<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 8-K/A3
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 16, 1997
(July 14, 1997)
--------------------
PMT SERVICES, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 0-24420 62-1215125
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification
incorporation) Number)
3841 GREEN HILLS VILLAGE DRIVE
NASHVILLE, TENNESSEE 37215
(Address of principal executive offices) (Zip Code)
(615) 254-1539
(Registrant's telephone number, including area code)
================================================================================
<PAGE>
ITEM 5. OTHER EVENTS
On July 14, 1997, PMT Services, Inc., a Tennessee corporation (the
"Company"), completed a business combination in which the Company acquired all
of the issued and outstanding capital stock of LADCO Financial Group ("LADCO").
The Company filed a Current Report on Form 8-K on July 18, 1997 (as amended by
Form 8-K/A(1) and Form 8-K/A(2) filed on July 29, 1997), in connection with the
above-referenced transaction. Attached as an exhibit hereto are the audited
financial statements of LADCO, as required by Regulation S-X Rule 3-05 and the
audited financial statements of the Company, which have been restated to give
retroactive effect to the business combination which was accounted for as a
pooling of interests.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(1) Supplemental Consolidated Financial Statements of PMT
Services, Inc. for fiscal 1996 (restated to give retroactive
effect to mergers accounted for as pooling of interests)
(2) Financial Statement Schedule: Schedule II
--Reserve for Merchant Losses
--Allowance for Bad Debts
(3) Consolidated Financial Statements of LADCO Financial Group as
of and for the year ended December 31, 1996
(b) Pro forma Financial Information
(1) Unaudited Pro Forma Consolidated Financial Statements
(c) Exhibits
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Ernst & Young LLP
27.1 Restated Financial Data Schedule for the Year Ended
July 31, 1996
27.2 Restated Financial Data Schedule for the Nine Months Ended
April 30, 1996
<PAGE>
SIGNATURES
----------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED HEREUNTO DULY AUTHORIZED.
PMT SERVICES, INC.
BY: /s/ Clay M. Whitson
---------------------------------
Clay M. Whitson
Chief Financial Officer
DATE: September 16, 1997
<PAGE>
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of PMT Services, Inc.
In our opinion, the accompanying supplemental consolidated balance sheet and the
related supplemental 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,
1996 and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended July 31, 1996, 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 1 to the supplemental consolidated financial statements,
the Company changed its method of accounting for income taxes in fiscal 1994.
As described in Note 3 to the supplemental consolidated financial statements,
PMT Services, Inc. merged with Erik Krueger, Incorporated (June 3, 1997) and
LADCO Financial Group July 14, 1997 (the Acquired Entities) in transactions
accounted for as poolings of interests. The accompanying consolidated financial
statements give retroactive effect to the merger of PMT Services, Inc. with the
Acquired Entities.
Price Waterhouse LLP
Nashville, TN
September 13, 1996,
except as to the poolings of interests as described
in Note 3, paragraph 3 which is as of January 30, 1997
and Note 3, paragraph 5 which is of July 14, 1997
<PAGE>
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
July 31,
------------------------
1995 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 2,801,072 $109,156,234
Accounts receivable.................................... 5,359,736 8,487,629
Current portion of net investment in finance leases.... 8,544,952 10,331,271
Inventory.............................................. 689,354 823,276
Deferred income taxes.................................. 680,124 945,934
Other current assets................................... 391,105 1,059,667
----------- ------------
Total current assets................................ 18,466,343 130,804,011
Purchased merchant portfolios, net of accumulated
amortization of $4,040,830 and $9,128,708........... 36,974,081 62,075,590
Long-term portion of net investment in finance leases.. 17,341,528 22,034,754
Property and equipment, net............................ 3,921,766 5,103,227
Intangible and other assets............................ 8,255,335 7,886,890
----------- ------------
Total assets........................................ $84,959,053 $227,904,472
=========== ============
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Current portion of long-term debt...................... $11,216,219 $ 13,281,646
Accounts payable....................................... 3,919,533 4,809,189
Accrued liabilities.................................... 3,851,622 6,051,183
Deferred revenues...................................... 289,601 230,496
------------ ------------
Total current liabilities........................... 19,276,975 24,372,514
Long-term debt......................................... 31,231,944 19,051,160
Deferred income taxes.................................. 1,035,074 994,721
------------ ------------
Total liabilities................................... 51,543,993 44,418,395
------------ ------------
Shareholders' equity:
Preferred stock, $0.01 par value, authorized:
10,000,000 shares; no shares outstanding
Common stock, $0.01 par value, authorized:
100,000,000 shares; issued: 8,888,991
and 38,478,274 shares.............................. 88,890 384,783
Additional paid-in capital.............................. 25,716,122 166,632,988
Treasury stock, at cost: 13,068 and 1,188 shares....... (68,500) (12,000)
Accumulated earnings.................................... 7,678,548 16,480,306
------------ ------------
33,415,060 183,486,077
------------ ------------
Commitments and contingent liabilities (Notes 3, 12 and 15)
Total liabilities and shareholders' equity.......... $84,959,053 $227,904,472
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
Year ended July 31,
-----------------------------------------
1994 1995 1996
----------- ------------ ------------
Revenues.......................... $97,125,288 $139,539,232 $214,891,226
Cost of revenues.................. 68,518,369 98,151,830 154,442,411
----------- ------------ ------------
Gross margin..................... 28,606,919 41,387,402 60,448,815
Selling, general and
administrative expenses......... 16,708,770 23,772,992 31,480,460
Depreciation and
amortization expense............. 1,745,611 3,621,995 7,730,768
Provision for merchant losses and
bad debts........................ 2,884,131 1,953,635 3,786,247
Stock award compensation.......... 239,659 241,477 --
----------- ------------ ------------
Total operating expenses ...... 21,578,171 29,590,099 42,997,475
----------- ------------ ------------
Income from operations............ 7,028,748 11,797,303 17,451,340
Interest income................... 32,988 313,073 2,107,547
Interest expense.................. (2,503,214) (3,356,556) (3,906,051)
Other income, net................. -- -- 703,896
----------- ------------ ------------
Income before provision
for income taxes and change in
accounting principle............. 4,558,522 8,753,820 16,356,732
Provision for income taxes........ 1,756,409 3,301,052 6,131,189
----------- ------------ ------------
Income before change in
accounting principle............. 2,802,113 5,452,768 10,225,543
Cumulative effect of change in
accounting principle............. 312,800 -- --
----------- ------------ ------------
Net income..................... $ 3,114,913 $ 5,452,768 $ 10,225,543
=========== ============ ============
Per share data:
Income before change in
accounting principle........... $ 0.15 $ 0.20 $ 0.29
Cumulative effect of change in
accounting principle........... 0.01 -- --
----------- ------------ ------------
Net income per share........... $ 0.16 $ 0.20 $ 0.29
=========== ============ ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Accumulated Total
Common Paid-in Earnings Treasury Unearned Shareholders'
Stock Capital (Deficit) Stock Compensation Equity
----------- ------------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1993............ $ 43,610 $ 1,565,462 $ 578,512 ($481,136) $ 1,706,448
Stock awards vested................. 239,659 239,659
Shares issued....................... 200 53,500 53,700
Stock warrants issued............... 261,000 261,000
Purchase of treasury stock.......... ($45,000) (45,000)
Distributions of Subchapter S
Corporations, prior to poolings... (432,486) (432,486)
Reissuance of treasury stock........ (3,000) 3,000 --
Net income for the year............ 3,114,913 3,114,913
--------- ------------ ----------- --------- --------- -----------
Balance at July 31, 1994............ 43,810 1,876,962 3,260,939 (42,000) (241,477) 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 7,678,548 (68,500) -- 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 $16,480,306 ($12,000) $ -- $183,486,077
========= ============ =========== ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended July 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by
operating activities:
Net income............................................ $ 3,114,913 $ 5,452,768 $ 10,225,543
Martin Howe fiscal year conversion.................... -- -- (356,914)
Adjustments:
Depreciation and amortization...................... 1,928,281 4,202,660 8,281,086
Provision for merchant losses and bad debts........ 2,884,131 1,953,635 3,786,247
Stock award compensation and other................. 239,659 241,477 --
Deferred income taxes.............................. (430,001) 357,734 (306,164)
Gain on sale of property and equipment............. -- (8,714) --
Gain on sale of merchant portfolio................. -- (80,198) --
Changes in assets and liabilities:
