-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OX8Wsquf/45cpWNbf8OVz3v416mNL5XlscFYhYiwzokC3HOrcX6hSu8CuYuWU8om lLLHeaV+iEZwJdAwArSBzg== 0000899243-97-002060.txt : 19971103 0000899243-97-002060.hdr.sgml : 19971103 ACCESSION NUMBER: 0000899243-97-002060 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971031 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PMT SERVICES INC /TN/ CENTRAL INDEX KEY: 0000923410 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 621215125 STATE OF INCORPORATION: TN FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-24420 FILM NUMBER: 97706125 BUSINESS ADDRESS: STREET 1: 3841 GREEN HILLS VILLAGE DR CITY: NASHVILLE STATE: TN ZIP: 37215 BUSINESS PHONE: 6152541539 MAIL ADDRESS: STREET 1: 3841 GREEN HILLS VILLAGE DR CITY: NASHVILLE STATE: TN ZIP: 37215 10-K/A 1 AMENDMENT TO FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) for the fiscal year ended July 31, 1997, or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) for the transition period from ____________ to ____________. COMMISSION FILE NO.: 0-24420 PMT SERVICES, INC. ------------------------------------------------------------------- (Exact name of registrant as specified in its charter) TENNESSEE 62-1215125 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3841 GREEN HILLS VILLAGE DRIVE, NASHVILLE, TN 37215 ------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (615) 254-1539 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered NONE NONE ---- ---- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE PER SHARE -------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the shares of Common Stock (based upon the closing price of these shares in the over-the-counter market on October 24, 1997) of the registrant held by nonaffiliates on October 24, 1997 ($17.3125 per share), was $728,906,716. As of October 24, 1997, 42,102,915 shares of the registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Documents incorporated by reference and the part of Form 10-K into which the document is incorporated: Portions of the Registrant's Proxy Statement Relating to the Annual Meeting of Shareholders to be held on December 19, 1997............................... Part III 2 PART I Item 1. BUSINESS GENERAL PMT Services, Inc., conducting business directly and through its operating subsidiaries (collectively, "PMT" or the "Company"), is an independent service organization which markets and services electronic credit card authorization and payment systems to merchants located throughout the United States. The Company's operating and growth strategies focus on expanding the Company's customer base of small merchants through trade and other association affiliations, telemarketing, acquiring subsidiary sales forces, merchant portfolio purchases and the provision of high levels of customer service. PMT has experienced rapid growth in its total merchant portfolio base which has caused significant growth in the Company's revenues and earnings. From July 31, 1989 to July 31, 1997, the Company's revenues increased from $4.3 million to $284.2 million. This increase in revenues resulted primarily from the purchase of merchant portfolios, the acquisition of operating businesses with existing merchant portfolios, new merchant contracts generated through the Company's internal marketing and sales efforts and, to a lesser extent, revenue enhancements with existing merchants. PMT's sales force generally targets small merchants for its primary customer base. These merchants typically have a low volume of credit card transactions, are difficult to identify and have traditionally been underserved by credit card processors. Management estimates that there are approximately 3.0 million merchant locations in the United States currently accepting VISA and MasterCard credit cards in the small merchant market segment and approximately 2.2 million of such small merchant locations who have credit card processing equipment utilizing electronic processing for credit card transactions. The balance of these small merchant locations still utilize paper-based authorization and settlement. Management believes that the small merchant market offers the Company significant growth opportunities for (i) installing and servicing credit card authorization and payment systems, (ii) converting small merchants currently accepting credit cards from a paper-based system to an electronic processing system and (iii) migrating from paper and cash to electronic forms of presentment other payment systems such as debit and electronic benefits transfer. During fiscal 1997, PMT adopted a strategy to increase its internal sales by completing mergers and acquisitions that complemented PMT's existing telemarketing and field sales efforts. Additionally, the Company embarked upon a strategy to continue to increase its revenues from additional electronic payment products by acquiring a leading check verification company and a debit network. Further complementing this strategy, PMT acquired an in-house leasing company to finance credit card equipment delivered to its merchants. In the future, PMT intends to exploit the synergies available between PMT and its operating subsidiaries, such as migrating services, when appropriate, to a universal source for authorization, supplies, equipment, leasing and back-office functions. PMT provides comprehensive customer service and support to merchants requiring consultative problem solving and account management. Management believes providing cost-effective, reliable and responsive service is the most effective long-term strategy to retain its merchant base. Through internally generated merchant accounts, purchases of merchant account portfolios, retention of merchants and the increasing use and acceptance of credit cards, management believes the Company has developed a stable and recurring base of revenues. 3 INDUSTRY OVERVIEW The number of credit cards in use has grown dramatically since their introduction over 40 years ago. According to recent industry statistics, in 1996 there were approximately 523 million "general purpose" credit cards honored by all types of merchants. General-purpose cards were dominated by VISA and MasterCard in 1996. The total number of VISA and MasterCard credit cards in circulation increased by 43.3 million to 445 million in 1996 from 1995. According to the Nilson Report, there are currently over 6,800 financial institutions that issue VISA and MasterCard credit cards in the United States. Approximately $677 billion was charged to VISA and MasterCard credit and debit cards in 1996, as compared with $80 billion in 1983. Despite this rapid growth, credit and debit card transactions represented less than 20% of consumer spending in the United States in 1995 (the majority of the remainder was either cash or check). Today, consumers increasingly expect to be able to use their credit cards in almost all purchase transactions, regardless of merchant location, type or size, as credit card use continues to incrementally displace cash and checks. In addition, VISA and MasterCard have aggressively attempted to increase the number of merchants accepting credit cards as a method of payment. According to industry statistics, in 1996 there were approximately 3.5 million merchant locations that accepted VISA and MasterCard credit cards as a method of payment. Electronic credit card transaction processing services encompass a variety of functions including data capture, communication, authorization and settlement. A typical transaction begins when a customer presents a credit card to a merchant for payment. The card is swiped through an electronic terminal which has been placed with the merchant by a bank or a non-bank service provider, such as PMT. The cardholder's purchase is electronically authorized by the issuing bank. Simultaneously, pertinent data relating to the transaction are recorded electronically by the terminal and transferred to a processing bank where the data is stored for use in settlement and client reporting. Both the authorization and data capture functions of the terminal involve transmissions of data via an electronic network. The processing bank transmits the total merchant charge to the card issuing institution through the VISA and MasterCard credit card associations and arranges for funds to be transferred to the merchant's bank. The merchant's account is credited with the full retail purchase amount, less the discount rate, generally within 24 to 72 hours, and the card issuer then enters the transaction on the cardholder's monthly statement. Historically, the larger acquiring banks have marketed credit card processing services within their regional market to their primary banking relationships and regional merchants. Typically, they do not concentrate on small merchants with a low volume of transactions because small merchants are often difficult to identify and expensive to service. This has created an opportunity for non- banks, including independent service organizations such as PMT, to pursue the opportunity of providing electronic processing to these small merchants. The transaction processing industry has undergone rapid consolidation over the last several years, particularly in the large merchant segment. The costs to convert from paper-based to electronic processing, merchant requirements for improved customer service, the upgrades required to accommodate new payment technologies such as debit, electronic benefits transfer, or check, and the significant research and development necessary to meet new demands of VISA and MasterCard for additional customer applications have made it difficult for some community and regional banks and independent service organizations to remain competitive. Many of these providers are unwilling or unable to invest the capital required to meet these changing requirements and are leaving the transaction processing business or otherwise seeking partners to provide transaction processing for their customers. Despite this ongoing consolidation, the industry remains highly fragmented with respect to the number of entities providing merchant services. Management estimates that in 1996 there were over 200 registered independent service providers marketing and selling transaction processing services to merchants. Many of these service 4 providers are small independent service organizations which PMT pursues for future acquisitions. Management believes these factors will result in continuing industry consolidation over the next several years. OPERATING AND GROWTH STRATEGY Focus on Small Merchants. PMT has focused its marketing and acquisition efforts on small merchants which traditionally have been underserved by processing banks. Management believes it understands the unique characteristics of this market segment and has tailored its marketing and servicing efforts accordingly. The Company is able to provide electronic processing systems at rates that generally are lower than those available from small local processing banks as a result of its significant transaction volume. See "Merchant Services." Acquisitions. When PMT consummated its initial public offering in August 1994, it had approximately 37,000 merchant accounts. At that time, various independent service providers controlled portfolios ranging in size from approximately 2,000 to 20,000 merchant accounts each. Many of these providers did not have the scale or access to capital necessary for rapid expansion. Since July 1996, PMT has acquired eleven of these independent service organizations, three of which were acquired subsequent to fiscal 1997. The Company and its operating subsidiaries benefit from the economies of scale achieved through combining operations. Bank Alliances. The industry has experienced a series of mergers, joint ventures and alliances, such as VISA and Total System's formation of Vital and the First Data Corporation's alliance program. These mergers, joint ventures and alliances have increased competition in the banking sector, particularly among the smaller service providers. As a non-bank entity, PMT has the opportunity to offer attractive pricing and service to this industry sector without threatening the core business of banks because PMT does not compete with banks for loans and deposits. Product Diversification. The Company has adopted a strategy to continue to increase its revenues through offering additional electronic payment products through the acquisition of a leading check verification company and a debit network. Further complementing this strategy, PMT has acquired an in-house leasing company to finance credit card equipment delivered to its merchants. Deliver Customer Service Support. The Company recently relocated to an expanded, technologically upgraded facility which will further enhance its customer service. Management believes providing cost-effective, reliable and responsive service is the most effective long-term strategy to retain its merchant base. The size of the Company's merchant base enables it to support a customer service program designed to provide comprehensive consultative problem solving and account management. PMT has continued to upgrade its customer service information systems by installing new hardware and creating proprietary software applications