services electronic credit card authorization and
payment systems to merchants located throughout the United States. The
Company's operating and growth strategies focus on expanding the Company's
customer base of small merchants through trade and other association
affiliations, telemarketing, acquiring subsidiary sales forces, merchant
portfolio purchases and the provision of high levels of customer service. PMT
has experienced rapid growth in its total merchant portfolio base which has
caused significant growth in the Company's revenues and earnings. From July 31,
1989 to July 31, 1997, the Company's revenues increased from $4.3 million to
$284.2 million. This increase in revenues resulted primarily from the purchase
of merchant portfolios, the acquisition of operating businesses with existing
merchant portfolios, new merchant contracts generated through the Company's
internal marketing and sales efforts and, to a lesser extent, revenue
enhancements with existing merchants.
PMT's sales force generally targets small merchants for its primary customer
base. These merchants typically have a low volume of credit card transactions,
are difficult to identify and have traditionally been underserved by credit card
processors. Management estimates that there are approximately 3.0 million
merchant locations in the United States currently accepting VISA and MasterCard
credit cards in the small merchant market segment and approximately 2.2 million
of such small merchant locations who have credit card processing equipment
utilizing electronic processing for credit card transactions. The balance of
these small merchant locations still utilize paper-based authorization and
settlement. Management believes that the small merchant market offers the
Company significant growth opportunities for (i) installing and servicing credit
card authorization and payment systems, (ii) converting small merchants
currently accepting credit cards from a paper-based system to an electronic
processing system and (iii) migrating from paper and cash to electronic forms of
presentment other payment systems such as debit and electronic benefits
transfer.
During fiscal 1997, PMT adopted a strategy to increase its internal sales by
completing mergers and acquisitions that complemented PMT's existing
telemarketing and field sales efforts. Additionally, the Company embarked upon
a strategy to continue to increase its revenues from additional electronic
payment products by acquiring a leading check verification company and a debit
network. Further complementing this strategy, PMT acquired an in-house leasing
company to finance credit card equipment delivered to its merchants. In the
future, PMT intends to exploit the synergies available between PMT and its
operating subsidiaries, such as migrating services, when appropriate, to a
universal source for authorization, supplies, equipment, leasing and back-office
functions.
PMT provides comprehensive customer service and support to merchants
requiring consultative problem solving and account management. Management
believes providing cost-effective, reliable and responsive service is the most
effective long-term strategy to retain its merchant base. Through internally
generated merchant accounts, purchases of merchant account portfolios, retention
of merchants and the increasing use and acceptance of credit cards, management
believes the Company has developed a stable and recurring base of revenues.
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INDUSTRY OVERVIEW
The number of credit cards in use has grown dramatically since their
introduction over 40 years ago. According to recent industry statistics, in
1996 there were approximately 523 million "general purpose" credit cards honored
by all types of merchants. General-purpose cards were dominated by VISA and
MasterCard in 1996. The total number of VISA and MasterCard credit cards in
circulation increased by 43.3 million to 445 million in 1996 from 1995.
According to the Nilson Report, there are currently over 6,800 financial
institutions that issue VISA and MasterCard credit cards in the United States.
Approximately $677 billion was charged to VISA and MasterCard credit and debit
cards in 1996, as compared with $80 billion in 1983. Despite this rapid growth,
credit and debit card transactions represented less than 20% of consumer
spending in the United States in 1995 (the majority of the remainder was either
cash or check). Today, consumers increasingly expect to be able to use their
credit cards in almost all purchase transactions, regardless of merchant
location, type or size, as credit card use continues to incrementally displace
cash and checks. In addition, VISA and MasterCard have aggressively attempted
to increase the number of merchants accepting credit cards as a method of
payment. According to industry statistics, in 1996 there were approximately 3.5
million merchant locations that accepted VISA and MasterCard credit cards as a
method of payment.
Electronic credit card transaction processing services encompass a variety of
functions including data capture, communication, authorization and settlement.
A typical transaction begins when a customer presents a credit card to a
merchant for payment. The card is swiped through an electronic terminal which
has been placed with the merchant by a bank or a non-bank service provider, such
as PMT. The cardholder's purchase is electronically authorized by the issuing
bank. Simultaneously, pertinent data relating to the transaction are recorded
electronically by the terminal and transferred to a processing bank where the
data is stored for use in settlement and client reporting. Both the
authorization and data capture functions of the terminal involve transmissions
of data via an electronic network. The processing bank transmits the total
merchant charge to the card issuing institution through the VISA and MasterCard
credit card associations and arranges for funds to be transferred to the
merchant's bank. The merchant's account is credited with the full retail
purchase amount, less the discount rate, generally within 24 to 72 hours, and
the card issuer then enters the transaction on the cardholder's monthly
statement.
Historically, the larger acquiring banks have marketed credit card processing
services within their regional market to their primary banking relationships and
regional merchants. Typically, they do not concentrate on small merchants with
a low volume of transactions because small merchants are often difficult to
identify and expensive to service. This has created an opportunity for non-
banks, including independent service organizations such as PMT, to pursue the
opportunity of providing electronic processing to these small merchants.
The transaction processing industry has undergone rapid consolidation over
the last several years, particularly in the large merchant segment. The costs
to convert from paper-based to electronic processing, merchant requirements for
improved customer service, the upgrades required to accommodate new payment
technologies such as debit, electronic benefits transfer, or check, and the
significant research and development necessary to meet new demands of VISA and
MasterCard for additional customer applications have made it difficult for some
community and regional banks and independent service organizations to remain
competitive. Many of these providers are unwilling or unable to invest the
capital required to meet these changing requirements and are leaving the
transaction processing business or otherwise seeking partners to provide
transaction processing for their customers. Despite this ongoing consolidation,
the industry remains highly fragmented with respect to the number of entities
providing merchant services. Management estimates that in 1996 there were over
200 registered independent service providers marketing and selling transaction
processing services to merchants. Many of these service
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providers are small independent service organizations which PMT pursues for
future acquisitions. Management believes these factors will result in continuing
industry consolidation over the next several years.
OPERATING AND GROWTH STRATEGY
Focus on Small Merchants. PMT has focused its marketing and acquisition
efforts on small merchants which traditionally have been underserved by
processing banks. Management believes it understands the unique characteristics
of this market segment and has tailored its marketing and servicing efforts
accordingly. The Company is able to provide electronic processing systems at
rates that generally are lower than those available from small local processing
banks as a result of its significant transaction volume. See "Merchant
Services."
Acquisitions. When PMT consummated its initial public offering in August
1994, it had approximately 37,000 merchant accounts. At that time, various
independent service providers controlled portfolios ranging in size from
approximately 2,000 to 20,000 merchant accounts each. Many of these providers
did not have the scale or access to capital necessary for rapid expansion.
Since July 1996, PMT has acquired eleven of these independent service
organizations, three of which were acquired subsequent to fiscal 1997. The
Company and its operating subsidiaries benefit from the economies of scale
achieved through combining operations.
Bank Alliances. The industry has experienced a series of mergers, joint
ventures and alliances, such as VISA and Total System's formation of Vital and
the First Data Corporation's alliance program. These mergers, joint ventures
and alliances have increased competition in the banking sector, particularly
among the smaller service providers. As a non-bank entity, PMT has the
opportunity to offer attractive pricing and service to this industry sector
without threatening the core business of banks because PMT does not compete with
banks for loans and deposits.
Product Diversification. The Company has adopted a strategy to continue to
increase its revenues through offering additional electronic payment products
through the acquisition of a leading check verification company and a debit
network. Further complementing this strategy, PMT has acquired an in-house
leasing company to finance credit card equipment delivered to its merchants.
Deliver Customer Service Support. The Company recently relocated to an
expanded, technologically upgraded facility which will further enhance its
customer service. Management believes providing cost-effective, reliable and
responsive service is the most effective long-term strategy to retain its
merchant base. The size of the Company's merchant base enables it to support a
customer service program designed to provide comprehensive consultative problem
solving and account management. PMT has continued to upgrade its customer
service information systems by installing new hardware and creating proprietary
software applications to further enhance the customer service it provides and to
accommodate future growth. Additionally, the new facility provides room for
expansion for additional customer service personnel and further upgrades of
telecommunication systems as such technology develops.
Increase Operating Efficiencies. Currently, the Company outsources its
processing and network services needs to third parties which have excess
capacity and the expertise to handle such needs. The Company has experienced
lower costs for processing and network services than the overall industry
because of the Company's increased economies of scale. Management believes its
significant transaction volume enabled it to negotiate competitive pricing from
its processing and network providers at prices below what the Company would
experience to build and support these systems internally. The Company has
achieved significant reductions in certain operating expenses through
operational efficiencies,
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economies of scale and improved labor productivity. The Company intends to
outsource processing and network services as long as it is economically more
attractive than the development and support of these services within the
Company, allowing management to focus on its core business of sales, marketing
and customer service.
Maintain a Stable and Recurring Revenue Base. Through merchant retention and
increased credit card use, the Company has developed a stable and recurring base
of revenues. In addition to its high customer service level, the Company's
endorsements from Associations provide an additional link to its merchants that
tends to reduce attrition. Furthermore, management believes that the low
transaction volume of its individual merchants makes such merchants less likely
to change service providers because of the initial set-up costs associated with
a transfer.
MARKETING
The Company utilizes a multi-faceted marketing approach which includes a
nationwide field sales and telemarketing force of approximately 310 people
(compared to 109 people at July 31, 1996). The Company also has various
relationships with other independent service organizations, independent sales
representatives and joint marketing arrangements with banks. During fiscal 1997,
the Company pursued acquisitions of operating businesses with significant field
sales forces to improve the Company's internal growth capabilities. As a result
of these acquisitions, the Company now provides services to many of the nation's
key population centers. This field sales force now represents the Company's
primary channel for internal merchant account acquisitions.
While now emphasizing internal growth through its field sales force, the
Company continues to telemarket through its Association marketing program
initiated in 1988, which now includes 241 Associations and more than one million
potential merchant accounts. Under these arrangements, the Company obtains
exclusive endorsements from the Associations and receives initial and ongoing
marketing assistance from the Associations. Telemarketers contact Association
members whose names and telephone numbers are obtained through the Associations.
If a merchant expresses interest, the Company performs various credit and
underwriting tests which might include a review of reports issued by credit
agencies and sight inspections from an outside agency. The Company can ship a
terminal overnight and install the necessary software over the telephone. This
process represents a very cost effective means of acquiring a new merchant and
of cross-selling additional products and services such as check verification and
debit processing to existing merchants of the Company. The Company typically
pays referral compensation to the Associations in exchange for the continuing
endorsement of the Company's services.
As a non-bank entity, PMT has the opportunity to offer attractive pricing and
service to the banking industry through bank alliances, without threatening the
core business of the banks because PMT does not compete with banks for loans and
deposits. Pursuant to the alliance between the bank and the Company, the bank
may offer competitively priced transaction processing services to their bank
customers through the Company.
Because of its significant transaction volume, the Company is able to obtain
favorable pricing from third-party service providers. From time to time, the
Company has entered into arrangements to allow other independent service
organizations to avail themselves of such favorable pricing. In connection with
such arrangements, the Company will (i) process the independent service
organization's transactions through the Company's servicing arrangements with
one of its current third-party providers and (ii) generally obtain the right to
purchase all or a portion of the independent service organization's merchants at
a specified price.
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ACQUISITIONS
Since fiscal 1991, the Company has completed numerous acquisitions of
operating businesses and merchant portfolios involving as few as 500 and as many
as 15,000 merchant accounts. During fiscal 1997, the Company completed eight
significant transactions involving merchant portfolios generating over $4.5
billion in combined annual charge volume. Management believes that increased
competition in the industry and other factors have pressured certain competitors
to examine the benefits of alliances, mergers and strategic partnerships or
dispose of all or a portion of their merchant portfolios. As a result,
management believes many opportunities for industry consolidation exist, both
within the banking sector and in the independent service organization market.
The Company's experience in acquisitions, coupled with its operating
efficiencies and significant cash flows, greatly enhance the Company's ability
to successfully integrate merchant portfolios on a cost-effective basis.
The following table lists certain acquisitions of operating businesses and
merchant portfolios that the Company has completed as of October 29, 1997:
Name Type of Acquisition Date of Acquisition
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United Missouri Bank Merchant Portfolio March 1996
Martin Howe Associates, Inc. Operating Business July 1996
Data Transfer Associates, Inc. Operating Business August 1996
Fairway Marketing Group, Inc. Operating Business December 1996
Bancard Systems, Inc. Operating Business January 1997
Retail Payment Services, Inc. Operating Business January 1997
IMA Payment Systems, Inc. Operating Business March 1997
Zions Bank Merchant Portfolio April 1997
CVE Corporation Operating Business April 1997
Erik Krueger, Incorporated Operating Business June 1997
LADCO Financial Group, Inc. Operating Business July 1997
Retail Systems Consulting, Inc. Operating Business September 1997
Bancard, Inc. Operating Business October 1997
The above mentioned acquisitions generate (on an annualized basis) over $8.0
billion in combined charge volume (excluding LADCO Financial Group, Inc.).
PROCESSING RELATIONSHIPS
PMT markets and services electronic credit card authorization and payment
systems pursuant to contractual relationships with processing banks that are
members of VISA and MasterCard. Under such contractual relationships, PMT's
processing banks process merchant credit card transactions pursuant to
contracts, the terms of which have been negotiated by PMT (or certain other
independent service organizations from whom PMT has acquired merchant
portfolios) and approved by the processing bank. PMT's processing banks
withhold from the merchants a discount rate and various fees for the processing
of each credit card transaction. From PMT's discount rate revenues, amounts are
paid to the issuing bank, the network service provider, VISA or MasterCard and
to the processing bank.
As of July 31, 1997, the Company relied on multiple relationships with
various banks to process the credit card transactions of PMT's clients.
Generally, the Company's agreements with processing banks contain aspects of
both marketing and service. The marketing portions of the agreements permit PMT
to originate new merchants which then enter into contractual agreements with the
processing banks for
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processing of credit card transactions. The service portion of the agreements
permits PMT to provide appropriate service to the merchants solicited to process
on the processing banks' systems. Although the marketing portion of the
agreements is limited as to time, the service portion of substantially all of
these agreements is not. The marketing aspects expire at various dates unless
renewed automatically, if applicable, or extended by the parties. There can be
no assurance that PMT's contractual arrangements with its processing banks will
be renewed or that PMT will be able to obtain favorable replacement
arrangements, whether upon expiration, termination or otherwise.
NETWORK SERVICES
Networks provide an electronic connection or pathway between the merchant and
PMT's processing bank and are paid a fixed amount per transaction. All
appropriate parties receive pertinent information from merchants via the
networks. PMT's relationships with its processing banks enable it to negotiate
directly with network service providers to obtain volume discounts for network
services. Historically, the Company's costs for outsourcing network services
have decreased as a result of the Company's scale and ability to negotiate
favorable volume sensitive contracts.
DISCOUNT RATE AND FEES
The primary source of revenue for PMT is the discount rate paid by the
merchant for each credit card transaction processed for that merchant. In
addition to revenues derived from the discount rate, the Company receives
periodic fees from most of its merchants for providing various other services.
See "Merchant Services." The discount rate and fees are negotiated by the
Company, within the terms of the Company's processing agreements, with each of
the merchants to which the Company provides services. PMT contracts with third
parties to provide a portion of the services to the merchant, including
communication networks, transaction processing and monthly preparation of
detailed merchant statements. Additionally, PMT complies with the pricing
structures established by VISA and MasterCard associations for the interchange
fee paid to the retail consumers' card-issuing banks and the associations' fees.
The primary costs incurred by PMT in delivering its services to the merchants
are: (i) an interchange fee paid to the card-issuing bank which is set by the
VISA and MasterCard associations and which is calculated as a percentage of the
transaction amount, (ii) a fee calculated as a percentage of the transaction
amount that is paid to the VISA or MasterCard association which is established
by the member banks of the VISA and MasterCard associations, (iii) a fixed, per-
transaction fee paid to the network service provider which is negotiated between
PMT and the network service provider and (iv) a fixed, per-transaction fee paid
to the processing bank which is negotiated between PMT and the processing bank.
The Company recognizes as revenue in its statement of income the full discount
rate collected from the merchant and various fees associated with servicing
merchant accounts. Also, the various costs incurred by the Company discussed
above (e.g., amounts paid to the card-issuing bank and network provider) are
reflected as costs of revenues.
Several factors can alter the profitability to PMT for merchant transactions.
Primarily, these include (i) improper use of the card reading terminal by the
merchant, resulting in higher interchange fees paid to the card-issuing bank,
(ii) lower than anticipated average dollar sales of credit card transactions
which reduce the Company's gross transaction margin because many of the
transaction costs are fixed, (iii) losses incurred as a result of customer
chargebacks (PMT can be required to absorb the full retail purchase amount),
(iv) the inability to collect the discount rate because of insufficient funds in
the merchant's bank account, (v) merchant fraud and (vi) excessive volume of
customer return transactions in which the Company incurs all transaction costs
except interchange fees.
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MERCHANT CLIENTS
The Company serves a diverse portfolio of small merchant clients, primarily
in the automotive after-market, restaurant and general retail industries. This
client diversification has contributed to the Company's growth despite the
varying economic conditions of the regions in which its merchants are located.
Merchant attrition is an expected aspect of the credit card processing
business. Historically, the Company's attrition has related to merchants going
out of business, merchants returning to local processing banks or merchants
transferring to competitors for rates the Company was unwilling to match.
Having evaluated a significant number of independent service organizations and
bank portfolios through due diligence, management believes its attrition rates
compare favorably with its peer group.
Merchant fraud is another inherent aspect of the credit card processing
business. Generally, the Company is responsible for fraudulent credit card
transactions of its merchants. Examples of merchant fraud include inputting
false sales transactions or false credits. The Company and its processing banks
monitor merchant charge volume, average charge and number of transactions, as
well as unusual patterns in the charges, returns and chargebacks processed for
merchants. As part of its fraud avoidance policies, the Company generally will
not process for certain types of businesses which provide future services where
incidents of fraud have been common. Management believes that the Company's
overall loss experience in relation to its charge volume compares favorably with
the Company's peer group. Generally, the Company is not responsible for
cardholder fraud. The Company evaluates its risks and estimates the potential
loss for chargebacks and merchant fraud based on historical experience. The
Company maintains a reserve for such estimated losses in the same period as the
related revenue, and subsequent actual fraud losses are charged against the
Company's reserve.
MERCHANT SERVICES
Management believes providing cost-effective, reliable and responsible
service is the most effective method of retaining merchant clients. The Company
maintains personnel and systems necessary for providing such services directly
to merchants and has developed a comprehensive program involving consultative
problem solving and account management. The Company maintains a department of
customer service personnel available 24-hours a day to respond to inquiries from
merchants regarding terminal, communication and training issues. Service
personnel provide terminal application consultation by telephone and regularly
reprogram terminals via telephone lines to accommodate particular merchant needs
regarding program enhancements, terminal malfunctions and VISA and MasterCard
regulations. In addition, merchants may obtain direct, personal assistance in
reconciling network and communications problems, including problems with network
outages and local phone company services. The Company has an ongoing program to
further enhance the customer service it provides and to accommodate future
growth of the Company's merchant base. In connection with upgrading the
Company's customer service information system, the Company will continue to
purchase new hardware and software. In addition, the Company's commitment to
providing comprehensive services includes the expansion of check guarantee and
debit services to merchants as such technology develops.
The Company may sell or finance through its in-house leasing company, a
credit card terminal to its merchant customers. The Company's terminals are
"down-loadable," meaning additional services, such as authorization or payment
services for additional credit cards, can be installed in the terminal
electronically from the Company's offices without the necessity of replacement
equipment or an on-site installation visit. Additionally, peripheral equipment
such as pin pads and printers can be easily forwarded to the merchants upon
request. The Company also loans, tests and ships point-of-sale terminals
directly to merchant
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locations, and provides complete repair-or-replacement services for
malfunctioning terminals. Generally, the Company can arrange for delivery of
replacement terminals by overnight courier.
COMPETITION
The market for placing and maintaining electronic credit card authorization
and payment systems with retail merchants is highly competitive. The Company
competes in this market on the basis of price, quality of customer service,
support and availability of additional features. Management believes merchants
initially select a processing service provider primarily based on price and
elect to sustain the relationship based on a combination of service and price.
See "Marketing".
Many industry participants have elected to sell, merge or form strategic
alliances in recent years which has prompted many small independent service
organizations and other providers to examine the viability of continuing to
operate independently.
The Company's principal competitors are local banks. The Company also
competes with larger, vertically-integrated transaction processors as well as
numerous competitors that provide certain merchant services while using third
parties for network and other services. In addition, the Company competes with
large regional and national banks that have not entered into a marketing
relationship with the Company. As a non-bank entity, PMT has the opportunity to
offer attractive pricing and services to this industry sector without
threatening the core business of banks because PMT does not compete with banks
for loans and deposits.
Larger, more fully integrated companies may penetrate PMT's segment of the
market. Moreover, many of the Company's competitors have access to significant
capital, management, marketing and technological resources greater than those of
the Company, and there can be no assurance the Company will continue to be able
to compete successfully with banks, other transaction processors and merchant
service providers.
EMPLOYEES
As of July 31, 1997, the Company had approximately 900 full-time employees,
consisting of 230 customer service personnel, 360 management and administrative
personnel, and 310 field sales representatives and telemarketers. The internal
growth of the Company's business will depend upon its ability to attract and
retain productive sales and other personnel.
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ITEM 2. PROPERTIES
In September 1997, the Company moved into its new corporate office facility
of which the Company leases approximately 100,000 square feet of the total
150,000 square feet in the Green Hills area of Nashville, Tennessee. In
connection with this move, the Company entered into a lease relating to such
space with Battleship, LLC. The term of the lease is ten years, with a five-
year renewal option. Base monthly rent for the office space will be $60,417 for
the first year and $75,656 per month for years two through ten.