Accounts receivable............................. (1,685,377) (1,827,243) (3,127,893)
Inventory....................................... (97,486) (258,265) (133,922)
Other assets.................................... (1,926,534) (1,144,571) (337,516)
Accounts payable................................ 1,627,072 (111,098) 889,656
Accrued liabilities........................... 2,066,539 (147,980) 864,000
Deferred revenues............................. (56,123) (155,291) (59,105)
------------ ------------ ------------
Net cash provided by operating activities................. 7,665,074 8,474,914 19,725,018
Cash flows from investing activities:
Purchase of merchant portfolios....................... (8,415,055) (24,752,658) (32,341,624)
Purchase of property and equipment..................... (1,580,904) (2,137,630) (2,185,032)
Purchase of equipment for leasing...................... (19,528,789) (16,809,608) (20,865,015)
Proceeds from sale of merchant portfolio............... -- 80,198 --
Proceeds from sale of property and equipment........... -- 37,000 --
Amounts received on leases, net of amortized
unearned income...................................... 16,085,306 10,478,442 12,252,928
------------ ------------ ------------
Net cash used in investing activities...... (13,439,442) (33,104,256) (43,138,743)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............... 21,357,062 35,591,026 35,842,752
Payments on long-term debt............................. (14,487,219) (27,710,631) (45,958,109)
Proceeds from issuance of common stock................. -- 17,098,894 140,963,115
Payments to repurchase treasury stock.................. (45,000) (32,500) (12,000)
Proceeds from minority shareholders' contributions..... -- -- 120,000
Distributions of Subchapter S Corporations............. (432,486) (524,614) (1,186,871)
------------ ------------ ------------
Net cash provided by financing activities.. 6,392,357 24,422,175 129,768,887
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents...... 617,989 (207,167) 106,355,162
Cash and cash equivalents at beginning of year............ 2,390,250 3,008,239 2,801,072
------------ ------------ ------------
Cash and cash equivalents at end of year.................. $ 3,008,239 $ 2,801,072 $109,156,234
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes................................ $ 919,258 $ 3,596,249 $ 5,772,989
Cash paid for interest.................................... 2,236,948 2,838,771 3,312,590
</TABLE>
5
<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 years 1994
and 1995, the Company issued promissory notes totaling $5,061,804 and $80,500,
respectively.
The Company recognized a tax benefit of $318,517 for the year ended July
31, 1996 for the excess of the fair market value at the exercise date over that
at the award date for stock options exercised.
In connection with the purchase of a merchant portfolio in March 1994, the
Company issued 312,500 shares of common stock.
In connection with an agreement between the Company and a processing bank
entered into simultaneously with the purchase of a merchant portfolio in March
1994, the Company issued warrants to purchase 120,000 shares of common stock.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations
PMT Services, Inc. (the "Company") markets and services electronic credit
card authorization and payment systems to merchants. 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
dates ranging from 1997 to 2002 unless extended by either party.
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 have been reclassified to conform to the
current year's presentation. The supplemental consolidated financial statements
give retroactive effect to certain mergers consummated in the fourth quarter of
fiscal 1996 and subsequent to July 31, 1996 which were accounted for as poolings
of interests (Note 3).
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and cost recognition
Revenues derived from the electronic processing of transactions (merchant
discount rate and related fees) on the credit card authorization equipment are
recognized at the time the merchants' transactions are processed. Related
commissions and processing charges are also recognized at that time.
7
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenues related to the direct sale of credit card authorization equipment
are recognized when the equipment is shipped. Installation fees related to both
the direct sale and the marketing of this equipment are recognized when
installation is completed. Fees received in advance of shipment or installation
are not recognized as revenue until earned.
Revenues related to direct 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.
The Company presents its consolidated statement of cash flows on the
indirect method as allowed by SFAS 95. Certain amounts in prior periods have
been reclassified to conform with this presentation.
Cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted cash
The Company is contractually required to maintain certain minimum funds on
deposit with processing banks and other financial institutions, amounting to
$4,036,831 and $3,329,913 at July 31, 1995 and 1996, respectively. These amounts
are included in intangible and other assets.
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 had a market
value of $33,990,917 at July 31, 1996 using discounted cash
8
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
flow analyses, based on the company's current incremental borrowing rates for
similar types of borrowing arrangements. The Company's hedging contract with no
carrying amount had a fair value of ($126,563) at July 31, 1996 based upon
market quotes from brokers.
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.
Direct Financing Leases
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. Purchased merchant portfolios are evaluated by management
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
9
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
merchant portfolio is indicated, amortization will be accelerated to recognize
the diminution in value.
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 amount to be exchanged in fiscal
1997 under this agreement will be determined by reference to the notional
amounts and the other terms of the agreement.
Under the Company's forward rate lock agreement, at the conclusion of the
agreement the Company and the counterparty will exchange an amount calculated by
reference to the agreed notional amount and a specified index, reducing the
Company's exposure to interest rate fluctuations on certain floating rate debt.
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
On August 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109) as required. Under SFAS 109,
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 13). The Company
recognized a benefit of $312,800 for deductible temporary differences upon
adoption of SFAS 109. This amount is presented as the cumulative effect of
change in accounting principle in the Company's statement of income for the year
ended July 31, 1994.
10
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net income per share
Net income per share for the fiscal years 1994, 1995 and 1996 is calculated
based on weighted average shares of common stock outstanding of 19,174,098,
27,105,717 and 34,705,437, respectively.
Stock splits
On May 13, 1994, the Board of Directors approved a stock split of four
shares of $0.01 par value common stock for one to be effected in the form of a
stock dividend. The stock split was effective June 10, 1994. 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 effected 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 9 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.
11
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In October 1995, the Company consummated a second public offering of
2,156,250 shares of common stock, 1,931,250 of which were offered by the
Company. The Company received net proceeds of approximately $40.8 million,
after deducting underwriting discounts and commissions and expenses of the
offering, and repaid all borrowings outstanding under its revolving line of
credit.
The Company offered 3,910,000 shares of its common stock in a third public
offering 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 - MERGERS AND ASSET PURCHASES:
Mergers
During fiscal year 1996, the Company began issuing common stock to acquire
companies with both existing merchant portfolios and sales organizations capable
of generating new accounts.
In fiscal year 1996 and 1997, the Company consummated nine acquisitions by
issuing common stock in exchange for all the outstanding common stock of the
companies acquired. These acquisitions 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 (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
Erik Krueger, Incorporated (Krueger) June 3, 1997 579,000
LADCO Financial Group (LFG) July 14, 1997 1,463,414
PMT's consolidated financial statements have been restated to include the
accounts of MHA, Fairway, BSI and RPS for all periods presented by including the
historical results of these entities. The historical results of these four
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 year 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
$0.03 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 has historically been significantly less than the above single
loss in one of the pooled entities. Additionally, no further asset impairment
losses are expected from any of the assets acquired in these mergers. The
historical results do not purport to be indicative of results which may occur in
the future.
12
<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, 1993, 1994 and 1995 have been combined with the
Company's statements of income for the fiscal years ended July 31, 1994, 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.
