<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended January 31, 1998
COMMISSION FILE NUMBER: 0-24420
PMT SERVICES, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1215125
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3841 GREEN HILLS VILLAGE DRIVE
NASHVILLE, TN 37215
(Address of principal executive offices)
(Zip Code)
(615) 254-1539
(Registrant's telephone number, including zip code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
As of March 13, 1998, 47,896,114 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 17,156,410 $ 23,810,173
Investments............................................ 39,256,594 49,167,521
Accounts receivable.................................... 23,435,069 18,303,296
Current portion of net investment in finance leases.... 8,528,735 9,249,753
Inventory.............................................. 3,252,691 1,818,613
Deferred income taxes.................................. 1,612,534 1,543,379
Other current assets................................... 2,563,697 2,061,295
------------ ------------
Total current assets.................................. 95,805,730 105,954,030
Purchased merchant portfolios, net of accumulated
amortization of $24,600,600 and $18,689,846.......... 87,028,661 84,343,006
Long-term portion of net investment in finance leases.. 29,724,657 24,636,881
Property and equipment, net............................ 12,983,253 9,379,056
Long-term note receivable.............................. 13,108,966 8,773,330
Intangible and other assets............................ 19,259,024 17,989,726
------------ ------------
Total assets.......................................... $257,910,291 $251,076,029
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................... $ 13,712,197 $ 14,516,369
Accounts payable....................................... 6,839,928 9,608,347
Accrued liabilities.................................... 3,786,031 5,721,670
Deferred revenues...................................... 1,506,751 291,493
------------ ------------
Total current liabilities............................ 25,844,907 30,137,879
Long-term debt......................................... 18,378,638 18,564,658
Deferred income taxes.................................. 503,528 624,777
------------ ------------
Total liabilities.................................... 44,727,073 49,327,314
------------ ------------
Commitments and contingent liabilities (Note 3)
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:
47,209,029 and 45,618,488 shares...................... 472,090 456,185
Additional paid-in capital............................. 171,592,805 171,129,805
Accumulated earnings................................... 41,118,323 30,162,725
------------ ------------
213,183,218 201,748,715
------------ ------------
Total liabilities and shareholders' equity............. $257,910,291 $251,076,029
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three month period ended Six month period ended
January 31, January 31,
------------------------ ----------------------
(Unaudited) (Unaudited)
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues............................. $99,812,509 $75,411,156 $193,325,049 $154,400,898
Cost of revenues..................... 70,765,687 54,321,147 138,191,038 112,151,605
----------- ----------- ------------ ------------
Gross margin......................... 29,046,822 21,090,009 55,134,011 42,249,293
----------- ----------- ------------ ------------
Selling, general and administrative
expenses............................ 13,889,404 10,406,979 26,315,686 20,424,585
Depreciation and amortization
expense............................. 4,165,203 3,066,590 7,987,843 5,957,199
Provision for merchant losses and
bad debt expense.................... 1,051,863 944,261 2,238,200 1,925,828
Nonrecurring operating expense, net.. -- 118,616 -- 584,753
----------- ----------- ------------ ------------
19,106,470 14,536,446 36,541,729 28,892,365
----------- ----------- ------------ ------------
Income from operations............... 9,940,352 6,553,563 18,592,282 13,356,928
Interest income, net................. 501,351 311,270 1,006,493 413,810
Other expense, net................... (312,900) (1,107,825) (755,784) (1,233,586)
----------- ----------- ------------ ------------
Income before provision for income
taxes.............................. 10,128,803 5,757,008 18,842,991 12,537,152
Provision for income taxes........... 3,848,945 2,122,351 6,797,698 4,336,553
----------- ----------- ------------ ------------
Net income........................... $ 6,279,858 $ 3,634,657 $ 12,045,293 $ 8,200,599
=========== =========== ============ ============
Earnings per share - Basic........... $ 0.13 $ 0.08 $ 0.26 $ 0.19
=========== =========== ============ ============
Earnings per share - Diluted......... $ 0.13 $ 0.08 $ 0.25 $ 0.18
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at July 31, 1997.......... $ 456,185 $171,129,805 $30,162,725 $201,748,715
Stock warrants exercised......... 1,200 148,800 150,000
Stock options exercised.......... 315 84,211 84,526
September 1997 pooling (Note 2).. 2,327 (143,994) (141,667)
November 1997 pooling (Note 2)... 12,063 87,937 666,353 766,353
Tax benefit from non-qualified