to further enhance the customer service it provides and to accommodate future growth. Additionally, the new facility provides room for expansion for additional customer service personnel and further upgrades of telecommunication systems as such technology develops. Increase Operating Efficiencies. Currently, the Company outsources its processing and network services needs to third parties which have excess capacity and the expertise to handle such needs. The Company has experienced lower costs for processing and network services than the overall industry because of the Company's increased economies of scale. Management believes its significant transaction volume enabled it to negotiate competitive pricing from its processing and network providers at prices below what the Company would experience to build and support these systems internally. The Company has achieved significant reductions in certain operating expenses through operational efficiencies, 5 economies of scale and improved labor productivity. The Company intends to outsource processing and network services as long as it is economically more attractive than the development and support of these services within the Company, allowing management to focus on its core business of sales, marketing and customer service. Maintain a Stable and Recurring Revenue Base. Through merchant retention and increased credit card use, the Company has developed a stable and recurring base of revenues. In addition to its high customer service level, the Company's endorsements from Associations provide an additional link to its merchants that tends to reduce attrition. Furthermore, management believes that the low transaction volume of its individual merchants makes such merchants less likely to change service providers because of the initial set-up costs associated with a transfer. MARKETING The Company utilizes a multi-faceted marketing approach which includes a nationwide field sales and telemarketing force of approximately 310 people (compared to 109 people at July 31, 1996). The Company also has various relationships with other independent service organizations, independent sales representatives and joint marketing arrangements with banks. During fiscal 1997, the Company pursued acquisitions of operating businesses with significant field sales forces to improve the Company's internal growth capabilities. As a result of these acquisitions, the Company now provides services to many of the nation's key population centers. This field sales force now represents the Company's primary channel for internal merchant account acquisitions. While now emphasizing internal growth through its field sales force, the Company continues to telemarket through its Association marketing program initiated in 1988, which now includes 241 Associations and more than one million potential merchant accounts. Under these arrangements, the Company obtains exclusive endorsements from the Associations and receives initial and ongoing marketing assistance from the Associations. Telemarketers contact Association members whose names and telephone numbers are obtained through the Associations. If a merchant expresses interest, the Company performs various credit and underwriting tests which might include a review of reports issued by credit agencies and sight inspections from an outside agency. The Company can ship a terminal overnight and install the necessary software over the telephone. This process represents a very cost effective means of acquiring a new merchant and of cross-selling additional products and services such as check verification and debit processing to existing merchants of the Company. The Company typically pays referral compensation to the Associations in exchange for the continuing endorsement of the Company's services. As a non-bank entity, PMT has the opportunity to offer attractive pricing and service to the banking industry through bank alliances, without threatening the core business of the banks because PMT does not compete with banks for loans and deposits. Pursuant to the alliance between the bank and the Company, the bank may offer competitively priced transaction processing services to their bank customers through the Company. Because of its significant transaction volume, the Company is able to obtain favorable pricing from third-party service providers. From time to time, the Company has entered into arrangements to allow other independent service organizations to avail themselves of such favorable pricing. In connection with such arrangements, the Company will (i) process the independent service organization's transactions through the Company's servicing arrangements with one of its current third-party providers and (ii) generally obtain the right to purchase all or a portion of the independent service organization's merchants at a specified price. 6 ACQUISITIONS Since fiscal 1991, the Company has completed numerous acquisitions of operating businesses and merchant portfolios involving as few as 500 and as many as 15,000 merchant accounts. During fiscal 1997, the Company completed eight significant transactions involving merchant portfolios generating over $4.5 billion in combined annual charge volume. Management believes that increased competition in the industry and other factors have pressured certain competitors to examine the benefits of alliances, mergers and strategic partnerships or dispose of all or a portion of their merchant portfolios. As a result, management believes many opportunities for industry consolidation exist, both within the banking sector and in the independent service organization market. The Company's experience in acquisitions, coupled with its operating efficiencies and significant cash flows, greatly enhance the Company's ability to successfully integrate merchant portfolios on a cost-effective basis. The following table lists certain acquisitions of operating businesses and merchant portfolios that the Company has completed as of October 29, 1997: Name Type of Acquisition Date of Acquisition ---- ------------------- ------------------- United Missouri Bank Merchant Portfolio March 1996 Martin Howe Associates, Inc. Operating Business July 1996 Data Transfer Associates, Inc. Operating Business August 1996 Fairway Marketing Group, Inc. Operating Business December 1996 Bancard Systems, Inc. Operating Business January 1997 Retail Payment Services, Inc. Operating Business January 1997 IMA Payment Systems, Inc. Operating Business March 1997 Zions Bank Merchant Portfolio April 1997 CVE Corporation Operating Business April 1997 Erik Krueger, Incorporated Operating Business June 1997 LADCO Financial Group, Inc. Operating Business July 1997 Retail Systems Consulting, Inc. Operating Business September 1997 Bancard, Inc. Operating Business October 1997 The above mentioned acquisitions generate (on an annualized basis) over $8.0 billion in combined charge volume (excluding LADCO Financial Group, Inc.). PROCESSING RELATIONSHIPS PMT markets and services electronic credit card authorization and payment systems pursuant to contractual relationships with processing banks that are members of VISA and MasterCard. Under such contractual relationships, PMT's processing banks process merchant credit card transactions pursuant to contracts, the terms of which have been negotiated by PMT (or certain other independent service organizations from whom PMT has acquired merchant portfolios) and approved by the processing bank. PMT's processing banks withhold from the merchants a discount rate and various fees for the processing of each credit card transaction. From PMT's discount rate revenues, amounts are paid to the issuing bank, the network service provider, VISA or MasterCard and to the processing bank. As of July 31, 1997, the Company relied on multiple relationships with various banks to process the credit card transactions of PMT's clients. Generally, the Company's agreements with processing banks contain aspects of both marketing and service. The marketing portions of the agreements permit PMT to originate new merchants which then enter into contractual agreements with the processing banks for 7 processing of credit card transactions. The service portion of the agreements permits PMT to provide appropriate service to the merchants solicited to process on the processing banks' systems. Although the marketing portion of the agreements is limited as to time, the service portion of substantially all of these agreements is not. The marketing aspects expire at various dates unless renewed automatically, if applicable, or extended by the parties. There can be no assurance that PMT's contractual arrangements with its processing banks will be renewed or that PMT will be able to obtain favorable replacement arrangements, whether upon expiration, termination or otherwise. NETWORK SERVICES Networks provide an electronic connection or pathway between the merchant and PMT's processing bank and are paid a fixed amount per transaction. All appropriate parties receive pertinent information from merchants via the networks. PMT's relationships with its processing banks enable it to negotiate directly with network service providers to obtain volume discounts for network services. Historically, the Company's costs for outsourcing network services have decreased as a result of the Company's scale and ability to negotiate favorable volume sensitive contracts. DISCOUNT RATE AND FEES The primary source of revenue for PMT is the discount rate paid by the merchant for each credit card transaction processed for that merchant. In addition to revenues derived from the discount rate, the Company receives periodic fees from most of its merchants for providing various other services. See "Merchant Services." The discount rate and fees are negotiated by the Company, within the terms of the Company's processing agreements, with each of the merchants to which the Company provides services. PMT contracts with third parties to provide a portion of the services to the merchant, including communication networks, transaction processing and monthly preparation of detailed merchant statements. Additionally, PMT complies with the pricing structures established by VISA and MasterCard associations for the interchange fee paid to the retail consumers' card-issuing banks and the associations' fees. The primary costs incurred by PMT in delivering its services to the merchants are: (i) an interchange fee paid to the card-issuing bank which is set by the VISA and MasterCard associations and which is calculated as a percentage of the transaction amount, (ii) a fee calculated as a percentage of the transaction amount that is paid to the VISA or MasterCard association which is established by the member banks of the VISA and MasterCard associations, (iii) a fixed, per- transaction fee paid to the network service provider which is negotiated between PMT and the network service provider and (iv) a fixed, per-transaction fee paid to the processing bank which is negotiated between PMT and the processing bank. The Company recognizes as revenue in its statement of income the full discount rate collected from the merchant and various fees associated with servicing merchant accounts. Also, the various costs incurred by the Company discussed above (e.g., amounts paid to the card-issuing bank and network provider) are reflected as costs of revenues. Several factors can alter the profitability to PMT for merchant transactions. Primarily, these include (i) improper use of the card reading terminal by the merchant, resulting in higher interchange fees paid to the card-issuing bank, (ii) lower than anticipated average dollar sales of credit card transactions which reduce the Company's gross transaction margin because many of the transaction costs are fixed, (iii) losses incurred as a result of customer chargebacks (PMT can be required to absorb the full retail purchase amount), (iv) the inability to collect the discount rate because of insufficient funds in the merchant's bank account, (v) merchant fraud and (vi) excessive volume of customer return transactions in which the Company incurs all transaction costs except interchange fees. 8 MERCHANT CLIENTS The Company serves a diverse portfolio of small merchant clients, primarily in the automotive after-market, restaurant and general retail industries. This client diversification has contributed to the Company's growth despite the varying economic conditions of the regions in which its merchants are located. Merchant attrition is an expected aspect of the credit card processing business. Historically, the Company's attrition has related to merchants going out of business, merchants returning to local processing banks or merchants transferring to competitors for rates the Company was unwilling to match. Having evaluated a significant number of independent service organizations and bank portfolios through due diligence, management believes its attrition rates compare favorably with its peer group. Merchant fraud is another inherent aspect of the credit card processing business. Generally, the Company is responsible for fraudulent credit card transactions of its merchants. Examples of merchant fraud include inputting false sales transactions or false credits. The Company and its