PMT's consolidated financial statements have been restated to include the
accounts of Krueger and LFG for all periods presented by including the
historical results of these entities. The historical results of these two
pooled entities reflect each of their actual operating structures and, as a
result, do not necessarily reflect the cost structure of the newly combined
entity.
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 merged
entities for the periods prior to the mergers are presented in the following
table. In addition, the table includes unaudited pro forma net income and net
income per share amounts which reflect pro forma adjustments to present income
taxes on the basis on which they will be reported in future periods.
13
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1994 JULY 31, 1995 JULY 31, 1996
-------------- -------------- ------------
<S> <C> <C> <C>
Revenues
PMT $53,506,857 $ 75,242,866 $136,254,139
LFG 7,887,345 8,860,400 11,008,144
MHA 7,689,671 13,764,195 13,585,887
BSI 9,668,196 16,808,554 21,540,196
Fairway 14,259,605 18,072,187 19,524,072
Other 4,113,614 6,791,030 12,978,788
----------- ------------ ------------
Revenues, as reported $97,125,288 $139,539,232 $214,891,226
=========== ============ ============
Net Income (Loss)
PMT $ 2,492,514 $ 4,032,000 $ 8,952,399
LFG 393,029 917,608 1,024,212
MHA 99,930 (391,845) (327,023)
BSI 56,679 236,002 287,669
Fairway (584) 164,381 (858,125)
Other 73,345 494,622 1,146,411
----------- ------------ ------------
Net income, as reported 3,114,913 5,452,768 10,225,543
Pro forma tax effect of
Subchapter S Corporations (28,365) (256,032) (115,325)
----------- ------------ ------------
Pro forma net income $ 3,086,548 $ 5,196,736 $ 10,110,218
=========== ============ ============
Net income per share
As reported $0.16 $0.20 $0.29
Pro forma $0.16 $0.19 $0.29
</TABLE>
These unusual costs in fiscal year 1996 described above in the pooled
entities, coupled with the additional common shares issued to complete the
poolings, result in the restated earnings per share being less than previously
reported. The decrease in fiscal year 1994 earnings per share results from each
of the pooled entities being much smaller in size in that year and not
contributing any significant level of earnings.
In addition to these six transactions, the Company completed three separate
mergers during fiscal year 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. These transactions were individually
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 five
portfolios in fiscal year 1994 and nine portfolios in fiscal year 1995. In
fiscal year 1996, the Company purchased four merchant portfolios. These
acquisitions were accounted for as purchase
14
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 6). Amortization
expense related to purchased merchant portfolios was $947,278, $2,283,638 and
$5,642,084 in fiscal years 1994, 1995 and 1996, respectively.
Individually significant purchase transactions are as follows:
CROWN CARD SERVICES - The Company acquired the merchant portfolio and
retained the sales force of Crown Card Services, Inc. ("Crown Card") on January
1, 1994. The total purchase price for the merchant portfolio was $853,700, of
which $630,000 was paid in cash. A noninterest bearing note payable for
$170,000 and 20,000 shares of common stock valued at $53,700 were issued to
Crown Card.
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, 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.
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 reflected as other current assets on the Company's balance sheet at July 31,
1996.
15
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
EFFECTIVE INCLUDED IN
DATE OF PRO FORMA RESULTS
PURCHASES BEGINNING FISCAL YEAR
--------- ----------------------
Crown Card January 1, 1994 1994
ABC April 1, 1995 1994
TermNet July 1, 1995 1994
CPS July 1, 1995 1994
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 year 1994 or fiscal year 1995, or
of results which may occur in the future.
16
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1994 JULY 31, 1995 JULY 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues $140,170,772 $212,376,315 $235,222,557
Income before extraordinary item
and change in accounting principle $ 1,255,515 $ 3,896,695 $ 10,320,854
Net income $ 1,568,415 $ 3,896,695 $ 10,320,854
Income per share before extraordinary
item and change in accounting principle $ 0.07 $ 0.14 $ 0.30
Net income per share $ 0.08 $ 0.14 $ 0.30
</TABLE>
In addition to the above transactions, the Company consummated acquisitions
of seven merchant portfolios subsequent to July 31, 1996 accounted for as
purchase transactions. These merchant portfolio acquisitions accounted for
approximately 18,000 merchant accounts. Operating results of the merchant
portfolios will be included in the Company's financial statements beginning on
the effective date of the purchase.
NOTE 4 - NET INVESTMENT IN DIRECT FINANCING LEASES:
<TABLE>
<CAPTION>
JULY 31
----------------------------------
1995 1996
------------------- -------------
<S> <C> <C>
Minimum lease payments $ 34,760,236 $ 45,674,278
Residual values - unguaranteed 4,302,833 5,773,731
Allowance for doubtful accounts (1,017,459) (1,659,203)
------------ ------------
Net minimum lease payments receivable 38,045,610 49,788,806
Unearned income (12,159,130) (17,422,781)
------------ ------------
Net investment in direct financing leases $ 25,886,480 $ 32,366,025
============ ============
</TABLE>
Changes in the allowance for doubtful accounts were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JULY 31
-----------------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ 1,300,509 $ 1,513,455 $ 1,017,459
Provision for bad debt expense 2,397,138 1,433,390 2,132,542
Charged off lease contracts (2,475,843) (2,487,772) (1,637,744)
Bad debt recoveries 291,651 558,386 146,946
----------- ------------ ------------
Balance at end of year $ 1,513,455 $ 1,017,459 $ 1,659,203
=========== ============ ============
</TABLE>
17
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At July 31, 1996, minimum lease payments receivable, including estimated
residual values receivable, are due as follows:
UNGUARANTEED
MINIMUM RESIDUAL
LEASE PAYMENTS VALUES
RECEIVABLE RECEIVABLE
-------------- ------------
1997 $18,501,323 $ 546,614
1998 14,143,537 1,040,496
1999 9,327,413 1,680,456
2000 3,326,204 2,159,899
Thereafter 375,801 346,266
----------- ----------
$45,674,278 $5,773,731
=========== ==========
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,
--------------------------
1995 1996
------------ ------------
Office equipment...................... $ 2,679,579 $ 4,476,951
Studio equipment...................... 639,021 945,779
Credit card terminals held for lease.. 1,318,931 1,640,538
Office furniture and fixtures......... 516,672 702,494
Leasehold improvements................ 72,575 124,766
----------- -----------
5,226,778 7,890,528
Less: accumulated depreciation.. (1,305,012) (2,787,301)
----------- -----------
$ 3,921,766 $ 5,103,227
=========== ===========
In addition to the direct financing leases described in Note 4, the
Company leases point-of-sale credit card terminals to merchants under operating
leases on a month-to-month basis. Depreciation expense on all of the Company's
property and equipment totaled $597,915, $465,398 and $1,074,644 in fiscal years
1994, 1995 and 1996, respectively.
NOTE 6 - INTANGIBLE AND OTHER ASSETS:
JULY 31,
------------------------
1995 1996
----------- -----------
Noncompetition agreements.............. $3,148,016 $3,345,193
Restricted cash........................ 4,036,831 3,329,913
Deferred finance costs................. 480,341 585,360
Other.................................. 590,147 626,424
---------- ----------
$8,255,335 $7,886,890
========== ==========
Intangible and other assets include noncompetition agreements with various
sellers of merchant portfolios purchased by the Company (Note 3).
18
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Amortization expense related to noncompetition agreements was $228,620,
$465,147 and $860,323 in fiscal years 1994, 1995 and 1996, respectively.
Accumulated amortization of noncompetition agreements was $843,357 and
$1,703,680 at July 31, 1995 and 1996, 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
$182,670, $580,665, and $550,318 in fiscal years 1994, 1995 and 1996,
respectively. Accumulated amortization of deferred finance costs was $863,027
and $1,413,345 at July 31, 1995 and 1996, respectively.