stock options................... 142,052 142,052
Distributions to Subchapter S
corporations, prior to merger... (1,612,054) (1,612,054)
Net income for the period........ 12,045,293 12,045,293
----------- ------------ ----------- ------------
Balance at January 31, 1998
Unaudited........................ $ 472,090 $171,592,805 $41,118,323 $213,183,218
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE>
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
JANUARY 31,
---------------------------
(UNAUDITED)
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 12,045,293 $ 8,200,599
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense........................ 8,081,986 6,408,512
Provision for merchant losses and bad debt expense........... 2,238,200 1,925,828
Deferred income taxes........................................ (190,404) (1,605,222)
Changes in assets and liabilities, excluding the effects of
non-restated acquisitions:
Accounts receivable........................................ (2,926,665) (3,634,709)
Inventory.................................................. (1,276,749) 172,029
Other assets............................................... (726,343) (2,201,861)
Accounts payable........................................... (4,344,733) 463,171
Accrued liabilities........................................ (3,473,294) 420,813
Deferred revenues.......................................... 56,903 43,943
------------ ------------
Net cash provided by operating activities.................. 9,484,194 10,193,103
------------ ------------
Cash flows from investing activities:
Purchase of merchant portfolios.............................. (4,682,173) (15,358,039)
Purchase of investments...................................... -- (72,393,934)
Proceeds from matured investments............................ 9,910,927 --
Purchase of property and equipment, net...................... (4,761,480) (1,885,675)
Purchase of equipment for leasing............................ (12,038,353) (10,520,848)
Amounts received on leases, net of amortized unearned
income...................................................... 6,899,393 7,339,133
------------ ------------
Net cash (used) by investing activities.................... (4,671,686) (92,819,363)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt..................... 10,933,333 1,611,339
Payments on long-term debt................................... (16,686,440) (522,080)
Issuance of note receivable.................................. (4,335,636) --
Proceeds from sale of common stock........................... 234,526 610,788
Distributions of Subchapter S corporations................... (1,612,054) (2,817,933)
------------ ------------
Net cash (used) by financing activities..................... (11,466,271) (1,117,886)
------------ ------------
Net (decrease) in cash and cash equivalents................... (6,653,763) (83,744,146)
Cash and cash equivalents at beginning of the period.......... 23,810,173 109,351,788
------------ ------------
Cash and cash equivalents at end of the period................ $ 17,156,410 $ 25,607,642
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 7,405,605 $ 2,588,583
Cash paid for interest 1,289,176 1,783,213
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
For the six months ended January 31, 1997, in connection with an operating
business acquisition in August 1996, the Company issued 500,000 shares of common
stock. For the six months ended January 31, 1998, in connection with two
separate operating business acquisitions in September and November 1997, the
Company issued 1,439,076 shares of common stock. The acquisitions were
accounted for as poolings of interests, but were not considered material for
retroactive restatement.
The accompanying notes are an integral part of this financial statement.
5
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS:
The accompanying interim consolidated financial statements are unaudited,
except for the balance sheet at July 31, 1997. Certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
although the Company believes the disclosures included herein are adequate to
make the information presented not misleading. These interim consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements for the fiscal year ended July 31, 1997.
The accompanying interim consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position at January 31, 1998 and
the results of its operations, its changes in shareholders' equity and its cash
flows for the fiscal six month periods ended January 31, 1998 and 1997. The
results of operations for the interim periods presented are not necessarily
indicative of results for the full fiscal year. The growth in the Company's
income and profitability from fiscal 1997 has resulted largely from mergers and
acquisitions, including the purchase of merchant portfolios. Future growth is
dependent upon, among other factors, the Company's ability to continue to
consummate such acquisitions of operating businesses and merchant portfolios.
The consolidated financial statements give retroactive effect to an
acquisition of an operating business consummated in the first quarter of fiscal
1998 which was accounted for as a pooling of interests. (Note 2).