On April 23, 1997, the Company subleased to Columbia/HCA Healthcare
Corporation ("Columbia") 29,273 square feet of its existing space leased from
Highwoods/Forsyth Limited Partnership. The Sublease is for a term commencing in
September, 1997 and ending December 31, 2000, the expiration date of the
Company's existing lease. Columbia will make monthly rental payments to the
Company in the amount of $34,152.
Below is a list of the Company's significant properties including the
approximate square footage and if the properties are leased or owned:
Properties
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Approximate
Square footage Lease/Own
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PMT - Corporate headquarters
Nashville, Tennessee 100,000 lease
Martin Howe Associates, Inc.
Dallas, Texas 7,803 lease
Data Transfer Associates, Inc.
Des Plaines, Illinois 8,732 lease
Bancard Systems, Inc.
Irvine, California 9,082 lease
Fairway Marketing Group, Inc.
Tampa, Florida 7,400 lease
IMA Payment Systems, Inc.
Nashville, Tennessee 2,450 lease
CVE Corporation
Omaha, Nebraska 10,000 lease
Ladco Financial Group
Thousand Oaks, California 8,441 lease
Management believes these arrangements and other available space are adequate
for the Company's current uses and anticipated growth.
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ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and other claims arising in the
ordinary course of business.
In addition, the Company is a defendant in a lawsuit styled Glenn Francis, et
al. v. BankCard America, Inc., PMT Services, Inc., d/b/ U.S. BankCard, et al.,
Docket No. 93-C5510, which is pending in the U.S. District Court for the
Northern District of Illinois.
The claim relates to the plaintiffs' relationship with defendant BankCard
America, Inc. The plaintiffs claim that they established certain merchant
accounts from which they were entitled to receive residual income. BankCard
America, Inc. ("BankCard") terminated its relationship with the plaintiffs. The
Company subsequently purchased a merchant portfolio from BankCard that included
the disputed merchant accounts. In connection with this purchase, BankCard made
various representations and warranties with respect to its right to sell the
portfolio and agreed to indemnify the Company for any breach of those
representations and warranties. This disputed purchase is one of six purchases
of portfolios made by the Company from BankCard or its affiliates since 1989. A
summary of the litigation to date is set forth below.
The lawsuit was filed on September 9, 1993, against BankCard and certain of
its affiliates alleging, among other claims, violations of the Racketeering
Influenced and Corrupt Organizations Act (RICO). On November 3, 1994, the court
dismissed the RICO counts with prejudice.
The Company was initially named as a defendant on August 30, 1995. The
lawsuit currently purports to allege acts of fraud, misappropriation and unjust
enrichment, but not RICO violations. The plaintiffs claim actual damages in the
amount of $162,000 plus costs and attorneys' fees and punitive damages in the
amount of $500,000 against certain defendants other than the Company. With
respect to the Company, the plaintiffs seek to void the sale of the merchant
accounts in dispute.
The motion referred to in our previous audit response letters wherein the
plaintiff sought permission to allege various violations of RICO has now been
denied. The original motion to dismiss the underlying action filed in August
1995 remains under advisement with the court.
Management believes that the Company has valid defenses and intends to
vigorously defend all claims made against it. Based on the status of the
litigation to date and the facts currently known to the Company, management does
not believe that the allegations in the lawsuit will have a material adverse
effect on the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders during the fourth quarter
of fiscal 1997.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol PMTS. The following
table sets forth the range of high and low sales prices on the Nasdaq National
Market by quarter for the two years ended July 31, 1997 and 1996, as reported
by the Nasdaq National Market:
1997 1996
High Low High Low
----- ----- ----- -----
First Quarter... 28.75 16.50 9.25 5.75
Second Quarter.. 22.50 13.63 13.42 8.46
Third Quarter... 16.06 10.38 20.08 11.50
Fourth Quarter.. 19.63 13.00 28.75 17.50
The stock prices for fiscal 1996 have been adjusted to give retroactive
effect to the Company's stock splits. The stock split for shareholders of
record on December 14, 1995 was a two-for-one stock split effected in the form
of a stock dividend. The stock split for shareholders of record on May 28, 1996
was a three-for-two stock split effected in the form of a stock dividend.
Based on the distribution of the Company's search cards, as of October 9,
1997, there were approximately 7,200 shareholders of the Company's common stock
including, 197 record holders.
The Company currently intends to retain all earnings to finance the
development and expansion of its operations and, therefore, does not anticipate
paying cash dividends or making any other cash distributions on its shares of
Common Stock in the foreseeable future. The Company's future dividend policy
will be determined by its Board of Directors on the basis of various factors,
including the Company's results of operations, financial condition, business
opportunities and capital requirements. The declaration of cash dividends is
currently prohibited by the Company's bank credit facility.
On June 3, 1997 the Company issued 579,000 shares of its common stock in
exchange for all the outstanding common stock of Eric Krueger, Incorporated
("Krueger"). On July 14, 1997 the Company issued 1,463,414 shares of its common
stock in exchange for all the outstanding common stock of Ladco Financial Group
("LFG"). The above referenced shares were issued to the shareholders of Krueger
and LFG in reliance upon the exemption provided by Section 4(2) of the Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data which have been
derived from the Company's audited financial statements for each of the five
years in the period ended July 31, 1997. The Company's financial statements as
of July 31, 1996 and 1997 and for each of the years in the three-year period
ended July 31, 1997 are included elsewhere herein. The data set forth below
should be read in conjunction with the Financial Statements, the Notes thereto
and other financial information included elsewhere herein.
13
<PAGE>
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------------------------------
(in thousands, except per share and other data)
1993 1994 1995 1996 1997
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues (1)........................ $61,987 $ 97,125 $139,539 $214,891 $284,213
Cost of revenues.................... 45,941 68,518 98,152 154,442 203,975
------- -------- -------- -------- --------
Gross margin........................ 16,046 28,607 41,387 60,449 80,238
Selling, general & administrative
expenses.......................... 10,358 16,709 23,773 31,481 36,543
Depreciation and amortization....... 570 1,745 3,622 7,731 12,670
Provision for merchant loss
and bad debt expense............. 1,573 2,884 1,954 3,786 4,248
Stock award compensation............ 281 240 241 -- --
Non-recurring operating
expense.......................... -- -- -- -- 594
------- -------- -------- -------- --------
Income from operations.............. 3,264 7,029 11,797 17,451 26,183
Interest income (expense),
net............................. (1,242) (2,470) (3,043) (1,798) 1,387
Other income (expense), net......... -- -- -- 704 (1,554)
------- -------- -------- -------- --------
Income before provision for
taxes, extraordinary item and
change in accounting principle.... 2,022 4,559 8,754 16,357 26,016
Provision for income taxes.......... 772 1,757 3,301 6,131 9,617
------- -------- -------- -------- --------
Income before extraordinary
item and change in accounting
principle......................... 1,250 2,802 5,453 10,226 16,399
Net income (2)...................... $ 1,839 $ 3,115 $ 5,453 $ 10,226 $ 16,399
PER SHARE INFORMATION:
Income before extraordinary
item........................... $ 0.07 $ 0.15 $ 0.20 $ 0.29 $ 0.40
Extraordinary item - net operating
loss carryforward................. 0.03 0.00 0.00 0.00 0.00
------- -------- -------- -------- --------
Income before change in
accounting principle.............. 0.10 0.15 0.20 0.29 0.40
Cumulative effect of change
in accounting principle........... 0.00 0.01 0.00 0.00 0.00
------- -------- -------- -------- --------
Earnings per share (3).............. $ 0.10 $ 0.16 $ 0.20 $ 0.29 $ 0.40
======= ======== ======== ======== ========
Weighted average shares
outstanding....................... 18,979 19,174 27,106 34,705 41,144
July 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital $(3,604) $(12,337) $ (811) $106,431 $ 75,629
Total assets 33,465 54,591 84,959 227,904 249,008
Long-term debt, less current
portion......................... 10,816 15,247 31,232 19,051 16,891
Total shareholders' equity.......... 1,706 4,898 33,415 183,486 202,567
</TABLE>
__________________________
(1) Revenue increased for fiscal 1993 through 1997 primarily from the purchase
of merchant portfolios and new merchant contracts generated by the Company
as well as fee enhancements with existing merchants.
(2) Net income for fiscal 1993 has increased through the utilization of net
operating loss carryforward of $589,471, the benefit of which has partially
offset the provision for income taxes. For the fiscal year ended July 31,
1994, net income has increased by $312,800 because of a change in
accounting principle relating to income taxes.
(3) Earnings per share for fiscal 1997 includes non-recurring, after-tax
operating and merger expenses of $1,943,000 or $0.05 per share. Earnings
per share for fiscal 1996 includes non-recurring income of $1,000,000 life
insurance proceeds and $296,000 of merger expenses or a net of $0.02 per
share.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of certain factors affecting the Company's
results of operations for each of the three fiscal years in the period ended
July 31, 1997 and its liquidity and capital resources. This discussion should
be read in conjunction with the financial statements and notes thereto included
elsewhere herein.
Overview
The Company is an independent service organization which markets and
services electronic credit card authorization and payment systems, including
sale and leasing of related equipment, to retail merchants located throughout
the United States. The Company's principal sources of revenues are discount
collected and merchant service fees. The remaining revenues consist of leases,
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" and related fees,
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.
Revenue related to finance leasing of point-of-sale processing equipment
are recognized over the term of the lease agreement using the interest method.
Acquisitions
The Company completed nine acquisitions in fiscal 1995, five acquisitions
in fiscal 1996 and completed 16 acquisitions in fiscal 1997. Significant
acquisitions are discussed further below.
In April 1995, the Company purchased a merchant portfolio from Bankcard
America, 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 for additional consideration of $2.5 million payable to the seller
contingent upon the seller's ability to negotiate the transfer of the merchant
accounts, to the Company's primary processing bank. In May 1995, an agreement
was entered into providing for transfer of the merchant accounts, and pursuant
to the terms of the purchase agreement, the Company paid $2.5 million
representing additional purchase price for the merchant portfolio.
Additionally, beginning June 1995, the Company's amended processing agreement
with its primary processing bank required a $1.5 million security deposit for a
six month period as a result of the conversion of other merchant portfolios to
this processing bank. This deposit plus accrued interest was returned to the
Company
15
<PAGE>
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.
The Company purchased two additional merchant portfolios including related
credit card equipment inventory, a merchant lease portfolio and other office
assets for approximately $12.2 million.
In the first quarter of fiscal 1996 the Company purchased a merchant
portfolio from Imperial Bank effective October 1, 1995. The Company paid
approximately $8.7 million for the portfolio from proceeds of the Company's
second public offering. In the third quarter of fiscal 1996, the Company
purchased two merchant portfolios. The Company purchased a merchant portfolio
from UMB Bank, N.A. ("UMB") for a purchase price of $13.5 million effective
March 1, 1996. Effective April 1, 1996, the Company purchased a merchant
portfolio from BankCard America, Inc. ("ABC") for a purchase price of $6.3
million.
In the fourth quarter of fiscal 1996, the Company consummated one operating
business acquisitions and one merchant portfolio acquisition. The Company
accounted for the larger of these two acquisitions as a pooling of interests.
On July 1, 1996, the Company issued 594,019 shares of its common stock in
exchange for all of the outstanding common stock of Martin Howe Associates, Inc.
("MHA"). The Company's consolidated financial statements have been restated to
include the accounts of MHA for all periods prior to the merger. The other
acquisition was accounted for as a purchase transaction and the operating
results have been included in the Company's financial statements beginning July
1, 1997, the effective date of the transaction.
In the first quarter of fiscal 1997, the Company completed one operating
business acquisition and two merchant portfolio acquisitions. On August 2,
1996, the Company issued 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 operating results of the
other two merchant portfolio acquisitions were accounted for as purchase
transactions and have been included in the Company's financial statements
beginning August 1, 1996, the effective date of the 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 three
operating business acquisitions accounted for as poolings of interests and two
merchant portfolio acquisitions. On December 23, 1996 the Company issued
424,999 shares of its common stock in exchange for all the outstanding common
stock of Fairway Marketing Group, Inc. ("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 Bancard Systems, Inc. ("BSI"). On January 30,
1997 the Company issued
16
<PAGE>
567,519 shares of its common stock in exchange for all the outstanding common
stock of Retail Payment Services, Inc. ("RPS"). The above referenced shares were
issued to the shareholders of Fairway, BSI and RPS in reliance upon the
exemption provided by Section 4(2) of the Act. The Company's consolidated
financial statements have been restated to include the accounts of Fairway, BSI
and RPS for all periods prior to the merger. The other two merchant portfolio
acquisitions were accounted for as purchase transactions and their 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.
In the third quarter of fiscal 1997, the Company consummated one operating
business acquisition and three merchant portfolio acquisitions. On March 31,
1997 the Company issued shares of its common stock in exchange for all the
outstanding common stock of IMA Bancard, Inc. ("IMA"). The shares were issued
to the shareholders of IMA in reliance upon the exemption provided by Section
4(2) of the Act. The acquisition was accounted for as an immaterial pooling of
interests. The other three merchant portfolio acquisitions were accounted for
as purchase transactions and their operating results have been included in the
Company's financial statements beginning March 1, 1997 and April 1, 1997, the
effective dates of the transactions.
In the fourth quarter of fiscal 1997, the Company consummated three
operating business acquisitions and one merchant portfolio acquisition. On
April 30, 1997 the Company issued shares of its common stock in exchange for all
the outstanding common stock of CVE, Inc. ("CVE"). The acquisition was
accounted for as an immaterial pooling of interests. On June 3, 1997 the
Company issued 579,000 shares of its common stock in exchange for all the
outstanding common stock of Eric Krueger, Incorporated ("Krueger"). On July 14,
1997 the Company issued 1,463,414 shares of its common stock in exchange for all
the outstanding common stock of Ladco Financial Group ("LFG"). The Company's
consolidated financial statements have been restated to include the accounts of
Kreuger and LFG for all periods prior to the merger. The above referenced
shares were issued to the shareholders of CVE, Krueger and LFG in reliance upon
the exemption provided by Section 4(2) of the Act. The other acquisition was
accounted for as a purchase transaction and the operating results have been
included in the Company's financial statements beginning July 1, 1997, the
effective date of the transaction.
The growth in the Company's revenues and profitability for fiscal years
1996 and 1997 has resulted largely from the acquisition of operating businesses
and merchant portfolios. Future growth is dependent upon, among other factors,
the Company's ability to continue to consummate additional acquisitions of
operating businesses and merchant portfolios. There can be no assurance that
the Company will be able to make successful 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 the 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 1995 or fiscal 1996, or of results which may occur in the
future because the cost structures of the acquired portfolios are not directly
comparable to the Company's.
17
<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>
Period-to-Period Changes
---------------------------
Year ended July 31, Increase (Decrease)
--------------------------------------------------
1996 1997
vs. vs.
1995 1996 1997 1995 1996
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 54.0% 32.3%
Cost of revenues 70.3 71.9 71.8 57.4 32.1
----- ----- -----
Gross margin 29.7 28.1 28.2 46.1 32.7
Selling, general and administrative expenses 17.0 14.6 12.8 32.4 16.1
Depreciation and amortization expense 2.6 3.6 4.5 113.4 63.9
Provision for merchant loss and bad debt expense 1.4 1.8 1.5 93.8 12.2
Stock award compensation 0.2 0.0 0.0 (100.0) 0.0
Non-recurring operating expense 0.0 0.0 0.2 -- 100.0
----- ----- -----
Income from operations 8.5 8.1 9.2 47.9 50.0
Interest income (expense), net (2.2) (0.8) 0.5 (40.9) (177.1)
Other income (expense), net 0.0 0.3 (0.5) 100.0 (320.8)
----- ----- -----
Income before provision for taxes 6.3 7.6 9.2 86.9 59.1
Provision for income taxes 2.4 2.8 3.4 85.7 56.9
----- ----- -----
Net income 3.9% 4.8% 5.8% 87.5% 60.4%
===== ===== =====
</TABLE>
Revenues
Revenues increased from $139.5 million in fiscal 1995 to $214.9 million in
fiscal 1996 and $284.2 million in fiscal 1997. These increases represent a
54.0% increase from fiscal 1995 to fiscal 1996 and a 32.3% increase from fiscal
1996 to fiscal 1997.
The increases in revenues for all periods presented resulted primarily from
acquisitions and new merchant contracts generated through the company's
telemarketing and field sales efforts, as well as fee enhancements with existing
merchants. The increases from fiscal 1995 to fiscal 1996 were primarily the
result of the purchased merchant portfolios which resulted in a 61.5% increase
in revenues. In fiscal 1996, the Company completed five acquisitions and in
fiscal 1997, the Company completed 16 acquisitions, eight of which were
acquisitions of operating businesses. Acquisitions accounted for approximately
72.4% of the increase in revenues in fiscal 1997.
Cost of Revenues
Cost of revenues increased from $98.2 million in fiscal 1995 to $154.4
million in fiscal 1996 and $204.0 million in fiscal 1997. These increases
represented a 57.4% increase from fiscal 1995 to fiscal 1996 and 32.1% increase
from fiscal 1996 to fiscal 1997.
The primary components of the Company's cost of revenues have generally
remained consistent as a percentage of revenues from fiscal 1995 through fiscal
1997. A majority of the Company's cost of revenues are fixed as a percentage of
each transaction amount, with the remaining costs being based on a fixed rate
applied to the number of transactions processed. In
18
<PAGE>
fiscal 1996, cost of revenues increased as a percentage of revenues as a result
of significant merchant portfolio acquisitions from banks which had a higher
cost of revenues as a percentage of revenues than those historically experienced
by the Company. This resulted from the Company assuming certain contractual
obligations which were less favorable than other existing agreements. In some
cases, where costs of acquired businesses were initially higher than normal, the
Company has been able to ultimately lower the cost to deliver the services.
Following the acquisition of LFG in fiscal 1997, the Company has
retroactively restated all prior periods to include the operating results of LFG
as if LFG had always been a part of PMT. This restatement has had a beneficial
impact on cost of revenues as a percentage of revenues for all periods when
compared to the corresponding percentages as reported prior to the restatement.
LFG's revenues consist primarily of income from financing leases which do not
have a corresponding cost of revenue. The cost of financing these leases is
recorded below income from operations as a component of interest expense.
Despite the beneficial impact from LFG on the cost of revenues percentages
compared to those prior to the restatement, LFG's impact on the trend in the
cost of revenues percentages has been unfavorable. LFG's revenues as a
percentage of the Company's total consolidated revenues declined from 6.3% in
fiscal 1995 to 5.1% in fiscal 1996, and 4.5% in fiscal 1997, providing less
benefit each year. Management believes that as processing revenues outpace the
growth in leasing, LFG's revenues will continue to decline as a percentage of
the Company's total consolidated revenues, providing progressively less benefit
in the future.
In fiscal 1997, cost of revenues as a percentage of revenues decreased
primarily as a result of revenue enhancement programs and from negotiated price
reductions from major vendors. These benefits received were partially offset by
the higher cost of revenues from the purchased bank portfolios and LFG's
decline in revenues as a percentage of the Company's total consolidated revenues
as previously discussed.
The Company's cost of revenues as a percentage of revenues can be
significantly affected by the cost structures of acquired merchant portfolios
and operating businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $23.8 million in fiscal
1995, $31.5 million in fiscal 1996 and $36.5 million in fiscal 1997. These
increases represented a 32.4% increase from fiscal 1995 to fiscal 1996 and a
16.1% increase from fiscal 1996 to fiscal 1997.
In fiscal 1996 and 1997, selling, general and administrative expenses
decreased as a percentage of revenues when compared to fiscal 1995 and fiscal
1996 by 2.4 percentage points and 1.8 percentage points, respectively. The
decrease in the percentage continues to reflect the Company's overall
improvement in utilization of personnel. The addition of revenues from
purchased merchant portfolios has not caused a proportionate increase in
selling, general and administrative expenses. Additionally, the Company's
selling expenses have decreased as a percentage of revenues as a result of the
Company's purchase of agent residual rights resulting in lower referral
compensation.
19
<PAGE>
Depreciation and Amortization
Depreciation and amortization expense increased from $3.6 million in fiscal
1995 to $7.7 million in fiscal 1996 and $12.7 million in fiscal 1997. These
increases represent a 113.4% increase from fiscal 1995 to fiscal 1996 and a
63.9% increase from fiscal 1996 to fiscal 1997.
Depreciation expense has increased in amount from fiscal year 1995 through
fiscal year 1997 but remained relatively consistent as a percentage of revenues
because of the significant increase in revenues. The increase in depreciation
expense is a direct result of additional equipment, fixture purchases for
customer service and operations and additional expenditures related to the
Company's management information systems.
Amortization expense has generally increased in amount and as a percentage
of revenues from fiscal 1995 through fiscal 1997. Amortization expense
increases in periods when the Company purchases merchant portfolios. In fiscal
1996 and 1997, the Company made several acquisitions of operating businesses
which were accounted for as poolings of interests. There is no amortization
expense related to these acquisitions.
Purchased merchant portfolios are evaluated by management for impairment at
each balance sheet date through review of actual attrition and projected cash
flows generated by each merchant portfolio in relation to the unamortized cost
of each merchant portfolio. If, upon review, an impairment of the value of the
purchased merchant portfolio is indicated, amortization will be accelerated and
any required loss in value recognized immediately. The Company has not recorded
any charges related to impairment of purchased merchant portfolios to date.
Subsequent to integration, management anticipates merchant attrition rates for
the portfolios acquired in fiscal 1997 to approximate normal rates historically
experienced by the Company's existing portfolios.
Provision for Merchant Loss and Bad Debt Expense
The provision for merchant losses and bad debt expense increased from $2.0
million in fiscal 1995 to $3.8 million in fiscal 1996 and $4.2 million in fiscal
1997. The increase from fiscal 1995 to fiscal 1996 represents a 93.8% increase.
In fiscal 1996, one of the entities incurred a single fraud loss of $890,000.