NOTE 7 - ACCRUED LIABILITIES:
JULY 31,
------------------------
1995 1996
----------- -----------
Income taxes payable................ $1,032,546 $1,696,910
Compensation and payroll taxes...... 1,089,972 969,817
Accrued rent........................ 55,863 --
Professional services............... 92,833 415,477
Accrued processing costs............ 262,894 238,189
Reserve for merchant losses......... 556,673 1,459,602
State franchise taxes payable....... -- 356,042
Sales and property taxes payable.... 289,592 281,429
Accrued financing costs............. 15,472 26,000
Interest payable on long-term debt.. 101,153 144,296
Other............................... 354,624 463,421
---------- ----------
$3,851,622 $6,051,183
========== ==========
19
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
JULY 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Revolving line of credit, due November 1, 1996
unless converted to a term loan with monthly
installments due over 48 months, interest
payable monthly at a variable rate based on the
prime rate (8.5% at July 31, 1996)......................... $15,293,000 --
Notes payable, secured by the remaining payment
stream on certain leases and restricted cash, principal
and interest at rates ranging from 10.11% to 12.21%
per annum are payable monthly, with all unpaid
principal and interest due by April 2000................... 14,823,054 $10,237,459
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 LIBOR rate then in effect (7.66% at July 31,
1996), are payable monthly, with all unpaid
and interest due in November. This instrument will
convert to a fixed rate note during fiscal 1997. Gains or
losses related to this transition are hedged by the
financial instrument agreement............................ -- 13,310,790
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), are
payable monthly, with all unpaid principal and
interest due by July 2000.................................. 2,635,069 3,210,195
Notes payable, secured by remaining payment stream
of certain leases and restricted cash, principal and
interest at 7.39% per annum are payable monthly, with
all unpaid principal and interest due in September 1997.... 2,973,910 696,413
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... 1,755,772 1,149,487
Notes payable, 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, 1996), are payable monthly, with all
unpaid principal and interest due by February 1997. 659,129 1,034,350
</TABLE>
20
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
JULY 31,
------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Notes payable, secured by the remaining payment
stream of certain leases and restricted cash, principal,
and interest at 5.17% per annum are payable monthly,
with all unpaid principal and interest due in April 1997... $ 1,908,015 $ 642,576
Notes payable, 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, 1996), are payable monthly, with all
unpaid principal and interest due by May 1998............. -- 996,545
Notes payable, secured by remaining payment
stream of certain leases and restricted cash, principal
and interest at 6.9% per annum are payable monthly,
with all unpaid principal and interest due in May 1997..... 712,714 --
Various lines of credit at 9% fixed rated initiated in
1994 and 1995; no repayment terms; debt serviced
as funds allow. 225,000 570,000
Non interest bearing notes payable with interest
imputed at 8%, issued in connection with the
Company's purchase of merchant portfolios;
maturing at various dates through October 1996. 80,500 40,000
Other debts repaid in 1996 or subsequent to
acquisitions............................................... 1,362,000 439,991
Other......................................................... 20,000 5,000
------------- -------------
Total long-term debt.......................................... 42,448,163 32,332,806
Less: current portion................................. ( 11,216,219) ( 13,281,646)
------------- -------------
$ 31,231,944 $ 19,051,160
============= =============
</TABLE>
21
<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 and July 18, 1995, increasing the revolving
line of credit to $17,500,000 and terminating the bridge loan. The proceeds from
the loans were used to purchase merchant portfolios, to repay debt and for
general working capital purposes. The revolving credit facility matures on
November 1, 1996 unless converted to a term loan payable in monthly installments
over four years. Notes issued under the credit facility will bear interest at a
rate based on LIBOR, the bank's prime rate or at a fixed rate based on the bond
equivalent bid side yield of the U.S. Treasury Note. Borrowings under the
agreement are secured by substantially all the Company's assets and life
insurance policies on the lives of two of the Company's executive officers. The
agreement contains restrictive covenants which include, among other items,
maintenance of specified ratios of fixed charge coverage, debt to earnings
before interest, taxes, depreciation and amortization and to net worth. The
covenants also include restrictions on capital expenditures and prohibition of
new indebtedness and cash dividends.
Maturities of long-term debt are as follows as of July 31, 1996:
YEAR ENDING
JULY 31
-----------
1997 $13,281,646
1998 8,848,117
1999 5,106,458
2000 3,244,446
2001 1,274,952
Thereafter 577,187
-----------
$32,332,806
===========
22
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9 - SHAREHOLDERS' EQUITY;
Changes in the shares of the Company's common stock are as follows:
Issued at July 31, 1993........... 4,361,063
Shares issued..................... 20,000
----------
Issued 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
----------
Issued 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
==========
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 1996 Annual Meeting of Shareholders.
NOTE 10 - 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 2,295,000
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 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.
23
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 status of options under the plan (reflecting all stock splits) is as
follows:
NUMBER EXERCISE EXPIRATION
OF OPTIONS PRICE DATE
---------- --------- ----------
Outstanding at July 31, 1993.. 458,700
---------
Outstanding at July 31, 1994.. 458,700
Granted.................... 1,361,724 $ 2.67 August 11-12, 2004
Granted.................... 24,000 $ 2.83 December 15, 2002
Granted.................... 15,000 $ 3.54 February 21, 2005
Terminated................. (5,196)
Exercised.................. (103,872) $0.83 - $2.67
--------- -------------
Outstanding at July 31, 1995.. 1,750,356
Granted.................... 69,000 $ 5.96 August 15, 2005
Granted.................... 16,500 $ 9.17 November 9, 2005
Granted.................... 84,000 $ 8.78 December 12, 2005
Granted.................... 150,000 $ 10.29 December 12, 2005
Granted.................... 24,000 $ 10.94 December 15, 2005
Granted.................... 120,000 $ 10.00 December 28, 2005
Granted.................... 48,000 $ 15.67 March 29, 2006
Granted.................... 40,000 $ 22.25 July 16, 2006
Terminated................. (265,052)
Exercised.................. (119,775) $0.83 - $2.67
--------- -------------
Outstanding at July 31, 1996.. 1,917,029
=========
Exercisable at July 31, 1996.. 558,175
=========
Options for 740,772 and 550,324 shares were available for future grant
under the plan at July 31, 1995 and 1996, respectively.
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).
24
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11 - RETIREMENT PLANS:
The Company initiated a 401(k) retirement plan, 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 was
$64,015.
Prior to the merger with the Company, employees of MHA and LFG could
participate in their respective Company's 401(k) plan. MHA matched 50% of the
employee contributions up to 6% of salary and LFG matched on a discretionary
basis. The plans are scheduled for termination subsequent to the merger with
PMT Services, Inc. MHA and LFG employees became eligible for participation in
the PMT 401(k) Plan effective with the merger.
NOTE 12 - LEASES:
The Company leases equipment and office space under noncancellable
operating leases. Rent expense approximated $558,658, $964,831 and $1,175,073
during fiscal years 1994, 1995 and 1996, respectively. Office space was leased
from a partnership comprising two of the Company's shareholders during fiscal
year 1994 and a portion of 1995. Rent expense paid to shareholders for office
space amounted to $113,000 and $54,000 during fiscal years 1994 and 1995,
respectively. 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. Subsequent to July 31, 1996, the Company entered into an agreement to
lease additional office space beginning October 1, 1996. Future minimum
payments under all noncancellable leases with terms greater than one year at
July 31, 1996 are:
YEAR ENDING
July 31
-----------
1997 $1,331,868
1998 1,239,051
1999 1,138,199
2000 944,278
2001 385,286
Thereafter --
25
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13 - OTHER INCOME - NET:
The Company recorded a non-taxable gain of $1,000,000 in the fourth
quarter of fiscal year 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
mergers which were accounted for as a pooling of interests.