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 - Earnings per Share (SFAS 128). SFAS
128 requires companies with complex capital structures that have publicly held
common stock or common stock equivalents to present both basic and diluted
earnings per share (EPS) on the face of the income statement. The presentation
of basic EPS replaces the presentation of primary EPS previously required by
Accounting Principles Board Opinion No. 15 (APB 15). Basic EPS is calculated as
income available to common shareholders divided by the weighted average number
of shares outstanding during the period. Diluted EPS (previously referred to as
fully diluted EPS) is calculated using the "if converted" method of convertible
securities and the treasury stock method for options and warrants as prescribed
by APB 15. This statement is effective for financial statements issued for
interim periods and annual periods ending after December 15, 1997. The Company
has adopted the provisions of this statement in the quarter ended January 31,
1998. Adoption of this statement did not have a material effect on earnings per
share.
6
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Earnings per share for the three month and six month periods ended January
31, 1998 and 1997 are calculated based on the following number of weighted
average shares:
Three months ended Six months ended
January 31, January 31,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Basic 47,187,549 43,163,840 46,488,340 43,122,209
Diluted 48,169,562 44,397,257 47,532,971 44,392,724
NOTE 2 - ACQUISITIONS:
OPERATING BUSINESS ACQUISITIONS
In the first quarter of fiscal year 1998, the Company consummated two
operating business acquisitions by issuing common stock in exchange for all the
outstanding common stock of the companies acquired. These transactions were
accounted for as poolings of interest. One of these transactions was considered
material for restatement, as follows. On October 2, 1997 the Company issued
3,870,965 shares of its common stock in exchange for all the outstanding common
stock of Bancard, Inc. ("BCI").
In the second quarter of fiscal 1998, the Company consummated an operating
business acquisition by issuing common stock in exchange for all the outstanding
common stock of the company acquired. This transaction was accounted for as a
pooling of interests, but was not considered material for restatement.
The Company's consolidated financial statements have been restated to
include the accounts of BCI for all periods presented by including the
historical results of BCI. The historical results of BCI reflect its actual
operating cost structures and, as a result, do not necessarily reflect the cost
structure of the newly combined entity.
BCI was a Subchapter S corporation for income tax purposes; therefore, it
did not pay U.S. federal income taxes. BCI will be included in the Company's
U.S. federal income tax return effective from the date of merger.
MERCHANT PORTFOLIO ACQUISITIONS
The Company purchases merchant portfolios which provide the Company the
right to service specific merchants under contract to processing banks for
electronic authorization and payment processing. In conjunction with the
purchase of merchant portfolios, the Company may enter into a noncompetition
agreement with the sellers of the portfolios. In such cases, a portion of the
purchase price of each merchant portfolio is allocated to the related
noncompetition agreement.
7
<PAGE>
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES:
In connection with the purchase of a merchant portfolio from Bankcard
America, Inc. ("ABC") in April 1995, the Company signed a guaranty for a
$1,000,000 note payable to the current processing bank by ABC expiring May 9,
1998. The Company received a security interest in 120,000 shares of the
Company's common stock currently held by a shareholder of ABC.
The Company entered into an agreement in July 1995 to purchase the rights
to service merchant accounts to be generated by Money Transfer Systems, Inc.
("MTSI") under a contract with the Company's primary processing bank. In
February 1998 the Company consummated an operating business acquisition by
issuing common stock in exchange for all the outstanding common stock of MTSI.
The Company intends to account for this transaction as a pooling of interests
but does not anticipate that it will be material for restatement. As a part of
this acquisition the Company fulfilled its commitments with respect to such
merchant accounts.
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 the principal party to the
merchant processing agreements, and therefore, is dependent upon its contractual
arrangements with its processing banks and other service providers 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 agreements with its various processing banks,
the Company generally is permitted to transfer merchants to another processing
bank subject to time limitations and termination fees. The agreements provide
mobility for substantially all of the Company's merchant base. However, in order
to transfer merchant contracts, the Company generally must pay the processing
banks a fee determined by a formula related to the annualized aggregate
transaction volume of the merchants transferred.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
PMT Services, Inc. is an independent service organization which directly
and through its wholly owned subsidiaries, markets and services electronic
credit card authorization and payment systems, including sale and leasing of
related equipment, to retail merchants located throughout the United States. The
Company's principal sources of revenues are discounts collected and merchant
service fees. The remaining revenues consist of point-of-sale processing
equipment leases, commissions and sales relating to credit card processing
equipment and installation fees. The Company initiates the credit card
processing relationship with a merchant and negotiates a "discount rate" and
related fees, within the terms of the Company's agreements with processing
banks. The discount is a percentage of the dollar amount of each credit card
transaction.
