<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended October 31, 1997
COMMISSION FILE NUMBER: 0-24420
PMT SERVICES, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-1215125
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
organization) No.)
3841 GREEN HILLS VILLAGE DRIVE
NASHVILLE, TN 37215
(Address of principal executive offices)
(Zip Code)
(615) 254-1539
(Registrant's telephone number, including zip code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
As of December 10, 1997, 45,974,855 shares of the Registrant's
Common Stock, $.01 par value, were outstanding.
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1997 1997
Unaudited
------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 27,649,364 $ 23,810,173
Investments............................................ 39,123,124 49,167,521
Accounts receivable.................................... 19,657,950 18,303,296
Current portion of net investment in finance leases.... 9,613,614 9,249,753
Inventory.............................................. 2,491,529 1,818,613
Deferred income taxes.................................. 1,575,167 1,543,379
Other current assets................................... 2,222,361 2,061,295
------------ ------------
Total current assets................................ 102,333,109 105,954,030
Purchased merchant portfolios, net of accumulated
amortization of $21,325,268 and $18,689,846......... 84,665,676 84,343,006
Long-term portion of net investment in finance leases.. 26,494,466 24,636,881
Property and equipment, net............................ 11,265,111 9,379,056
Long-term note receivable.............................. 11,996,908 8,773,330
Intangible and other assets............................ 17,298,420 17,989,726
------------ ------------
Total assets........................................ $254,053,690 $251,076,029
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................ $ 13,734,703 $ 14,516,369
Accounts payable......................................... 7,290,485 9,608,347
Accrued liabilities...................................... 8,498,285 5,721,670
Deferred revenues........................................ 332,450 291,493
------------ ------------
Total current liabilities.......................... 29,855,923 30,137,879
Long-term debt........................................ 17,777,119 18,564,658
Deferred income taxes.................................... 490,183 624,777
------------ ------------
Total liabilities...................................... 48,123,225 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:
45,972,674 and 45,618,488 shares................... 459,727 456,185
Additional paid-in capital............................... 171,292,621 171,129,805
Accumulated earnings..................................... 34,178,117 30,162,725
------------ ------------
205,930,465 201,748,715
------------ ------------
Commitments and contingent liabilities (Notes 3)
Total liabilities and shareholders' equity............... $254,053,690 $251,076,029
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
THREE MONTH PERIOD ENDED
October 31,
--------------------------
Unaudited
1997 1996
---- ----
Revenues...................................... $93,512,540 $78,989,742
Cost of revenues.............................. 67,425,351 57,830,458
----------- -----------
Gross margin.................................. 26,087,189 21,159,284
----------- -----------
Selling, general and administrative expenses.. 12,426,282 10,017,606
Depreciation and amortization expense......... 3,822,640 2,890,609
Provision for merchant losses and bad debt
expense...................................... 1,186,337 981,567
Nonrecurring operating expense, net........... -- 466,137
----------- -----------
17,435,259 14,355,919
----------- -----------
Income from operations 8,651,930 6,803,365
Interest income, net.......................... 505,142 102,540
Other expense, net............................ (442,884) (125,761)
----------- -----------
Income before provision for income taxes...... 8,714,188 6,780,144
Provision for income taxes.................... 2,948,753 2,214,202
----------- -----------
Net income.................................... $ 5,765,435 $ 4,565,942
=========== ===========
Earnings per share............................ $0.12 $0.10
=========== ===========
The accompanying notes are an integral part of this financial statement.