NOTE 14 - INCOME TAXES:
The provision for income taxes comprises the following:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current tax expense:
Federal.................................................................... $1,533,021 $2,425,471 $5,395,173
State...................................................................... 340,589 517,847 1,042,180
---------- ---------- ----------
1,873,610 2,943,318 6,437,353
---------- ---------- ----------
Deferred tax benefit:
Federal.................................................................... (99,646) 143,946 (470,526)
State...................................................................... (17,555) 76,500 (30,469)
---------- ---------- ----------
(117,201) 220,446 (500,995)
---------- ---------- ----------
Increase in valuation
allowance.................................................................. -- 137,288 194,831
---------- ---------- ----------
$1,756,409 $3,301,052 $6,131,189
========== ========== ==========
The Company's effective tax rate differs from the statutory rate as follows:
YEAR ENDED JULY 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
Federal tax at statutory rate................................................ 34.0% 34.0% 34.0%
Increase (decrease) in taxes resulting
from:
State income taxes (net
of federal tax benefit)................................................... 4.7 4.5 4.1
Valuation allowance........................................................ -- 1.6 1.2
Other...................................................................... (0.2) (2.4) (1.8)
---------- ---------- ----------
38.5% 37.7% 37.5%
========== ========== ==========
</TABLE>
Deferred income taxes under SFAS 109 reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets at July 31, 1995 and
1996 are as follows:
26
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JULY 31,
----------------------------
1995 1996
------------- -------------
Current tax assets:
Compensation liabilities.......... $ 24,321 $ 30,897
Loss reserves..................... 618,054 858,343
Other............................. 37,749 56,694
------------ ------------
Net current tax assets.............. $ 680,124 $ 945,934
============ ============
Noncurrent tax assets:
Leased equipment.................. 8,613,556 10,646,486
Unearned income................... 4,985,244 7,143,341
Merchant portfolio amortization... 682,907 1,586,194
Net operating loss of subsidiary.. 905,596 1,222,814
Other............................. 153,102 182,442
------------ ------------
15,340,405 20,781,277
Valuation allowance................ (137,288) (332,119)
Noncurrent tax liability:
Gross lease receivable............ (14,251,697) (18,726,454)
Residual values................... (1,764,162) (2,367,230)
Depreciation...................... (101,454) (242,327)
Other............................. (120,878) (107,868)
------------ ------------
(16,238,191) (21,443,879)
------------ ------------
Net noncurrent tax liability........ $ (1,035,074) $ (994,721)
============ ============
As of July 31, 1996, the Company has approximately $3,000,000 of federal
and state net operating loss carryforwards available to offset future taxable
income of a subsidiary of the Company. A valuation allowance has been
established for these net operating losses.
NOTE 15 - COMMITMENTS AND CONTINGENCIES:
In addition to the third-party debt guaranty and operating leases described
in Notes 3 and 12 above, the Company is subject to the following commitments and
contingencies described herein.
The Company entered into an agreement in July 1995 to purchase the rights
to service merchant accounts to be generated by another independent sales and
service provider ("service provider") under a contract with the Company's
primary processing bank. The Company's option to purchase may be exercised upon
the earlier of default by the service provider under its loan agreement with a
third party or December 1, 1997 and expires on January 31, 1998. The purchase
price will be derived as a multiple of average monthly cash flow generated by
the merchant accounts for the three months immediately prior to the purchase.
27
<PAGE>
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL 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 of $4.75 per merchant
account. At July 31, 1996, the service provider was a newly developed entity
without significant merchant accounts generated.
VISA and MasterCard require merchants accepting VISA and MasterCard credit
cards to contract directly with a processing bank that is a member bank of the
VISA or MasterCard associations. The Company is not a party to the merchant
processing agreements and is therefore dependent upon its contractual
arrangements with its processing banks in order to continue to service its
merchant portfolio. The Company has a contractual right to receive revenues
derived from the discount rate and fees earned on its merchant portfolio so long
as the merchant continues to process transactions on the processing bank's
system and the Company provides adequate service to the merchant and remains in
compliance under its agreement with the processing bank. Under the terms of the
Company's agreement with its primary processing bank, the Company is permitted
to transfer merchants to another processing bank subject to time limitations and
termination fees. This agreement provides mobility for substantially all of the
Company's merchant base. However, in order to transfer merchant contracts, the
Company must pay the processing bank a fee determined by a formula related to
the annualized aggregate transaction volume of the merchants transferred.
28
<PAGE>
Schedule II
PMT SERVICES, INC.
RESERVE FOR MERCHANT LOSSES
BALANCE AT BALANCE AT
BEGINNING END OF
OF PERIOD ADDITIONS(1) DEDUCTIONS(2) PERIOD
---------- ------------ ------------- ----------
Fiscal Year 1994.......... $168,660 $ 486,993 $210,894 $ 444,759
1995.......... $444,759 $ 520,245 $408,331 $ 556,673
1996.......... $556,673 $1,653,705 $750,776 $1,459,602
______________________
(1) Additions represent amounts charged to expense during the respective
periods.
(2) 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
OF PERIOD ADDITIONS(1) OTHER (2) DEDUCTIONS(3) PERIOD
---------- ------------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year 1994 $1,300,509 $2,397,138 $291,651 $2,475,843 $1,513,455
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
</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.
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors.................................. 1
Audited Consolidated Financial Statements
Consolidated Balance Sheet...................................... 2
Consolidated Statement of Income................................ 3
Consolidated Statement of Changes in Stockholders' Equity....... 4
Consolidated Statement of Cash Flows............................ 5
Notes to Consolidated Financial Statements...................... 6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
LADCO Financial Group and Subsidiaries
We have audited the accompanying consolidated balance sheet of LADCO Financial
Group and Subsidiaries (dba LADCO Leasing) as of December 31, 1996, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LADCO
Financial Group and Subsidiaries (dba LADCO Leasing) at December 31, 1996, and
the consolidated results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
February 25, 1997
1
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash $ 3,183,846
Restricted cash 1,085,120
Receivables and other assets 707,916
Net investment in direct financing leases 35,038,662
Furniture and equipment, net of
accumulated depreciation of $365,947 326,147
-----------
$40,341,691
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities $ 562,263
Notes payable 33,486,285
Current income taxes payable 133,330
Deferred income taxes 2,179,313
-----------
36,361,191
Stockholders' equity:
Common stock, no par value:
Authorized shares - 1,000,000
Issued and outstanding shares - 90,000 10,000
Retained earnings 4,615,450
Notes receivable from majority stockholder (644,950)
-----------
Total stockholders' equity 3,980,500
-----------
$40,341,691
===========
See accompanying notes.
</TABLE>
2
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Income from direct financing leases $ 9,543,957
Other income 2,564,284
-----------
12,108,241
Expenses:
Interest 3,026,136
Provision for bad debt expense 2,109,318
Amortization of finance costs 864,724
Selling, general and administrative expenses 3,976,204
-----------
9,976,382
-----------
Income before income taxes 2,131,859
Provision for income taxes 876,101
-----------
Net income $ 1,255,758
===========
See accompanying notes.
</TABLE>
3
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
COMMON RETAINED FROM MAJORITY
STOCK EARNINGS STOCKHOLDER TOTAL
------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $10,000 $3,359,692 $(644,950) $2,724,742
Net Income -- 1,255,758 -- 1,255,758
------- ---------- --------- ----------
Balance at December 31, 1996 $10,000 $4,615,450 $(644,950) $3,980,500
======= ========== ========= ==========
See accompanying notes.