Revenues derived from the electronic processing of transactions are
recognized at the time the merchants' transactions are processed. Revenues
related to the direct sale of credit card authorization equipment are recognized
when the equipment is shipped. Fees related to both the direct sale and
marketing of this equipment are recognized when installation is completed. Fees
received in advance of shipment or installation are deferred until realized.
Revenue related to finance leasing of point-of-sale processing equipment are
recognized over the term of the lease agreement using the interest method.
Acquisitions
In the second quarter of fiscal 1997, the Company consummated three
operating business acquisitions accounted for as poolings of interests and two
merchant portfolio acquisitions. On December 23, 1996 the Company consummated an
acquisition pursuant to which it issued 424,999 shares of its common stock in
exchange for all the outstanding common stock of Fairway Marketing Group, Inc.
("Fairway"). On January 27, 1997, the Company consummated an acquisition
pursuant to which it issued 3,131,250 shares of its common stock in exchange for
all the outstanding common stock of Bancard Systems, Inc. ("BSI"). On January
30, 1997 the Company consummated an acquisition pursuant to which it issued
567,519 shares of its common stock in exchange for all the outstanding common
stock of Retail Payment Services, Inc. ("RPS"). The above referenced shares were
issued to the shareholders of Fairway, BSI and RPS in reliance upon the
exemption provided by Section 4(2) of the Securities Act of 1933 (the "Act").
The Company's consolidated financial statements have been restated to include
the accounts of Fairway, BSI and RPS for all periods prior to each merger. The
two merchant portfolio acquisitions were accounted for as purchase transactions,
and their operating results have been included in the Company's financial
statements beginning November 1, 1996 and December 1, 1996, the respective
effective dates of the transactions.
In the third quarter of fiscal 1997, the Company consummated one operating
business acquisition and three merchant portfolio acquisitions. On March 31,
1997 the Company consummated an acquisition pursuant to which it issued shares
of its common stock in exchange for all the outstanding common stock of IMA
Bancard, Inc. ("IMA"). The shares were issued to the shareholders of IMA in
reliance upon the exemption provided by Section 4(2) of the Act. The acquisition
was accounted for as an immaterial pooling of interests. The three merchant
portfolio acquisitions were accounted for as purchase transactions, and their
operating results have been
9
<PAGE>
included in the Company's financial statements beginning March 1, 1997 and April
1, 1997, the respective effective dates of the transactions.
In the fourth quarter of fiscal 1997, the Company consummated three
operating business acquisitions and one merchant portfolio acquisition. On April
30, 1997, the Company consummated an acquisition pursuant to which it issued
shares of its common stock in exchange for all the outstanding common stock of
CVE Corporation ("CVE"). The acquisition was accounted for as an immaterial
pooling of interests. On June 3, 1997 the Company consummated an acquisition
pursuant to which it issued 579,000 shares of its common stock in exchange for
all the outstanding common stock of Erik Krueger, Incorporated ("Krueger"). On
July 14, 1997, the Company consummated an acquisition pursuant to which it
issued 1,463,414 shares of its common stock in exchange for all the outstanding
common stock of Ladco Financial Group, Inc. ("LFG"). The Company's consolidated
financial statements have been restated to include the accounts of Krueger and
LFG for all periods prior to the merger. The above referenced shares were issued
to the shareholders of CVE, Krueger and LFG in reliance upon the exemption
provided by Section 4(2) of the Act. The merchant portfolio acquisition was
accounted for as a purchase transaction and the operating results have been
included in the Company's financial statements beginning July 1, 1997, the
effective date of the transaction.
In the first quarter of fiscal 1998, the Company consummated two operating
business acquisitions. On September 17, 1997, the Company consummated an
acquisition pursuant to which it issued shares of its common stock in exchange
for all the outstanding common stock of Retail Systems Consulting, Inc. ("RSC").
The acquisition was accounted for as an immaterial pooling of interests. On
October 2, 1997, the Company consummated an acquisition pursuant to which it
issued 3,870,965 shares of its common stock in exchange for all the outstanding
common stock of Bancard, Inc. ("BCI"). The Company's consolidated financial
statements have been restated to include the accounts of BCI for all periods
prior to the merger. The above referenced shares were issued to the shareholders
of RSC and BCI in reliance upon the exemption provided by Section 4(2) of the
Act.