3
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
--------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at July 31, 1997............ $456,185 $171,129,805 $30,162,725 $201,748,715
Stock warrants exercised......... 1,200 148,800 150,000
Stock options exercised.......... 15 6,951 6,966
September 1997 pooling (Note 2).. 2,327 (143,994) (141,667)
Tax benefit from non-qualified
stock options.................. 7,065 7,065
Distributions to Subchapter S
corporations, prior to merger.. (1,606,049) (1,606,049)
Net income for the period........ 5,765,435 5,765,435
--------- ------------- ------------ -------------
Balance at October 31, 1997
Unaudited....................... $459,727 $171,292,621 $34,178,117 $205,930,465
========= ============= ============ =============
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
October 31,
--------------------------
UNAUDITED
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 5,765,435 $ 4,565,942
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense........................ 3,822,640 2,890,609
Provision for merchant losses and bad debt expense........... 1,186,337 981,567
Deferred income taxes........................................ (166,382) (432,386)
Changes in assets and liabilities, excluding the effects of
non-restated acquisitions:
Accounts receivable....................................... (1,284,325) (2,923,685)
Inventory................................................. (613,982) (44,826)
Other assets.............................................. 52,218 (721,062)
Accounts payable.......................................... (2,330,571) 2,613,241
Accrued liabilities....................................... 1,632,446 767,919
Deferred revenues......................................... 40,957 49,888
----------- ------------
Net cash provided by operating activities................. 8,104,773 7,747,207
----------- ------------
Cash flows from investing activities:
Purchase of merchant portfolios.............................. (2,954,050) (14,156,358)
Proceeds from matured investments............................ 10,044,397 --
Purchase of property and equipment, net...................... (2,484,302) (1,803,481)
Purchase of equipment for leasing............................ (5,656,361) (5,403,518)
Amounts received on leases, net of amortized unearned
income...................................................... 3,311,187 3,056,218
----------- ------------
Net cash (used) provided by investing activities.......... 2,260,871 (18,307,139)
----------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt..................... 5,978,191 9,173,827
Payments on long-term debt................................... (7,831,983) (6,890,031)
Issuance of note receivable.................................. (3,223,578) --
Proceeds from sale of common stock........................... 156,966 559,743
Distributions of Subchapter S corporations.................. (1,606,049) (2,323,152)
----------- ------------
Net cash (used) provided by financing activities.......... (6,526,453) 520,387
----------- ------------
Net increase (decrease) in cash and cash equivalents.......... 3,839,191 (10,039,545)
Cash and cash equivalents at beginning of the period.......... 23,810,173 109,351,788
----------- ------------
Cash and cash equivalents at end of the period................ $27,649,364 $ 99,312,243
=========== ============
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 1,071,706 $ 1,337,185
Cash paid for interest 650,506 906,957
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
For the three months ended October 1997 and 1996, in connection with two
separate operating business acquisitions in September 1997 and August 1996, the
Company issued 232,726 and 500,000 shares of common stock, respectively. 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 accompanying notes are an integral part of this financial statement.
5
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PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS:
The accompanying interim consolidated financial statements are
unaudited, except for the balance sheet at July 31, 1997. Certain information
and disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
although the Company believes the disclosures included herein are adequate to
make the information presented not misleading. These interim consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements for the fiscal year ended July 31, 1997.
The accompanying interim consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position at October 31, 1997 and
the results of its operations and its cash flows for the fiscal three month
periods ended October 31, 1997 and 1996. The results of operations for the
interim periods presented are not necessarily indicative of results for the full
fiscal year. The growth in the Company's income and profitability from fiscal
1997 has resulted largely from mergers and acquisitions, including the purchase
of merchant portfolios. Future growth is dependent upon, among other factors,
the Company's ability to continue to consummate such operating businesses and
merchant portfolios.
The consolidated financial statements give retroactive effect to an
acquisition consummated in the first quarter of fiscal 1998 which was accounted
for as pooling of interests. (Note 2).
Earnings per share for the three month periods ended October 31, 1997
and 1996 is calculated based on the weighted average number of shares of common
stock outstanding of 46,941,817 and 44,395,706, 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 earnings 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 (ABP 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.
6
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 - ACQUISITIONS:
OPERATING BUSINESS ACQUISITIONS
In the first quarter of fiscal year 1998, the Company consummated two
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. One of these transactions was considered
material for restatement. On October 2, 1997 the Company issued 3,870,965
shares of its common stock in exchange for all the outstanding common stock of
Bancard, Inc. ("BCI").
The Company's consolidated financial statements have been restated to
include the accounts of BCI for all periods presented by including the
historical results of BCI. The historical results of BCI reflect its actual
operating cost structures and, as a result, do not necessarily reflect the cost
structure of the newly combined entity.
BCI was a Subchapter S corporation for income tax purposes; therefore,
it did not pay U.S. federal income taxes. BCI 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 BCI for
the periods prior to the merger 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.
Three month period ended
October 31,
------------------------
1997 1996
----------- -----------
Revenues
PMT $85,347,927 $60,997,643
BCI 8,164,613 9,740,487
Other(1) -- 8,251,612
----------- -----------
Revenues, as reported $93,512,540 $78,989,742
=========== ===========
7
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Three month period ended
October 31,
------------------------
1997 1996
---------- ----------
Net Income
PMT $4,914,588 $3,410,384
BCI 850,847 774,398
Other(1) -- 381,160
---------- ----------
Net Income, as reported $5,765,435 $4,565,942
Tax effect of Subchapter S
corporations (319,068) (433,334)
---------- ----------
Pro forma net income $5,446,367 $4,132,608
========== ==========
Earnings per share
As reported $ 0.12 $ 0.10
Pro forma $ 0.12 $ 0.09
(1) Includes fiscal 1997 operating business acquisitions which were also
Subchapter S corporations (Fairway Marketing Group, Inc., Retail Payment
Services, Inc. and Erik Krueger, Incorporated).