processing banks monitor merchant charge volume, average charge and number of transactions, as well as unusual patterns in the charges, returns and chargebacks processed for merchants. As part of its fraud avoidance policies, the Company generally will not process for certain types of businesses which provide future services where incidents of fraud have been common. Management believes that the Company's overall loss experience in relation to its charge volume compares favorably with the Company's peer group. Generally, the Company is not responsible for cardholder fraud. The Company evaluates its risks and estimates the potential loss for chargebacks and merchant fraud based on historical experience. The Company maintains a reserve for such estimated losses in the same period as the related revenue, and subsequent actual fraud losses are charged against the Company's reserve. MERCHANT SERVICES Management believes providing cost-effective, reliable and responsible service is the most effective method of retaining merchant clients. The Company maintains personnel and systems necessary for providing such services directly to merchants and has developed a comprehensive program involving consultative problem solving and account management. The Company maintains a department of customer service personnel available 24-hours a day to respond to inquiries from merchants regarding terminal, communication and training issues. Service personnel provide terminal application consultation by telephone and regularly reprogram terminals via telephone lines to accommodate particular merchant needs regarding program enhancements, terminal malfunctions and VISA and MasterCard regulations. In addition, merchants may obtain direct, personal assistance in reconciling network and communications problems, including problems with network outages and local phone company services. The Company has an ongoing program to further enhance the customer service it provides and to accommodate future growth of the Company's merchant base. In connection with upgrading the Company's customer service information system, the Company will continue to purchase new hardware and software. In addition, the Company's commitment to providing comprehensive services includes the expansion of check guarantee and debit services to merchants as such technology develops. The Company may sell or finance through its in-house leasing company, a credit card terminal to its merchant customers. The Company's terminals are "down-loadable," meaning additional services, such as authorization or payment services for additional credit cards, can be installed in the terminal electronically from the Company's offices without the necessity of replacement equipment or an on-site installation visit. Additionally, peripheral equipment such as pin pads and printers can be easily forwarded to the merchants upon request. The Company also loans, tests and ships point-of-sale terminals directly to merchant 9 locations, and provides complete repair-or-replacement services for malfunctioning terminals. Generally, the Company can arrange for delivery of replacement terminals by overnight courier. COMPETITION The market for placing and maintaining electronic credit card authorization and payment systems with retail merchants is highly competitive. The Company competes in this market on the basis of price, quality of customer service, support and availability of additional features. Management believes merchants initially select a processing service provider primarily based on price and elect to sustain the relationship based on a combination of service and price. See "Marketing". Many industry participants have elected to sell, merge or form strategic alliances in recent years which has prompted many small independent service organizations and other providers to examine the viability of continuing to operate independently. The Company's principal competitors are local banks. The Company also competes with larger, vertically-integrated transaction processors as well as numerous competitors that provide certain merchant services while using third parties for network and other services. In addition, the Company competes with large regional and national banks that have not entered into a marketing relationship with the Company. As a non-bank entity, PMT has the opportunity to offer attractive pricing and services to this industry sector without threatening the core business of banks because PMT does not compete with banks for loans and deposits. Larger, more fully integrated companies may penetrate PMT's segment of the market. Moreover, many of the Company's competitors have access to significant capital, management, marketing and technological resources greater than those of the Company, and there can be no assurance the Company will continue to be able to compete successfully with banks, other transaction processors and merchant service providers. EMPLOYEES As of July 31, 1997, the Company had approximately 900 full-time employees, consisting of 230 customer service personnel, 360 management and administrative personnel, and 310 field sales representatives and telemarketers. The internal growth of the Company's business will depend upon its ability to attract and retain productive sales and other personnel. 10 ITEM 2. PROPERTIES In September 1997, the Company moved into its new corporate office facility of which the Company leases approximately 100,000 square feet of the total 150,000 square feet in the Green Hills area of Nashville, Tennessee. In connection with this move, the Company entered into a lease relating to such space with Battleship, LLC. The term of the lease is ten years, with a five- year renewal option. Base monthly rent for the office space will be $60,417 for the first year and $75,656 per month for years two through ten. On April 23, 1997, the Company subleased to Columbia/HCA Healthcare Corporation ("Columbia") 29,273 square feet of its existing space leased from Highwoods/Forsyth Limited Partnership. The Sublease is for a term commencing in September, 1997 and ending December 31, 2000, the expiration date of the Company's existing lease. Columbia will make monthly rental payments to the Company in the amount of $34,152. Below is a list of the Company's significant properties including the approximate square footage and if the properties are leased or owned: Properties -------------- Approximate Square footage Lease/Own -------------- --------- PMT - Corporate headquarters Nashville, Tennessee 100,000 lease Martin Howe Associates, Inc. Dallas, Texas 7,803 lease Data Transfer Associates, Inc. Des Plaines, Illinois 8,732 lease Bancard Systems, Inc. Irvine, California 9,082 lease Fairway Marketing Group, Inc. Tampa, Florida 7,400 lease IMA Payment Systems, Inc. Nashville, Tennessee 2,450 lease CVE Corporation Omaha, Nebraska 10,000 lease Ladco Financial Group Thousand Oaks, California 8,441 lease Management believes these arrangements and other available space are adequate for the Company's current uses and anticipated growth. 11 ITEM 3. LEGAL PROCEEDINGS The Company is subject to legal proceedings and other claims arising in the ordinary course of business. In addition, the Company is a defendant in a lawsuit styled Glenn Francis, et al. v. BankCard America, Inc., PMT Services, Inc., d/b/ U.S. BankCard, et al., Docket No. 93-C5510, which is pending in the U.S. District Court for the Northern District of Illinois. The claim relates to the plaintiffs' relationship with defendant BankCard America, Inc. The plaintiffs claim that they established certain merchant accounts from which they were entitled to receive residual income. BankCard America, Inc. ("BankCard") terminated its relationship with the plaintiffs. The Company subsequently purchased a merchant portfolio from BankCard that included the disputed merchant accounts. In connection with this purchase, BankCard made various representations and warranties with respect to its right to sell the portfolio and agreed to indemnify the Company for any breach of those representations and warranties. This disputed purchase is one of six purchases of portfolios made by the Company from BankCard or its affiliates since 1989. A summary of the litigation to date is set forth below. The lawsuit was filed on September 9, 1993, against BankCard and certain of its affiliates alleging, among other claims, violations of the Racketeering Influenced and Corrupt Organizations Act (RICO). On November 3, 1994, the court dismissed the RICO counts with prejudice. The Company was initially named as a defendant on August 30, 1995. The lawsuit currently purports to allege acts of fraud, misappropriation and unjust enrichment, but not RICO violations. The plaintiffs claim actual damages in the amount of $162,000 plus costs and attorneys' fees and punitive damages in the amount of $500,000 against certain defendants other than the Company. With respect to the Company, the plaintiffs seek to void the sale of the merchant accounts in dispute. The motion referred to in our previous audit response letters wherein the plaintiff sought permission to allege various violations of RICO has now been denied. The original motion to dismiss the underlying action filed in August 1995 remains under advisement with the court. Management believes that the Company has valid defenses and intends to vigorously defend all claims made against it. Based on the status of the litigation to date and the facts currently known to the Company, management does not believe that the allegations in the lawsuit will have a material adverse effect on the business or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of shareholders during the fourth quarter of fiscal 1997. 12 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on the Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbol PMTS. The following table sets forth the range of high and low sales prices on the Nasdaq National Market by quarter for the two years ended July 31, 1997 and 1996, as reported by the Nasdaq National Market: 1997 1996 High Low High Low ----- ----- ----- ----- First Quarter... 28.75 16.50 9.25 5.75 Second Quarter.. 22.50 13.63 13.42 8.46 Third Quarter... 16.06 10.38 20.08 11.50 Fourth Quarter.. 19.63 13.00 28.75 17.50 The stock prices for fiscal 1996 have been adjusted to give retroactive effect to the Company's stock splits. The stock split for shareholders of record on December 14, 1995 was a two-for-one stock split effected in the form of a stock dividend. The stock split for shareholders of record on May 28, 1996 was a three-for-two stock split effected in the form of a stock dividend. Based on the distribution of the Company's search cards, as of October 9, 1997, there were approximately 7,200 shareholders of the Company's common stock including, 197 record holders. The Company currently intends to retain all earnings to finance the development and expansion of its operations and, therefore, does not anticipate paying cash dividends or making any other cash distributions on its shares of Common Stock in the foreseeable future. The Company's future dividend policy will be determined by its Board of Directors on the basis of various factors, including the Company's results of operations, financial condition, business opportunities and capital requirements. The declaration of cash dividends is currently prohibited by the Company's bank credit facility. On June 3, 1997 the Company issued 579,000 shares of its common stock in exchange for all the outstanding common stock of Eric Krueger, Incorporated ("Krueger"). On July 14, 1997 the Company issued 1,463,414 shares of its common stock in exchange for all the outstanding common stock of Ladco Financial Group ("LFG"). The above referenced shares were issued to the shareholders of Krueger and LFG in reliance upon the exemption provided by Section 4(2) of the Act. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data which have been derived from the Company's audited financial statements for each of the five years in the period ended July 31, 1997. The Company's financial statements as of July 31, 1996 and 1997 and for each of the years in the three-year period ended July 31, 1997 are included elsewhere herein. The data set forth below should be read in conjunction with the Financial Statements, the Notes thereto and other financial information included elsewhere herein. 13