Although the Company incurs merchant fraud losses each year and recognizes an
accrual each year for such possibilities, the Company's annual loss experience
has historically been significantly less than the loss referenced above in one
of the pooled entities.
From fiscal 1996 to fiscal 1997, the provision for merchant losses
increased 12.2% but decreased 0.3 percentage points as a percentage of total
revenue.
Stock Award Compensation
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, in fiscal 1995 the remaining
unearned compensation expense of $241,000 was recognized at the completion of
the Company's initial public offering.
20
<PAGE>
Non-recurring Operating Expense
In fiscal 1997, the Company incurred non-recurring duplicative net costs
related to a sales force included in a merchant portfolio acquisition.
Interest Income/Expense
In fiscal 1995, the Company recognized net interest expense of $3.0 million
which decreased to $1.8 million in fiscal 1996. In fiscal 1997, the Company
recognized net interest income of $1.4 million. This represents a 40.9%
decrease from fiscal 1995 to fiscal 1996 and a 177.1% decrease from fiscal 1996
to fiscal 1997.
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. In fiscal 1997, the Company used a
portion of the third offering net proceeds to fund merchant portfolio
acquisitions and capital expenditures. The Company received interest income
from the investment of the remaining net proceeds from the offerings. To the
extent the Company should use an additional amount of the net proceeds from the
third offering for acquisitions or working capital, management would not expect
to continue to recognize a significant amount of interest income.
Acquisitions of operating businesses consummated by the Company in fiscal
1997 resulted in certain debt being assumed. A portion of this debt remains
outstanding. LFG recognized interest expense of $3.1 million, $3.5 million and
$3.8 million in fiscal 1995, fiscal 1996 and fiscal 1997, respectively. This
interest expense was a result of LFG utilizing various credit facilities which
at July 31, 1997 were payable at an interest rate ranging from 6% to 12%
per annum.
Other Income/Expense
The Company recorded a non-taxable gain of $1,000,000 in the fourth quarter
of fiscal 1996 for the receipt of insurance proceeds on the life of the former
Chief Financial Officer of the Company. Additionally, in fiscal years 1996 and
1997 the Company has included in this line item all non-recurring transaction
costs such as legal and accounting fees related to acquisitions of operating
businesses, which were accounted for as poolings of interests.
During fiscal 1997, LFG recorded a charge of $367,000 related to the buyout
of a consulting agreement resulting from the death of their former Chief
Financial Officer. This charge occurred prior to the effective date of the
merger with this entity and is included in other expense on a restated basis.
21
<PAGE>
Income Tax
As a result of the Company's increased profitability in fiscal 1996 and
1997, income tax expense has increased. Income tax expense increased from $3.3
million in fiscal 1995 to $6.1 million in fiscal 1996 and $9.6 million in fiscal
1997. The Company's effective income tax rate for fiscal 1995 through fiscal
1997 has remained relatively consistent.
Seasonality
The Company's revenue volume is generated from consumer credit purchases.
However, the Company's revenues generally do not reflect the seasonal
fluctuations that typically are associated with traditional peaks in consumer
retail sales. The Company's merchants are largely engaged in retail operations
which do not display these seasonal fluctuations in consumer spending. As a
result, the Company experiences a generally even distribution of revenues
throughout its fiscal year, with the third quarter experiencing a lower
percentage of annual revenues.
Quarterly Information
The following table sets forth statements of income data for each of the
eight quarters in the two year period ended July 31, 1997. This income data has
been restated for the material operating business acquisitions completed in
fiscal 1996 and fiscal 1997. Each such operating business acquisition was
accounted for as a pooling of interests. This unaudited quarterly information
has been prepared on the same basis as the annual information presented
elsewhere herein and, in management's opinion, includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the selected quarterly information when read in conjunction with
the financial statements and notes thereto. The operating results for any
quarter are not necessarily indicative of results for the entire fiscal year or
for any future period.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
1996
----
Revenues $46,113 $48,032 $53,967 $66,779 $214,891
Gross margin 13,266 14,363 15,170 17,650 60,449
Income from operations 3,786 3,816 4,551 5,298 17,451
Income before provision for income taxes 2,762 3,290 3,914 6,391 16,357
Net income 1,661 1,979 2,339 4,247 10,226
1997
----
Revenues $69,249 $66,051 $65,755 $83,158 $284,213
Gross margin 18,975 18,986 19,098 23,179 80,238
Income from operations 5,945 5,790 5,882 8,566 26,183
Income before provision for income taxes 6,006 5,757 5,701 8,552 26,016
Net income 3,792 3,634 3,600 5,373 16,399
</TABLE>
The quarterly variances shown above generally are indicative of those
discussed for the annual periods. The growth in revenues resulted primarily
from acquisitions and new merchant contracts generated through the Company's
telemarketing and field sales efforts, as well as fee enhancements with existing
merchants.
22
<PAGE>
In the third and fourth quarters of fiscal 1996, the Company made
significant acquisitions which had a higher cost of revenues as a percentage of
revenues than those historically experienced by the Company. Additionally, in
the fourth quarter of fiscal 1996 the Company recorded a non-taxable gain of
$1,000,000 for the receipt of insurance proceeds on the life of the former Chief
Financial Officer of the Company.
In all quarters of fiscal 1997 and the fourth quarter of fiscal 1996, the
Company reported net interest income. Following the Company's initial public
offering in August 1994, the Company repaid all borrowings outstanding under its
principal revolving credit loan and bridge loan. The Company consummated a
second public offering in October 1995 and a third public offering in April
1996. The Company received interest income from the investment of the remaining
net proceeds from the offerings.
In the fourth quarter of fiscal 1997, the addition of revenues from
purchased merchant portfolios have not caused a proportionate increase in
selling, general and administrative expenses.
Liquidity and Capital Resources
The Company recognizes as revenue in its statement of income the full
discount rate and related fees 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. 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 have included
debt service, acquisitions of merchant portfolios, capital expenditures and
working capital.
Several factors can alter the profitability to the Company of merchant
transactions. Primarily, these include (i) improper use of the card reading
terminal by the merchant resulting in higher interchange fees paid to the card-
issuing bank, (ii) lower than anticipated average dollar sales of credit card
transactions thereby reducing the discount rate collected because many of the
transaction costs are fixed, (iii) losses incurred as a result of customer
chargebacks (the Company can be required to absorb the full retail purchase
amount), (iv) the inability to collect the discount rate because of insufficient
funds in the merchant's bank account, (v) merchant fraud and (vi) excessive
volume of customer return transactions in which the Company again incurs all
costs except interchange fees. The Company's actual losses as a percentage of
total revenues remained consistent from fiscal 1996 to fiscal 1997. Management
does not believe that the other factors mentioned above have had a material
effect on the Company's profitability.
The Company expects that cash generated from operations and 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 for a $20.0 million revolving
line of credit. The Company has a revolving line of credit facility, through
its LFG subsidiary in two related notes payable, having an aggregate available
balance of $4.5 million. Each component of the facility bears interest at a
variable rate based on the
23
<PAGE>
prime rate. The aggregate balance outstanding at July 31, 1997 under the LFG
facility was $1,636,505.
The Company advanced funds to an independent developer who purchased a
building in which the Company leases a portion of the space as its corporate
headquarters. The loan provided by the Company has a maximum available balance
of $13,300,000. The loan amount is being advanced in various draws by the
building owner based on certain achieved milestones in renovation of the
building. The outstanding principal balance at July 31, 1997 is $8,773,330.
The remaining available balance of the loan has been advanced since that date.
Working Capital
Cash flow provided by operating activities was $8.6 million in fiscal 1995
as compared to $19.7 million in fiscal 1996 and $19.4 million in fiscal 1997.
The increase in cash flow from operating activities from fiscal 1995 to fiscal
1996 resulted from increases in net income which has been achieved principally
through acquisitions of operating businesses and merchant portfolios and
internal generation of new merchant accounts. The effect of net income
increases for all periods presented is partially offset by increases in working
capital needs.
At July 31, 1997, the Company had working capital of $75.6 million, as
compared to working capital of $106.4 million at July 31, 1996. This decrease
in working capital primarily reflects the use of net proceeds from the Company's
third public offering in April 1996 for merchant portfolio acquisitions in
fiscal 1996 and fiscal 1997.
Accounts receivable increased $8,750,000 from July 31, 1996 to July 31,
1997. This increase was the result of increases in the number of merchant
accounts acquired through acquisitions of merchant portfolios and the internal
generation of new merchant accounts.
Other assets at July 31, 1997, excluding non-competition agreements and
deferred processing costs, increased from July 31, 1996 because of an increase
in restricted cash balances of $4,395,000 required to be maintained in
connection with several acquisitions. Additionally, in fiscal 1997 certain
acquired operating businesses issued notes receivable of $2,513,000 to their
respective shareholders. Also in fiscal 1997, a merchant portfolio acquisition
consummated in the first quarter required prepaid processing costs of
approximately $1,356,000 which will be amortized over forty months.
Accounts payable at July 31, 1997 increased $4,307,000 as compared to July
31, 1996, primarily as a result of funds owed on a merchant portfolio
acquisition. Accrued liabilities decreased $994,000 from July 31, 1996, to July
31, 1997, primarily as a result of decreased income and state franchise taxes.
Capital Expenditures and Investing Activities
Capital expenditures were approximately $24.4 million for fiscal 1997 as
compared to $23.1 million for fiscal 1996 and $18.9 million for fiscal 1995.
The overall increase in capital expenditures primarily resulted from additional
expenditures related to the Company's management
24
<PAGE>
information systems, the purchase of additional credit card terminals and the
purchase of peripheral equipment for operating and financing leases to
merchants. In addition to the increase in capital expenditures, the Company used
$24.8 million, $32.3 million and $33.4 million for the purchase of merchant
portfolios in fiscal 1995, 1996 and 1997, respectively. The Company purchased
nine merchant portfolios in fiscal 1995, four merchant portfolios in fiscal
1996, and eight merchant portfolios in fiscal 1997. Amounts received on
financing leases, net of amortized unearned income were $10.5 million, $12.3
million and $14.0 million in fiscal 1995, 1996 and 1997, respectively.
At July 31, 1997 approximately $49.2 million of the net proceeds received
in the third public offering in April 1996 have been reinvested in U.S. Treasury
securities.
Financing Activities
The significant increase in cash provided by financing activities for
fiscal 1996 resulted from the consummation of the Company's second and third
public offerings in October 1995 and April 1996. Cash provided by financing
activities for fiscal 1996 was $129.8 million which primarily reflects the net
proceeds from the offerings after retirement of the Company's outstanding bank
indebtedness.
Net cash used by financing activities was $13.1 million in fiscal 1997.
The cash used by financing activities for fiscal 1997 reflects the net payments
used to decrease the Company's outstanding indebtedness and the issuance of a
note receivable of $8.8 million.
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. Management believes
that the combination of these sources will be sufficient to meet the Company's
anticipated liquidity needs and its growth plans through fiscal 1998. The
Company, however, may pursue additional expansion opportunities, including
acquisitions of operating businesses 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.
The Company's revolving credit facility with First Union National Bank of
Tennessee was amended and restated during fiscal 1995 to increase the line of
credit to $17.5 million. The Company repaid all outstanding debt related to
this credit facility with the proceeds from its second public offering during
fiscal 1996. During fiscal 1997 this credit facility was amended and restated,
increasing the revolving line of credit to $20.0 million and terminating the
bridge loan. The current amendment expires January 31, 1998. Borrowings, if
any, under the new credit facility will be used to finance future purchases of
merchant portfolios and equipment and for working capital purposes.
25
<PAGE>
Business Risk Factors
This Annual Report on Form 10-K and other information that is provided by the
Company contain statements that, with the exception of historical facts, are
forward-looking statements including, but not limited to, statements about: (i)
future growth through and availability of merchant portfolios and operating
business acquisitions, (ii) the Company's strategies, uses and expectations for
existing and new products, services, technologies and opportunities, (iii) the
future profitability of merchant portfolios and operating business acquisitions,
(iv) the demand for and acceptance of new and existing products and services,
(v) the provision of merchant account portfolio processing services to the
banking industry and (vi) the adequacy of the Company's capital resources.
These statements are forward-looking statements that are subject to important
risks and uncertainties, which could affect the Company's actual results and
could cause such results to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These important risks and uncertainties include, but are not
limited to, the following:
Registration Termination. An independent service organization, such as PMT,
must register through processing banks with VISA and MasterCard. VISA and
MasterCard permit PMT, as a registered service provider, to provide VISA and
MasterCard transaction processing services through processing banks that are
members of VISA or MasterCard. There can be no assurance that PMT's
registration with VISA and MasterCard upon expiration will be renewed or that
the current rules of VISA and MasterCard permitting independent service
providers to market transaction processing services will remain in effect.
Furthermore, these rules are set by member banks, some of which are competitors
of PMT. The non-renewal of either registration or any changes in VISA or
MasterCard rules that would prevent the registration of PMT or limited its
ability to provide VISA and MasterCard transaction processing services, would
have a material adverse effect on PMT's financial condition and operating
results.
Dependence on Processing Relationships. The success of PMT's business is
dependent, in part, on the ability of processing banks to provide certain
services to PMT's merchant clients. The failure of these processing banks to
process merchant transactions efficiently and effectively could result in
merchants terminating their agreements and relationships with PMT and its
processing banks. Termination of these agreements could result in PMT's loss of
its principal source of revenue. There can be no assurance (i) that PMT's
contractual arrangements with its processing banks will be renewed or that PMT
will be able to obtain favorable replacement arrangements, whether upon
expiration, termination or otherwise, (ii) that such processing banks or their
replacements will provide adequate levels of service or (iii) that such
processing banks will not themselves be acquired, resulting in possible adverse
changes in PMT's relationship with the processing bank. Any of these events
could have a material adverse effect on PMT's business.
Risks Associated with Growth Strategy. A material element of the Company's
growth strategy is the acquisition of additional merchant portfolios and
operating businesses in order to achieve greater economies of scale. There can
be no assurance that the current level of growth opportunities will continue to
exist, that the Company will be able to acquire merchant portfolios and
operating businesses that satisfy the Company's criteria, or that any such
acquisition will be
26
<PAGE>
on terms favorable to the Company. Further, the Company's growth strategy will
require that the Company continue to hire qualified personnel, while
concurrently expanding its managerial and operational infrastructure. There can
be no assurance that the Company will be able to hire and retain qualified
personnel or that that Company will be able to expand successfully its
infrastructure as appropriate to accommodate future acquisitions or growth. As a
result of these factors, the Company may not realize the expected economic
benefits associated with its acquisitions, which may have a material adverse
effect on the Company's financial condition and results of operations.
Competition. The market for credit, charge and debit card transaction
processing services is highly competitive. PMT's principal competitors include
local processing banks, vertically integrated non-bank processors and other
independent service organizations, many of whom have substantially greater
resources than PMT. Many of PMT's competitors have access to significant
capital, management, marketing and technological resources that are equal to or
greater than those of PMT, and there can be no assurance that PMT will continue
to be able to compete successfully with such competitors.
Merchant Attrition. Merchant attrition is an expected aspect of the credit
card business. There can be no assurance that in the future the Company's rates
of attrition will not exceed its own historical levels or the attrition rates
experienced by its peer group. Historically, PMT's merchant attrition has been
related to merchants going out of business, merchants returning to local
processing banks or merchants transferring to competitors with rates PMT was
unwilling to match. Significant merchant attrition would have a material
adverse effect on PMT's financial condition and operating results.
Chargeback Risk. In the event a billing dispute between a cardholder and a
merchant is not resolved in favor of the merchant, the transaction is "charged
back" to the merchant, and the purchase price is refunded to the cardholder. If
the merchant does not provide a credit to the cardholder, PMT, and, in certain
cases, PMT and the processing bank, must bear the credit risk for the full
transaction amount. There can be no assurance that PMT will not experience
significant chargebacks in the future. Significant chargebacks that are not
paid by the merchant would have a material adverse effect on PMT's financial
condition and operating results.
Merchant Fraud. Generally, PMT is responsible for fraudulent credit card
transactions initiated by its merchant clients. Examples of merchant fraud
include inputting false sales transactions or false credits. Furthermore,
management believes that a significant majority of such fraud occurs in the
states of California, Florida, New York and Texas where a large concentration of
the Company's merchant base is located. PMT and its processing banks monitor
merchant charge volume, average charge and number of transactions, as well as
check for unusual patterns in the charges, returns and chargebacks processed.
As part of its fraud avoidance policies, PMT generally will not process for
certain types of businesses in which incidents of fraud have been common. There
can be no assurance that PMT will not experience significant amounts of merchant
fraud in the future. Significant merchant fraud would have a material adverse
effect on PMT's financial condition and operating results.
27
<PAGE>
Industry Price Increases. From time to time, VISA and MasterCard increase
the fees they charge for processing transactions. Most merchant processing
agreements permit fee increases to be passed on to the merchants. There can be
no assurance however, that competitive pressures will not result in PMT
absorbing a portion or all of such increases in the future, which event could
have a material adverse effect on PMT.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.................................................. 30
Consolidated Balance Sheets at July 31, 1996 and July 31, 1997..................... 31
Consolidated Statement of Income, each of the three years ended July 31, 1997...... 32
Consolidated Statement of Changes in Shareholders' Equity, each of the three
years ended July 31, 1997........................................................ 33
Consolidated Statement of Cash Flows, each of the three years ended July 31, 1997.. 34
Notes to Consolidated Financial Statements......................................... 36
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of PMT Services, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
PMT Services, Inc. and its subsidiaries at July 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 17, on October 2, 1997 PMT Services, Inc. merged with
Bancard, Inc. in a transaction accounted for as a pooling of interests. The
accompanying supplementary consolidated financial statements give retroactive
effect to the merger of PMT Services, Inc. with Bancard, Inc.
In our opinion, based upon our audits, the accompanying supplementary
consolidated balance sheet(s) and the related supplementary consolidated
statements of income, of changes in shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of PMT
Services, Inc. and its subsidiaries at July 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended July 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Nashville, TN
September 23, 1997, except as to
Note 17 which describes
the pooling of interests
with Bancard, Inc. which is
as of October 2, 1997.