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. In conjunction 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 3 - COMMITMENTS AND CONTINGENCIES:
In connection with the purchase of a merchant portfolio from Bankcard
America, Inc. ("ABC") in April 1995, the Company signed a guaranty for a
$1,000,000 note payable to the current processing bank by ABC expiring May 9,
1998. The Company received a security interest in 120,000 shares of the
Company's common stock currently held by a shareholder of ABC.
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 May 1, 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.
8
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
PMT Services, Inc. is an independent service organization which markets and
services electronic credit card authorization and payment systems, 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 point-of-
sale processing equipment 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
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 consummated an acquisition pursuant to which it 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 purchases.
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 consummated an
acquisition pursuant to which it issued 424,999
10
<PAGE>
shares of its common stock in exchange for all the outstanding common stock of
Fairway Marketing Group, Inc. ("Fairway"). On January 27, 1997, the Company
consummated an acquisition pursuant to which it issued 3,131,250 shares of
its common stock in exchange for all the outstanding common stock of Bancard
Systems, Inc. ("BSI"). On January 30, 1997 the Company consummated an
acquisition pursuant to which it issued 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 consummated an acquisition pursuant to which it 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 consummated an acquisition pursuant to which it 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 consummated an acquisition pursuant to
which it issued 579,000 shares of its common stock in exchange for all the
outstanding common stock of Erik Krueger, Incorporated ("Krueger"). On July 14,
1997 the Company consummated an acquisition pursuant to which it 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 Krueger 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.
In the first quarter of fiscal 1998, the Company consummated two operating
business acquisitions. On September 17, 1997 the Company consummated an
acquisition pursuant to which it issued shares of its common stock in exchange
for all the outstanding common stock of Retail Systems Consulting, Inc. ("RSC").
The acquisition was accounted for as an immaterial pooling of interests. On
October 2, 1997 the Company consummated an acquisition pursuant to which it
issued 3,870,965 shares of its common stock in exchange for all the outstanding
common stock of Bancard, Inc. ("BCI"). The Company's consolidated financial
statements have been restated to include the accounts of BCI for all periods
prior to the merger. The above referenced shares were issued to the
shareholders of RSC and BCI in reliance upon the exemption provided by Section
4(2) of the Act.
11
<PAGE>
The growth in the Company's revenues and profitability from fiscal 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.
Results of Operations
The following table presents, for the periods indicated, the percentage of
revenues represented by certain line items in the Company's statement of income:
<TABLE>
<CAPTION>
Three Month Period Percentage/Increase
Ended October 31, (Decrease)
------------------------- ----------
1997 1996
------ ------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 18.4%
Cost of revenues 72.1 73.2 16.6
----- -----
Gross margin 27.9 26.8 23.3
Selling, general and
administrative expenses 13.3 12.7 24.0
Depreciation and amortization expense 4.1 3.7 32.2
Provision for merchant losses and bad
debt expense 1.2 1.2 20.9
Nonrecurring operating expense -- 0.6 (100.0)
----- -----
Income from operations 9.3 8.6 27.2
Interest income, net 0.5 0.1 392.6
Other expense, net (0.5) (0.1) 252.2
----- -----
Income before provision for
taxes 9.3 8.6 28.5
Provision for income taxes 3.1 2.8 33.2
----- -----
Net Income 6.2% 5.8% 26.3%
===== =====
</TABLE>
Revenues
Revenues for the first quarter of fiscal 1998 increased to $93.5 million, an
increase of 18.4% over the same period last year. The growth in revenues has
resulted in an increase in the Company's accounts receivable. The increase in
revenues resulted primarily from acquisitions and new merchant contracts
generated through the Company's field sales and telemarketing efforts, as well
as revenue enhancements with existing merchants. Merchant portfolio purchases
accounted for 59.9% of the increase in revenues in the first quarter of fiscal
1998.
Cost of Revenues
Cost of revenues increased from $57.8 million in the first quarter of
fiscal 1997 to $67.4 million in the first quarter of fiscal 1998. Cost
decreased as a percentage of revenues for the three month period ended October
31, 1997 by 1.1 percentage points.