</TABLE>
4
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
OPERATING ACTIVITIES
Net income $ 1,255,758
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 967,051
Provision for bad debts 2,109,318
Deferred income taxes 596,261
Changes in assets and liabilities:
Current tax payable 133,330
Accounts payable, accrued liabilities,
receivables, and other assets (96,775)
------------
Net cash provided by operating activities 4,964,943
INVESTING ACTIVITY
Equipment purchased for leasing (20,698,874)
Amounts received on leases, net of
amortized unearned income 11,519,094
Purchases of furniture and equipment (229,704)
Increase in restricted cash (116,467)
------------
Net cash used in investing activities (9,525,951)
FINANCING ACTIVITIES
Proceeds from notes payable 19,722,892
Repayments of notes payable (13,928,459)
------------
Net cash provided by financing activities 5,794,433
------------
Net increase in cash 1,233,425
Cash at beginning of year 1,950,421
------------
Cash at end of year $ 3,183,846
============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year:
Interest $ 3,035,923
Income taxes 66,000
See accompanying notes.
5
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
LADCO Financial Group (the Company) is engaged primarily in the commercial
leasing business through its wholly owned subsidiaries, LADCO Finance Corp. I,
LADCO Finance Corp. II, LADCO Financial Corp. III, LADCO Finance Corp. IV, and
LADCO Receivable Corp. The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated upon consolidation.
The Company's subsidiaries are organized as special purpose corporations. The
Company contributed blocks of leases to each subsidiary in exchange for stock,
the payoff of notes payable and cash. The subsidiaries obtained cash in exchange
for issuing debt secured by the payment stream from the leases received from the
Company. The assets of the subsidiaries are pledged as security for the notes
payable.
Funding for leased equipment is obtained on both a recourse and nonrecourse
basis. The operating cycle of the leases is greater than twelve months;
accordingly, the balance sheet is not classified as to current assets and
current liabilities.
DIRECT FINANCING LEASES
At lease commencement, 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 lease income. The unearned
lease 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.
DEPRECIATION AND AMORTIZATION
Furniture and equipment is depreciated using accelerated methods over three to
five years.
6
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return
and combined state tax returns. Certain income and expense items, primarily
related to lease income and depreciation on leased equipment, are accounted for
in different time periods for financial reporting purposes as compared to income
tax purposes. Appropriate provisions are made in the consolidated financial
statements for deferred taxes in recognition of these timing differences.
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109,
deferred taxes are recognized using the liability method, and tax rates are
applied to cumulative temporary differences based on when and how they are
expected to affect the tax return. Deferred tax assets and liabilities are
adjusted for tax rate changes.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist of cash, receivables and lease contracts receivable. The
Company invests excess cash with major banks. The Company has not experienced
any losses relating to such cash investments. The Company provides services to
various industries and individuals. Customers in California are 31% of the lease
contracts receivable. During 1996, the Company transacted 22% of new leases with
one vendor. No other vendor accounted for more than 7% of lease originations
during 1996. Risk with respect to accounts and lease contracts receivable is
reduced due to the Company's long-term relationship with its vendors. The
Company has not experienced unusual credit losses relating to receivables.
7
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CURRENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1997, the Company is required to adopt the provisions of
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS 125). SFAS 125 establishes standards for the recognition and measurement
of transactions involving transfers of financial assets. SFAS 125 adopts a
financial components approach which, after a transfer of financial assets,
requires recognition of assets which continue to be controlled by the transferor
and a derecognition of assets for which control has been surrendered. SFAS 125
is to be applied prospectively to transactions occurring after January 1, 1997.
Transactions prior to adoption are not affected. The adoption of SFAS 125 is not
expected to have a material impact on the financial condition or results of
operations of the Company.
2. NOTE RECEIVABLE FROM MAJORITY STOCKHOLDER
The Company held a non-interest bearing note receivable due from the majority
stockholder of approximately $645,000 as an offset to equity on the balance
sheet.
3. CASH
Restricted cash is used as additional security for notes payable (Note 5). The
restriction is removed as the notes payable are reduced. The cash accounts
earned interest at an average rate of 5.6% during the year ended December 31,
1996.
8
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NET INVESTMENT IN DIRECT FINANCING LEASES
The net investment in direct financing leases consists of the following at
December 31, 1996;
<TABLE>
<S> <C>
Minimum lease payments receivable $ 49,449,509
Residual values--unguaranteed 6,291,985
Allowance for doubtful accounts (2,107,222)
------------
Net minimum lease payments receivable 53,634,272
Unearned income (18,595,610)
------------
Net investment in direct financing leases $ 35,038,662
============
</TABLE>
Changes in the allowance for doubtful accounts were as follows for the year
ended December 31, 1996:
<TABLE>
<S> <C>
Balance at beginning of year $ 1,176,725
Provision for bad debt expense 2,109,318
Charged off lease contracts (1,471,101)
Bad debt recoveries 292,280
------------
Balance at year of year $ 2,107,222
============
</TABLE>
At December 31, 1996, minimum lease payments receivable, including estimated
residual values receivable, are due as follows:
<TABLE>
<CAPTION>
MINIMUM UNGUARANTEED
LEASE RESIDUAL
PAYMENTS VALUES
RECEIVABLE RECEIVABLE
---------------------------------
<S> <C> <C>
1997 $19,884,354 $ 231,228
1998 15,483,241 771,038
1999 10,089,007 2,170,927
2000 3,584,617 2,672,668
2001 408,290 446,124
-------------------------------
$49,449,509 $ 6,291,985
===============================
</TABLE>
9
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NET INVESTMENT IN DIRECT FINANCING LEASES (CONTINUED)
The Company's experience shows that a portion of the leases will terminate at
dates other than at the end of the contractual lease period. Accordingly, the
foregoing table should not be regarded as a forecast of future collections.
5. NOTES PAYABLE
Notes payable consist of the following at December 31, 1996:
<TABLE>
<S> <C>
Notes payable, secured by the remaining payment stream of all leases and
restricted cash of LADCO Finance Corp. IV, principal and interest
at a variable rate of interest of the one-month LIBOR rate then in
effect plus 2% per annum (7.53% at December 31, 1996), are payable
monthly, with all unpaid principal and interest due in April 2002.
This instrument will convert to a fixed rate based on the Treasury
rate plus an investor spread during 1997. Gains and losses related
to this conversion are hedged by the financial instrument agreement
(Note 11). $ 17,618,314
Notes payable, secured by the remaining payment stream of all leases and
restricted cash of LADCO Receivable Corp., principal and interest
at rates ranging from 10.11% to 12.21% per annum are payable monthly,
with all unpaid principal and interest due by April 2000. 8,607,449
Notes payable, secured by the remaining payment stream of certain leases
and restricted cash of LADCO Financial Group, principal and interest
at a variable rate of interest of the one-month LIBOR rate then in
effect plus 3.50% to 4.25% per annum (various rates ranging from
9.03% to 9.78% at December 31, 1996), are payable monthly, with all
unpaid principal and interest due by September 2001. 3,510,465
</TABLE>
10
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
<TABLE>
<S> <C>
Notes payable, secured by the remaining payment stream of certain leases
and restricted cash of LADCO Financial Group, principal and interest
at an annualized rate of interest of the prime rate then in effect
plus 1% per annum (9.25% at December 31, 1996), are payable monthly,
with all unpaid principal and interest due by January 1997. $ 1,682,300
Notes payable, secured by the remaining payment stream of certain leases
and restricted cash of LADCO Financial Group, principal and interest
at an annualized rate of interest of the prime rate then in effect
plus 1.5% per annum (9.75% at December 31, 1996), are payable monthly,
wth all unpaid principal and interest due by March 1998. 1,152,965
Notes payable, secured by the remaining payment stream of certain leases
and restricted cash of LADCO Financial Group, principal and interest
at 12% per annum are payable monthly, with all unpaid principal and
interest due by March 1999. 870,571
Notes payable, secured by the remaining payment stream of all leases and
restricted cash of LADCO Finance Corp. III, principal and interest at
5.17% per annum are payable monthly, with all unpaid principal and
interest due in April 1997. 44,221
------------
$ 33,486,285
============
</TABLE>
11
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
Maturities of notes payable are as follows as of December 31, 1996:
<TABLE>
<S> <C>
1997 $14,075,452
1998 9,294,097
1999 5,656,208
2000 4,114,081
2001 346,447
-----------
$33,486,285
===========
</TABLE>
The Company has certain covenants relating to financings which include maximum
default rates and minimum net worth requirements. The Company was in compliance
with these covenants at December 31, 1996.