30
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
July 31,
---------------------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $109,156,234 $ 23,607,045
Investments.......................................... -- 49,167,521
Accounts receivable.................................. 8,487,629 17,237,904
Current portion of net investment in finance leases.. 10,331,271 9,249,753
Inventory............................................ 823,276 1,720,194
Deferred income taxes................................ 945,934 1,543,379
Other current assets................................. 1,059,667 2,028,511
------------ ------------
Total current assets................................ 130,804,011 104,554,307
Purchased merchant portfolios, net of accumulated
amortization of $9,668,708 and $18,689,846.......... 62,075,590 84,343,006
Long-term portion of net investment in finance leases 22,034,754 24,636,881
Property and equipment, net.......................... 5,103,227 9,154,953
Long-term note receivable............................ -- 8,773,330
Intangible and other assets.......................... 7,886,890 17,545,370
------------ ------------
Total assets........................................ $227,904,472 $249,007,847
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................... $ 13,281,646 $ 14,516,369
Accounts payable..................................... 4,809,189 9,116,159
Accrued liabilities.................................. 6,051,183 5,057,408
Deferred revenues.................................... 230,496 234,873
------------ ------------
Total current liabilities 24,372,514 28,924,809
Long-term debt....................................... 19,051,160 16,891,014
Deferred income taxes................................ 994,721 624,777
------------ ------------
Total liabilities................................... 44,418,395 46,440,600
------------ ------------
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; outstanding:
38,478,274 and 41,748,708 shares................... 384,783 417,487
Additional paid-in capital............................ 166,632,988 170,991,426
Treasury stock, at cost: 1,188 shares................ (12,000) (12,000)
Accumulated earnings.................................. 16,480,306 31,170,334
------------ ------------
183,486,077 202,567,247
------------ ------------
Commitments and contingent liabilities (Notes 3, 13
and 16)
Total liabilities and shareholders' equity.......... $227,904,472 $249,007,847
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended July 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues............................... $139,539,232 $214,891,226 $284,213,432
Cost of revenues....................... 98,151,830 154,442,411 203,975,701
------------ ------------ ------------
Gross margin....................... 41,387,402 60,448,815 80,237,731
------------ ------------ ------------
Selling, general and administrative
expenses........................... 23,772,992 31,480,460 36,542,433
Depreciation and amortization expense.. 3,621,995 7,730,768 12,670,386
Provision for merchant loss and bad
debt expense....................... 1,953,635 3,786,247 4,248,218
Stock award compensation............... 241,477 -- --
Non-recurring operating expense........ -- -- 593,626
------------ ------------ ------------
29,590,099 42,997,475 54,054,663
------------ ------------ ------------
Income from operations................. 11,797,303 17,451,340 26,183,068
Interest income........................ 313,073 2,107,547 5,226,188
Interest expense....................... (3,356,556) (3,906,051) (3,838,817)
Other income (expense), net............ -- 703,896 (1,554,171)
------------ ------------ ------------
Income before provision for income
taxes.............................. 8,753,820 16,356,732 26,016,268
Provision for income taxes............. 3,301,052 6,131,189 9,617,516
------------ ------------ ------------
Net income......................... $ 5,452,768 $ 10,225,543 $ 16,398,752
============ ============ ============
Earnings per share..................... $ 0.20 $ 0.29 $ 0.40
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Accumulated Total
Common Paid-in Treasury Unearned Earnings Shareholders'
Stock Capital Stock Compensation (Deficit) Equity
---------- ------------- --------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1994......... $ 43,810 $ 1,876,962 $(42,000) $(241,477) $ 3,260,939 $ 4,898,234
Stock awards vested............ 926,597 241,477 1,168,074
Shares issued.................. 24,209 15,891,283 15,915,492
Expiration of put options on
redeemable common stock...... 19,224 6,502,083 6,521,307
Stock warrants exercised....... 1,301 418,615 419,916
Stock options exercised........ 346 106,582 106,928
Acquire majority interest in
subsidiary................... (510,545) (510,545)
Purchase of treasury stock..... (32,500) (32,500)
Reissuance of treasury stock... (6,000) 6,000 --
Distributions of Subchapter S
Corporations prior to
poolings..................... (524,614) (524,614)
Net income for the year........ 5,452,768 5,452,768
-------- ------------ -------- ------------ ----------- -------------
Balance at July 31, 1995......... 88,890 25,716,122 (68,500) -- 7,678,548 33,415,060
Shares issued.................. 58,520 140,746,488 140,805,008
Stock options exercised........ 448 475,803 476,251
Stock splits................... 236,925 (236,925) --
Purchase of treasury stock..... (12,000) (12,000)
Reissuance of treasury stock... (68,500) 68,500 --
Minority shareholders'
contribution.................. 120,000 120,000
Martin Howe fiscal year
conversion.................... (356,914) (356,914)
Distributions of Subchapter S
Corporations prior to
poolings...................... (1,186,871) (1,186,871)
Net income for the year........ 10,225,543 10,225,543
-------- ------------ -------- ------------ ----------- -------------
Balance at July 31, 1996......... 384,783 166,632,988 (12,000) -- 16,480,306 183,486,077
Shares issued................... 10 14,844 14,854
Stock options exercised......... 3,694 771,034 774,728
August 1996 pooling............. 5,000 (4,000) (115,762) (114,762)
March 1997 pooling.............. 8,000 (7,000) 141,303 142,303
May 1997 pooling................ 16,000 1,074,821 213,098 1,303,919
Tax benefit from non-
qualified stock options...... 1,986,174 1,986,174
Minority shareholders'
contribution................ 522,565 522,565
Distributions of Subchapter S
Corporations, prior to
poolings...................... (1,947,363) (1,947,363)
Net income for the year......... 16,398,752 16,398,752
-------- ------------ -------- ------------ ----------- -------------
Balance at July 31, 1997......... $417,487 $170,991,426 $(12,000) -- $31,170,334 $202,567,247
======== ============ ======== ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended July 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net income............................................. $ 5,452,768 $ 10,225,543 $ 16,398,752
Martin Howe fiscal year conversion.................... -- (356,914) --
Adjustments:
Depreciation and amortization expense................ 4,202,660 8,281,086 13,278,028
Provision for merchant losses and bad debt expense... 1,953,635 3,786,247 4,248,218
Stock award compensation and other................... 241,477 -- --
Deferred income taxes................................ 357,734 (306,164) (954,970)
Changes in assets and liabilities, excluding the effects
of non-restated adjustments:
Accounts receivable................................. (1,827,243) (3,127,893) (8,188,636)
Inventory........................................... (258,265) (133,922) (662,688)
Other assets........................................ (1,144,571) (337,516) (6,596,169)
Accounts payable.................................... (111,098) 889,656 3,670,073
Accrued liabilities................................. (147,980) 864,000 (1,685,785)
Deferred revenues................................... (155,291) (59,105) (103,607)
------------ ------------ ------------
Net cash provided by operating activities......... 8,563,826 19,725,018 19,403,216
Cash flows from investing activities:
Purchase of merchant portfolios...................... (24,752,658) (32,341,624) (33,363,964)
Purchase of property and equipment, net.............. (2,109,344) (2,185,032) (5,121,765)
Purchase of equipment for leasing.................... (16,809,608) (20,865,015) (19,296,806)
Purchase of investments, net......................... -- -- (49,167,521)
Proceeds from receivable securitization.............. -- -- 1,076,317
Amounts received on leases, net of amortized
unearned income................................. 10,478,442 12,252,928 14,042,820
------------ ------------ ------------
Net cash used in investing activities............. (33,193,168) (43,138,743) (91,830,919)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............. 35,591,026 35,842,752 34,093,211
Payments on long-term debt........................... (27,710,631) (45,958,109) (37,283,586)
Proceeds from issuance of common stock............... 17,098,894 140,963,115 789,582
Issuance of note receivable.......................... -- -- (8,773,330)
Payments to repurchase treasury stock................ (32,500) (12,000) --
Proceeds from minority shareholders' contributions... -- 120,000 --
Distributions of Subchapter S Corporations........... (524,614) (1,186,871) (1,947,363)
------------ ------------ ------------
Net cash provided (used) by financing activities.. 24,422,175 129,768,887 (13,121,486)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.... (207,167) 106,355,162 (85,549,189)
Cash and cash equivalents at beginning of year.......... 3,008,239 2,801,072 109,156,234
------------ ------------ ------------
Cash and cash equivalents at end of year................ $ 2,801,072 $109,156,234 $ 23,607,045
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for income taxes............................. $ 3,596,249 $ 5,772,989 $ 9,367,692
Cash paid for interest................................. 2,838,771 3,312,590 3,300,415
</TABLE>
34
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
Supplemental schedule of noncash activities:
In connection with the purchase of merchant portfolios in fiscal 1995, the
Company issued promissory notes totaling $80,500. In connection with three
separate operating business acquisitions in fiscal 1997, the Company issued
2,900,000 shares of common stock. The acquisitions were accounted for as
poolings of interests which did not require retroactive restatement because they
had an insignificant impact on the Company.
The Company recognized a tax benefit of $318,517 and $1,986,174 for the
years ended July 31, 1996 and 1997, respectively, for the excess of the fair
market value at the exercise date over that at the award date for stock options
exercised.
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations
The Company markets and services electronic credit card authorization and
payment systems to merchants, including sale and leasing of related equipment.
The Company provides these services to merchants pursuant to contracts between
the Company and various processing banks. Generally, the Company's agreements
with the processing banks contain certain aspects of both marketing and service.
Although the marketing portion of the agreements is limited as to time, the
service portion of substantially all of these agreements is not. The marketing
aspects expire at various dates unless renewed automatically, if applicable, or
extended by the parties. There can be no assurance that PMT's contractual
arrangements with its processing banks will be renewed or that PMT will be able
to obtain favorable replacement arrangements, whether upon expiration,
termination or otherwise.
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. Interests in the majority-owned
subsidiaries are reported using the full consolidation method. All material
intercompany balances and transactions are eliminated.
Basis of presentation
Certain financial statement items, in prior periods, have been reclassified
to conform to the current year's presentation. The consolidated financial
statements give retroactive effect to certain acquisitions of operating
businesses consummated in fiscal 1996 and 1997 which were accounted for as
poolings of interests (Note 3).
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
36
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenue and cost recognition
Revenues derived from the electronic processing of transactions (merchant
discount rate and related fees) on the credit card authorization equipment are
recognized at the time the merchants' transactions are processed. Related
commission expense and processing charges are also recognized at that time.
Revenues related to the direct sale of credit card authorization equipment
are recognized when the equipment is shipped. Installation fees related to both
the direct sale and the marketing of this equipment are recognized when
installation is completed. Fees received in advance of shipment or installation
are not recognized as revenue until earned.
Revenue related to finance leasing of point-of-sale processing equipment
are recognized over the term of the lease agreement using the interest method.
Cost of revenues includes interchange fees paid to the credit card-issuing
bank and fees paid to the network service provider, VISA and MasterCard and the
processing bank. These costs are recognized at the time the merchants'
transactions are processed and the related revenue is recorded.
The Company recognizes as revenue in its statement of income the full
discount rate and fees collected from the merchant. The various costs incurred
by the Company, including amounts paid to the card-issuing bank, the processor
and network service provider, are reflected as costs of revenues. In accordance
with the Company's contracts with some of 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 and fees from the merchants and disburses to each of the
service providers their fees. Disbursements for the interchange fee paid to the
card-issuing bank are made 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.
Cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
37
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Investments
The Company's investments of $49,167,521 are in United States Government
Treasury notes for a term less than one year. These investments are classified
as held-to-maturity according to Statement of Financial Accounting Standard No.
115 - Accounting for Certain Debt and Equity Securities (SFAS 115), and are
carried at amortized cost as determined by specific identification. The fair
value of these investments is $49,198,891 at July 31, 1997. No such investments
were outstanding at July 31, 1996.
Financial instruments
The Company has various financial instruments, including cash, time
deposits, receivables, accounts payable, revolving credit facilities, accrued
liabilities and a hedging contract. Cash, time deposits, receivables, accounts
payable and accrued liabilities are settled within a year and are not subject to
market rate fluctuations. Revolving credit facilities are at variable
market rates. The carrying value of these financial instruments approximates
their fair market values. Notes payable with a carrying amount of $32,332,806
at July 31, 1996 and $31,407,383 at July 31, 1997 had a market value of
$33,990,917 and $32,289,941, respectively, using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Hedging contract
The Company entered a forward rate lock agreement during fiscal 1996 to
minimize its exposure to interest rate risk. The notional amount of the
agreement totaled $15,000,000. The notional amount does not represent amounts
exchanged by parties and, thus, is not a measure of the Company's exposure to
loss through its use of these agreements. The hedging contract, with no
carrying amount, had a fair value of ($126,563) at July 31, 1996. In fiscal
1997, the Company entered into another forward rate lock agreement in the amount
of $20,000,000. Both forward rate lock agreements settled in fiscal 1997 and
the amounts exchanged under these agreements had no material impact on the
financial statements. Such settlements were deferred and are being amortized,
using the effective interest rate method, over the remaining life of the
underlying debt hedged. There were no outstanding hedging contracts at July 31,
1997.
Under the Company's forward rate lock agreements, the Company and the
counter party exchange, upon maturity of the agreement, an amount calculated by
reference to the agreed notional amount and a specified index. These forward
rate lock agreements allow the Company to reduce its exposure to interest rate
fluctuations on certain floating rate debt.
38
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Accounts receivable
Accounts receivable primarily comprise amounts due from processing banks
which represent the discount rate and fees earned, after related interchange
fees and other processing costs, on transactions processed during the month
ending on the balance sheet date. Such balances are received from processing
banks approximately 20 days following the end of each month.
Financing leases
The Company provides direct financing leases and sales-type leases to its
customers. The significant difference between the two types of leases is dealer
profit recognized by the Company in a sales-type lease. At inception of a lease
of point-of-sale equipment, the Company records an investment in direct
financing leases which is equal to the total of future lease rentals and the
estimated residual value of the leased equipment, less unearned income. The
unearned income is the difference between the cost of the equipment and the
total of future lease rentals plus the estimated residual value of the leased
equipment. Residual value is the estimated proceeds from the sale or lease of
the asset at the end of the lease term. Amortization of unearned income is
recorded on the interest method. The Company's investment in finance leases is
reduced by an allowance for rental payments that are expected to be
uncollectible.
Inventory
Inventory of credit card authorization equipment is stated at the lower of
cost or market, with cost being determined by specific identification.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed
using straight-line and accelerated methods over the estimated useful lives of
the assets ranging from 3 to 10 years.
Purchased merchant portfolios
Purchased merchant portfolios are recorded at acquired cost. Amortization
expense is recognized on a straight-line basis over 10 years consistent for
acquired entities. Management evaluates purchased merchant portfolios and other
long-lived assets for impairment at each balance sheet date through review of
actual attrition and projected undiscounted cash flows generated by each
merchant portfolio in relation to the unamortized cost of each merchant
portfolio. If, upon review, an impairment of the value of the purchased
merchant portfolio is indicated, amortization will be accelerated to recognize
the diminution in value.
39
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Reserve for chargebacks and merchant fraud
Disputes between a cardholder and a merchant periodically arise as a result
of cardholder dissatisfaction with merchandise quality or merchant services and
the disputes may not be resolved in the merchant's favor. In these cases, the
transaction is "charged back" to the merchant and the purchase price is refunded
by the merchant. If the merchant is unable to grant a refund, the Company or,
under limited circumstances, the Company and the processing bank, must bear the
credit risk for the full amount of the transaction. The Company evaluates its
risk and estimates its potential loss for chargebacks based on historical
experience. A provision for these estimated losses is provided in the same
period as the related revenues.
Income taxes
The liability method is used in accounting for income taxes, whereby
deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. The tax benefit of deductible temporary differences
is reflected within the various components of deferred tax assets and recognized
if the realization thereof is more likely than not (Note 15).
Earnings per share
Earnings per share for fiscal 1995, 1996 and 1997 is calculated based on
weighted average shares of common stock outstanding of 27,105,717, 34,705,437
and 41,143,856 respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 - Earnings per Share (SFAS 128). SFAS
128 requires companies with complex capital structures that have publicly held
common stock or common stock equivalents to present both basic and diluted
earning per share (EPS) on the face of the income statement. The presentation
of basic EPS replaces the presentation of primary EPS previously required by
Accounting Principles Board Opinion No. 15 (APB 15). Basic EPS is calculated as
income available to common shareholders divided by the weighted average number
of shares outstanding during the period. Diluted EPS (previously referred to as
fully diluted EPS) is calculated using the "if converted" method for convertible
securities and the treasury stock method for options and warrants as prescribed
by APB 15. This statement is effective for financial statements issued for
interim periods and annual periods ending after December 15, 1997. Earlier
application is not permitted. The Company will adopt the provisions of this
statement in the quarter ended January 31, 1998. Management believes the
provisions of this statement will not have a material effect on earnings per
share.
40
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock splits
On December 14, 1995 the Board of Directors approved a two-for-one stock
split and on May 17, 1996 approved a three-for-two stock split, each to be
affected in the form of a stock dividend. The stock splits for December 14, 1995
and May 17, 1996 were effective for shareholders of record at the close of
business on December 29, 1995 and May 28, 1996, respectively. All earnings per
share information included in the accompanying financial statements has been
adjusted to give retroactive effect to the stock splits for all periods
presented. Additionally, all share information stated in Note 10 has been
adjusted to give retroactive effect to the stock splits.
NOTE 2 - STOCK 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 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.
Upon the effective date of the Offering, vesting of management stock awards
for 439,084 shares of common stock was accelerated and the remaining unearned
compensation of $241,000 was immediately recognized. The Company received a tax
deduction in fiscal 1995 for the fair value of the vested stock on the effective
date of the Offering. Compensation expense related to the stock awards was
recognized in the financial statements based upon the fair value of the common
stock at the date of the awards of $2.48 per share. The tax benefit arising
from the excess of fair value at the vesting date over that at the award date of
approximately $927,000 is recognized as additional paid-in capital.
Warrants for 130,060 shares of the Company's common stock were exercised
concurrent with the effective date of the Offering at a weighted average
exercise price of $3.23. Additionally, the Company delivered 112,500 shares of
common stock to the seller in connection with the March 1994 purchase of a
merchant portfolio.
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.
41
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company offered 3,910,000 shares of its common stock in a third public
offering consummated 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 - ACQUISITIONS:
Operating Business Acquisitions
During fiscal 1996, the Company began issuing common stock to acquire
operating businesses with both existing merchant portfolios and sales
organizations capable of generating new accounts.
In fiscal 1996 and 1997, the Company consummated nine operating business
acquisitions by issuing common stock in exchange for all the outstanding common
stock of the companies acquired. These transactions were accounted for as
poolings of interest. Six of these transactions were considered material for
restatement and are summarized below:
Company Acquired Date Shares Issued
Martin Howe Associates, Inc. (MHA) July 1, 1996 594,011
Fairway Marketing Group (Fairway) December 23, 1996 424,999
Bancard Systems, Inc. (BSI) January 27, 1997 3,131,250
Retail Payment Services, Inc. (RPS) January 30, 1997 567,519
Eric Krueger, Incorporated (Krueger) June 3, 1997 579,000
LADCO Financial Group, Inc. (LFG) July 14, 1997 1,463,414
PMT's consolidated financial statements have been restated to include the
accounts of the above named entities for all periods presented by including the
historical results of these entities. The historical results of these six
pooled entities reflect each of their actual operating cost structures and, as a
result, do not necessarily reflect the cost structure of the newly combined
entity. Significant, unusual and non-recurring costs affecting fiscal 1996
operating results of the pooled entities include a single fraud loss of
$890,000, recognition of $400,000 in asset impairment losses in one entity, and
executive bonuses of $330,000 (totaling approximately $1 million after-tax or
$0.02 per share). Although PMT incurs merchant fraud losses each year, and
recognizes an accrual each year for such possibilities, the Company's annual
loss experience historically has been significantly less than the loss
referenced to above. Additionally, no further asset impairment losses are
expected from any of the assets acquired as a result of these operating business
acquisitions. The historical results do not purport to be indicative of results
which may occur in the future.
42
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MHA had a calendar year end and, accordingly, the MHA statements of income
for the years ended December 31, 1994, and 1995 have been combined with the
Company's statements of income for the fiscal years ended July 31, 1995 and
1996, respectively. In order to conform MHA's year end to the Company's fiscal
year end, results of operations for MHA for the six- month period ended June 30,
1996 have been excluded from the consolidated statement of income for the fiscal
year ended July 31, 1996. Accordingly, an adjustment has been made in fiscal
year 1996 to retained earnings for the exclusion of the net loss of $356,914 for
such six-month period. MHA's results of operations for this six-month period
include revenues of $10,743,645, expenses of $11,022,698 and net loss before
provision of income taxes of $279,053.
Fairway, RPS and Krueger were Subchapter S Corporations for income tax
purposes; therefore, these entities did not pay U.S. federal income taxes.
These entities will be included in the Company's U.S. federal income tax return
effective from the date of merger.
Separate revenues, net income and related per share amounts of the acquired
operating businesses for the periods prior to the mergers are presented in the
following table. In addition, the table includes unaudited pro forma net income
and earnings per share amounts which reflect pro forma adjustments to present
income taxes on the basis on which they will be reported in future periods.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 31, 1995 July 31, 1996 July 31, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues
PMT $ 75,242,866 $136,254,139 $240,756,047
LFG 8,860,400 11,008,144 12,881,617
MHA 13,764,195 13,585,887 --
BSI 16,808,554 21,540,196 12,218,404
Fairway 18,072,187 19,524,072 7,125,352
Other 6,791,030 12,978,788 11,232,012
------------ ------------ ------------
Revenues, as reported $139,539,232 $214,891,226 $284,213,432
============ ============ ============
Net Income (Loss)
PMT $ 4,032,000 $ 8,952,399 $ 13,805,887
LFG 917,608 1,024,212 1,318,778
MHA (391,845) (327,023) --
BSI 236,002 287,669 745,665
Fairway 164,381 (858,125) 183,262
Other 494,622 1,146,411 345,160
------------ ------------ ------------
Net income, as reported 5,452,768 10,225,543 16,398,752
Pro forma tax effect of Subchapter
S Corporations (256,032) (115,325) (268,666)
------------ ------------ ------------
Pro forma net income $ 5,196,736 $ 10,110,218 $ 16,130,086
============ ============ ============
</TABLE>
43
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Earnings per share:
As reported $0.20 $0.29 $0.40
Pro forma $0.19 $0.29 $0.39
In addition to these six transactions, the Company completed three separate
operating business acquisitions during fiscal 1997 with three unrelated entities
by issuing an aggregate of 2,900,000 shares of its common stock in exchange for
all the outstanding stock of the three entities. On an individual basis these
transactions were not considered material for retroactive restatement.
Asset Purchases
The Company purchases merchant portfolios which provide the Company the
right to service specific merchants under contract to processing banks for
electronic authorization and payment processing. The Company purchased nine
merchant portfolios in fiscal 1995, four merchant portfolios in fiscal 1996 and
eight merchant portfolios in fiscal 1997. These acquisitions were accounted for
as purchase transactions, and accordingly, the operating results of the merchant
portfolios are included in the Company's results of operations from the
effective dates of the acquisitions.
In connection with the purchase of merchant portfolios, the Company may
enter into a noncompetition agreement with the sellers of the portfolios. In
such cases, a portion of the purchase price of each merchant portfolio is
allocated to the related noncompetition agreement (Note 7). Amortization
expense related to purchased merchant portfolios was $2,283,638, $5,642,084 and
$8,886,428 in fiscal 1995, 1996 and 1997, respectively.
Individually significant purchase transactions are as follows:
ABC - The Company purchased a merchant portfolio from BankCard America,
Inc. ("ABC") in April 1995 for a purchased 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 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.
44
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED 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
120,000 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 included in intangible and other assets on the Company's balance sheet at
July 31, 1997.
TERMNET AND CPS - In July 1995, the Company purchased two 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 obtained a merchant terminal 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.
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.
Unaudited pro forma operating results are presented below to provide
additional information relative to the potential effect upon the Company's
operations of significant acquisitions. Pro forma information is provided only
for acquisitions meeting certain size and other requirements set forth by the
Securities and Exchange Commission. Each of the above acquisitions meet these
requirements and are included in the unaudited pro forma summary for the periods
specified below. There were no asset purchases which met the significance
requirements in fiscal 1997.
45
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EFFECTIVE INCLUDED IN
DATE OF PRO FORMA RESULTS
PURCHASES BEGINNING FISCAL YEAR
--------- ---------------------
ABC April 1, 1995 1995
TermNet July 1, 1995 1995
CPS July 1, 1995 1995
Imperial October 1, 1995 1995
UMB March 1, 1995 1995
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
purchases been made at the beginning of fiscal 1995 or fiscal 1996, or of
results which may occur in the future.
PRO FORMA PRO FORMA
YEAR ENDED YEAR ENDED
July 31, 1995 JULY 31, 1996
--------------- ---------------
Revenues $212,376,315 $235,222,557
Net income $ 3,896,695 $ 10,320,854
Earnings per share $0.14 $0.30
Actual results during fiscal 1997 were not materially different than pro forma
results.