Year Ended July 31, ---------------------------------------------------- (in thousands, except per share and other data) 1993 1994 1995 1996 1997 -------- -------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Revenues (1)........................ $61,987 $ 97,125 $139,539 $214,891 $284,213 Cost of revenues.................... 45,941 68,518 98,152 154,442 203,975 ------- -------- -------- -------- -------- Gross margin........................ 16,046 28,607 41,387 60,449 80,238 Selling, general & administrative expenses.......................... 10,358 16,709 23,773 31,481 36,543 Depreciation and amortization....... 570 1,745 3,622 7,731 12,670 Provision for merchant loss and bad debt expense............. 1,573 2,884 1,954 3,786 4,248 Stock award compensation............ 281 240 241 -- -- Non-recurring operating expense.......................... -- -- -- -- 594 ------- -------- -------- -------- -------- Income from operations.............. 3,264 7,029 11,797 17,451 26,183 Interest income (expense), net............................. (1,242) (2,470) (3,043) (1,798) 1,387 Other income (expense), net......... -- -- -- 704 (1,554) ------- -------- -------- -------- -------- Income before provision for taxes, extraordinary item and change in accounting principle.... 2,022 4,559 8,754 16,357 26,016 Provision for income taxes.......... 772 1,757 3,301 6,131 9,617 ------- -------- -------- -------- -------- Income before extraordinary item and change in accounting principle......................... 1,250 2,802 5,453 10,226 16,399 Net income (2)...................... $ 1,839 $ 3,115 $ 5,453 $ 10,226 $ 16,399 PER SHARE INFORMATION: Income before extraordinary item........................... $ 0.07 $ 0.15 $ 0.20 $ 0.29 $ 0.40 Extraordinary item - net operating loss carryforward................. 0.03 0.00 0.00 0.00 0.00 ------- -------- -------- -------- -------- Income before change in accounting principle.............. 0.10 0.15 0.20 0.29 0.40 Cumulative effect of change in accounting principle........... 0.00 0.01 0.00 0.00 0.00 ------- -------- -------- -------- -------- Earnings per share (3).............. $ 0.10 $ 0.16 $ 0.20 $ 0.29 $ 0.40 ======= ======== ======== ======== ======== Weighted average shares outstanding....................... 18,979 19,174 27,106 34,705 41,144 July 31, --------------------------------------------------- 1993 1994 1995 1996 1997 ------- -------- -------- -------- -------- BALANCE SHEET DATA: Working capital $(3,604) $(12,337) $ (811) $106,431 $ 75,629 Total assets 33,465 54,591 84,959 227,904 249,008 Long-term debt, less current portion......................... 10,816 15,247 31,232 19,051 16,891 Total shareholders' equity.......... 1,706 4,898 33,415 183,486 202,567
__________________________ (1) Revenue increased for fiscal 1993 through 1997 primarily from the purchase of merchant portfolios and new merchant contracts generated by the Company as well as fee enhancements with existing merchants. (2) Net income for fiscal 1993 has increased through the utilization of net operating loss carryforward of $589,471, the benefit of which has partially offset the provision for income taxes. For the fiscal year ended July 31, 1994, net income has increased by $312,800 because of a change in accounting principle relating to income taxes. (3) Earnings per share for fiscal 1997 includes non-recurring, after-tax operating and merger expenses of $1,943,000 or $0.05 per share. Earnings per share for fiscal 1996 includes non-recurring income of $1,000,000 life insurance proceeds and $296,000 of merger expenses or a net of $0.02 per share. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of certain factors affecting the Company's results of operations for each of the three fiscal years in the period ended July 31, 1997 and its liquidity and capital resources. This discussion should be read in conjunction with the financial statements and notes thereto included elsewhere herein. Overview The Company is an independent service organization which markets and services electronic credit card authorization and payment systems, including sale and leasing of related equipment, to retail merchants located throughout the United States. The Company's principal sources of revenues are discount collected and merchant service fees. The remaining revenues consist of leases, commissions and sales relating to credit card processing equipment and installation fees. The Company initiates the credit card processing relationship with a merchant and negotiates a "discount rate" and related fees, within the terms of the Company's agreements with processing banks. The discount is a percentage of the dollar amount of each credit card transaction. Revenues derived from the electronic processing of transactions are recognized at the time the merchants' transactions are processed. Revenues related to the direct sale of credit card authorization equipment are recognized when the equipment is shipped. Fees related to both the direct sale and marketing of this equipment are recognized when installation is completed. Fees received in advance of shipment or installation are deferred until realized. Revenue related to finance leasing of point-of-sale processing equipment are recognized over the term of the lease agreement using the interest method. Acquisitions The Company completed nine acquisitions in fiscal 1995, five acquisitions in fiscal 1996 and completed 16 acquisitions in fiscal 1997. Significant acquisitions are discussed further below. In April 1995, the Company purchased a merchant portfolio from Bankcard America, Inc. ("ABC") for a purchase price of $7.7 million. The Company paid $2.6 million in cash, issued a 3% interest bearing note for $400,000 due May 1, 1995 and issued a $4.7 million note bearing interest at 3% due July 1, 1995. The Company incurred direct costs and expenses related to the purchase of the merchant portfolio of approximately $1.3 million. The purchase agreement provided for additional consideration of $2.5 million payable to the seller contingent upon the seller's ability to negotiate the transfer of the merchant accounts, to the Company's primary processing bank. In May 1995, an agreement was entered into providing for transfer of the merchant accounts, and pursuant to the terms of the purchase agreement, the Company paid $2.5 million representing additional purchase price for the merchant portfolio. Additionally, beginning June 1995, the Company's amended processing agreement with its primary processing bank required a $1.5 million security deposit for a six month period as a result of the conversion of other merchant portfolios to this processing bank. This deposit plus accrued interest was returned to the Company 15 in March 1996. A sum of $500,000 will remain on deposit with this bank as long as the Company participates in the bank's Association Marketing Agreement. The Company purchased two additional merchant portfolios including related credit card equipment inventory, a merchant lease portfolio and other office assets for approximately $12.2 million. In the first quarter of fiscal 1996 the Company purchased a merchant portfolio from Imperial Bank effective October 1, 1995. The Company paid approximately $8.7 million for the portfolio from proceeds of the Company's second public offering. In the third quarter of fiscal 1996, the Company purchased two merchant portfolios. The Company purchased a merchant portfolio from UMB Bank, N.A. ("UMB") for a purchase price of $13.5 million effective March 1, 1996. Effective April 1, 1996, the Company purchased a merchant portfolio from BankCard America, Inc. ("ABC") for a purchase price of $6.3 million. In the fourth quarter of fiscal 1996, the Company consummated one operating business acquisitions and one merchant portfolio acquisition. The Company accounted for the larger of these two acquisitions as a pooling of interests. On July 1, 1996, the Company issued 594,019 shares of its common stock in exchange for all of the outstanding common stock of Martin Howe Associates, Inc. ("MHA"). The Company's consolidated financial statements have been restated to include the accounts of MHA for all periods prior to the merger. The other acquisition was accounted for as a purchase transaction and the operating results have been included in the Company's financial statements beginning July 1, 1997, the effective date of the transaction. In the first quarter of fiscal 1997, the Company completed one operating business acquisition and two merchant portfolio acquisitions. On August 2, 1996, the Company issued shares of its common stock in exchange for all the outstanding stock of Data Transfer Associates, Inc. ("DTA"). The acquisition was accounted for as an immaterial pooling of interests. The shares were issued to the shareholders of DTA in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933 (the "Act"). The operating results of the other two merchant portfolio acquisitions were accounted for as purchase transactions and have been included in the Company's financial statements beginning August 1, 1996, the effective date of the acquisitions. On September 16, 1996, the Company paid cash and issued warrants to purchase 10,000 shares of the Company's common stock as consideration in a transaction related to the purchase of certain rights and obligations with respect to the solicitation and maintenance of a merchant portfolio. The warrants were issued to the two individual sellers in reliance upon the exemption provided by Section 4(2) of the Act. The warrants are currently fully exercisable, at an exercise price of $17.00 per share, and expire September 16, 2006. In the second quarter of fiscal 1997, the Company consummated three operating business acquisitions accounted for as poolings of interests and two merchant portfolio acquisitions. On December 23, 1996 the Company issued 424,999 shares of its common stock in exchange for all the outstanding common stock of Fairway Marketing Group, Inc. ("Fairway"). On January 27, 1997, 3,131,250 shares of the Company's common stock were issued in exchange for all the outstanding common stock of Bancard Systems, Inc. ("BSI"). On January 30, 1997 the Company issued 16 567,519 shares of its common stock in exchange for all the outstanding common stock of Retail Payment Services, Inc. ("RPS"). The above referenced shares were issued to the shareholders of Fairway, BSI and RPS in reliance upon the exemption provided by Section 4(2) of the Act. The Company's consolidated financial statements have been restated to include the accounts of Fairway, BSI and RPS for all periods prior to the merger. The other two merchant portfolio acquisitions were accounted for as purchase transactions and their operating results have been included in the Company's financial statements beginning November 1, 1996 and December 1, 1996, the effective dates of the transactions. In the third quarter of fiscal 1997, the Company consummated one operating business acquisition and three merchant portfolio acquisitions. On March 31, 1997 the Company issued shares of its common stock in exchange for all the outstanding common stock of IMA Bancard, Inc. ("IMA"). The shares were issued to the shareholders of IMA in reliance upon the exemption provided by Section 4(2) of the Act. The acquisition was accounted for as an immaterial pooling of interests. The other three merchant portfolio acquisitions were accounted for as purchase transactions and their operating results have been included in the Company's financial statements beginning March 1, 1997 and April 1, 1997, the effective dates of the transactions. In the fourth quarter of fiscal 1997, the Company consummated three operating business acquisitions and one merchant portfolio acquisition. On April 30, 1997 the Company issued shares of its common stock in exchange for all the outstanding common stock of CVE, Inc. ("CVE"). The acquisition was accounted for as an immaterial pooling of interests. On June 3, 1997 the Company issued 579,000 shares of its common stock in exchange for all the outstanding common stock of Eric Krueger, Incorporated ("Krueger"). On July 14, 1997 the Company issued 1,463,414 shares of its common stock in exchange for all the outstanding common stock of Ladco Financial Group ("LFG"). The Company's consolidated financial statements have been restated to include the accounts of Kreuger and LFG for all periods prior to the merger. The above referenced shares were issued to the shareholders of CVE, Krueger and LFG in reliance upon the exemption provided by Section 4(2) of the Act. The other acquisition was accounted for as a purchase transaction and the operating results have been included in the Company's financial statements beginning July 1, 1997, the effective date of the transaction. The growth in the Company's revenues and profitability for fiscal years 1996 and 1997 has resulted largely from the acquisition of operating businesses and merchant portfolios. Future growth is dependent upon, among other factors, the Company's ability to continue to consummate additional acquisitions of operating businesses and merchant portfolios. There can be no assurance that the Company will be able to make successful acquisitions or that the attrition of merchants from acquired portfolios will not exceed anticipated attrition, thus resulting in lower revenues from the purchased portfolios. See pro forma operating results in Note 3 to the financial statements for information relative to the potential effect of the acquisitions on the Company's operations. Management believes the pro forma operating results reflected in Note 3 are not indicative of what would have occurred had the purchases been made at the beginning of fiscal 1995 or fiscal 1996, or of results which may occur in the future because the cost structures of the acquired portfolios are not directly comparable to the Company's. 17 Results of Operations The following table presents, for the periods indicated, the percentage of revenues represented by certain line items in the Company's statement of income:
Period-to-Period Changes --------------------------- Year ended July 31, Increase (Decrease) -------------------------------------------------- 1996 1997 vs. vs. 1995 1996 1997 1995 1996 ------------------------------------------------------------------------------------------------------------------------ Revenues 100.0% 100.0% 100.0% 54.0% 32.3% Cost of revenues 70.3 71.9 71.8 57.4 32.1 ----- ----- ----- Gross margin 29.7 28.1 28.2 46.1 32.7 Selling, general and administrative expenses 17.0 14.6 12.8 32.4 16.1 Depreciation and amortization expense 2.6 3.6 4.5 113.4 63.9 Provision for merchant loss and bad debt expense 1.4 1.8 1.5 93.8 12.2 Stock award compensation 0.2 0.0 0.0 (100.0) 0.0 Non-recurring operating expense 0.0 0.0 0.2 -- 100.0 ----- ----- ----- Income from operations 8.5 8.1 9.2 47.9 50.0 Interest income (expense), net (2.2) (0.8) 0.5 (40.9) (177.1) Other income (expense), net 0.0 0.3 (0.5) 100.0 (320.8) ----- ----- ----- Income before provision for taxes 6.3 7.6 9.2 86.9 59.1 Provision for income taxes 2.4 2.8 3.4 85.7 56.9 ----- ----- ----- Net income 3.9% 4.8% 5.8% 87.5% 60.4% ===== ===== =====