In the first quarter of fiscal 1998, cost of revenues as a percentage of
revenues decreased from first quarter of fiscal 1997 primarily as a result of
negotiated price reductions from major vendors and revenue enhancement programs.
These benefits received were partially offset by the higher cost of revenues
from purchased bank portfolios and LFG's decline in revenues as a percentage of
the Company's total consolidated revenues.
12
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $12.4 million in the first
quarter of fiscal 1998 and $10.0 million for the first quarter of fiscal 1997.
As a percentage of revenues, selling, general and administrative expenses have
increased for the first quarter of fiscal 1998 by 0.6 percentage points when
compared to the same period in fiscal 1997. The increase in selling, general
and administrative expenses as a percentage of revenues includes expenses
incurred to relocate and expand the corporate headquarters and customer service
center in Nashville, Tennessee and increased expenses from recently acquired
operating businesses.
Depreciation and Amortization
Depreciation and amortization expense increased from $2.9 million for the
quarter ended October 31, 1996 to $3.8 million for the quarter ended October 31,
1997 which represents a 32.2% increase. The increase in depreciation and
amortization was primarily the result of additional expenditures related to the
Company's management information systems and new corporate headquarters and
purchased merchant portfolios.
Provision for Merchant Losses and Bad Debt Expense
The provision for merchant losses and bad debt expense increased from $1.0
million in the first quarter of fiscal 1997 to $1.2 million in the first quarter
of fiscal 1998. As a percentage of revenues, provision for merchant loss and
bad debt expense has remained relatively consistent.
Non-recurring Operating Expense
In the first quarter of fiscal 1997, the Company incurred nonrecurring
duplicative net costs of approximately $466,000. These net costs relate to a
sales force included in a merchant portfolio acquisition.
Interest Income, Net
For the first quarter of fiscal 1998, the Company recognized approximately
$505,000 net interest income. Interest expense of PMT's LFG operating business
has declined in the first quarter of fiscal 1998 as compared to the first
quarter of fiscal 1997 as a result of refinancing certain debts with more
favorable interest rates.
Other Expense
In the first quarter of fiscal 1998, the Company incurred other expenses of
approximately $443,000. For the same quarter in fiscal 1997, the Company
incurred other expenses of approximately $126,000. 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.
13
<PAGE>
Income Tax
Income tax expense increased in the first quarter of fiscal 1998 in relation
to the comparable period in fiscal 1997, principally as a result of the
Company's increased profitability in fiscal 1998. For the three months ended
October 31, 1997, the income tax expense of $2.9 million represented an
effective income tax rate of 33.8% as compared to the income tax expense of $2.2
million (32.7% effective income tax rate) in the first three months of fiscal
1997. These effective tax rates are below the expected effective tax rate for
fiscal 1998 due to the impact of certain acquired entities which were Subchapter
S corporations prior to the effective dates of the mergers.
Liquidity and Capital Resources
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. The Company's management invests excess cash in overnight
investments and U.S. Government Treasury notes and bills.
The Company expects that cash generated from operations and the excess cash on
hand will be adequate to meet the Company's immediate cash needs. In addition,
on January 31, 1997 the Company amended and restated its credit facility with
First Union National Bank of Tennessee to provide a $20.0 million revolving line
of credit of which there was no outstanding balance at October 31, 1997. The
Company has an additional revolving line of credit, through its LFG facility,
having an aggregate available balance of $3.0 million. The facility bears
interest at a variable rate based on the prime rate. There was no outstanding
balance at October 31, 1997 under the LFG facility.
Working Capital
Net cash flow provided by operating activities was $8.1 million for the first
three months of fiscal 1998 as compared to net cash flow provided by operating
activities of $7.7 million for the first three months of fiscal 1997. The
increase in cash flow from operating activities 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 the net income increase is partially offset by
increases in working capital needs.
Capital Expenditures and Investing Activities
Cash provided by investing activities was approximately $2.2 million for the
three month period ended October 31, 1997 as compared to cash used in investing
activities of $18.3 million for the same period in fiscal 1997. Capital
expenditures were approximately $8.1 million for the first quarter of fiscal
1998 as compared to $7.2 million for the first quarter of fiscal 1997. The
overall increase in capital expenditures primarily resulted from additional
expenditures related to the Company's management information systems, the
relocation of the corporate headquarters, 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 $3.0 million and $14.2 million for the purchase of merchant
portfolios and agents' residual rights in the three month periods ended October
31, 1997 and 1996, respectively.