NOTE 4 - NET INVESTMENT IN DIRECT FINANCE LEASES:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Minimum lease payments................................................................. $ 45,674,278 $ 48,501,795
Residual values - unguaranteed......................................................... 5,773,731 5,725,153
Allowance for doubtful accounts........................................................ (1,659,203) (2,481,981)
------------ ------------
Net minimum lease payments receivable.................................................. 49,788,806 51,744,967
Unearned income........................................................................ (17,422,781) (17,858,333)
------------ ------------
Net investment in direct financing leases.............................................. $ 32,366,025 $ 33,886,634
============ ============
</TABLE>
Changes in the allowance for doubtful accounts were as follows:
<TABLE>
<CAPTION>
For the year ended July 31,
----------------------------------------
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Balance at beginning of year $ 1,513,455 $ 1,017,459 $ 1,659,203
Provision for bad debt expense 1,433,390 2,132,542 2,389,962
Charged off lease contracts (2,487,772) (1,637,744) (2,043,331)
Bad debt recoveries 558,386 146,946 476,147
------------ ------------ -----------
Balance at end of year $ 1,017,459 $ 1,659,203 $ 2,481,981
============ ============ ===========
</TABLE>
46
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At July 31, 1997, minimum lease payments receivable, including estimated
residual values receivable, are due as follows:
Unguaranteed
Minimum residual
lease payments values
receivable receivable
-------------- -----------
1998 $20,376,671 $ 176,456
1999 15,434,230 565,691
2000 9,402,650 2,187,321
2001 3,043,504 2,416,606
Thereafter 244,740 379,079
----------- ----------
$48,501,795 $5,725,153
=========== ==========
The Company's experience indicates a portion of the leases will terminate
at dates other than the end of the contractual lease period. Accordingly, the
foregoing table should not be regarded as a forecast of future collections.
NOTE 5 - PROPERTY AND EQUIPMENT:
JULY 31,
--------------------------
1996 1997
------------ ------------
Office equipment...................... $ 5,422,730 $ 9,047,142
Credit card terminals held for lease.. 1,640,538 3,913,614
Office furniture and fixtures......... 702,494 856,104
Leasehold improvements................ 124,766 205,253
----------- -----------
7,890,528 14,022,113
Less: accumulated depreciation...... (2,787,301) (4,867,160)
----------- -----------
$ 5,103,227 $ 9,154,953
=========== ===========
In addition to the direct financing leases described in Note 4, the Company
leases point-of-sale terminals to merchants under operating leases on a month-
to-month basis. Depreciation expense on all of the Company's property and
equipment totaled $465,398, $1,074,644 and $1,949,774 in fiscal 1995, 1996 and
1997, respectively.
NOTE 6 - NOTE RECEIVABLE:
The Company entered into a leasing arrangement in March 1997 for a portion
of the office space in a building that will serve as the Company's corporate
headquarters completed in September 1997. The Company has advanced funds to an
independent developer who purchased the building and is responsible for its
renovation. The loan provided by the Company has a maximum available balance of
$13,300,000 which bears interest at 5% (comparable to invested funds), payable
monthly in arrears. The loan amount is being advanced in various draws by the
building owner based on certain achieved milestones in the renovation. The
outstanding principal balance at July 31, 1997 is $8,773,330. The Company's
note receivable is secured by
47
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
a first lien on the property and has a term of ten years. The Company obtained
an independent appraisal of the property in determining its fair value for the
purpose of classifying the related leasing transaction in accordance with
Statement of Financial Accounting Standards No. 13 - Accounting for Leases. The
lease has a term of ten years and is classified as an operating lease. The
Company's minimum lease commitment related to the property is included in Note
13 - Leases.
NOTE 7 - INTANGIBLE AND OTHER ASSETS:
July 31,
------------------------
1996 1997
----------- -----------
Noncompetition agreements........................ $3,345,193 $ 4,068,352
Restricted cash.................................. 3,329,913 7,724,597
Notes receivable from shareholders............... -- 2,513,186
Prepaid processing costs......................... -- 1,307,330
Deferred finance costs........................... 585,360 526,666
Other............................................ 626,424 1,405,239
---------- -----------
$7,886,890 $17,545,370
========== ===========
Intangible and other assets include noncompetition agreements with various
sellers of merchant portfolios purchased by the Company (Note 3).
Amortization expense related to noncompetition agreements was $465,147,
$860,323 and $1,243,676 in fiscal 1995, 1996 and 1997, respectively.
Accumulated amortization of noncompetition agreements was $1,703,680 and
$2,947,356 at July 31, 1996 and 1997, respectively.
Restricted cash represents funds withheld by certain processing banks
pursuant to processing agreements to cover potential merchant losses or by
lending institutions pursuant to loan agreements to provide additional
collateral.
Amortization of deferred finance costs included in interest expense was
$580,665, $550,318 and $607,642 in fiscal 1995, 1996 and 1997, respectively.
Accumulated amortization of deferred finance costs was $1,413,345 and $2,020,987
at July 31, 1996 and 1997, respectively.
48
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
NOTE 8- ACCRUED LIABILITIES:
July 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Income taxes payable........................................ $ 1,696,910 $ 1,030,799
Compensation and payroll taxes.............................. 969,817 1,503,250
Reserve for merchant losses................................. 1,459,602 1,093,290
Professional services....................................... 415,477 332,560
Accrued processing costs.................................... 238,189 193,640
State franchise taxes payable............................... 356,042 --
Sales and property taxes payable............................ 281,429 270,997
Interest payable on long-term debt.......................... 144,296 75,056
Sub-ISO deposits............................................ -- 63,711
Other....................................................... 489,421 494,105
----------- -----------
$ 6,051,183 $ 5,057,408
=========== ===========
NOTE 9 - LONG-TERM DEBT:
July 31,
------------------------
1996 1997
----------- -----------
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash,
principal and interest at a variable rate based
on the one month Commercial Paper rate then
in effect (6.05% at July 31, 1997), are payable
monthly, with all unpaid principal and interest
due in May 2003........................................... $ -- $ 5,258,258
Notes payable, secured by the remaining payment
stream on certain leases and restricted cash, principal
and interest at rates ranging from 10.11% to 12.21%
per annum are payable monthly, with all unpaid
principle and interest due by April 2000................. 10,237,459 5,084,577
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash, principal
and interest at 7.22% per annum, are payable monthly,
with all unpaid and interest due by May 2002.............. 13,310,790 18,760,944
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash, principal
and interest at variable rates based on the one month
LIBOR rate then in effect (various rates ranging
from 10.06% to 10.38% at July 31, 1996),
paid in fiscal 1997....................................... 3,210,195 --
</TABLE>
49
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Notes payable, secured by remaining payment stream
of certain leases and restricted cash, principal and
interest at 7.39% per annum, paid in fiscal 1997.......... 696,413 --
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash, principal
and interest at 12.0% per annum are payable monthly,
with all unpaid principal and interest due by
March 1999................................................ 1,149,487 481,204
Revolving line of credit obligation (maximum available
balance of $3,000,000), secured by the remaining
payment stream of certain leases and restricted cash,
principal and interest at a varable rate based on the prime
rate (9.5% at July 31, 1997), are payable monthly, with
all unpaid principal and interest due on demand........... 1,034,350 1,290,048
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash, principal,
and interest at 5.17% per annum, paid in fiscal 1997...... 642,576 --
Revolving line of credit obligation (maximum available balance
of $1,500,000), secured by the remaining payment stream
of certain leases and restricted cash, principal and
interest at a variable rate based on the prime rate
(10.0% at July 31, 1997), are payable monthly, with all
unpaid principal and interest due by May 1998............. 996,545 346,457
Other debts repaid in 1997 or subsequent to
acquisitions.............................................. 1,049,991 --
Other....................................................... 5,000 185,895
------------ ------------
Total long-term debt........................................ 32,332,806 31,407,383
Less: current portion (13,281,646) (14,516,369)
------------ ------------
$ 19,051,160 $ 16,891,014
============ ============
</TABLE>
50
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company entered into an agreement on March 22, 1994 for a $12,500,000
revolving line of credit and $2,368,000 bridge loan. This credit facility was
amended and restated on May 31, 1995, July 18, 1995 and January 31, 1997,
increasing the revolving line of credit to $20,000,000 and terminating the
bridge loan. The current amendment expires January 31, 1998. Borrowings, if
any, under the new credit facility will be used to finance future purchases of
merchant portfolios and equipment and for general corporate purposes.
Maturities of long-term debt are as follows as of July 31, 1997:
Year Ending
July 31,
------------
1998 $14,516,369
1999 9,115,484
2000 5,209,256
2001 1,610,339
2002 579,164
Thereafter 376,771
-----------
$31,407,383
===========
NOTE 10 - SHAREHOLDERS' EQUITY:
Changes in the shares of the Company's common stock are as follows:
<TABLE>
<CAPTION>
<S> <C>
Outstanding at July 31, 1994.......................................... 4,381,063
Shares issued......................................................... 2,420,872
Exercise of put options............................................... 1,922,372
Exercise of options and warrants...................................... 164,684
-----------
Outstanding at July 31, 1995.......................................... 8,888,991
Shares issued......................................................... 5,851,961
Exercise of options................................................... 44,805
Stock dividends....................................................... 23,692,517
-----------
Outstanding at July 31, 1996.......................................... 38,478,274
Shares issued......................................................... 2,900,966
Exercise of options................................................... 369,468
-----------
Outstanding at July 31, 1997.......................................... 41,748,708
===========
</TABLE>
Shares of common stock issued in operating business acquisitions accounted
for as poolings of interests, for which the financial statements have been
restated, have been reflected as outstanding on a pre-split basis for all
periods presented above.
The Company's shareholders approved an increase in the amount of authorized
shares of Common Stock of the Company from 40,000,000 shares to 100,000,000
shares at the Company's December 16, 1996 Annual Meeting of Shareholders.
51
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11 - STOCK OPTIONS AND WARRANTS:
The Company has an incentive stock option plan, whereby the Company has
reserved for issuance upon exercise of stock options a maximum of 3,795,000
shares of the Company's common stock. In addition to certain other provisions,
the plan provides for the option price of the shares to be determined by the
Board of Directors or their designees at the date of the grant provided,
however, that in the case of incentive stock options, the option price shall be
no less than 100% of the fair market value of the common stock on such date
(110% in the case of an individual who owns more than 10% of the total combined
voting power of all classes of stock of the Company). In the case of
nonstatutory stock options, the option price shall be no less than 85% of the
fair market value of the common stock on the date of grant.
The options expire at such times as determined by the Board of Directors at
the time of the grant, which shall be no later than ten years from the grant
date (five years in the case of an individual who owns more than 10% of the
total combined voting power of all classes of stock of the Company). The Company
is authorized to loan, or guarantee loans for, the purchase price of shares
issuable upon exercise of options granted under the plan.
In May 1994, the Company adopted an outside director stock option plan and
amended the plan at the December 1995 annual shareholders' meeting. The plan
provides for the grant of non-qualified stock options to outside directors and
authorizes the issuance of up to 300,000 shares of common stock pursuant to
options having an exercise price equal to the fair market value of the common
stock on the date the options are granted. Options were granted to each outside
director on the effective date of the Offering to purchase 30,000 shares of the
Company's common stock for a total of 120,000 shares (Note 2). Options granted
under the plan are exercisable one-fourth each on the first, second, third and
fourth anniversaries of the grant date and expire ten years after the grant
date.
The Company adopted Statement of Financial Accounting Standards No. 123--
Accounting for Stock Based Compensation (SFAS 123) as of August 1, 1996. In
accordance with the provisions of SFAS No. 123, the Company applies APB Opinion
25 and related interpretations in accounting for its stock option plans and
accordingly, does not recognize compensation costs. If the Company had elected
to recognize compensation costs based on the fair value of the options granted
at grant date as prescribed by SFAS 123, net income and earnings per share would
have been reduced to the pro forma amounts indicated in the table below:
52
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1995 1996 1997
---------- ----------- -----------
Net income as reported $5,452,768 $10,225,543 $16,398,752
Pro forma net income 5,148,588 9,593,109 15,037,710
Earnings per share as reported 0.20 0.29 0.40
Pro forma earnings per share 0.19 0.28 0.37
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 40.8% 42.5% 47.4%
Risk-free interest rate 7.3%-7.8% 5.7%-6.8% 6.3%-6.9%
Expected life of options 6.7 years 6.7 years 6.7 years
</TABLE>
The weighted average fair value at date of grant for options granted during
1995, 1996 and 1997 was $1.46, $5.88 and $9.45 per option, respectively.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding at July 31, 1994............. 458,700 $ 0.88
Granted................................ 1,400,724 2.68
Exercised.............................. (103,872) 0.99
Terminated............................. (5,196) 1.13
----------- ---------
Outstanding at July 31, 1995............. 1,750,356 $ 2.31
Granted................................ 551,500 10.79
Exercised.............................. (119,775) 1.26
Terminated............................. (265,052) 2.73
----------- ---------
Outstanding at July 31, 1996............. 1,917,029 $ 4.76
Granted................................ 410,500 16.29
Exercised.............................. (369,468) 2.12
Terminated............................. (77,640) 9.66
----------- ---------
Outstanding at July 31, 1997............. 1,880,421 $ 7.59
=========== =========
</TABLE>
53
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ----------- ----------- ----------- --------- ----------- -------
<S> <C> <C> <C> <C> <C>
$0.83-$1.13 77,950 4.7 $ 0.94 77,950 $ 0.94
$2.67-$3.54 914,956 7.0 $ 2.63 361,866 $ 2.67
$5.96-$8.78 132,240 8.3 $ 7.75 23,280 $ 8.00
$9.17-$13.75 470,000 8.9 $11.08 75,500 $10.16
$15.00-22.25 285,275 9.2 $19.33 23,401 $17.92
--------- -------
1,880,421 561,997
========= =======
</TABLE>
The Company has granted stock warrants which give the holder the right to
purchase 120,000 shares of the Company's common stock at an exercise price of
$1.25 per share. These warrants expire March 22, 2004 (Note 3). In fiscal
1997, the Company granted warrants to purchase 10,000 shares of its common stock
at an exercise price of $17.00 per share in conjunction with an immaterial
acquisition. These warrants expire September 16, 2006.
NOTE 12 - RETIREMENT PLANS:
The Company initiated the PMT Services, Inc. 401(k) Retirement Plan, in
fiscal 1996. Following the initial enrollment, employees become eligible for
participation in the plan on the semi-annual enrollment date following the
employee completing 12 consecutive months of employment and 1,000 hours of
service or more. The Company contributes an amount equal to 50% of employee
voluntary contributions up to a maximum of 6% of the employee's annual
compensation. The plan expense for fiscal 1996 and 1997 was $64,015 and
$114,720, respectively.
54
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13 - LEASES:
The Company leases equipment and office space under noncancellable
operating leases. Rent expense approximated $964,831, $1,175,073 and $1,621,296
during fiscal 1995, 1996 and 1997, respectively. Office space was leased from a
partnership comprising two of the Company's shareholders during a portion of
1995. Rent expense paid to shareholders for office space amounted to $54,000
during fiscal 1995. This office space lease agreement terminated in 1995 and the
Company relocated. None of the Company's current office space is with a related
party. In March 1997, the Company entered into a leasing arrangement for a
portion of the office space in a building that will serve as the Company's
corporate headquarters (Note 6). Future minimum payments under all
noncancellable leases with terms greater than one year at July 31, 1997 are:
FISCAL YEAR
ENDING
JULY 31,
-----------
1998 $ 2,895,974
1999 3,276,032
2000 3,239,272
2001 2,560,611
2002 1,921,822
Thereafter 7,558,150
-----------
21,451,861
Less: Sublease rentals (2,635,858)
-----------
$18,816,003
===========
NOTE 14 - OTHER INCOME (EXPENSE) - NET:
The Company recorded a non-taxable gain of $1,000,000 in the fourth quarter
of fiscal 1996 for the receipt of insurance proceeds on the life of the former
Chief Financial Officer of the Company. Additionally, the Company has included
in this line item all non-recurring transaction costs related to operating
business acquisitions, which were accounted for as poolings of interest.
During fiscal 1997, LFG recorded a charge of $367,000 related
to the buyout of a consulting agreement due to the death of their former Chief
Financial Officer. This charge occurred prior to the effective date of the
merger with this entity and is included in other expense on a restated basis.
55
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 15 - INCOME TAXES:
The provision for income taxes comprises the following:
<TABLE>
<CAPTION>
Year ended July 31,
--------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Current tax expense:
Federal........................................... $2,425,471 $5,395,173 $ 8,955,618
State............................................. 517,847 1,042,180 1,616,868
---------- ---------- -----------
2,943,318 6,437,353 10,572,486
---------- ---------- -----------
Deferred tax benefit:
Federal........................................... 143,946 (470,526) (935,449)
State............................................. 76,500 (30,469) (19,521)
---------- ---------- -----------
220,446 (500,995) (954,970)
---------- ---------- -----------
Increase in valuation
allowance......................................... 137,288 194,831 --
---------- ---------- -----------
$3,301,052 $6,131,189 $ 9,617,516
========== ========== ===========
</TABLE>
The Company's effective tax rate differs from the statutory rate as follows:
<TABLE>
<CAPTION>
Year ended July 31,
-------------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Federal tax at statutory rate....................... 34.0% 34.0% 35.0%
Increase (decrease) in taxes
resulting from:
State income taxes (net
of federal tax benefit).......................... 4.5 4.1 4.0
Valuation allowance 1.6 1.2 0.0
Other............................................. (2.4) (1.8) (2.0)
---------- ---------- -----------
37.7% 37.5% 37.0%
========== ========== ===========
</TABLE>
Deferred income taxes under Statement of Financial Accounting Standards No.
109 - Accounting for Income Taxes, reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets at July 31, 1996 and 1997 are as
follows:
56
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JULY 31,
----------------------------
1996 1997
------------- -------------
Current tax assets:
Compensation liabilities........... $ 30,897 $ 31,645
Loss reserves...................... 858,343 1,386,971
Other.............................. 56,694 124,763
------------ ------------
Net current tax assets............... $ 945,934 $ 1,543,379
============ ============
Noncurrent tax assets:
Leased equipment................... 10,646,486 12,799,951
Unearned income.................... 7,143,341 8,005,899
Merchant portfolio amortization.... 1,586,194 3,345,402
Operating loss carryforwards and
AMT credits....................... 1,222,814 1,299,321
Other.............................. 182,442 182,442
------------ ------------
20,781,277 25,633,015
Valuation allowance.................. (332,119) (332,119)
Noncurrent tax liability:
Gross lease receivable............. (18,726,454) (21,743,354)
Residual values.................... (2,367,230) (2,566,975)
Depreciation....................... (242,327) (517,919)
Residual value of sold portfolios.. -- (788,371)
Other.............................. (107,868) (309,054)
------------ ------------
(21,443,879) (25,925,673)
------------ ------------
Net noncurrent tax liability........ $ (994,721) $ (624,777)
============ ============
As of July 31, 1997, the Company has approximately $3,000,000 of federal
and state net operating loss carryforwards and AMT credits available to offset
future taxable income of certain subsidiaries of the Company. These
carryforwards and credits expire at various dates through fiscal 2005. A
valuation allowance has been established for these net operating losses and AMT
credits as utilization is not reasonably assured.
NOTE 16 - COMMITMENTS AND CONTINGENCIES:
In addition to the third-party debt guaranty and operating leases described
in Notes 3 and 13 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
57
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 per merchant.
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.
NOTE 17 - SUBSEQUENT EVENTS:
On October 2, 1997, the Company consummated an operating business
acquisition by issuing 3,870,988 shares of its common stock in exchange for all
the outstanding common stock of Bancard, Inc. The transaction will be accounted
for as a pooling of interests. Unaudited pro forma results assuming this
acquisition had been consummated as of the beginning of the earliest period
presented are as follows:
58
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pro forma Pro forma Pro forma
year ended year ended year ended
July 31, 1995 July 31, 1996 July 31, 1997
------------- ------------- -------------
Revenues $157,285,005 $246,742,712 $325,040,454
Net Income 6,039,927 11,405,167 19,054,451
Earnings per share 0.20 0.30 0.42
59
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
60
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
<S> <C> <C>
NAME AGE POSITION
---- --- --------
Richardson M. Roberts... 39 Chairman of the Board and Chief Executive Officer
Gregory S. Daily........ 38 President, Treasurer and Director
Clay M. Whitson......... 39 Vice-President of Finance and Chief Financial Officer
Joseph T. Stewart, Jr... 58 Chief Operating Officer
Vickie G. Johnson....... 38 Chief Accounting Officer, Secretary and Controller
</TABLE>
Mr. Roberts has served as Chief Executive Officer of the Company, Chairman
of the Board and a director since co-founding the Company in August 1984. Mr.
Roberts also served as President of the Company from August 1984 to December
1995. Mr. Roberts was previously employed with Comdata Network, Inc. as a
national sales representative.
Mr. Daily has served as Treasurer and a director of the Company since co-
founding the Company in August 1984. Mr. Daily also served as Vice-President
and Chief Operating Officer of the Company from August 1984 to December 1995,
and currently serves as President and Treasurer of the Company. Mr. Daily was
previously employed with Comdata Network, Inc. as a telemarketing
representative.
Mr. Whitson has served as Vice-President of Finance of the Company since
joining the Company in January 1996 and currently serves as Chief Financial
Officer of the Company. Mr. Whitson was previously employed as Chief Financial
Officer of the Gemala Group, a diversified conglomerate based in Indonesia.
Prior to joining the Gemala Group in 1990, Mr. Whitson was a Director in the
Mergers and Acquisitions Department at The Chase Manhattan Bank, N.A.
Mr. Stewart has served as Chief Operating Officer of the Company since
joining the Company in January 1996. Mr. Stewart was previously employed as
Executive Vice-President of the Electronic Funds Services unit of First Data
Corporation.
Ms. Johnson has served as Controller of the Company since joining the
Company in October 1991. Ms. Johnson also serves as Chief Accounting Officer
and Secretary of the Company. Ms. Johnson was previously employed with Historic
Hotel Partners, Inc. as Regional Controller.
DIRECTORS
Information with respect to the Company's directors is incorporated herein
by reference from the Company's Proxy Statement relating to the Annual Meeting
of Shareholders to be held on December 19, 1997.
COMPLIANCE WITH REPORTING REQUIREMENTS OF THE EXCHANGE ACT
Information with respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934 is set forth in the Company's Proxy Statement relating to
the Annual Meeting of Shareholders to be held on December 19, 1997, under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance."