6. OTHER INCOME
Other income consists of the following components for the year ended December
31, 1996:
<TABLE>
<S> <C>
Extended rental income $ 1,627,177
Loss waiver fees 304,155
Interest income 156,268
Upgrades and warranties 147,700
Document processing fees 125,413
Commissions and servicing fees 78,384
Other 125,187
-----------
Total other income $ 2,564,284
===========
</TABLE>
12
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The provision for taxes based on income for the year ended December 31, 1996,
consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-----------------------------------------------
<S> <C> <C>
Federal $213,380 $407,864 $621,244
State 66,460 188,397 254,857
-----------------------------------------------
$279,840 $596,261 $876,101
===============================================
</TABLE>
The consolidated effective tax rate is different than the statutory rate. The
differences for the year ended December 31, 1996, result from the following:
<TABLE>
<S> <C>
Statutory rate 34.0%
State taxes 6.8
Nondeductible expenses .3
----
Effective tax rate 41.1%
====
</TABLE>
The temporary differences which created the net deferred tax liability at
December 31, 1996, were as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Leased equipment $ 12,443,801
Unearned income 8,321,156
Operating loss and credit carryforwards 998,183
Allowance for doubtful accounts 944,668
Other 183,149
------------
22,890,957
============
Deferred tax liabilities:
Gross lease receivables (22,168,215)
Residual values (2,820,697)
Other (81,358)
------------
(25,070,270)
------------
Net deferred tax liability $ (2,179,313)
============
</TABLE>
13
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEFINED CONTRIBUTION PLAN
Effective January 1, 1993, the Company adopted a 401(k) defined contribution
plan covering substantially all full-time regular employees. Contributions to
the plan are at the Company's discretion. Employees become fully vested after
five years of participation in the plan. Contributions in the amount of $31,470
were made to the plan during the year ended December 31, 1996.
9. COMMITMENTS
The Company rents its office facilities under operating leases. Minimum future
rental commitments payable under these leases are as follows:
<TABLE>
<S> <C>
1997 $174,525
1998 183,252
1999 159,020
Thereafter -
--------
$516,797
========
</TABLE>
Rent expense for the year ending December 31, 1996, was $166,215.
10. RELATED PARTY TRANSACTIONS
The Company had certain transactions with companies owned by its majority
shareholder and its former chief financial officer, who had relinquished this
role effective January 1996. In 1996, the Company paid approximately $116,000
relating to software support and services to an entity owned by the Company's
former chief financial officer.
During 1995, the Company entered into a monthly consulting services agreement
which became effective January 1, 1996, with the former chief financial officer
whereby the former chief financial officer will receive $9,842 per month for a
term of five years. The consulting expense recorded for this agreement totaled
$118,100 for the year ended December 31, 1996.
During 1994, the Company acquired gross lease receivables of $3,085,000 from
LADCO Partners, Inc. (LPI), a company in which the majority shareholder of LADCO
Leasing owns a 37.5% interest. Other owners are parties related to LADCO. A
portion of the assets acquired included leases sold by the Company in 1991 to an
unrelated third party in a transaction accounted for as a sale. At the time of
this purchase, LADCO was owed a holdback totaling $628,000 from the
aforementioned unrelated third party which initially arose upon the completion
of the securitization transaction in 1991. The purchased lease portfolio was
discounted on a limited recourse basis to a lender for approximately $2,200,000.
As a result of the transaction the Company received full repayment of its
holdback of $628,000. LPI shareholders realized a gain of approximately $698,000
on facilitating the transaction with their capital and assuming the risk of the
purchase from the trustee of the securitization. LADCO recorded a gain of
$329,000 on the settlement of the holdback. During 1995, the Company sold the
remaining balance of lease receivables back to LPI at the then remaining book
value. No gain or loss was recognized on this transaction.
14
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. FINANCIAL INSTRUMENT AGREEMENT
The Company entered into a forward rate lock agreement during 1996 to minimize
its exposure to interest rate risk. The notional amount of the agreement totaled
$20,000,000. 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 amount to be exchanged in 1997 under this agreement will
be determined by reference to the notional amounts and the other terms of the
agreement.
Under the Company's forward rate lock agreement, at the conclusion of the
agreement the Company and the counterparty will exchange an amount calculated by
reference to the agreed notional amount and a specified index.
The Company entered into the agreement to ensure that the Company would not
require additional financing to repay the floating rate instrument when the
instrument converts to a fixed rate instrument in 1997. There is no credit
exposure under the agreement at year end. During 1996, the Company settled a
similar forward rate lock agreement with a cash payment to the counterparty of
$60,938.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value, are
reported using quoted market prices. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and in many cases, could not be realized in
immediate settlement of the instrument. Fair values for certain financial
instruments and all non-financial instruments are not required to be disclosed.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company. The following methods and assumptions were used
by the Company in estimating its fair value disclosures for financial
instruments:
Cash and restricted cash: The carrying amount reported in the balance
sheet for cash and restricted cash approximates its fair value.
15
<PAGE>
LADCO FINANCIAL GROUP AND SUBSIDIARIES
(DBA LADCO LEASING)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Notes payable: The fair values of the Company's borrowings are estimated
using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Financial instrument agreement: The fair value is estimated by obtaining
market quotes from brokers.
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1996, are as follows:
CARRYING FAIR
AMOUNT VALUE
---------------------------
Financial assets:
Cash $ 3,183,846 $ 3,183,846
Restricted cash 1,085,120 1,085,120
Financial liabilities:
Notes payable 33,486,285 33,910,312
Financial instrument agreements
held for purposes other than trading: - -
Financial instrument agreement - (93,750)
16
<PAGE>
PMT SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
PMT SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
INTRODUCTION
The following unaudited pro forma consolidated financial statements present a
balance sheet as of April 30, 1997, and statements of income for the nine months
ended April 30, 1997 and April 30, 1996. The pro forma balance sheet and
statement of income include, on a pro forma basis, the impact of the recently
completed mergers with LADCO Financial Group and Erik Krueger, Incorporated (the
Acquired Entities) accounted for as pooling of interests as described in Note 1.
The pro forma financial statements should be read in conjunction with the
supplemental audited financial statements and the notes thereto included in
Item 7(a)(1) of this filing. Additionally, the Company's Current Report on
Form 8-K dated July 18, 1997 includes the definitive Agreement and Plan of
Merger with LADCO Financial Group. LADCO Financial Group's audited consolidated
financial statements as of, and for the year ended, December 31, 1996 are
included with this filing.