In the second quarter of fiscal 1998, the Company consummated one operating
business acquisition. On November 12, 1997 the Company consummated an
acquisition pursuant to which it issued shares of its common stock in exchange
for all the outstanding common stock of Ferrante Financial Services, Inc.
("Ferrante"). The acquisition was accounted for as an immaterial pooling of
interests. The above referenced shares were issued to the shareholders of
Ferrante in reliance upon the exemption provided by Section 4(2) of the Act.
The growth in the Company's revenues and profitability from fiscal 1997
have resulted largely from the acquisition of operating businesses and merchant
portfolios. Future growth is dependent upon, among other factors, the Company's
ability to continue to consummate additional acquisitions of operating
businesses and merchant portfolios. There can be no assurance that the Company
will be able to make successful acquisitions, that the Company will be able to
successfully integrate operating business it acquires or that the attrition of
merchants from acquired portfolios will not exceed anticipated attrition, thus
resulting in lower revenues from the purchased portfolios.
10
<PAGE>
Results of Operations
The following table presents, for the periods indicated, the percentage of
revenues represented by certain line items in the Company's consolidated
statement of income:
<TABLE>
<CAPTION>
Percentage/ Percentage/
Three Month Period Increase Six Month Period Increase
Ended January 31, (Decrease) Ended January 31, (Decrease)
----------------- ---------- ---------------- ----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 32.4% 100.0% 100.0% 25.2%
Cost of revenues 70.9 72.0 30.3 71.5 72.6 23.2
----- ----- ----- -----
Gross margin 29.1 28.0 37.7 28.5 27.4 30.5
Selling, general and
administrative expenses 13.9 13.8 33.5 13.6 13.2 28.8
Depreciation and
amortization expense 4.2 4.1 35.8 4.1 3.9 34.1
Provision for merchant
loss and bad debt expense 1.0 1.2 11.4 1.2 1.2 16.2
Nonrecurring operating
expense -- 0.2 (100.0) -- 0.4 (100.0)
----- ----- ----- -----
Income from operations 10.0 8.7 51.7 9.6 8.7 39.2
Interest income, net 0.5 0.4 61.1 0.5 0.2 143.2
Other expense, net (0.3) (1.5) (71.8) (0.4) (0.8) (38.7)
----- ----- ----- -----
Income before provision
for taxes 10.2 7.6 75.9 9.7 8.1 50.3
Provision for income taxes 3.9 2.8 81.4 3.5 2.8 56.8
----- ----- ----- -----
Net income 6.3% 4.8% 72.8 6.2% 5.3% 46.9
===== ===== ===== =====
</TABLE>
Revenues
Revenues for the second quarter of fiscal 1998 increased to $99.8 million,
an increase of 32.4% over the same period last year. For the first six months
of fiscal 1998, the Company reported revenues of $193.3 million, 25.2% higher
than revenues of $154.4 million for the same period in fiscal 1997. The
increase in revenues has resulted in an increase in the Company's accounts
receivable. The increase in revenues resulted primarily from acquisitions and
new merchant contracts generated through the Company's field sales and
telemarketing efforts, as well as revenue enhancements with existing merchants.
Merchant portfolio purchases and operating business acquisitions not included in
prior periods accounted for 66.1% of the increase in revenues in the second
quarter of fiscal 1998 and 62.2% of the increase in the first six months of
fiscal 1998.
Cost of Revenues
Cost of revenues increased from $54.3 million in the second quarter of
fiscal 1997 to $70.8 million in the second quarter of fiscal 1998. Additionally,
for the six month period ended January 31, 1998, cost of revenues increased to
$138.2 million from $112.2 million for the same period in fiscal 1997. Cost
decreased as a percentage of revenues for both the three month and six month
periods ended January 31, 1998 by 1.1 percentage points compared to the
corresponding periods in fiscal 1997.
Cost of revenues as a percentage of revenues decreased during these periods
primarily as a result of negotiated price reductions from major vendors and
revenue enhancement programs. These benefits were partially offset by the higher
cost of revenues from purchased bank portfolios and LFG's decline in revenues as
a percentage of the Company's total consolidated revenues.