61
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated herein by reference from the Company's
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
December 19, 1997, except that the Comparative Performance Graph and the
Compensation Committee Report on Executive Compensation included in the Proxy
Statement are expressly not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated herein by reference to the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on December
19, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated herein by reference to the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on December
19, 1997.
62
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Item 8 of Form 10-K:
(1) Financial Statements:
--------------------
Report of Independent Accountants
Consolidated Balance Sheets as of July 31, 1997 and July 31, 1996
Consolidated Statements of Income, each of the three years ended
July 31, 1997
Consolidated Statements of Changes in Shareholders' Equity,
each of the three years ended July 31, 1997
Consolidated Statement of Cash Flows, each of the three years ended
July 31, 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules: Page
-----------------------------
Independent Auditors' Report on
Financial Statement Schedule................... 64
Schedule II - Reserve for Merchant Losses
and Allowance for Bad Debts.................... 65
The other schedules are omitted because the required information is
either inapplicable or has been disclosed in the consolidated
financial statements and notes thereto.
(3) Supplemental Financial Statements:
---------------------------------
Report of Independent Accountants
Consolidated Balance Sheets as of July 31, 1997 and July 31, 1996
Consolidated Statements of Income, each of the three years ended
July 31, 1997
Consolidated Statements of Changes in Shareholders' Equity,
each of the three years ended July 31, 1997
Consolidated Statement of Cash Flows, each of the three years ended
July 31, 1997
Notes to Consolidated Financial Statements
(4) Supplemental Financial Statement Schedules:
-------------------------------------------
Independent Auditors' Report on
Financial Statement Schedule
Schedule II - Reserve for Merchant Losses
and Allowance for Bad Debts
The other schedules are omitted because the required information is
either inapplicable or has been disclosed in the consolidated
financial statements and notes thereto.
(5) Other Supplemental Information:
-------------------------------
Quarterly Information for each of the two years ended July 31, 1997
Five year Selected Financial Data
(7) Exhibits
The index to Exhibits is at page 97.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated July 18, 1997
discussing a business combination requiring retroactive effect
in the consolidated financial statements (as amended by Form 8-K/A(1)
and Form 8-K/A(2), each filed July 29, 1997, and Form 8-K/A(3) filed
September 16, 1997).
The Company filed a Current Report on Form 8-K dated October 10, 1997
discussing a business combination requiring retroactive effect in the
consolidated financial statements (as amended by Form 8-K/A filed
October 14, 1997).
63
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of PMT Services, Inc.
Our audits of the consolidated financial statements referred to in our report
dated September 23, 1997, appearing on page 30 of this Form 10-K also included
an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this
Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in
all material respects, the information set forth herein when read in conjunction
with the related financial statements.
PRICE WATERHOUSE LLP
Nashville, TN
September 23, 1997, except as to
NOTE 17 which describes the
pooling of interests with
Bancard, Inc. which is
as of October 2, 1997
64
<PAGE>
Schedule II
PMT SERVICES, INC.
RESERVE FOR MERCHANT LOSSES
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
FISCAL YEAR OF PERIOD ADDITIONS(1) OTHERS(2) DEDUCTIONS(3) PERIOD
- ------------- ---------- ------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1995 $ 444,759 $ 520,245 -- $ 408,331 $ 556,673
1996 $ 556,673 $1,653,705 -- $ 750,776 $1,459,602
1997 $1,459,602 $1,858,256 $284,906 $2,509,474 $1,093,290
</TABLE>
______________________
(1) Additions represent amounts charged to expense during the respective
periods.
(2) Other represents additions from immaterial operating business acquisitions,
during the respective periods.
(3) Deductions represent actual chargebacks incurred by the Company during the
respective periods.
ALLOWANCE FOR BAD DEBTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
FISCAL YEAR OF PERIOD ADDITIONS(1) OTHER(2) DEDUCTIONS(3) PERIOD
- ------------- ---------- ------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1995 $1,513,455 $1,433,390 $558,386 $2,487,772 $1,017,459
1996 $1,017,459 $2,132,542 $146,946 $1,637,744 $1,659,203
1997 $1,659,203 $2,389,962 $476,147 $2,043,331 $2,481,981
</TABLE>
______________________
(1) Additions represent amounts charged to expense during the respective
periods.
(2) Other represents recoveries by the Company during the respective periods.
(3) Deductions represent actual write-offs recorded by the Company during the
respective periods.
65
<PAGE>
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
July 31,
---------------------------
1996 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $109,351,788 $ 23,810,173
Investments.......................................... -- 49,167,521
Accounts receivable.................................. 9,402,725 18,303,296
Current portion of net investment in finance leases.. 10,331,271 9,249,753
Inventory............................................ 1,338,118 1,818,613
Deferred income taxes................................ 945,934 1,543,379
Other current assets................................. 1,061,855 2,061,295
------------ ------------
Total current assets................................ 132,431,691 105,954,030
Purchased merchant portfolios, net of accumulated
amortization of $9,668,708 and $18,689,846.......... 62,075,590 84,343,006
Long-term portion of net investment in finance leases 22,034,754 24,636,881
Property and equipment, net.......................... 6,667,474 9,379,056
Long-term note receivable............................ -- 8,773,330
Intangible and other assets.......................... 8,082,356 17,989,726
------------ ------------
Total assets........................................ $231,291,865 $251,076,029
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................... $ 13,456,646 $ 14,516,369
Accounts payable..................................... 4,944,124 9,608,347
Accrued liabilities.................................. 6,864,404 5,721,670
Deferred revenues.................................... 230,496 291,493
------------ ------------
Total current liabilities 25,495,670 30,137,879
Long-term debt....................................... 21,071,884 18,564,658
Deferred income taxes................................ 994,721 624,777
------------ ------------
Total liabilities................................... 47,562,275 49,327,314
------------ ------------
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; outstanding:
43,126,894 and 45,618,488 shares................... 431,269 456,185
Additional paid-in capital............................ 166,843,991 171,129,805
Treasury stock, at cost: 7,788 shares in 1996........ (2,093,152) 0
Accumulated earnings.................................. 18,547,482 30,162,725
------------ ------------
183,729,590 201,748,715
------------ ------------
Commitments and contingent liabilities (Notes 3, 13
and 16)
Total liabilities and shareholders' equity.......... $231,291,865 $251,076,029
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
66
<PAGE>
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended July 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues............................... $157,285,005 $246,742,712 $325,040,457
Cost of revenues 110,671,191 178,036,354 235,641,951
------------ ------------ ------------
Gross margin....................... 46,613,814 68,706,358 89,398,506
------------ ------------ ------------
Selling, general and administrative
expenses........................... 28,101,479 37,958,846 41,869,703
Depreciation and amortization expense.. 3,772,872 7,913,535 12,804,471
Provision for merchant loss and bad
debt expense....................... 2,056,355 4,055,591 4,395,497
Stock award compensation............... 241,477 -- --
Non-recurring operating expense........ -- -- 593,626
------------ ------------ ------------
34,172,183 49,927,972 59,663,297
------------ ------------ ------------
Income from operations................. 12,441,631 18,778,386 29,735,209
Interest income........................ 313,073 2,107,547 5,226,188
Interest expense....................... (3,413,725) (4,053,473) (4,045,639)
Other income (expense), net............ -- 703,896 (2,243,792)
------------ ------------ ------------
Income before provision for income
taxes.............................. 9,340,979 17,536,356 28,671,966
Provision for income taxes............. 3,301,052 6,131,189 9,617,516
------------ ------------ ------------
Net income......................... $ 6,039,927 $ 11,405,167 $ 19,054,450
============ ============ ============
Earnings per share..................... $ 0.20 $ 0.30 $ 0.42
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
67
<PAGE>
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Accumulated Total
Common Paid-in Treasury Unearned Earnings Shareholders'
Stock Capital Stock Compensation (Deficit) Equity
---------- ------------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1994......... $ 59,305 $ 2,118,956 $ (42,000) $(241,477) $ 3,747,084 $ 5,641,868
Stock awards vested............ 926,597 241,477 1,168,074
Shares issued.................. 24,209 15,891,283 15,915,492
Expiration of put options on
redeemable common stock...... 19,224 6,502,083 6,521,307
Stock warrants exercised....... 1,301 418,615 419,916
Stock options exercised........ 346 106,582 106,928
Acquire majority interest in...
subsidiary................... (510,545) (510,545)
Purchase of treasury stock..... (32,500) (32,500)
Reissuance of treasury stock... (6,000) 6,000 --
Distributions of Subchapter S
Corporations prior to
poolings..................... (524,614) (524,614)
Net income for the year........ 6,039,927 6,039,927
---------- ------------ ----------- ------------ ----------- -------------
Balance at July 31, 1995......... 104,385 25,958,116 (68,500) -- 8,751,852 34,745,853
Shares issued.................. 58,520 140,746,488 140,805,008
Stock options exercised........ 448 475,803 476,251
Stock splits................... 267,916 (267,916) --
Purchase of treasury stock..... (2,093,152) (2,093,152)
Reissuance of treasury stock... (68,500) 68,500 --
Minority shareholders'
contribution.................. 120,000 120,000
Martin Howe fiscal year
conversion.................... (356,914) (356,914)
Distributions of Subchapter S
Corporations prior to
poolings...................... (1,372,623) (1,372,623)
Net income for the year........ 11,405,167 11,405,167
---------- ------------ ----------- ------------ ----------- -------------
Balance at July 31, 1996......... 431,269 166,843,991 (2,093,152) -- 18,547,482 183,729,590
Shares issued................... 10 14,844 14,854
Stock options exercised......... 3,695 771,034 774,729
August 1996 pooling............. 5,000 (4,000) (115,762) (114,762)
March 1997 pooling.............. 8,000 (7,000) 141,303 142,303
May 1997 pooling................ 16,000 1,074,821 213,098 1,303,919
Cancellation of treasury
shares........................ (7,789) (72,624) 2,093,152 (2,012,739) --
Tax benefit from non-
qualified stock options....... 1,986,174 1,986,174
Minority shareholders'
contribution.................. 522,565 522,565
Distributions of Subchapter S
Corporations, prior to
poolings...................... (5,665,107) (5,665,107)
Net income for the year......... 19,054,450 19,054,450
---------- ------------ ----------- ------------ ----------- -------------
Balance at July 31, 1997......... $ 456,185 $171,129,805 -- -- $30,162,725 $201,748,715
========== ============ =========== ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
68
<PAGE>
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended July 31,
--------------------------------------------------
1995 1996 1997
-------------------- ------------- -------------
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net income......................................................... $ 6,039,927 $ 11,405,167 $ 19,054,450
Martin Howe fiscal year conversion................................. -- (356,914) --
Adjustments:
Depreciation and amortization expense............................. 4,353,537 8,450,362 13,412,112
Provision for merchant losses and bad debt expense................ 2,056,355 4,055,591 4,395,497
Stock award compensation and other................................ 241,477 -- --
Deferred income taxes............................................. 357,734 (306,163) (954,970)
Changes in assets and liabilities, excluding the effects of
non-restated acquisitions:
Accounts receivable............................................. (1,974,181) (3,227,295) (8,907,206)
Inventory....................................................... (468,679) (87,959) (246,264)
Other assets.................................................... (1,406,363) (119,006) (6,455,471)
Accounts payable................................................ 28,427 (107,848) 4,021,848
Accrued liabilities............................................. (179,468) 1,134,179 (1,982,023)
Deferred revenues............................................... (155,291) (59,105) (46,987)
------------ ------------ ------------
Net cash provided by operating activities..................... 8,893,475 20,801,009 22,290,986
Cash flows from investing activities:
Purchase of merchant portfolios................................... (24,752,658) (32,341,624) (33,720,014)
Purchase of property and equipment, net........................... (2,274,935) (2,627,903) (5,182,861)
Purchase of equipment for leasing................................. (16,809,608) (20,865,015) (19,296,806)
Purchase of investments, net...................................... -- -- (49,167,521)
Acquisitions of businesses, net of cash acquired.................. -- (312,599) 356,050
Proceeds from receivable securitization........................... -- -- 1,076,317
Amounts received on leases, net of amortized
unearned income............................................. 10,478,442 12,252,928 14,042,820
------------ ------------ ------------
Net cash used in investing activities......................... (33,358,759) (43,894,213) (91,892,015)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.......................... 35,591,026 36,017,752 34,093,211
Payments on long-term debt........................................ (27,719,029) (46,284,340) (38,058,587)
Proceeds from issuance of common stock............................ 17,098,894 140,963,115 789,583
Issuance of note receivable....................................... -- -- (8,773,330)
Payments to repurchase treasury stock............................. (32,500) (12,000) --
Proceeds from minority shareholders' contributions................ -- 120,000 --
Distributions of Subchapter S Corporations........................ (524,614) (1,372,623) (3,991,463)
------------ ------------ ------------
Net cash provided (used) by financing activities.............. 24,413,777 129,431,904 (15,940,586)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents................. (51,507) 106,338,700 (85,541,615)
Cash and cash equivalents at beginning of year....................... 3,064,595 3,013,088 109,351,788
------------ ------------ ------------
Cash and cash equivalents at end of year............................. $ 3,013,088 $109,351,788 $ 23,810,173
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for income taxes.......................................... $ 3,596,249 $ 5,772,989 $ 9,367,692
Cash paid for interest.............................................. 2,895,940 3,453,909 3,506,217
</TABLE>
69
<PAGE>
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
Supplemental schedule of noncash activities:
In connection with the purchase of merchant portfolios in fiscal 1995, the
Company issued promissory notes totaling $80,500. In connection with three
separate operating business acquisitions in fiscal 1997, the Company issued
2,900,000 shares of common stock. The acquisitions were accounted for as
poolings of interests which did not require retroactive restatement, because
they had an insignificant impact on the Company.
The Company recognized a tax benefit of $318,517 and $1,986,174 for the
years ended July 31, 1996 and 1997, respectively, for the excess of the fair
market value at the exercise date over that at the award date for stock options
exercised.
The accompanying notes are an integral part of these financial statements.
70
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations
The Company markets and services electronic credit card authorization and
payment systems to merchants, including sale and leasing of related equipment.
The Company provides these services to merchants pursuant to contracts between
the Company and various processing banks. Generally, the Company's agreements
with the processing banks contain certain aspects of both marketing and service.
Although the marketing portion of the agreements is limited as to time, the
service portion of substantially all of these agreements is not. The marketing
aspects expire at various dates unless renewed automatically, if applicable, or
extended by the parties. There can be no assurance that PMT's contractual
arrangements with its processing banks will be renewed or that PMT will be able
to obtain favorable replacement arrangements, whether upon expiration,
termination or otherwise.
Basis of consolidation
The supplemental consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. Interests in the majority-
owned subsidiaries are reported using the full consolidation method. All
material intercompany balances and transactions are eliminated.
Basis of presentation
Certain financial statement items, in prior periods, have been reclassified
to conform to the current year's presentation. The supplemental consolidated
financial statements give retroactive effect to certain acquisitions of
operating businesses consummated subsequent to year end but prior to filing of
the Company's Annual Report on Form 10-K which were accounted for as a pooling
of interests (Note 3).
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
71
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenue and cost recognition
Revenues derived from the electronic processing of transactions (merchant
discount rate and related fees) on the credit card authorization equipment are
recognized at the time the merchants' transactions are processed. Related
commission expense and processing charges are also recognized at that time.
Revenues related to the direct sale of credit card authorization equipment
are recognized when the equipment is shipped. Installation fees related to both
the direct sale and the marketing of this equipment are recognized when
installation is completed. Fees received in advance of shipment or installation
are not recognized as revenue until earned.
Revenue related to finance leasing of credit card point-of-sale processing
equipment are recognized over the term of the lease agreement using the interest
method.
Cost of revenues includes interchange fees paid to the credit card-issuing
bank and fees paid to the network service provider, VISA and MasterCard and the
processing bank. These costs are recognized at the time the merchants'
transactions are processed and the related revenue is recorded.
The Company recognizes as revenue in its statement of income the full
discount rate and fees collected from the merchant. The various costs incurred
by the Company, including amounts paid to the card-issuing bank, the processor
and network service provider, are reflected as costs of revenues. In accordance
with the Company's contracts with its processing banks, all of the funds
collection and most of the disbursement function is performed on behalf of the
Company by the processing bank. At month end, the processing bank collects the
total discount rate and fees from the merchants and disburses to each of the
service providers their fees. Disbursements for the interchange fee paid to the
card-issuing bank are made 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.
Cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
72
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Investments
The Company's investments of $49,167,521 are in United States Government
Treasury notes for a term less than one year. These investments are classified
as held-to-maturity according to Statement of Financial Accounting Standard No.
115 - Accounting for Certain Debt and Equity Securities (SFAS 115), and are
carried at amortized cost as determined by specific identification. The fair
value of these investments is $49,198,891 at July 31, 1997. No such investments
were outstanding at July 31, 1996.
Financial instruments
The Company has various financial instruments, including cash, time
deposits, receivables, accounts payable, revolving credit facilities, accrued
liabilities and a hedging contract. Cash, time deposits, receivables, accounts
payable and accrued liabilities are settled within a year and are not subject to
market rate fluctuations. Revolving credit facilities are at variable market
rates. The carrying value of these financial instruments approximates their
fair market values. Notes payable with a carrying amount of $34,528,530 at July
31, 1996 and $33,081,027 at July 31, 1997 had a market value of $36,186,641 and
$33,963,585, respectively, using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
Hedging contract
The Company entered a forward rate lock agreement during fiscal 1996 to
minimize its exposure to interest rate risk. The notional amount of the
agreement totaled $15,000,000. The notional amount does not represent amounts
exchanged by parties and, thus, is not a measure of the Company's exposure to
loss through its use of these agreements. The hedging contract, with no
carrying amount, had a fair value of ($126,563) at July 31, 1996. In fiscal
1997, the Company entered into another forward rate lock agreement in the amount
of $20,000,000. Both forward rate lock agreements settled in fiscal 1997 and
the amounts exchanged under these agreements had no material impact on the
financial statements. Such settlements were deferred and are being amortized,
using the effective interest rate method, over the remaining life of the
underlying debt hedged. There were no outstanding hedging contracts at July 31,
1997.
Under the Company's forward rate lock agreements, the Company and the
counter party exchange, upon maturity of the agreement, an amount calculated by
reference to the agreed notional amount and a specified index. These forward
rate lock agreements allow the Company to reduce its exposure to interest rate
fluctuations on certain floating rate debt.
73
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Accounts receivable
Accounts receivable primarily comprise amounts due from processing banks
which represent the discount rate and fees earned, after related interchange
fees and other processing costs, on transactions processed during the month
ending on the balance sheet date. Such balances are received from processing
banks approximately 20 days following the end of each month.
Financing leases
The Company provides direct financing leases and sales-type leases to its
customers. The significant difference between the two types of leases is dealer
profit recognized by the Company in a sales-type lease. At inception of a lease
of point-of-sale equipment, the Company records an investment in direct
financing leases which is equal to the total of future lease rentals and the
estimated residual value of the leased equipment, less unearned income. The
unearned income is the difference between the cost of the equipment and the
total of future lease rentals plus the estimated residual value of the leased
equipment. Residual value is the estimated proceeds from the sale or lease of
the asset at the end of the lease term. Amortization of unearned income is
recorded on the interest method. The Company's investment in finance leases is
reduced by an allowance for rental payments that are expected to be
uncollectible.
Inventory
Inventory of credit card authorization equipment is stated at the lower of
cost or market, with cost being determined by specific identification.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed
using straight-line and accelerated methods over the estimated useful lives of
the assets ranging from 3 to 10 years.
Purchased merchant portfolios
Purchased merchant portfolios are recorded at acquired cost. Amortization
expense is recognized on a straight-line basis over 10 years consistent for
acquired entities. Management evaluates purchased merchant portfolios and other
long-lived assets for impairment at each balance sheet date through review of
actual attrition and projected undiscounted cash flows generated by each
merchant portfolio in relation to the unamortized cost of each merchant
portfolio. If, upon review, an impairment of the value of the purchased
merchant portfolio is indicated, amortization will be accelerated to recognize
the diminution in value.
74
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Reserve for chargebacks and merchant fraud
Disputes between a cardholder and a merchant periodically arise as a result
of cardholder dissatisfaction with merchandise quality or merchant services and
the disputes may not be resolved in the merchant's favor. In these cases, the
transaction is "charged back" to the merchant and the purchase price is refunded
by the merchant. If the merchant is unable to grant a refund, the Company or,
under limited circumstances, the Company and the processing bank, must bear the
credit risk for the full amount of the transaction. The Company evaluates its
risk and estimates its potential loss for chargebacks based on historical
experience. A provision for these estimated losses is provided in the same
period as the related revenues.
Income taxes
The liability method is used in accounting for income taxes, whereby
deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. The tax benefit of deductible temporary differences
is reflected within the various components of deferred tax assets and recognized
if the realization thereof is more likely than not (Note 15).
Earnings per share
Earnings per share for fiscal 1995, 1996 and 1997 is calculated based on
weighted average shares of common stock outstanding of 30,976,685, 38,576,405
and 45,014,824 respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 - Earnings per Share (SFAS 128). SFAS
128 requires companies with complex capital structures that have publicly held
common stock or common stock equivalents to present both basic and diluted
earning per share (EPS) on the face of the income statement. The presentation
of basic EPS replaces the presentation of primary EPS previously required by
Accounting Principles Board Opinion No. 15 (APB 15). Basic EPS is calculated as
income available to common shareholders divided by the weighted average number
of shares outstanding during the period. Diluted EPS (previously referred to as
fully diluted EPS) is calculated using the "if converted" method for convertible
securities and the treasury stock method for options and warrants as prescribed
by APB 15. This statement is effective for financial statements issued for
interim periods and annual periods ending after December 15, 1997. Earlier
application is not permitted. The Company will adopt the provisions of this
statement in the quarter ended January 31, 1998. Management believes the
provisions of this statement will not have a material effect on earnings per
share.