<PAGE>
PMT SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
APRIL 30, 1997
<TABLE>
<CAPTION>
THE ACQUIRED PRO FORMA
PMT ENTITIES ADJUSTMENTS COMBINED
--- ------------ ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 4,867,807 3,521,134 8,388,941
Investments 68,040,264 -- 68,040,264
Accounts receivable 13,589,579 121,874 13,711,453
Current portion of net investment in
finance leases -- 10,498,497 10,498,497
Inventory 1,283,668 98,593 1,382,261
Deferred income taxes 214,165 531,427 745,592
Other current assets 3,248,837 131,549 3,380,386
----------- ---------- ------------ -----------
Total current assets 91,244,320 14,903,074 -- 106,147,394
Purchased merchant portfolios, net of
accumulated amortization of $16,082,794 81,942,663 -- 81,942,663
Long-term portion of net investment in
finance leases 23,010,573 23,010,573
Property and equipment, net 8,055,805 402,486 8,458,291
Deferred income taxes 1,695,832 -- 1,695,832
Note receivable 8,025,000 -- 8,025,000
Intangible and other assets 8,600,411 2,308,359 10,908,770
----------- ---------- ------------ -----------
Total assets 199,564,031 40,624,492 -- 240,188,523
=========== ========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 119,837 16,213,358 16,333,195
Accounts payable 4,018,085 25,132 4,043,217
Accrued liabilities 2,397,772 2,584,302 4,982,074
Deferred revenues 245,803 -- 245,803
----------- ---------- ------------ -----------
Total current liabilities 6,781,497 18,822,792 -- 25,604,289
Long-term debt 570,000 15,980,085 16,550,085
Deferred income taxes -- 1,987,882 1,987,882
----------- ---------- ------------ -----------
Total liabilities 7,351,497 36,790,759 -- 44,142,256
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; 40,124,109 shares 380,817 15,790 4,634 401,241
Additional paid-in-capital 169,154,942 -- (4,634) 169,150,308
Treasury stock, at cost: 1,188 shares (12,000) -- (12,000)
Accumulated earnings 22,688,775 3,817,943 26,506,718
----------- ---------- ------------ -----------
Total shareholders' equity 192,212,534 3,833,733 -- 196,046,267
----------- ---------- ------------ -----------
Total Liabilities and Stockholders'
equity 199,564,031 40,624,492 -- 240,188,523
=========== ========== ============ ===========
</TABLE>
<PAGE>
PMT SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 30, 1997 NINE MONTHS ENDED APRIL 30, 1996
-------------------------------------------------- -------------------------------------------------
PMT THE ACQUIRED PMT THE ACQUIRED
SERVICES, INC. ENTITIES COMBINED SERVICES, INC. ENTITIES COMBINED
-------------- ------------ ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues 185,901,606 15,263,115 201,164,721 135,785,023 12,327,356 148,112,379
Cost of revenues 139,074,880 4,862,850 143,937,730 101,623,183 3,690,393 105,313,576
----------- ---------- ----------- ----------- ---------- -----------
Gross margin 46,826,726 10,400,265 57,226,991 34,161,840 8,636,963 42,798,803
Selling, general and
administrative
expenses 22,987,929 3,504,386 26,492,315 19,581,879 2,958,171 22,540,050
Depreciation and
amortization expense 8,896,486 155,811 9,052,297 5,278,066 69,830 5,347,896
Provision for merchant
losses and bad debts 964,814 2,526,753 3,491,567 1,153,168 1,613,287 2,766,455
Nonrecurring operating
expenses, net 593,626 366,530 960,156 -- -- --
----------- ---------- ----------- ----------- ---------- -----------
Total operating
expenses 33,442,855 6,553,480 39,996,335 26,013,113 4,641,288 30,654,401
Income from operations 13,383,871 3,846,785 17,230,656 8,148,727 3,995,675 12,144,402
Interest income 3,797,003 156,234 3,953,237 725,427 -- 725,427
Interest expense (34,139) (2,970,121) (3,004,260) (330,895) (2,573,629) (2,904,524)
Other expense, net (714,944) -- (714,944) -- -- --
----------- ---------- ----------- ----------- ---------- -----------
Income before provision
for income taxes 16,431,791 1,032,898 17,464,689 8,543,259 1,422,046 9,965,305
Provision for income
taxes 6,144,930 417,028 6,561,958 3,497,769 622,286 4,120,055
----------- ---------- ----------- ----------- ---------- -----------
Net income 10,286,861 615,870 10,902,731 5,045,490 799,760 5,845,250
=========== ========== =========== =========== ========== ===========
Weighted average
shares outstanding 38,524,027 40,566,441 31,036,326 33,078,740
Earnings per share 0.27 0.27 0.16 0.18
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CONSUMMATED ACQUISITIONS
The unaudited pro forma consolidated balance sheet and statements of income
reflect the recently completed mergers with LADCO Financial Group and Erik
Krueger, Incorporated (the Acquired Entities). These transactions were accounted
for as pooling of interests. The Company's historical financial statements have
been restated for all periods presented by including the historical results of
the Acquired Entities. The historical results of the Acquired Entities reflect
each of their actual operating structures and, as a result, do not necessarily
reflect the cost structure of the newly combined entity.
DATE OF APPROXIMATE TOTAL ASSETS
COMPANY MERGER CONSIDERATION AT DATE OF MERGER
---------- ------------- --------------- ------------------------
LADCO Financial Group July 14, 1997 1,463,414 $39.5 million
Erik Krueger,
Incorporated June 3, 1997 579,000 $ 0.2 million
NOTE 2 - UNAUDITED PRO FORMA ADJUSTMENTS
The unaudited pro forma adjustments present the capital structure on the basis
on which they will be reported in future periods.
<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 and 333-27403) 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 13, 1996, except as to the poolings
of interests with the Acquired Entities which is as of July 14, 1997, appearing
on page 1 of Item 7(a)(1) of this Form 8-K/A(3). We also consent to the
application of such report to the Financial Statement Schedule for the three
years ended July 31, 1996 which appears on page 1 of Item 7(a)(2) of this Form
8-K when such schedule is read in conjunction with the financial statements
referred to in our report. The audit referred to in such report also included
this schedule.
PRICE WATERHOUSE LLP
Nashville, Tennessee
September 16, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 25, 1997, with respect to the
consolidated financial statements of LADCO Financial Group and Subsidiaries (dba
LADCO Leasing) for the year ended December 31, 1996 incorporated by reference in
the Registration Statements (Form S-3 333-00164, Form S-3 333-16757, Form S-3
333-19157, Form S-3 333-24783 Form S-3 333-26075, Form S-3 333-27403, Form S-8
33-88974, Form S-8 33-88976, Form S-8 33-97000 and Form S-8 333-33021) of PMT
Services, Inc. for the registration of shares of its common stock.
ERNST & YOUNG LLP
Los Angeles, California
September 15, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 109,156,234
<SECURITIES> 0
<RECEIVABLES> 42,086,367
<ALLOWANCES> 1,232,713
<INVENTORY> 823,275
<CURRENT-ASSETS> 130,804,011
<PP&E> 7,890,528
<DEPRECIATION> 2,787,301
<TOTAL-ASSETS> 227,904,472
<CURRENT-LIABILITIES> 24,372,514
<BONDS> 0
0
0
<COMMON> 384,783
<OTHER-SE> 183,101,294
<TOTAL-LIABILITY-AND-EQUITY> 227,904,472
<SALES> 214,891,226
<TOTAL-REVENUES> 214,891,226
<CGS> 154,442,411
<TOTAL-COSTS> 154,442,411
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,786,247
<INTEREST-EXPENSE> 3,906,051
<INCOME-PRETAX> 16,356,732
<INCOME-TAX> 6,131,189
<INCOME-CONTINUING> 10,225,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,225,543
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> APR-30-1996
<CASH> 106,364,434
<SECURITIES> 0
<RECEIVABLES> 29,890,602
<ALLOWANCES> 1,043,960
<INVENTORY> 736,691
<CURRENT-ASSETS> 126,854,062
<PP&E> 6,476,620
<DEPRECIATION> 1,598,275
<TOTAL-ASSETS> 222,675,541
<CURRENT-LIABILITIES> 22,052,748
<BONDS> 0
0
0
<COMMON> 263,324
<OTHER-SE> 180,722,052
<TOTAL-LIABILITY-AND-EQUITY> 222,675,541
<SALES> 148,112,379
<TOTAL-REVENUES> 148,112,379
<CGS> 105,313,576
<TOTAL-COSTS> 105,313,576
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,766,455
<INTEREST-EXPENSE> 2,904,524
<INCOME-PRETAX> 9,965,305
<INCOME-TAX> 3,986,625
<INCOME-CONTINUING> 5,978,680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,978,680
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0
</TABLE>