11
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $13.9 million in the
second quarter of fiscal 1998 and $10.4 million for the second quarter of fiscal
1997. For the first six months of fiscal 1998, selling, general and
administrative expenses increased to $26.3 million from $20.4 million for the
same period in fiscal 1997. As a percentage of revenues, selling, general and
administrative expenses increased for the six month period ended January 31,
1998 to 13.6% from 13.2% in fiscal 1997. The increase in selling, general and
administrative expenses as a percentage of revenues includes expenses incurred
to relocate and expand the customer service center in Nashville, Tennessee and
proportionately higher agent compensation associated with the sales programs of
certain operating businesses acquired during the past year.
Depreciation and Amortization
Depreciation and amortization expense increased 35.8% from $3.1 million for
the quarter ended January 31, 1997 to $4.2 million for the quarter ended January
31, 1998. For the first six months of fiscal 1998, depreciation and
amortization increased to $8.0 million from $6.0 million for the same period in
fiscal 1997. The increase in depreciation and amortization was primarily the
result of purchased merchant portfolios and additional expenditures related to
the Company's management information systems and new customer service center.
Provision for Merchant Losses and Bad Debt Expense
The provision for merchant losses and bad debt expense increased from
$944,000 in the second quarter of fiscal 1997 to $1.1 million in the second
quarter of fiscal 1998. For the first six months of fiscal 1998, the provision
for merchant losses and bad debt expense increased to $2.2 million from $1.9
million for the same period in fiscal 1997. As a percentage of revenues, the
provision for merchant losses and bad debt expense declined to 1.0% in the
second quarter of fiscal 1998 from 1.2% in the second quarter of fiscal 1997.
Revenues and bad debt expenses associated with the Company's terminal leasing
subsidiary (LFG) have declined as a percentage of the Company's total
consolidated revenues as the Company has completed additional acquisitions.
Nonrecurring Operating Expense
During the first six months of fiscal 1997, the Company incurred
nonrecurring duplicative net costs of $585,000 relating to a sales force
acquired as a result of a merchant portfolio acquisition.
Interest Income, Net
For the first six months of fiscal 1998, net interest income increased to
$1.0 million from $414,000 in fiscal 1997. The interest expense of PMT's LFG
subsidiary has declined from the first six months of fiscal 1997 principally as
a result of refinancing certain indebtedness with more favorable interest rates.
Other Expense
In the second quarter of fiscal 1998 and the six months year to date, the
Company incurred other expenses of $313,000 and $756,000, respectively. For the
same periods in fiscal 1997, the Company incurred other expenses of $1.1 million
and $1.2 million, respectively. The Company
12
<PAGE>
The Company has included in this line item all non-recurring transaction costs
such as legal and accounting fees related to acquisitions of operating
businesses, which were accounted for as poolings of interests.
Other expense in the quarter ended January 31, 1997 also includes a non-
recurring charge of approximately $690,000 related to the settlement of
litigation with a former officer and shareholder of an entity which PMT merged
with subsequent to the resolution of the dispute. Because the merger was
accounted for as a pooling of interests, the expense charge is included in the
Company's results of operations on a restated basis.
Income Tax
Income tax expense increased in the second quarter and year to date periods
of fiscal 1998 in relation to the comparable periods in fiscal 1997, principally
as a result of the Company's increased profitability in fiscal 1998. For the
six months ended January 31, 1998, income tax expense of $6.8 million
represented an effective income tax rate of 36.1% as compared to income tax
expense of $4.3 million or 34.6% in the first six months of fiscal 1997. These
effective tax rates are below the expected effective tax rate for fiscal 1998
because of the impact of certain acquired entities which were Subchapter S
corporations prior to the effective dates of the mergers.
Liquidity and Capital Resources
The Company's cash flow is generated by collecting monthly revenues from
the merchants. Payments to suppliers and vendors are typically paid within 30
days, except for interchange which is paid daily to the card-issuing banks and
dues and assessments which are paid quarterly to Visa and MasterCard
Associations. Historically, the Company's primary uses of its capital resources
have included debt service, acquisitions of merchant portfolios, capital
expenditures and working capital. The Company's management invests excess cash
in overnight investments and U.S. Government Treasury notes and bills.