75
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock splits
On December 14, 1995 the Board of Directors approved a two-for-one stock
split and on May 17, 1996 approved a three-for-two stock split, each to be
affected in the form of a stock dividend. The stock splits for December 14,
1995 and May 17, 1996 were effective for shareholders of record at the close of
business on December 29, 1995 and May 28, 1996, respectively. All earnings per
share information included in the accompanying financial statements has been
adjusted to give retroactive effect to the stock splits for all periods
presented. Additionally, all share information stated in Note 10 has been
adjusted to give retroactive effect to the stock splits.
NOTE 2 - STOCK 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 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 purchases, upgrade the
Company's information systems and for working capital needs.
Upon the effective date of the Offering, vesting of management stock awards
for 439,084 shares of common stock was accelerated and the remaining unearned
compensation of $241,000 was immediately recognized. The Company received a tax
deduction in fiscal 1995 for the fair value of the vested stock on the effective
date of the Offering. Compensation expense related to the stock awards was
recognized in the financial statements based upon the fair value of the common
stock at the date of the awards of $2.48 per share. The tax benefit arising
from the excess of fair value at the vesting date over that at the award date of
approximately $927,000 is recognized as additional paid-in capital.
Warrants for 130,060 shares of the Company's common stock were exercised
concurrent with the effective date of the Offering at a weighted average
exercise price of $3.23. Additionally, the Company delivered 112,500 shares of
common stock to the seller in connection with the March 1994 purchase of a
merchant portfolio.
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.
76
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company offered 3,910,000 shares of its common stock in a third public
offering consummated 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 - ACQUISITIONS:
Operating Business Acquisitions
During fiscal 1996, the Company began issuing common stock to acquire
operating businesses with both existing merchant portfolios and sales
organizations capable of generating new accounts.
In fiscal 1996, 1997 and 1998, the Company consummated ten operating
business acquisitions by issuing common stock in exchange for all the
outstanding common stock of the companies acquired. These transactions were
accounted for as poolings of interest. The October 2, 1997 acquisition of
Bancard, Inc. is subsequent to the Company's fiscal year end. These supplemental
consolidated financial statements have been prepared to reflect the restatement
of all periods presented. Seven of these transactions were considered material
for restatement and are summarized below:
<TABLE>
<CAPTION>
Company Acquired Date Shares Issued
<S> <C> <C>
Martin-Howe Associates, Inc. (MHA) July 1, 1996 594,011
Fairway Marketing Group (Fairway) December 23, 1996 424,999
Bancard Systems, Inc. (BSI) January 27, 1997 3,131,250
Retail Payment Services, Inc. (RPS) January 30, 1997 567,519
Eric Krueger, Incorporated (Krueger) June 3, 1997 579,000
LADCO Financial Group, Inc. (LFG) July 14, 1997 1,463,414
Bancard, Inc. (BCI) October 2, 1997 3,870,968
</TABLE>
PMT's supplemental consolidated financial statements have been restated to
include the accounts of the above named entities for all periods presented by
including the historical results of these entities. The historical results of
these seven pooled entities reflect each of their actual operating cost
structures and, as a result, do not necessarily reflect the cost structure of
the newly combined entity. Significant, unusual and non-recurring costs
affecting fiscal 1996 operating results of the pooled entities include a single
fraud loss of $890,000, recognition of $400,000 in asset impairment losses in
one entity, and executive bonuses of $330,000 (totaling approximately $1 million
after-tax or $0.02 per share). Although PMT incurs merchant fraud losses each
year, and recognizes an accrual each year for such possibilities, the Company's
annual loss experience historically has been significantly less than the loss
referred to above. Additionally, no further asset impairment losses are
expected from any of the assets acquired as a result of these operating business
acquisitions. The historical results do not purport to be indicative of results
which may occur in the future.
77
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MHA had a calendar year end and, accordingly, the MHA statements of income
for the years ended December 31, 1994, and 1995 have been combined with the
Company's statements of income for the fiscal years ended July 31, 1995 and
1996, respectively. In order to conform MHA's year end to the Company's fiscal
year end, results of operations for MHA for the six- month period ended June 30,
1996 have been excluded from the consolidated statement of income for the fiscal
year ended July 31, 1996. Accordingly, an adjustment has been made in fiscal
year 1996 to retained earnings for the exclusion of the net loss of $356,914 for
such six-month period. MHA's results of operations for this six-month period
include revenues of $10,743,645, expenses of $11,022,698 and net loss before
provision of income taxes of $279,053.
Fairway, RPS, Krueger and Bancard were Subchapter S Corporations for income
tax purposes; therefore, these entities did not pay U.S. federal income taxes.
These entities will be included in the Company's U.S. federal income tax return
effective from the date of merger.
Separate revenues, net income and related per share amounts of the acquired
operating businesses for the periods prior to the mergers are presented in the
following table. In addition, the table includes unaudited pro forma net income
and earnings per share amounts which reflect pro forma adjustments to present
income taxes on the basis on which they will be reported in future periods.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
July 31, 1995 July 31, 1996 July 31, 1997
-------------- -------------- -------------
Revenues
PMT $ 75,242,866 $136,254,139 $240,756,047
BCI 17,745,773 31,851,486 40,827,025
LFG 8,860,400 11,008,144 12,881,617
MHA 13,764,195 13,585,887 --
BSI 16,808,554 21,540,196 12,218,404
Fairway 18,072,187 19,524,072 7,125,352
Other 6,791,030 12,978,788 11,232,012
------------ ------------ ------------
Revenues, as reported $157,285,005 $246,742,712 $325,040,457
============ ============ ============
Net Income (Loss)
PMT $ 4,032,000 $ 8,952,399 13,805,887
BCI 587,159 1,179,624 2,655,698
LFG 917,608 1,024,212 1,318,778
MHA (391,845) (327,023) --
BSI 236,002 287,669 745,665
Fairway 164,381 (858,125) 183,262
Other 494,622 1,146,411 345,160
------------ ------------ ------------
Net income, as reported 6,039,927 11,405,167 19,054,450
Pro forma tax effect of Subchapter
S Corporations (484,437) (574,199) (1,277,831)
------------ ------------ ------------
Pro forma net income $ 5,555,490 $ 10,830,968 $ 17,776,619
============ ============ ============
</TABLE>
78
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Earnings per share:
As reported $0.20 $0.30 $0.42
Pro forma $0.18 $0.28 $0.39
In addition to these seven transactions, the Company completed three
separate operating business acquisitions during fiscal 1997 with three unrelated
entities by issuing an aggregate of 2,900,000 shares of its common stock in
exchange for all the outstanding stock of the three entities. On an individual
basis these transactions were not considered material for retroactive
restatement.
Asset Purchases
The Company purchases merchant portfolios which provide the Company the
right to service specific merchants under contract to processing banks for
electronic authorization and payment processing. The Company purchased nine
merchant portfolios in fiscal 1995, four merchant portfolios in fiscal 1996 and
nine merchant portfolios in fiscal 1997. These acquisitions were accounted for
as purchase transactions, and accordingly, the operating results of the merchant
portfolios are included in the Company's results of operations from the
effective dates of the acquisitions.
In connection with the purchase of merchant portfolios, the Company may
enter into a noncompetition agreement with the sellers of the portfolios. In
such cases, a portion of the purchase price of each merchant portfolio is
allocated to the related noncompetition agreement (Note 7). Amortization
expense related to purchased merchant portfolios was $2,283,638, $5,642,084 and
$8,886,428 in fiscal 1995, 1996 and 1997, respectively.
Individually significant purchase transactions are as follows:
ABC - The Company purchased a merchant portfolio from BankCard America,
Inc. ("ABC") in April 1995 for a purchased 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 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.
79
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED 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
120,000 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 included in intangible and other assets on the Company's balance sheet at
July 31, 1997.
TERMNET AND CPS - In July 1995, the Company purchased two 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 obtained a merchant terminal 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.
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.
Unaudited pro forma operating results are presented below to provide
additional information relative to the potential effect upon the Company's
operations of significant acquisitions. Pro forma information is provided only
for acquisitions meeting certain size and other requirements set forth by the
Securities and Exchange Commission. Each of the above acquisitions meet these
requirements and are included in the unaudited pro forma summary for the periods
specified below. There were no asset purchases which met the significance
requirements in fiscal 1997.
80
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C>
Effective Included in
date of pro forma results
purchases BEGINNING FISCAL YEAR
--------- ---------------------
ABC April 1, 1995 1995
TermNet July 1, 1995 1995
CPS July 1, 1995 1995
Imperial October 1, 1995 1995
UMB March 1, 1995 1995
</TABLE>
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
purchases been made at the beginning of fiscal 1995 or fiscal 1996, or of
results which may occur in the future.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED YEAR ENDED
July 31, 1995 JULY 31, 1996
--------------- ---------------------
<S> <C> <C>
Revenues $212,376,315 $235,222,557
Net income $ 3,896,695 $ 10,320,854
Earnings per share $0.14 $0.30
</TABLE>
Actual results during fiscal 1997 were not materially different than pro forma
results.
NOTE 4 - NET INVESTMENT IN DIRECT FINANCE LEASES:
<TABLE>
<CAPTION>
JULY 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Minimum lease payments................................................................. $ 45,674,278 $ 48,501,795
Residual values - unguaranteed......................................................... 5,773,731 5,725,153
Allowance for doubtful accounts........................................................ (1,659,203) (2,481,981)
------------ ------------
Net minimum lease payments receivable.................................................. 49,788,806 51,744,967
Unearned income........................................................................ (17,422,781) (17,858,333)
------------ ------------
Net investment in direct financing leases.............................................. $ 32,366,025 $ 33,886,634
============ ============
</TABLE>
Changes in the allowance for doubtful accounts were as follows:
<TABLE>
<CAPTION>
For the year ended July 31,
----------------------------------------
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Balance at beginning of year $ 1,513,455 $ 1,017,459 $ 1,659,203
Provision for bad debt expense 1,433,390 2,132,542 2,389,962
Charged off lease contracts (2,487,772) (1,637,744) (2,043,331)
Bad debt recoveries 558,386 146,946 476,147
------------ ------------ -----------
Balance at end of year $ 1,017,459 $ 1,659,203 $ 2,481,981
============ ============ ===========
</TABLE>
81
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At July 31, 1997, minimum lease payments receivable, including estimated
residual values receivable, are due as follows:
<TABLE>
<CAPTION>
Unguaranteed
Minimum residual
lease payments values
receivable receivable
-------------- -----------
<S> <C> <C>
1998 $20,376,671 $ 176,456
1999 15,434,230 565,691
2000 9,402,650 2,187,321
2001 3,043,504 2,416,606
Thereafter 244,740 379,079
----------- ----------
$48,501,795 $5,725,153
=========== ==========
</TABLE>
The Company's experience indicates a portion of the leases will terminate
at dates other than the end of the contractual lease period. Accordingly, the
foregoing table should not be regarded as a forecast of future collections.
<TABLE>
<CAPTION>
NOTE 5 - PROPERTY AND EQUIPMENT:
JULY 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Office equipment...................... $ 6,066,655 $ 9,551,203
Credit card terminals held for lease.. 1,864,032 4,043,489
Office furniture and fixtures......... 702,494 856,104
Leasehold improvements................ 1,456,291 205,253
----------- -----------
10,089,472 14,656,049
Less: accumulated depreciation...... (3,421,998) (5,276,993)
----------- -----------
$ 6,667,474 $ 9,379,056
=========== ===========
</TABLE>
In addition to the direct financing leases described in Note 4, the Company
leases point-of-sale terminals to merchants under operating leases on a month-
to-month basis. Depreciation expense on all of the Company's property and
equipment totaled $616,275, $1,253,241 and $2,083,858 in fiscal 1995, 1996 and
1997, respectively.
NOTE 6 - NOTE RECEIVABLE:
The Company entered into a leasing arrangement in March 1997 for a portion
of the office space in a building that will serve as the Company's corporate
headquarters completed in September 1997. The Company has advanced funds to an
independent developer who purchased the building and is responsible for its
renovation. The loan provided by the Company has a maximum available balance of
$13,300,000 which bears interest at 5% (comparable to invested funds), payable
monthly in arrears. The loan amount is being advanced in various draws by the
82
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
building owner based on certain achieved milestones in the renovation. The
outstanding principal balance at July 31, 1997 is $8,773,330. The Company's
note receivable is secured by a first lien on the property and has a term of ten
years. The Company obtained an independent appraisal of the property in
determining its fair value for the purpose of classifying the related leasing
transaction in accordance with Statement of Financial Accounting Standards No.
13 - Accounting for Leases. The lease has a term of ten years and is classified
as an operating lease. The Company's minimum lease commitment related to the
property is included in Note 13 - Leases.
<TABLE>
<CAPTION>
NOTE 7 - INTANGIBLE AND OTHER ASSETS:
July 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Noncompetition agreements.............. $3,345,193 $ 4,068,352
Restricted cash........................ 3,329,913 7,724,597
Notes receivable from shareholders..... 171,598 2,957,542
Prepaid processing costs............... -- 1,307,330
Deferred finance costs................. 585,360 526,666
Other.................................. 650,292 1,405,239
---------- -----------
$8,082,356 $17,989,726
========== ===========
</TABLE>
Intangible and other assets include noncompetition agreements with various
sellers of merchant portfolios purchased by the Company (Note 3).
Amortization expense related to noncompetition agreements was $465,147,
$860,323 and $1,243,676 in fiscal 1995, 1996 and 1997, respectively.
Accumulated amortization of noncompetition agreements was $1,703,680 and
$2,947,356 at July 31, 1996 and 1997, respectively.
Restricted cash represents funds withheld by certain processing banks
pursuant to processing agreements to cover potential merchant losses or by
lending institutions pursuant to loan agreements to provide additional
collateral.
Amortization of deferred finance costs included in interest expense was
$580,665, $550,318 and $607,642 in fiscal 1995, 1996 and 1997, respectively.
Accumulated amortization of deferred finance costs was $1,413,345 and $2,020,987
at July 31, 1996 and 1997, respectively.
83
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8- ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
July 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Income taxes payable........................................ $ 1,696,910 1,030,799
Compensation and payroll taxes.............................. 1,534,631 1,912,576
Reserve for merchant losses................................. 1,681,002 1,331,290
Professional services....................................... 415,477 332,560
Accrued processing costs.................................... 238,189 193,640
State franchise taxes payable............................... 356,042 --
Sales and property taxes payable............................ 298,792 274,159
Interest payable on long-term debt.......................... 150,399 82,179
Other....................................................... 492,962 564,467
----------- -----------
$ 6,864,404 $ 5,721,670
=========== ===========
NOTE 9 - LONG-TERM DEBT:
July 31,
------------------------
1996 1997
----------- -----------
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash,
principal and interest at a variable rate based
on the one month Commercial Paper rate then
in effect (6.05% at July 31, 1997), are payable
monthly, with all unpaid principal and interest
due in May 2003........................................... $ -- $ 5,258,258
Notes payable, secured by the remaining payment
stream on certain leases and restricted cash, principal
and interest at rates ranging from 10.11% to 12.21%
per annum are payable monthly, with all unpaid
principle and interest due by April 2000.................. 10,237,459 5,084,577
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash, principal
and interest at 7.22% per annum, are payable monthly,
with all unpaid and interest due by May 2002............. 13,310,790 18,760,944
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash, principal
and interest at variable rates based on the one month
LIBOR rate then in effect (various rates ranging
from 10.06% to 10.38% at July 31, 1996),
paid in fiscal 1997....................................... 3,210,195 --
</TABLE>
84
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Notes payable, secured by remaining payment stream
of certain leases and restricted cash, principal and
interest at 7.39% per annum, paid in fiscal 1997.......... 696,413 --
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash, principal
and interest at 12.0% per annum are payable monthly,
with all unpaid principal and interest due by
March 1999................................................ 1,149,487 481,204
Revolving line of credit obligation (maximum available
balance of $3,000,000), secured by the remaining
payment stream of certain leases and restricted cash,
principal and interest at a variable rate based on the
prime rate (9.5% at July 31, 1997), are payable
monthly, with all unpaid principal and interest
due on demand............................................. 1,034,350 1,290,048
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash, principal,
and interest at 5.17% per annum, paid in fiscal
1997...................................................... 642,576 --
Revolving line of credit obligation (maximum available
balance of $1,500,000), secured by the remaining
payment stream of certain leases and restricted cash,
principal and interest at a variable rate based on the
prime rate (10.0% at July 31, 1997), are payable
monthly, with all unpaid principal and interest due
by May 1998............................................... 996,545 346,457
Other debts repaid in 1996 or subsequent to
acquisitions.............................................. 3,245,715 1,673,644
Other....................................................... 5,000 185,895
------------ ------------
Total long-term debt........................................ 34,528,530 33,081,027
Less: current portion (13,456,646) (14,516,369)
------------ ------------
$ 21,071,884 $ 18,564,658
============ ============
</TABLE>
85
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company entered into an agreement on March 22, 1994 for a $12,500,000
revolving line of credit and $2,368,000 bridge loan. This credit facility was
amended and restated on May 31, 1995, July 18, 1995 and January 31, 1997,
increasing the revolving line of credit to $20,000,000 and terminating the
bridge loan. The current amendment expires January 31, 1998. Borrowings, if
any, under the new credit facility will be used to finance future purchases of
merchant portfolios and equipment and for general corporate purposes.
Maturities of long-term debt are as follows as of July 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Year Ending
July 31
-----------
1998 $14,516,369
1999 10,789,127
2000 5,209,256
2001 1,610,339
2002 579,164
Thereafter 376,772
-----------
$33,081,027
===========
</TABLE>
NOTE 10 - SHAREHOLDERS' EQUITY:
Changes in the shares of the Company's common stock are as follows:
<TABLE>
<CAPTION>
<S> <C>
Outstanding at July 31, 1994.......................................... 5,930,603
Shares issued......................................................... 2,420,872
Exercise of put options.............................................. 1,922,372
Exercise of options and warrants...................................... 164,684
-----------
Outstanding at July 31, 1995.......................................... 10,438,531
Shares issued......................................................... 5,851,961
Exercise of options................................................... 44,805
Stock dividends....................................................... 26,791,597
-----------
Outstanding at July 31, 1996.......................................... 43,126,894
Shares issued......................................................... 2,900,966
Exercise of options................................................... 369,468
Cancellation of treasury shares....................................... (778,840)
-----------
Outstanding at July 31, 1997.......................................... 45,618,448
===========
</TABLE>
Shares of common stock issued in operating business acquisitions accounted
for as poolings of interests, for which the financial statements have been
restated, have been reflected as outstanding on a pre-split basis for all
periods presented above.
86
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's shareholders approved an increase in the amount of authorized
shares of Common Stock of the Company from 40,000,000 shares to 100,000,000
shares at the Company's December 16, 1996 Annual Meeting of Shareholders.
NOTE 11 - STOCK OPTIONS AND WARRANTS:
The Company has an incentive stock option plan, whereby the Company has
reserved for issuance upon exercise of stock options a maximum of 3,795,000
shares of the Company's common stock. In addition to certain other provisions,
the plan provides for the option price of the shares to be determined by the
Board of Directors or their designees at the date of the grant provided,
however, that in the case of incentive stock options, the option price shall be
no less than 100% of the fair market value of the common stock on such date
(110% in the case of an individual who owns more than 10% of the total combined
voting power of all classes of stock of the Company). In the case of
nonstatutory stock options, the option price shall be no less than 85% of the
fair market value of the common stock on the date of grant.
The options expire at such times as determined by the Board of Directors at
the time of the grant, which shall be no later than ten years from the grant
date (five years in the case of an individual who owns more than 10% of the
total combined voting power of all classes of stock of the Company). The
Company is authorized to loan, or guarantee loans for, the purchase price of
shares issuable upon exercise of options granted under the plan.
In May 1994, the Company adopted an outside director stock option plan and
amended the plan at the December 1995 annual shareholders' meeting. The plan
provides for the grant of non-qualified stock options to outside directors and
authorizes the issuance of up to 300,000 shares of common stock pursuant to
options having an exercise price equal to the fair market value of the common
stock on the date the options are granted. Options were granted to each outside
director on the effective date of the Offering to purchase 30,000 shares of the
Company's common stock for a total of 120,000 shares (Note 2). Options granted
under the plan are exercisable one-fourth each on the first, second, third and
fourth anniversaries of the grant date and expire ten years after the grant
date.
The Company adopted Statement of Financial Accounting Standards No. 123 -
Accounting for Stock Based Compensation (SFAS 123) as of August 1, 1996. In
accordance with the provisions of SFAS No. 123, the Company applies APB Opinion
25 and related interpretations in accounting for its stock option plans and
accordingly, does not recognize compensation costs. If the Company had elected
to recognize compensation costs based on the fair value of the options
granted at grant date as prescribed by SFAS 123, net income and
87
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
earnings per share would have been reduced to the pro forma amounts indicated in
the table below:
1995 1996 1997
---- ---- ----
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net income as reported $6,039,927 $11,405,167 $19,054,450
Pro forma net income 5,735,749 10,772,733 17,693,408
Net income per share as reported 0.20 0.30 0.42
Pro forma net income per share 0.19 0.29 0.39
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 40.8% 42.5% 47.4%
Risk-free interest rate 7.3%-7.8% 5.7%-6.8% 6.3%-6.9%
Expected life of options 6.7 years 6.7 years 6.7 years
</TABLE>
The weighted average fair value at date of grant for options granted during
1995, 1996 and 1997 was $1.46, $5.88 and $9.45 per option, respectively.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding at July 31, 1994............................ 458,700 $ 0.88
Granted............................................... 1,400,724 2.68
Exercised............................................. (103,872) 0.99
Terminated............................................ (5,196) 1.13
----------- --------------
Outstanding at July 31, 1995............................ 1,750,356 $ 2.31
Granted............................................... 551,500 10.79
Exercised............................................. (119,775) 1.26
Terminated............................................ (265,052) 2.73
----------- --------------
Outstanding at July 31, 1996............................ 1,917,029 $ 4.76
Granted............................................... 410,500 16.29
Exercised............................................. (369,468) 2.12
Terminated............................................ (77,640) 9.66
----------- --------------
Outstanding at July 31, 1997............................ 1,880,421 $ 7.59
=========== ===============
</TABLE>
88
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- -------------- ----------- ----------- ------------------- ------------------- --------
<S> <C> <C> <C> <C> <C>
$0.83-$1.13 77,950 4.7 $ 0.94 77,950 $ 0.94
$2.67-$3.54 914,956 7.0 $ 2.63 361,866 $ 2.67
$5.96-$8.78 132,240 8.3 $ 7.75 23,280 $ 8.00
$9.17-$13.75 470,000 8.9 $11.08 75,500 $10.16
$15.00-22.25 285,275 9.2 $19.33 23,401 $17.92
--------- -------
1,880,421 561,997
========= =======
</TABLE>
In fiscal 1995, the Company has granted stock warrants which give the
holder the right to purchase 120,000 shares of the Company's common stock at an
exercise price of $1.25 per share. These warrants expire March 22, 2004 (Note
3). In fiscal 1997, the Company granted warrants to purchase 10,000 shares of
its common stock at an exercise price of $17.00 per share in conjunction with an
immaterial acquisition. These warrants expire September 16, 2006.