Revenues Revenues increased from $139.5 million in fiscal 1995 to $214.9 million in fiscal 1996 and $284.2 million in fiscal 1997. These increases represent a 54.0% increase from fiscal 1995 to fiscal 1996 and a 32.3% increase from fiscal 1996 to fiscal 1997. The increases in revenues for all periods presented resulted primarily from acquisitions and new merchant contracts generated through the company's telemarketing and field sales efforts, as well as fee enhancements with existing merchants. The increases from fiscal 1995 to fiscal 1996 were primarily the result of the purchased merchant portfolios which resulted in a 61.5% increase in revenues. In fiscal 1996, the Company completed five acquisitions and in fiscal 1997, the Company completed 16 acquisitions, eight of which were acquisitions of operating businesses. Acquisitions accounted for approximately 72.4% of the increase in revenues in fiscal 1997. Cost of Revenues Cost of revenues increased from $98.2 million in fiscal 1995 to $154.4 million in fiscal 1996 and $204.0 million in fiscal 1997. These increases represented a 57.4% increase from fiscal 1995 to fiscal 1996 and 32.1% increase from fiscal 1996 to fiscal 1997. The primary components of the Company's cost of revenues have generally remained consistent as a percentage of revenues from fiscal 1995 through fiscal 1997. A majority of the Company's cost of revenues are fixed as a percentage of each transaction amount, with the remaining costs being based on a fixed rate applied to the number of transactions processed. In 18 fiscal 1996, cost of revenues increased as a percentage of revenues as a result of significant merchant portfolio acquisitions from banks which had a higher cost of revenues as a percentage of revenues than those historically experienced by the Company. This resulted from the Company assuming certain contractual obligations which were less favorable than other existing agreements. In some cases, where costs of acquired businesses were initially higher than normal, the Company has been able to ultimately lower the cost to deliver the services. Following the acquisition of LFG in fiscal 1997, the Company has retroactively restated all prior periods to include the operating results of LFG as if LFG had always been a part of PMT. This restatement has had a beneficial impact on cost of revenues as a percentage of revenues for all periods when compared to the corresponding percentages as reported prior to the restatement. LFG's revenues consist primarily of income from financing leases which do not have a corresponding cost of revenue. The cost of financing these leases is recorded below income from operations as a component of interest expense. Despite the beneficial impact from LFG on the cost of revenues percentages compared to those prior to the restatement, LFG's impact on the trend in the cost of revenues percentages has been unfavorable. LFG's revenues as a percentage of the Company's total consolidated revenues declined from 6.3% in fiscal 1995 to 5.1% in fiscal 1996, and 4.5% in fiscal 1997, providing less benefit each year. Management believes that as processing revenues outpace the growth in leasing, LFG's revenues will continue to decline as a percentage of the Company's total consolidated revenues, providing progressively less benefit in the future. In fiscal 1997, cost of revenues as a percentage of revenues decreased primarily as a result of revenue enhancement programs and from negotiated price reductions from major vendors. These benefits received were partially offset by the higher cost of revenues from the purchased bank portfolios and LFG's decline in revenues as a percentage of the Company's total consolidated revenues as previously discussed. The Company's cost of revenues as a percentage of revenues can be significantly affected by the cost structures of acquired merchant portfolios and operating businesses. Selling, General and Administrative Expenses Selling, general and administrative expenses were $23.8 million in fiscal 1995, $31.5 million in fiscal 1996 and $36.5 million in fiscal 1997. These increases represented a 32.4% increase from fiscal 1995 to fiscal 1996 and a 16.1% increase from fiscal 1996 to fiscal 1997. In fiscal 1996 and 1997, selling, general and administrative expenses decreased as a percentage of revenues when compared to fiscal 1995 and fiscal 1996 by 2.4 percentage points and 1.8 percentage points, respectively. The decrease in the percentage continues to reflect the Company's overall improvement in utilization of personnel. The addition of revenues from purchased merchant portfolios has not caused a proportionate increase in selling, general and administrative expenses. Additionally, the Company's selling expenses have decreased as a percentage of revenues as a result of the Company's purchase of agent residual rights resulting in lower referral compensation. 19 Depreciation and Amortization Depreciation and amortization expense increased from $3.6 million in fiscal 1995 to $7.7 million in fiscal 1996 and $12.7 million in fiscal 1997. These increases represent a 113.4% increase from fiscal 1995 to fiscal 1996 and a 63.9% increase from fiscal 1996 to fiscal 1997. Depreciation expense has increased in amount from fiscal year 1995 through fiscal year 1997 but remained relatively consistent as a percentage of revenues because of the significant increase in revenues. The increase in depreciation expense is a direct result of additional equipment, fixture purchases for customer service and operations and additional expenditures related to the Company's management information systems. Amortization expense has generally increased in amount and as a percentage of revenues from fiscal 1995 through fiscal 1997. Amortization expense increases in periods when the Company purchases merchant portfolios. In fiscal 1996 and 1997, the Company made several acquisitions of operating businesses which were accounted for as poolings of interests. There is no amortization expense related to these acquisitions. Purchased merchant portfolios are evaluated by management for impairment at each balance sheet date through review of actual attrition and projected cash flows generated by each merchant portfolio in relation to the unamortized cost of each merchant portfolio. If, upon review, an impairment of the value of the purchased merchant portfolio is indicated, amortization will be accelerated and any required loss in value recognized immediately. The Company has not recorded any charges related to impairment of purchased merchant portfolios to date. Subsequent to integration, management anticipates merchant attrition rates for the portfolios acquired in fiscal 1997 to approximate normal rates historically experienced by the Company's existing portfolios. Provision for Merchant Loss and Bad Debt Expense The provision for merchant losses and bad debt expense increased from $2.0 million in fiscal 1995 to $3.8 million in fiscal 1996 and $4.2 million in fiscal 1997. The increase from fiscal 1995 to fiscal 1996 represents a 93.8% increase. In fiscal 1996, one of the entities incurred a single fraud loss of $890,000. Although the Company incurs merchant fraud losses each year and recognizes an accrual each year for such possibilities, the Company's annual loss experience has historically been significantly less than the loss referenced above in one of the pooled entities. From fiscal 1996 to fiscal 1997, the provision for merchant losses increased 12.2% but decreased 0.3 percentage points as a percentage of total revenue. Stock Award Compensation The Company recognizes noncash compensation expense based on the vesting of certain stock awards. The vesting of awarded shares accelerated upon completion of the initial public offering. As a result, in fiscal 1995 the remaining unearned compensation expense of $241,000 was recognized at the completion of the Company's initial public offering. 20 Non-recurring Operating Expense In fiscal 1997, the Company incurred non-recurring duplicative net costs related to a sales force included in a merchant portfolio acquisition. Interest Income/Expense In fiscal 1995, the Company recognized net interest expense of $3.0 million which decreased to $1.8 million in fiscal 1996. In fiscal 1997, the Company recognized net interest income of $1.4 million. This represents a 40.9% decrease from fiscal 1995 to fiscal 1996 and a 177.1% decrease from fiscal 1996 to fiscal 1997. The Company consummated an initial public offering in August 1994, a second public offering in October 1995 and a third public offering in April 1996. The Company received net proceeds from the initial, second and third public offerings of approximately $15.9 million, $40.8 million and $100 million (after deducting underwriting discounts and commissions and expenses of the offerings), respectively. With the first two offerings, the Company repaid all borrowings outstanding under its credit facility. In fiscal 1997, the Company used a portion of the third offering net proceeds to fund merchant portfolio acquisitions and capital expenditures. The Company received interest income from the investment of the remaining net proceeds from the offerings. To the extent the Company should use an additional amount of the net proceeds from the third offering for acquisitions or working capital, management would not expect to continue to recognize a significant amount of interest income. Acquisitions of operating businesses consummated by the Company in fiscal 1997 resulted in certain debt being assumed. A portion of this debt remains outstanding. LFG recognized interest expense of $3.1 million, $3.5 million and $3.8 million in fiscal 1995, fiscal 1996 and fiscal 1997, respectively. This interest expense was a result of LFG utilizing various credit facilities which at July 31, 1997 were payable at an interest rate ranging from 6% to 12% per annum. Other Income/Expense The Company recorded a non-taxable gain of $1,000,000 in the fourth quarter of fiscal 1996 for the receipt of insurance proceeds on the life of the former Chief Financial Officer of the Company. Additionally, in fiscal years 1996 and 1997 the Company has included in this line item all non-recurring transaction costs such as legal and accounting fees related to acquisitions of operating businesses, which were accounted for as poolings of interests. During fiscal 1997, LFG recorded a charge of $367,000 related to the buyout of a consulting agreement resulting from the death of their former Chief Financial Officer. This charge occurred prior to the effective date of the merger with this entity and is included in other expense on a restated basis. 21 Income Tax As a result of the Company's increased profitability in fiscal 1996 and 1997, income tax expense has increased. Income tax expense increased from $3.3 million in fiscal 1995 to $6.1 million in fiscal 1996 and $9.6 million in fiscal 1997. The Company's effective income tax rate for fiscal 1995 through fiscal 1997 has remained relatively consistent. Seasonality The Company's revenue volume is generated from consumer credit purchases. However, the Company's revenues generally do not reflect the seasonal fluctuations that typically are associated with traditional peaks in consumer retail sales. The Company's merchants are largely engaged in retail operations which do not display these seasonal fluctuations in consumer spending. As a result, the Company experiences a generally even distribution of revenues throughout its fiscal year, with the third quarter experiencing a lower percentage of annual revenues. Quarterly Information The following table sets forth statements of income data for each of the eight quarters in the two year period ended July 31, 1997. This income data has been restated for the material operating business acquisitions completed in fiscal 1996 and fiscal 1997. Each such operating business acquisition was accounted for as a pooling of interests. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein and, in management's opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the selected quarterly information when read in conjunction with the financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for the entire fiscal year or for any future period.