The Company expects that cash generated from operations and excess cash on
hand will be adequate to meet the Company's immediate cash needs. In addition,
on January 31, 1997 the Company amended and restated its credit facility with
First Union National Bank of Tennessee to provide a $20.0 million revolving line
of credit which expired on January 31, 1998. The Company is currently
negotiating a new or amended line of credit. The Company has an additional
revolving line of credit, through its LFG subsidiary, with an aggregate
available balance of $3.0 million. The facility bears interest at a variable
rate based on the prime rate. There was no outstanding balance at January 31,
1998 under the LFG facility.
Working Capital
Net cash flow provided by operating activities was approximately $9.5
million for the first six months of fiscal 1998 as compared to $10.2 million for
the first six months of fiscal 1997. The decrease in cash flow from operating
activities resulted from increases in working capital needs which offset
increases in net income obtained principally through acquisitions of operating
businesses and merchant portfolios and internal generation of new merchant
accounts.
13
<PAGE>
Capital Expenditures and Investing Activities
Cash used by investing activities was approximately $4.7 million for the
six month period ended January 31, 1998 as compared to $92.8 million for the
same period in fiscal 1997. In fiscal 1998, a portion of the Company's
investment in securities matured on January 30, 1998. In the first six months of
fiscal 1997, the Company reinvested in U.S. Treasury securities approximately
$72.4 million of the net proceeds received in the Company's third public
offering.
Net capital expenditures were approximately $16.8 million for the first six
months of fiscal 1998 as compared to $12.4 million for the same period of fiscal
1997. The overall increase in capital expenditures resulted primarily from
additional expenditures related to the Company's management information systems,
the relocation of its customer service center in Nashville, Tennessee, the
purchase of additional credit card terminals and accessories for operating and
financing leases to merchants. In addition to the increase in capital
expenditures, the Company used $4.7 million and $15.4 million for the purchase
of merchant portfolios and agents' residual rights in the six month periods
ended January 31, 1998 and 1997, respectively.
Financing Activities
Net cash used by financing activities for the first six months of fiscal
1998 was approximately $11.5 million, as compared to $1.1 million for the same
period in fiscal 1997.
The overall increase of net cash used by financing activities for the first
six months of fiscal 1998 reflects the issuance of $4.3 million in additional
funds on a note receivable and payments to decrease the Company's indebtedness
which was partially offset by the issuance of additional long-term debt of $10.9
million through its subsidiary, LFG.
Future Capital Needs
Management believes that significant expenditures for the purchase of
additional merchant portfolios may be required for the Company to sustain its
growth in the future. Management expects to fund such purchases through cash on
hand, cash generated from operations and bank borrowings. Management believes
that the combination of these sources will be sufficient to meet the Company's
anticipated liquidity needs and its growth plans through fiscal 1998. The
Company, however, may pursue additional expansion opportunities, including
acquisitions of operating businesses accounted for as poolings requiring the
issuance of additional shares of stock. Additionally, the Company may make
purchases of additional merchant portfolios, which may require additional
capital, and the Company may incur, from time to time, additional short-term and
long-term indebtedness or issue, in public or private transactions, equity or
debt securities, the availability and terms of which will depend upon then
prevailing market and other conditions. There can be no assurance that any such
financing will be obtained on terms acceptable to the Company.
The Company's revolving credit facility with First Union National Bank of
Tennessee was amended and restated during fiscal 1997 to increase the facility
to $20.0 million and expired January 31, 1998. The Company is currently
negotiating a new or amended line of credit.
The Company has developed a plan to ensure its systems are compliant with
the requirements to process transactions in the year 2000. The majority of the
Company's internal information systems are in the process of being replaced with
fully-compliant new systems. The
14
<PAGE>
total cost of the software and implementation is estimated to be $900,000 which
will be capitalized as incurred. This new system implementation is expected to
be completed by July 1, 1999. Each of the Company's merchants utilize equipment
to capture and transmit financial transactions. The Company is in the process of
completing all necessary updates to this equipment to ensure it will continue to
be effective in the year 2000. The total future costs of this transition is
estimated to be less than $300,000. The Company is also working with its
processing banks and network providers to ensure their systems are year 2000
compliant. All of these costs will be borne by the processors and network
companies. In the event some of the processors are unable to convert their
systems appropriately, the Company plans to move its merchant accounts to third
parties who are able to perform the processing.