NOTE 12 - RETIREMENT PLANS:
The Company initiated the PMT Services, Inc. 401(k) Retirement Plan, in
fiscal 1996. Following the initial enrollment, employees become eligible for
participation in the plan on the semi-annual enrollment date following the
employee completing 12 consecutive months of employment and 1,000 hours of
service or more. The Company contributes an amount equal to 50% of employee
voluntary contributions up to a maximum of 6% of the employee's annual
compensation. The plan expense for fiscal 1996 and 1997 was $64,015 and
$114,720, respectively.
89
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13 - LEASES:
The Company leases equipment and office space under noncancellable
operating leases. Rent expense approximated $981,374, $1,200,997 and $1,654,116
during fiscal 1995, 1996 and 1997, respectively. Office space was leased from
a partnership comprising two of the Company's shareholders during a portion of
1995. Rent expense paid to shareholders for office space amounted to $54,000
during fiscal 1995. This office space lease agreement terminated in 1995 and the
Company relocated. None of the Company's current office space is with a related
party. In March 1997, the Company entered into a leasing arrangement for a
portion of the office space in a building that will serve as the Company's
corporate headquarters (Note 6). Future minimum payments under all
noncancellable leases with terms greater than one year at July 31, 1997 are:
<TABLE>
<CAPTION>
FISCAL YEAR
ending
<S> <C>
July 31
---------
1998 $ 2,988,974
1999 3,431,032
2000 3,447,272
2001 2,816,611
2002 2,082,822
Thereafter 7,558,150
-----------
22,324,861
Less: Sublease rentals (2,635,858)
-----------
$ 19,689,003
============
</TABLE>
NOTE 14 - OTHER INCOME (EXPENSE) - NET:
The Company recorded a non-taxable gain of $1,000,000 in the fourth quarter
of fiscal 1996 for the receipt of insurance proceeds on the life of the former
Chief Financial Officer of the Company. Additionally, the Company has included
in this line item all non-recurring transaction costs related to operating
business acquisitions, which were accounted for as poolings of interest.
During fiscal 1997, LFG recorded a charge of $367,000 related to the buyout
of a consulting agreement due to the death of their former Chief Financial
Officer. This charge occurred prior to the effective date of the merger with
this entity and is included in other expense on a restated basis.
90
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 15 - INCOME TAXES:
The provision for income taxes comprises the following:
<TABLE>
<CAPTION>
Year ended July 31,
--------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Current tax expense:
Federal.................................... $2,425,471 $5,395,173 $ 8,955,618
State...................................... 517,847 1,042,180 1,616,868
---------- ---------- -----------
2,943,318 6,437,353 $10,572,486
---------- ---------- -----------
Deferred tax benefit:
Federal.................................... 143,946 (470,526) (935,449)
State...................................... 76,500 (30,469) (19,521)
---------- ---------- -----------
220,446 (500,995) (954,970)
---------- ---------- -----------
Increase in valuation
allowance.................................. 137,288 194,831 --
---------- ---------- -----------
$3,301,052 $6,131,189 $ 9,617,516
========== ========== ===========
</TABLE>
The Company's effective tax rate differs from the statutory rate as follows:
<TABLE>
<CAPTION>
Year ended July 31,
------------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Federal tax at statutory rate......................... 34.0% 34.0% 35.0%
Increase (decrease) in taxes
resulting from:
State income taxes (net
of federal tax benefit)............................ 4.5 4.1 4.0
Subchapter S Corporations
income not subject to
tax................................................ (3.4) (3.3) (4.2)
Valuation allowance 1.6 1.2 0.0
Other............................................... (1.4) (1.0) (1.3)
---------- ---------- -----------
35.3% 35.0% 33.5%
========== ========== ===========
</TABLE>
Deferred income taxes under Statement of Financial Accounting Standards No.
109 - Accounting for Income Taxes, reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets at July 31, 1996 and 1997 are as
follows:
91
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
JULY 31,
---------------------------
1996 1997
------------ ------------
Current tax assets:
<S> <C> <C>
Compensation liabilities........... $ 30,897 $ 31,645
Loss reserves...................... 858,343 1,386,971
Other.............................. 56,694 124,763
------------ ------------
Net current tax assets............... $ 945,934 $ 1,543,379
============ ============
Noncurrent tax assets:
Leased equipment................... 10,646,486 12,799,951
Unearned income.................... 7,143,341 8,005,899
Merchant portfolio amortization.... 1,586,194 3,345,402
Operating loss carryforwards and
AMT credits....................... 1,222,814 1,299,321
Other.............................. 182,442 182,442
------------ ------------
20,781,277 25,633,015
Valuation allowance........... (332,119) (332,119)
Noncurrent tax liability:
Gross lease receivable............. (18,726,454) (21,743,354)
Residual values.................... (2,367,230) (2,566,975)
Depreciation....................... (242,327) (517,919)
Residual value of sold portfolios.. -- (788,371)
Other.............................. (107,868) (309,054)
------------ ------------
(21,443,879) (25,925,673)
------------ ------------
Net noncurrent tax liability........ $ (994,721) $ (624,777)
============ ============
</TABLE>
As of July 31, 1997, the Company has approximately $3,000,000 of federal
and state net operating loss carryforwards and AMT credits available to offset
future taxable income of certain subsidiaries of the Company. These
carryforwards and credits expire at various dates through fiscal 2005. A
valuation allowance has been established for these net operating losses and AMT
credits as utilization is not reasonably assured.
NOTE 16 - COMMITMENTS AND CONTINGENCIES:
In addition to the third-party debt guaranty and operating leases described
in Notes 3 and 13 above, the Company is subject to the following commitments and
contingencies described herein.
92
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 January31, 1998. The purchase
price will be derived ass a multiple of average monthly cash flow generated by
the merchant accounts for the the 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 provider's accounts by
January 31, 1998. Additionally,t he 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 per merchant.
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
processing agreements and is therefore dependent upon its contractual
arrangements with a processing banks in order to continue to service its
merchant portfolio. The Company has a contractual right to receive revenues as
derived from the discount rate and fee 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.
93
<PAGE>
SCHEDULE II
PMT SERVICES, INC.
RESERVE FOR MERCHANT LOSSES (SUPPLEMENTAL)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
FISCAL YEAR OF PERIOD ADDITIONS(1) OTHERS(2) DEDUCTIONS(3) PERIOD
- ------------- ---------- ------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1995 $ 554,759 $ 622,965 -- $ 421,051 $ 756,673
1996 $ 756,673 $1,923,049 -- $ 998,720 $1,681,002
1997 $1,681,002 $2,005,535 $284,906 $2,640,153 $1,331,290
______________________
(1) Additions represent amounts charged to expense during the respective
periods.
(2) Other represents additions from immaterial operating business acquisitions, during the respective periods.
(3) Deductions represent actual chargebacks incurred by the Company during the
respective periods.
</TABLE>
ALLOWANCE FOR BAD DEBTS (SUPPLEMENTAL)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
beginning END OF
FISCAL YEAR OF PERIOD ADDITIONS(1) OTHER(2) DEDUCTIONS(3) PERIOD
- ------------- ---------- ------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1995 $1,513,455 $1,433,390 $558,386 $2,487,772 $1,017,459
1996 $1,017,459 $2,132,542 $146,946 $1,637,744 $1,659,203
1997 $1,659,203 $2,389,962 $476,147 $2,043,331 $2,481,981
______________________
(1) Additions represent amounts charged to expense during the respective
periods.
(2) Other represents recoveries by the Company during the respective periods.
(3) Deductions represent actual write-offs recorded by the Company during the
respective periods.
</TABLE>
94
<PAGE>
Quarterly Information (Supplemental basis)
The following table sets forth statements of income data for each of the
eight quarters in the two year period ended July 31, 1997. This income data has
been restated to Bancard, Inc. which was acquired by PMT Services, Inc. in a
transaction accounted for as a pooling of interests. This unaudited quarterly
information has been prepared on the same basis as the annual information
presented elsewhere herein and, in management's opinion includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the selected quarterly information when read in conjunction with
the financial statements and notes thereto. The operating results for any
quarter are not necessarily indicative of results for the entire fiscal year or
for any future period.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
1996
----
Revenues $54,076 $55,995 $61,930 $74,742 $246,743
Gross margin 15,330 16,428 17,234 19,714 68,706
Income from operations 4,118 4,148 4,882 5,630 18,778
Income before provision for
income taxes 3,057 3,585 4,208 6,686 17,536
Net income 1,956 2,273 2,634 4,542 11,405
1997
----
Revenues $78,990 $75,411 $75,865 $94,774 $325,040
Gross margin 21,160 21,090 21,369 25,780 89,399
Income from operations 6,803 6,554 6,850 9,528 29,735
Income before provision for
income taxes 6,780 5,757 6,645 9,490 28,672
Net income 4,566 3,634 4,543 6,311 19,054
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
Selected (Supplemental) Financial Data
Year Ended July 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues................................. $69,955 $110,202 $157,285 $246,743 $325,040
Cost of revenues......................... 50,845 77,244 110,671 178,037 235,641
------- -------- -------- -------- --------
Gross margin............................. 19,110 32,958 46,614 68,706 89,399
Selling, general & administrative
expenses................................ 12,922 20,184 28,101 37,959 41,870
Depreciation and amortization............ 599 1,910 3,773 7,914 12,805
Provision for merchant loss
and bad debt expense.................... 1,586 3,130 2,057 4,055 4,395
Stock award compensation................. 281 240 241 -- --
Non-recurring operating
expense................................. -- -- -- -- 594
------- -------- -------- -------- --------
Income from operations................... 3,722 7,494 12,442 18,778 29,735
Interest income (expense), net........... (1,251) (2,481) (3,101) (1,946) 1,181
Other income (expense), net.............. -- -- -- 704 (2,244)
------- -------- -------- -------- --------
Income before provision for
taxes, extraordinary item and
change in accounting
principle............................... 2,471 5,013 9,341 17,536 28,672
Provision for income taxes............... 772 1,756 3,301 6,131 9,618
------- -------- -------- -------- --------
Income before extraordinary
item and change in accounting
principle............................... 1,699 3,257 6,040 11,405 19,054
Net income............................... $ 2,289 $ 3,257 $ 6,040 $ 11,405 $ 19,054
PER SHARE INFORMATION:
Income before extraordinary
item.................................... $ 0.07 $ 0.14 $ 0.20 $ 0.30 $ 0.42
Extraordinary item - net
operating loss carryforward............. 0.03 0.00 0.00 0.00 0.00
------- -------- -------- -------- --------
Income before change in
accounting principle.................... 0.10 0.14 0.20 0.30 0.42
Cumulative effect of change
in accounting principle................. 0.00 0.01 0.00 0.00 0.00
------- -------- -------- -------- --------
Earnings per share....................... $ 0.10 $ 0.15 $ 0.20 $ 0.30 $ 0.42
======= ======== ======== ======== ========
Weighted average shares
outstanding............................. 22,850 23,045 30,977 38,576 45,015
</TABLE>
__________________________
(1) Revenue increased for fiscal 1993 through 1997 primarily from the purchase
of merchant portfolios and new merchant contracts generated by the Company
as well as fee enhancements with existing merchants.
(2) Net income for fiscal 1993 has increased through the utilization of net
operating loss carryforward of $589,471, the benefit of which has partially
offset the provision for income taxes. For the fiscal year ended July 31,
1994, net income has increased by $312,800 because of a change in
accounting principle relating to income taxes.
(3) Earnings per share for fiscal 1997 includes non-recurring, after-tax
operating and merger expenses of $2,633,000 or $0.06 per share. Earnings
per share for fiscal 1996 includes non-recurring income of $1,000,000 life
insurance proceeds and $296,000 of merger expenses or a net of $0.02 per
share.
96
<PAGE>
(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
3.1 Amended and Restated Charter of the Registrant (1)
3.2 Bylaws of the Registrant (1)
3.3 Articles of Amendment to the Amended and Restated Charter of the
Registrant (8)
4.1 Section 6 of the Amended and Restated Charter of the Registrant
(included in Exhibit 3.1)
4.2 Specimen of Common Stock certificate (1)
10.1(a) Purchase Agreement, dated April 28, 1995, between the Registrant,
BankCard America, Inc., and each of Paul L. Alperstein, Samuel
Buchbinder and Sol Alperstein. (2)
10.1(b) Option Agreement, dated July 25, 1995, between the Registrant and
Money Transfer Systems, Inc., Mel Ora and Greg Mohr. (5)
10.1(c) Purchase Agreement, dated March 12, 1996, between the Registrant and
UMB Bank, n.a. (6)
10.1(d) Agreement and Plan of Merger, dated June 28, 1996, by and among the
Registrant, PMT Acquisition Corporation and Martin Howe Associates,
Inc. (7)
10.1(e) Agreement and Plan of Merger, dated June 9, 1997, between the
Registrant, PMT LADCO Acquisition Corporation, LADCO and the Ladd
Family Trust (11)
10.1(f) Agreement and Plan of Merger dated October 2, 1997, by and among the
Registrant, PMT BCI Acquisition Corporation, Bancard Inc. and Jay W.
Hearst, Anthony Sdao, Scott J. Bahneman, Jack W. Hearst, Gillian G.
Hearst and Stephen M. Hearst as shareholders of Bancard, Inc. (12)
10.1(g) Processing Agreement, dated March 1, 1994, between the Registrant and
First National Bank of Omaha, relating to the processing of BankCard
transactions. (1)
10.1(h) Amendment to Processing Agreement, dated May 10, 1995, between the
Registrant and First National Bank of Omaha. (5)
10.1(i) Amendment to Processing Agreement, dated July 18, 1995, between the
Registrant and First National Bank of Omaha. (5)
10.1(j) Amendment to Processing Agreement, dated August 7, 1995, between the
Registrant and First National Bank of Omaha. (5)
10.1(k) Amendment to Agreement, dated November 1, 1995 between the Registrant
and First National Bank of Omaha. (7)
97
<PAGE>
10.1(l) Fifth Amendment to Processing Agreement, dated May 29, 1996, between
the Registrant and First National Bank of Omaha. (7)
10.1(m) Provider Agreement, dated June 15, 1995, between the Registrant and
Harris Trust and Savings Bank Charge-it Division, relating to the
processing of BankCard transactions. (5)
10.1(n) Processing Agreement, dated March 12, 1996, between the Registrant and
UMB Bank, n.a., relating to the processing of BankCard transactions.
(6)
10.1(o) Private-Label Credit Card Processing Agreement, dated March 12, 1996,
between the Registrant and UMB Bank, n.a., relating to the processing
of charge card transactions. (6)
10.1(p) Assignment and Assumption Agreement, dated March 12, 1996, between
Registrant and UMB Bank, n.a. (6)
10.1(q) Marketing Agreement, dated March 12, 1996, between the Registrant and
UMB Bank, n.a. (6)
10.1(r) Service Agreement, dated March 28, 1997, between the Registrant and
Global Payment Systems LLC.
10.1(s) Consulting Agreement, dated April 1, 1997, between the Registrant and
Stephen D. Kane.
10.1(t) Transaction Processing Services Agreement, dated August 15, 1997,
between the Registrant and Paymentech Network Services, Inc.
10.1(u) Lease, dated August 31, 1994, between the Registrant and Eastpark, L.P.
(3)
10.1(v) First Amendment to Lease, dated September 30, 1994 between Registrant
and Eastpark, L.P. (5)
10.1(w) Second Amendment to Lease, dated May 11, 1995 between Registrant and
Eastpark, L.P. (5)
10.1(x) Third Amendment to Lease, dated March 1, 1996, between Registrant and
Eastpark, L.P. (7)
10.1(y) Fourth Amendment to Lease, dated May 1, 1996, between Registrant and
Highwoods/Forsyth Limited Partnership (Successor-in-Interest to
Eastpark, L.P.) (7)
10.1(z) Lease Agreement, dated July 31, 1996, between Registrant and Centoff
Realty Company, Inc. (7)
10.1(aa) Lease Agreement, dated April 2, 1997, between the Registrant and
Battleship, LLC. (10)
10.1(bb) Purchase Option Agreement, dated April 2, 1997, between the Registrant
and Battleship, LLC. (10)
98
<PAGE>
10.1(cc) Business Property Lease, dated June 20, 1997, between the Registrant
and John P. Chudy.
10.2(a) 1994 Non-Employee Director Stock Option Plan. (1)
10.2(b) Non-Employee Director Restricted Stock Award Plan. (7)
10.2(c) 1994 Incentive Stock Plan. (1)
10.2(d) PMT Services, Inc. 401(k) Retirement Plan. (4)
10.2(e) 1994 Incentive Stock Plan Amendment No. 1. (8)
10.2(f) 1997 Non qualified Stock Option Plan. (10)
10.3(a) Amended and Restated Loan Agreement, dated May 31, 1995, between the
Registrant and First Union National Bank of Tennessee. (5)
10.3(b) Amended and Restated Security Amendment, dated May 31, 1995, between
the Registrant and First Union National Bank of Tennessee. (5)
10.3(c) First Amendment to Amended and Restated Loan Agreement, dated July 18,
1995, between the Registrant and First Union National Bank of
Tennessee. (5)
10.3(d) Second Amendment to the Amended and Restated Loan Agreement, dated
January 31, 1997, between the Registrant and First Union National Bank
of Tennessee. (9)
10.3(e) Loan Agreement, dated April 2, 1997, between the Registrant and
Battleship, LLC. (10)
10.3(f) Note, dated April 2, 1997, between the Registrant and Battleship, LLC.
(10)
10.3(g) Deed of Trust and Security Agreement, dated April 2, 1997, between the
Registrant and Battleship, LLC. (10)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants dated September 23, 1997.
27.1 Financial Data Schedule.
- -----------------------
(1) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 33-79064.
(2) Incorporated by reference to exhibits filed with the Registrant's
Current Report on Form 8-K, filed on May 15, 1995, Commission No.
0-24420.
(3) Incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended July 31, 1994.
99
<PAGE>
(4) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8, Registration No. 33-97000.
(5) Incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended July 31, 1995.
(6) Incorporated by reference to exhibits filed with the Registrant's
Current Report on Form 8-K, filed on March 27, 1996, Commission No.
0-24420.
(7) Incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 10-K for the year ended July 31, 1996.
(8) Incorporated by reference to exhibits filed with the Registrant's
Current Report on Form 8-K, filed on December 23, 1996, Commission No.
0-24420.
(9) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended January
31, 1997.
(10) Incorporated by reference to exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended April 30,
1997.
(11) Incorporated by reference to exhibits filed with the Registrant's
Current Report on Form 8-K, filed on July 18, 1997, Commission No.
0-24420.
(12) Incorporated by reference to exhibits filed with the Registrant's
Current Report on Form 8-K, filed on October 10, 1997, Commission No.
0-24420.
100
<PAGE>
EXECUTIVE COMPENSATION PLAN AND ARRANGEMENTS
The following is a list of all executive compensation plans and arrangements
filed as exhibits to this Annual Report on form 10-K:
Exhibit
Number Exhibit
------ -------
*10.2(a) 1994 Non-Employee Director Stock Option Plan.
***10.2(b) Non-Employee Director Restricted Stock Award Plan.
*10.2(c) 1994 Incentive Stock Plan.
**10.2(d) PMT Services, Inc. 401(K) Retirement Plan.
****10.2(e) 1994 Incentive Stock Plan Amendment No. 1.
*****10.2(f) 1997 Non qualified Stock Option Plan.
- ----------------------
* Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form S-1
Registration No. 33-79064.
** Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form S-8,
Registration No. 33-97000.
*** Incorporated by reference to exhibits filed with the
Registrant's Annual Report on Form 10-K for the year
ended July 31, 1996.
**** Incorporated by reference to exhibits filed with the
Registrant's Current Report on Form 8-K, filed on
December 23, 1996, Commission No. 0-24420.
***** Incorporated by reference to exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended April 30, 1997.
101
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Nashville, State of Tennessee, on October 31, 1997.
PMT SERVICES, INC.
By: /s/ Richardson M. Roberts
-------------------------
Richardson M. Roberts
Chairman of the Board and
Chief Executive Officer
102
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (Nos. 333-00164,
333-16757, 333-19157, 333-24783, 333-26075, 333-27403 and 333-37849 and the
Registration Statements on Form S-8 (Nos. 33-88974, 33-88976, 33-97000 and
333-33021) of PMT Services, Inc. of our report dated September 23, 1997, except
as to Note 17 which describes the pooling of interests with Bancard, Inc. which
is as of October 2, 1997, appearing on page 30 of this Form 10-K. We also
consent to the incorporation by reference of our report on the Financial
Statement Schedules, which appears on page 65 of such annual report on
Form 10-K.
PRICE WATERHOUSE LLP
Nashville, Tennessee
October 29, 1997