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- -------- (in thousands) 1996 ---- Revenues $46,113 $48,032 $53,967 $66,779 $214,891 Gross margin 13,266 14,363 15,170 17,650 60,449 Income from operations 3,786 3,816 4,551 5,298 17,451 Income before provision for income taxes 2,762 3,290 3,914 6,391 16,357 Net income 1,661 1,979 2,339 4,247 10,226 1997 ---- Revenues $69,249 $66,051 $65,755 $83,158 $284,213 Gross margin 18,975 18,986 19,098 23,179 80,238 Income from operations 5,945 5,790 5,882 8,566 26,183 Income before provision for income taxes 6,006 5,757 5,701 8,552 26,016 Net income 3,792 3,634 3,600 5,373 16,399
The quarterly variances shown above generally are indicative of those discussed for the annual periods. The growth in revenues resulted primarily from acquisitions and new merchant contracts generated through the Company's telemarketing and field sales efforts, as well as fee enhancements with existing merchants. 22 In the third and fourth quarters of fiscal 1996, the Company made significant acquisitions which had a higher cost of revenues as a percentage of revenues than those historically experienced by the Company. Additionally, in the fourth quarter of fiscal 1996 the Company recorded a non-taxable gain of $1,000,000 for the receipt of insurance proceeds on the life of the former Chief Financial Officer of the Company. In all quarters of fiscal 1997 and the fourth quarter of fiscal 1996, the Company reported net interest income. Following the Company's initial public offering in August 1994, the Company repaid all borrowings outstanding under its principal revolving credit loan and bridge loan. The Company consummated a second public offering in October 1995 and a third public offering in April 1996. The Company received interest income from the investment of the remaining net proceeds from the offerings. In the fourth quarter of fiscal 1997, the addition of revenues from purchased merchant portfolios have not caused a proportionate increase in selling, general and administrative expenses. Liquidity and Capital Resources The Company recognizes as revenue in its statement of income the full discount rate and related fees collected from the merchant. The various costs incurred by the Company, including amounts paid to the card-issuing bank, the processing bank, and the network service provider, are reflected as costs of revenues. The Company's cash flow is generated by collecting monthly revenues from the merchants. Payments to suppliers and vendors are typically paid within 30 days, except for interchange which is paid daily to the card-issuing banks. Historically, the Company's primary uses of its capital resources have included debt service, acquisitions of merchant portfolios, capital expenditures and working capital. Several factors can alter the profitability to the Company of merchant transactions. Primarily, these include (i) improper use of the card reading terminal by the merchant resulting in higher interchange fees paid to the card- issuing bank, (ii) lower than anticipated average dollar sales of credit card transactions thereby reducing the discount rate collected because many of the transaction costs are fixed, (iii) losses incurred as a result of customer chargebacks (the Company can be required to absorb the full retail purchase amount), (iv) the inability to collect the discount rate because of insufficient funds in the merchant's bank account, (v) merchant fraud and (vi) excessive volume of customer return transactions in which the Company again incurs all costs except interchange fees. The Company's actual losses as a percentage of total revenues remained consistent from fiscal 1996 to fiscal 1997. Management does not believe that the other factors mentioned above have had a material effect on the Company's profitability. The Company expects that cash generated from operations and excess cash on hand will be adequate to meet the Company's immediate cash needs. In addition, on January 31, 1997, the Company amended and restated its credit facility with First Union National Bank of Tennessee to provide for a $20.0 million revolving line of credit. The Company has a revolving line of credit facility, through its LFG subsidiary in two related notes payable, having an aggregate available balance of $4.5 million. Each component of the facility bears interest at a variable rate based on the 23 prime rate. The aggregate balance outstanding at July 31, 1997 under the LFG facility was $1,636,505. The Company advanced funds to an independent developer who purchased a building in which the Company leases a portion of the space as its corporate headquarters. The loan provided by the Company has a maximum available balance of $13,300,000. The loan amount is being advanced in various draws by the building owner based on certain achieved milestones in renovation of the building. The outstanding principal balance at July 31, 1997 is $8,773,330. The remaining available balance of the loan has been advanced since that date. Working Capital Cash flow provided by operating activities was $8.6 million in fiscal 1995 as compared to $19.7 million in fiscal 1996 and $19.4 million in fiscal 1997. The increase in cash flow from operating activities from fiscal 1995 to fiscal 1996 resulted from increases in net income which has been achieved principally through acquisitions of operating businesses and merchant portfolios and internal generation of new merchant accounts. The effect of net income increases for all periods presented is partially offset by increases in working capital needs. At July 31, 1997, the Company had working capital of $75.6 million, as compared to working capital of $106.4 million at July 31, 1996. This decrease in working capital primarily reflects the use of net proceeds from the Company's third public offering in April 1996 for merchant portfolio acquisitions in fiscal 1996 and fiscal 1997. Accounts receivable increased $8,750,000 from July 31, 1996 to July 31, 1997. This increase was the result of increases in the number of merchant accounts acquired through acquisitions of merchant portfolios and the internal generation of new merchant accounts. Other assets at July 31, 1997, excluding non-competition agreements and deferred processing costs, increased from July 31, 1996 because of an increase in restricted cash balances of $4,395,000 required to be maintained in connection with several acquisitions. Additionally, in fiscal 1997 certain acquired operating businesses issued notes receivable of $2,513,000 to their respective shareholders. Also in fiscal 1997, a merchant portfolio acquisition consummated in the first quarter required prepaid processing costs of approximately $1,356,000 which will be amortized over forty months. Accounts payable at July 31, 1997 increased $4,307,000 as compared to July 31, 1996, primarily as a result of funds owed on a merchant portfolio acquisition. Accrued liabilities decreased $994,000 from July 31, 1996, to July 31, 1997, primarily as a result of decreased income and state franchise taxes. Capital Expenditures and Investing Activities Capital expenditures were approximately $24.4 million for fiscal 1997 as compared to $23.1 million for fiscal 1996 and $18.9 million for fiscal 1995. The overall increase in capital expenditures primarily resulted from additional expenditures related to the Company's management 24 information systems, the purchase of additional credit card terminals and the purchase of peripheral equipment for operating and financing leases to merchants. In addition to the increase in capital expenditures, the Company used $24.8 million, $32.3 million and $33.4 million for the purchase of merchant portfolios in fiscal 1995, 1996 and 1997, respectively. The Company purchased nine merchant portfolios in fiscal 1995, four merchant portfolios in fiscal 1996, and eight merchant portfolios in fiscal 1997. Amounts received on financing leases, net of amortized unearned income were $10.5 million, $12.3 million and $14.0 million in fiscal 1995, 1996 and 1997, respectively. At July 31, 1997 approximately $49.2 million of the net proceeds received in the third public offering in April 1996 have been reinvested in U.S. Treasury securities. Financing Activities The significant increase in cash provided by financing activities for fiscal 1996 resulted from the consummation of the Company's second and third public offerings in October 1995 and April 1996. Cash provided by financing activities for fiscal 1996 was $129.8 million which primarily reflects the net proceeds from the offerings after retirement of the Company's outstanding bank indebtedness. Net cash used by financing activities was $13.1 million in fiscal 1997. The cash used by financing activities for fiscal 1997 reflects the net payments used to decrease the Company's outstanding indebtedness and the issuance of a note receivable of $8.8 million. Future Capital Needs Management believes that significant expenditures for the purchase of additional merchant portfolios may be required for the Company to sustain its growth in the future. Management expects to fund such purchases through cash on hand, cash generated from operations and bank borrowings. Management believes that the combination of these sources will be sufficient to meet the Company's anticipated liquidity needs and its growth plans through fiscal 1998. The Company, however, may pursue additional expansion opportunities, including acquisitions of operating businesses accounted for as poolings requiring the issuance of additional shares of stock. Additionally, the Company may make purchases of additional merchant portfolios, which may require additional capital, and the Company may incur, from time to time, additional short-term and long-term indebtedness or issue, in public or private transactions, equity or debt securities, the availability and terms of which will depend upon then prevailing market and other conditions. There can be no assurance that any such financing will be obtained on terms acceptable to the Company. The Company's revolving credit facility with First Union National Bank of Tennessee was amended and restated during fiscal 1995 to increase the line of credit to $17.5 million. The Company repaid all outstanding debt related to this credit facility with the proceeds from its second public offering during fiscal 1996. During fiscal 1997 this credit facility was amended and restated, increasing the revolving line of credit to $20.0 million and terminating the bridge loan. The current amendment expires January 31, 1998. Borrowings, if any, under the new credit facility will be used to finance future purchases of merchant portfolios and equipment and for working capital purposes. 25 Business Risk Factors This Annual Report on Form 10-K and other information that is provided by the Company contain statements that, with the exception of historical facts, are forward-looking statements including, but not limited to, statements about: (i) future growth through and availability of merchant portfolios and operating business acquisitions, (ii) the Company's strategies, uses and expectations for existing and new products, services, technologies and opportunities, (iii) the future profitability of merchant portfolios and operating business acquisitions, (iv) the demand for and acceptance of new and existing products and services, (v) the provision of merchant account portfolio processing services to the banking industry and (vi) the adequacy of the Company's capital resources. These statements are forward-looking statements that are subject to important risks and uncertainties, which could affect the Company's actual results and could cause such results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. These important risks and uncertainties include, but are not limited to, the following: Registration Termination. An independent service organization, such as PMT, must register through processing banks with VISA and MasterCard. VISA and MasterCard permit PMT, as a registered service provider, to provide VISA and MasterCard transaction processing services through processing banks that are members of VISA or MasterCard. There can be no assurance that PMT's registration with VISA and MasterCard upon expiration will be renewed or that the current rules of VISA and MasterCard permitting independent service providers to market transaction processing services will remain in effect. Furthermore, these rules are set by member banks, some of which are competitors of PMT. The non-renewal of either registration or any changes in VISA or MasterCard rules that would prevent the registration of PMT or limited its ability to provide VISA and MasterCard transaction processing services, would have a material adverse effect on PMT's financial condition and operating results. Dependence on Processing Relationships. The success of PMT's business is dependent, in part, on the ability of processing banks to provide certain services to PMT's merchant clients. The failure of these processing banks to process merchant transactions efficiently and effectively could result in merchants terminating