14
<PAGE>
Financing Activities
Net cash provided by financing activities for the first three months of fiscal
1997 was approximately $500,000, as compared to cash used by financing
activities of $6.5 million for the same period in fiscal 1998.
The overall increase of net cash used by financing activities for the first
three months of fiscal 1998 reflects the issuance of $3.2 million in additional
funds on a note receivable and payments to decrease the Company's indebtedness.
Future Capital Needs
Management believes that significant expenditures for the purchase of
additional merchant portfolios may be required for the Company to sustain its
growth in the future. Management expects to fund such purchases through cash on
hand, cash generated from operations and 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 1997 to increase the facility
to $20.0 million of which there was no outstanding balance at October 31, 1997.
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.
The Company has developed a plan to ensure its systems are compliant with the
requirements to process transactions in the year 2000. The majority of the
Company's internal information systems are in the process of being replaced with
fully-compliant new systems. The total cost of the software and implementation
is estimated to be $900,000 which will be capitalized as incurred. This new
system implementation is expected to be completed by July 1, 1999. Each of the
Company's merchants utilize equipment to capture and transmit financial
transactions. The Company is in the process of completing all necessary updates
to this equipment to ensure it will continue to be effective in the year 2000.
The total future costs of this transition is estimated to be less than $300,000.
The Company is also working with its processing banks and network providers to
ensure their systems are year 2000 compliant. All of these costs will be borne
by the processors and network companies. In the event some of the processors
are unable to convert their systems appropriately, the Company will switch
merchant accounts to those that are able to perform the processing.
This report contains certain forward-looking statements. Specifically, the
forward-looking statements relate to future growth through portfolio
acquisitions, the availability of capital to support such acquisitions and the
Company's year 2000 compliance program. The ability of the Company to
15
<PAGE>
achieve the expectations expressed in these forward-looking statements will be
subject to several factors that could cause actual results to differ materially
from those expressed in the forward-looking statements, such as merchant
attrition, difficulties in integrating newly acquired businesses and portfolios,
the availability of capital, the cost of acquired businesses and portfolios, the
Company's continued ability to account for acquisitions as poolings of
interests, industry price increases and the ability of the Company's processing
banks to process merchant transactions effectively. In addition, in reference to
the year 2000 compliance program, there is no assurance that the Company will be
able to move the merchant accounts efficiently or in a cost effective manner.
Results actually achieved thus may differ materially from the expectations
expressed in such statements.
16
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
On September 17, 1997 the Company consummated an acquisition pursuant
to which it issued 232,726 shares of its common stock in exchange for
all the outstanding common stock of Retail Systems Consulting, Inc.
("RSC"). On October 2, 1997 the Company consummated an acquisition
pursuant to which it issued 3,870,965 shares of its common stock in
exchange for all the outstanding common stock of Bancard, Inc.
("BCI"). The above referenced shares were issued to the shareholders
of RSC and BCI in reliance upon the exemption provided by Section 4(2)
of the Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.0 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a current Report on Form 8-K/A dated September 16,
1997, amending a Current Report on Form 8-K dated July 18, 1997 which
discussed a business combination requiring retroactive effect in the
consolidated financial statements.
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).
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PMT SERVICES, INC.
By: /s/Vickie G. Johnson
------------------------
Vickie G. Johnson
Chief Accounting Officer
(principal accounting officer)
Date: December 15, 1997
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PMT SERVICES, INC. FOR THE QUARTER ENDED
OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 27,649,364
<SECURITIES> 39,123,124
<RECEIVABLES> 29,271,564
<ALLOWANCES> 0
<INVENTORY> 2,491,529
<CURRENT-ASSETS> 102,333,109
<PP&E> 11,265,111
<DEPRECIATION> 5,757,959
<TOTAL-ASSETS> 254,053,690
<CURRENT-LIABILITIES> 29,855,923
<BONDS> 0
0
0
<COMMON> 459,727
<OTHER-SE> 171,292,621
<TOTAL-LIABILITY-AND-EQUITY> 254,053,690
<SALES> 93,512,540
<TOTAL-REVENUES> 93,512,540
<CGS> 67,425,351
<TOTAL-COSTS> 67,425,351
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,186,337
<INTEREST-EXPENSE> 710,648
<INCOME-PRETAX> 8,714,188
<INCOME-TAX> 2,948,753
<INCOME-CONTINUING> 5,765,435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,765,435
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0
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