This report contains certain forward-looking statements. Specifically, the
forward-looking statements relate to future growth through portfolio
acquisitions, the availability of capital to support such acquisitions and the
Company's year 2000 compliance program. The ability of the Company to achieve
the expectations expressed in these forward-looking statements will be subject
to several factors that could cause actual results to differ materially from
those expressed in the forward-looking statements, such as merchant attrition,
difficulties in integrating newly acquired businesses and portfolios, the
availability of capital, the cost of acquired businesses and portfolios, the
Company's continued ability to account for acquisitions as poolings of
interests, industry price increases and the ability of the Company's processing
banks to process merchant transactions effectively. In addition, in reference
to the year 2000 compliance program, there is no assurance that the Company will
be able to move the merchant accounts efficiently or in a cost effective manner.
Results actually achieved thus may differ materially from the expectations
expressed in such statements.
15
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
On November 12, 1997, the Company consummated an acquisition pursuant
to which it issued 1,206,349 shares of its common stock in exchange
for all the outstanding common stock of Ferrante Financial Services,
Inc. ("Ferrante"). The above referenced shares were issued to the
shareholders of Ferrante in reliance upon the exemption provided by
Section 4(2) of the Act.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Company held on December
19, 1997, the following proposals were adopted by the vote specified:
1. Robert C. Fisher, Jr. and Harold L. Siebert were elected to serve
on the Board of Directors of the Company for a term of three
years.
Withhold
For Authority
--- ---------
Robert C. Fisher, Jr. 27,750,499 292,585
Harold L. Siebert 27,750,499 292,585
2. The shareholders voted to amend the 1994 Incentive Stock plan by
increasing the number of shares that may be issued thereunder
from 3,795,000 to 4,195,000 by a vote of 15,714,164 for,
11,746,845 against and 24,074 abstentions. Additionally this
amendment removed the requirement for shareholder approval of any
amendment that could materially increase benefits accruing to
option holders and the absolute restrictions on transfers of non-
qualified stock options ("NQSOs"). Pursuant to this amendment,
certain officers of the Company may grant options to individuals
not employed in executive positions. The requirement that NQSOs
be granted at an exercise price of at least 85% of fair market
value was eliminated. The amendment also limited the acceleration
of vesting of options on the occurrence of a corporate change in
control.
3. The shareholders voted to amend the Company's 1994 Non-Employee
Director Stock Option Plan to remove restrictions on the transfer
of options received under the Director Plan by a person prior to
death with the consent of the Compensation Committee.
Additionally, the amendment eliminated the requirement that
shareholders approve any amendment that would materially increase
benefits accruing to option holders and limited the acceleration
of vesting of options on the occurrence of a corporate change in
control. The amendment was approved by a vote of 17,107,801 for,
10,255,693 against and 21,589 abstentions.
4. The shareholders voted to create the 1997 Executive Stock
Incentive Plan by a vote of 15,769,635 for, 11,591,424 against
and 24,024 abstentions.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.0 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated December 31, 1997
discussing items approved at the Company's Annual Shareholders meeting
held on December 19, 1997.
17
<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 thereunto duly authorized.
PMT SERVICES, INC.
By: /s/VICKIE G. JOHNSON
--------------------
Vickie G. Johnson
Chief Accounting Officer
(principal accounting officer)
Date: March 17, 1998
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PMT SERVICES, INC. FOR THE QUARTER ENDED
JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 17,156,410
<SECURITIES> 39,256,594
<RECEIVABLES> 31,963,804
<ALLOWANCES> 0
<INVENTORY> 3,252,691
<CURRENT-ASSETS> 95,805,730
<PP&E> 12,983,253
<DEPRECIATION> 7,096,387
<TOTAL-ASSETS> 257,910,291
<CURRENT-LIABILITIES> 25,844,907
<BONDS> 0
0
0
<COMMON> 472,090
<OTHER-SE> 257,438,201
<TOTAL-LIABILITY-AND-EQUITY> 257,910,291
<SALES> 193,325,049
<TOTAL-REVENUES> 193,325,049
<CGS> 138,191,038
<TOTAL-COSTS> 138,191,038
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,238,200
<INTEREST-EXPENSE> 1,363,949
<INCOME-PRETAX> 18,842,991
<INCOME-TAX> 6,797,698
<INCOME-CONTINUING> 12,045,293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,045,293
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>