their agreements and relationships with PMT and its processing banks. Termination of these agreements could result in PMT's loss of its principal source of revenue. There can be no assurance (i) that PMT's contractual arrangements with its processing banks will be renewed or that PMT will be able to obtain favorable replacement arrangements, whether upon expiration, termination or otherwise, (ii) that such processing banks or their replacements will provide adequate levels of service or (iii) that such processing banks will not themselves be acquired, resulting in possible adverse changes in PMT's relationship with the processing bank. Any of these events could have a material adverse effect on PMT's business. Risks Associated with Growth Strategy. A material element of the Company's growth strategy is the acquisition of additional merchant portfolios and operating businesses in order to achieve greater economies of scale. There can be no assurance that the current level of growth opportunities will continue to exist, that the Company will be able to acquire merchant portfolios and operating businesses that satisfy the Company's criteria, or that any such acquisition will be 26 on terms favorable to the Company. Further, the Company's growth strategy will require that the Company continue to hire qualified personnel, while concurrently expanding its managerial and operational infrastructure. There can be no assurance that the Company will be able to hire and retain qualified personnel or that that Company will be able to expand successfully its infrastructure as appropriate to accommodate future acquisitions or growth. As a result of these factors, the Company may not realize the expected economic benefits associated with its acquisitions, which may have a material adverse effect on the Company's financial condition and results of operations. Competition. The market for credit, charge and debit card transaction processing services is highly competitive. PMT's principal competitors include local processing banks, vertically integrated non-bank processors and other independent service organizations, many of whom have substantially greater resources than PMT. Many of PMT's competitors have access to significant capital, management, marketing and technological resources that are equal to or greater than those of PMT, and there can be no assurance that PMT will continue to be able to compete successfully with such competitors. Merchant Attrition. Merchant attrition is an expected aspect of the credit card business. There can be no assurance that in the future the Company's rates of attrition will not exceed its own historical levels or the attrition rates experienced by its peer group. Historically, PMT's merchant attrition has been related to merchants going out of business, merchants returning to local processing banks or merchants transferring to competitors with rates PMT was unwilling to match. Significant merchant attrition would have a material adverse effect on PMT's financial condition and operating results. Chargeback Risk. In the event a billing dispute between a cardholder and a merchant is not resolved in favor of the merchant, the transaction is "charged back" to the merchant, and the purchase price is refunded to the cardholder. If the merchant does not provide a credit to the cardholder, PMT, and, in certain cases, PMT and the processing bank, must bear the credit risk for the full transaction amount. There can be no assurance that PMT will not experience significant chargebacks in the future. Significant chargebacks that are not paid by the merchant would have a material adverse effect on PMT's financial condition and operating results. Merchant Fraud. Generally, PMT is responsible for fraudulent credit card transactions initiated by its merchant clients. Examples of merchant fraud include inputting false sales transactions or false credits. Furthermore, management believes that a significant majority of such fraud occurs in the states of California, Florida, New York and Texas where a large concentration of the Company's merchant base is located. PMT and its processing banks monitor merchant charge volume, average charge and number of transactions, as well as check for unusual patterns in the charges, returns and chargebacks processed. As part of its fraud avoidance policies, PMT generally will not process for certain types of businesses in which incidents of fraud have been common. There can be no assurance that PMT will not experience significant amounts of merchant fraud in the future. Significant merchant fraud would have a material adverse effect on PMT's financial condition and operating results. 27 Industry Price Increases. From time to time, VISA and MasterCard increase the fees they charge for processing transactions. Most merchant processing agreements permit fee increases to be passed on to the merchants. There can be no assurance however, that competitive pressures will not result in PMT absorbing a portion or all of such increases in the future, which event could have a material adverse effect on PMT. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements
Page ---- Report of Independent Accountants.................................................. 30 Consolidated Balance Sheets at July 31, 1996 and July 31, 1997..................... 31 Consolidated Statement of Income, each of the three years ended July 31, 1997...... 32 Consolidated Statement of Changes in Shareholders' Equity, each of the three years ended July 31, 1997........................................................ 33 Consolidated Statement of Cash Flows, each of the three years ended July 31, 1997.. 34 Notes to Consolidated Financial Statements......................................... 36
29 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of PMT Services, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of PMT Services, Inc. and its subsidiaries at July 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As described in Note 17, on October 2, 1997 PMT Services, Inc. merged with Bancard, Inc. in a transaction accounted for as a pooling of interests. The accompanying supplementary consolidated financial statements give retroactive effect to the merger of PMT Services, Inc. with Bancard, Inc. In our opinion, based upon our audits, the accompanying supplementary consolidated balance sheet(s) and the related supplementary consolidated statements of income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of PMT Services, Inc. and its subsidiaries at July 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Nashville, TN September 23, 1997, except as to Note 17 which describes the pooling of interests with Bancard, Inc. which is as of October 2, 1997. 30 PMT SERVICES, INC. CONSOLIDATED BALANCE SHEET
July 31, --------------------------------- 1996 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents............................ $109,156,234 $ 23,607,045 Investments.......................................... -- 49,167,521 Accounts receivable.................................. 8,487,629 17,237,904 Current portion of net investment in finance leases.. 10,331,271 9,249,753 Inventory............................................ 823,276 1,720,194 Deferred income taxes................................ 945,934 1,543,379 Other current assets................................. 1,059,667 2,028,511 ------------ ------------ Total current assets................................ 130,804,011 104,554,307 Purchased merchant portfolios, net of accumulated amortization of $9,668,708 and $18,689,846.......... 62,075,590 84,343,006 Long-term portion of net investment in finance leases 22,034,754 24,636,881 Property and equipment, net.......................... 5,103,227 9,154,953 Long-term note receivable............................ -- 8,773,330 Intangible and other assets.......................... 7,886,890 17,545,370 ------------ ------------ Total assets........................................ $227,904,472 $249,007,847 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt.................... $ 13,281,646 $ 14,516,369 Accounts payable..................................... 4,809,189 9,116,159 Accrued liabilities.................................. 6,051,183 5,057,408 Deferred revenues.................................... 230,496 234,873 ------------ ------------ Total current liabilities 24,372,514 28,924,809 Long-term debt....................................... 19,051,160 16,891,014 Deferred income taxes................................ 994,721 624,777 ------------ ------------ Total liabilities................................... 44,418,395 46,440,600 ------------ ------------ Shareholders' equity: Preferred stock, $0.01 par value, authorized: 10,000,000 shares; no shares outstanding Common stock, $0.01 par value, authorized: 100,000,000 shares; outstanding: 38,478,274 and 41,748,708 shares................... 384,783 417,487 Additional paid-in capital............................ 166,632,988 170,991,426 Treasury stock, at cost: 1,188 shares................ (12,000) (12,000) Accumulated earnings.................................. 16,480,306 31,170,334 ------------ ------------ 183,486,077 202,567,247 ------------ ------------ Commitments and contingent liabilities (Notes 3, 13 and 16) Total liabilities and shareholders' equity.......... $227,904,472 $249,007,847 ============ ============
The accompanying notes are an integral part of these financial statements. 31 PMT SERVICES, INC. CONSOLIDATED STATEMENT OF INCOME
Year ended July 31, ------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- Revenues............................... $139,539,232 $214,891,226 $284,213,432 Cost of revenues....................... 98,151,830 154,442,411 203,975,701 ------------ ------------ ------------ Gross margin....................... 41,387,402 60,448,815 80,237,731 ------------ ------------ ------------ Selling, general and administrative expenses........................... 23,772,992 31,480,460 36,542,433 Depreciation and amortization expense.. 3,621,995 7,730,768 12,670,386 Provision for merchant loss and bad debt expense....................... 1,953,635 3,786,247 4,248,218 Stock award compensation............... 241,477 -- -- Non-recurring operating expense........ -- -- 593,626 ------------ ------------ ------------ 29,590,099 42,997,475 54,054,663 ------------ ------------ ------------ Income from operations................. 11,797,303 17,451,340 26,183,068 Interest income........................ 313,073 2,107,547 5,226,188 Interest expense....................... (3,356,556) (3,906,051) (3,838,817) Other income (expense), net............ -- 703,896 (1,554,171) ------------ ------------ ------------ Income before provision for income taxes.............................. 8,753,820 16,356,732 26,016,268 Provision for income taxes............. 3,301,052 6,131,189 9,617,516 ------------ ------------ ------------ Net income......................... $ 5,452,768 $ 10,225,543 $ 16,398,752 ============ ============ ============ Earnings per share..................... $ 0.20 $ 0.29 $ 0.40 ============ ============ ============
The accompanying notes are an integral part of these financial statements. 32 PMT SERVICES, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Additional Accumulated Total Common Paid-in Treasury Unearned Earnings Shareholders' Stock Capital Stock Compensation (Deficit) Equity ---------- ------------- --------- ------------- ------------ -------------- Balance at July 31, 1994......... $ 43,810 $ 1,876,962 $(42,000) $(241,477) $ 3,260,939 $ 4,898,234 Stock awards vested............ 926,597 241,477 1,168,074 Shares issued.................. 24,209 15,891,283 15,915,492 Expiration of put options on redeemable common stock...... 19,224 6,502,083 6,521,307 Stock warrants exercised....... 1,301 418,615 419,916 Stock options exercised........ 346 106,582 106,928 Acquire majority interest in subsidiary................... (510,545) (510,545) Purchase of treasury stock..... (32,500) (32,500) Reissuance of treasury stock... (6,000) 6,000 -- Distributions of Subchapter S Corporations prior to poolings..................... (524,614) (524,614) Net income for the year........ 5,452,768 5,452,768 -------- ------------ -------- ------------ ----------- ------------- Balance at July 31, 1995......... 88,890 25,716,122 (68,500) -- 7,678,548 33,415,060 Shares issued.................. 58,520 140,746,488 140,805,008 Stock options exercised........ 448 475,803 476,251 Stock splits................... 236,925 (236,925) -- Purchase of treasury stock..... (12,000) (12,000) Reissuance of treasury stock... (68,500) 68,500 -- Minority shareholders' contribution.................. 120,000 120,000 Martin Howe fiscal year conversion.................... (356,914) (356,914) Distributions of Subchapter S Corporations prior to poolings...................... (1,186,871) (1,186,871) Net income for the year........ 10,225,543 10,225,543 -------- ------------ -------- ------------ ----------- ------------- Balance at July 31, 1996......... 384,783 166,632,988 (12,000) -- 16,480,306 183,486,077 Shares issued................... 10 14,844 14,854 Stock options exercised......... 3,694 771,034 774,728 August 1996 pooling............. 5,000 (4,000) (115,762) (114,762) March 1997 pooling.............. 8,000 (7,000) 141,303 142,303 May 1997 pooling................ 16,000 1,074,821 213,098 1,303,919 Tax benefit from non- qualified stock options...... 1,986,174 1,986,174 Minority shareholders' contribution................ 522,565 522,565 Distributions of Subchapter S Corporations, prior to poolings...................... (1,947,363) (1,947,363) Net income for the year......... 16,398,752 16,398,752 -------- ------------ -------- ------------ ----------- ------------- Balance at July 31, 1997......... $417,487 $170,991,426 $(12,000) -- $31,170,334 $202,567,247 ======== ============ ======== ============ =========== =============
The accompanying notes are an integral part of these financial statements. 33 PMT SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended July 31, ------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- Reconciliation of net income to net cash provided by operating activities: Net income............................................. $ 5,452,768 $ 10,225,543 $ 16,398,752 Martin Howe fiscal year conversion.................... -- (356,914) -- Adjustments: Depreciation and amortization expense................ 4,202,660 8,281,086 13,278,028 Provision for merchant losses and bad debt expense... 1,953,635 3,786,247 4,248,218 Stock award compensation and other................... 241,477 -- -- Deferred income taxes................................ 357,734 (306,164) (954,970) Changes in assets and liabilities, excluding the effects of non-restated adjustments: Accounts receivable................................. (1,827,243) (3,127,893) (8,188,636) Inventory........................................... (258,265) (133,922) (662,688) Other assets........................................ (1,144,571) (337,516) (6,596,169) Accounts payable.................................... (111,098) 889,656 3,670,073 Accrued liabilities................................. (147,980) 864,000 (1,685,785) Deferred revenues................................... (155,291) (59,105) (103,607) ------------ ------------ ------------ Net cash provided by operating activities......... 8,563,826 19,725,018 19,403,216 Cash flows from investing activities: Purchase of merchant portfolios...................... (24,752,658) (32,341,624) (33,363,964) Purchase of property and equipment, net.............. (2,109,344) (2,185,032) (5,121,765) Purchase of equipment for leasing.................... (16,809,608) (20,865,015) (19,296,806) Purchase of investments, net......................... -- -- (49,167,521) Proceeds from receivable securitization.............. -- -- 1,076,317 Amounts received on leases, net of amortized unearned income................................. 10,478,442 12,252,928 14,042,820 ------------ ------------ ------------ Net cash used in investing activities............. (33,193,168) (43,138,743) (91,830,919) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of long-term debt............. 35,591,026 35,842,752 34,093,211 Payments on long-term debt........................... (27,710,631) (45,958,109) (37,283,586) Proceeds from issuance of common stock............... 17,098,894 140,963,115 789,582 Issuance of note receivable.......................... -- -- (8,773,330) Payments to repurchase treasury stock................ (32,500) (12,000) -- Proceeds from minority shareholders' contributions... -- 120,000 -- Distributions of Subchapter S Corporations........... (524,614) (1,186,871) (1,947,363) ------------ ------------ ------------ Net cash provided (used) by financing activities.. 24,422,175 129,768,887 (13,121,486) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents.... (207,167) 106,355,162 (85,549,189) Cash and cash equivalents at beginning of year.......... 3,008,239 2,801,072 109,156,234 ------------ ------------ ------------ Cash and cash equivalents at end of year................ $ 2,801,072 $109,156,234 $ 23,607,045 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid for income taxes............................. $ 3,596,249 $ 5,772,989 $ 9,367,692 Cash paid for interest................................. 2,838,771 3,312,590 3,300,415
34 PMT SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED) Supplemental schedule of noncash activities: In connection with the purchase of merchant portfolios in fiscal 1995, the Company issued promissory notes totaling $80,500. In connection with three separate operating business acquisitions in fiscal 1997, the Company issued 2,900,000 shares of common stock. The acquisitions were accounted for as poolings of interests which did not require retroactive restatement because they had an insignificant impact on the Company. The Company recognized a tax benefit of $318,517 and $1,986,174 for the years ended July 31, 1996 and 1997, respectively, for the excess of the fair market value at the exercise date over that at the award date for stock options exercised. The accompanying notes are an integral part of these financial statements. 35 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Operations The Company markets and services electronic credit card authorization and payment systems to merchants, including sale and leasing of related equipment. The Company provides these services to merchants pursuant to contracts between the Company and various processing banks. Generally, the Company's agreements with the processing banks contain certain aspects of both marketing and service. Although the marketing portion of the agreements is limited as to time, the service portion of substantially all of these agreements is not. The marketing aspects expire at various dates unless renewed automatically, if applicable, or extended by the parties. There can be no assurance that PMT's contractual arrangements with its processing banks will be renewed or that PMT will be able to obtain favorable replacement arrangements, whether upon expiration, termination or otherwise. Basis of consolidation The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Interests in the majority-owned subsidiaries are reported using the full consolidation method. All material intercompany balances and transactions are eliminated. Basis of presentation Certain financial statement items, in prior periods, have been reclassified to conform to the current year's presentation. The consolidated financial statements give retroactive effect to certain acquisitions of operating businesses consummated in fiscal 1996 and 1997 which were accounted for as poolings of interests (Note 3). Management estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 36 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Revenue and cost recognition Revenues derived from the electronic processing of transactions (merchant discount rate and related fees) on the credit card authorization equipment are recognized at the time the merchants' transactions are processed. Related commission expense and processing charges are also recognized at that time. Revenues related to the direct sale of credit card authorization equipment are recognized when the equipment is shipped. Installation fees related to both the direct sale and the marketing of this equipment are recognized when installation is completed. Fees received in advance of shipment or installation are not recognized as revenue until earned. Revenue related to finance leasing of point-of-sale processing equipment are recognized over the term of the lease agreement using the interest method. Cost of revenues includes interchange fees paid to the credit card-issuing bank and fees paid to the network service provider, VISA and MasterCard and the processing bank. These costs are recognized at the time the merchants' transactions are processed and the related revenue is recorded. The Company recognizes as revenue in its statement of income the full discount rate and fees collected from the merchant. The various costs incurred by the Company, including amounts paid to the card-issuing bank, the processor and network service provider, are reflected as costs of revenues. In accordance with the Company's contracts with some of its processing banks, all of the funds collection and most of the disbursement function is performed on behalf of the Company by the processing bank. At month end, the processing bank collects the total discount rate and fees from the merchants and disburses to each of the service providers their fees. Disbursements for the interchange fee paid to the card-issuing bank are made daily. Shortly after month end, the processing bank disburses to the Company the remainder of the funds collected from the merchant which represents a significant portion of the Company's gross margin. Cash equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. 37 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Investments The Company's investments of $49,167,521 are in United States Government Treasury notes for a term less than one year. These investments are classified as held-to-maturity according to Statement of Financial Accounting Standard No. 115 - Accounting for Certain Debt and Equity Securities (SFAS 115), and are carried at amortized cost as determined by specific identification. The fair value of these investments is $49,198,891 at July 31, 1997. No such investments were outstanding at July 31, 1996. Financial instruments The Company has various financial instruments, including cash, time deposits, receivables, accounts payable, revolving credit facilities, accrued liabilities and a hedging contract. Cash, time deposits, receivables, accounts payable and accrued liabilities are settled within a year and are not subject to market rate fluctuations. Revolving credit facilities are at variable market rates. The carrying value of these financial instruments approximates their fair market values. Notes payable with a carrying amount of $32,332,806 at July 31, 1996 and $31,407,383 at July 31, 1997 had a market value of $33,990,917 and $32,289,941, respectively, using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Hedging contract The Company entered a forward rate lock agreement during fiscal 1996 to minimize its exposure to interest rate risk. The notional amount of the agreement totaled $15,000,000. The notional amount does not represent amounts exchanged by parties and, thus, is not a measure of the Company's exposure to loss through its use of these agreements. The hedging contract, with no carrying amount, had a fair value of ($126,563) at July 31, 1996. In fiscal 1997, the Company entered into another forward rate lock agreement in the amount of $20,000,000. Both forward rate lock agreements settled in fiscal 1997 and the amounts exchanged under these agreements had no material impact on the financial statements. Such settlements were deferred and are being amortized, using the effective interest rate method, over the remaining life of the underlying debt hedged. There were no outstanding hedging contracts at July 31, 1997. Under the Company's forward rate lock agreements, the Company and the counter party exchange, upon maturity of the agreement, an amount calculated by reference to the agreed notional amount and a specified index. These forward rate lock agreements allow the Company to reduce its exposure to interest rate fluctuations on certain floating rate debt. 38 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Accounts receivable Accounts receivable primarily comprise amounts due from processing banks which represent the discount rate and fees earned, after related interchange fees and other processing costs, on transactions processed during the month ending on the balance sheet date. Such balances are received from processing banks approximately 20 days following the end of each month. Financing leases The Company provides direct financing leases and sales-type leases to its customers. The significant difference between the two types of leases is dealer profit recognized by the Company in a sales-type lease. At inception of a lease of point-of-sale equipment, the Company records an investment in direct financing leases which is equal to the total of future lease rentals and the estimated residual value of the leased equipment, less unearned income. The unearned income is the difference between the cost of the equipment and the total of future lease rentals plus the estimated residual value of the leased equipment. Residual value is the estimated proceeds from the sale or lease of the asset at the end of the lease term. Amortization of unearned income is recorded on the interest method. The Company's investment in finance leases is reduced by an allowance for rental payments that are expected to be uncollectible. Inventory Inventory of credit card authorization equipment is stated at the lower of cost or market, with cost being determined by specific identification. Property and equipment Property and equipment are recorded at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets ranging from 3 to 10 years. Purchased merchant portfolios Purchased merchant portfolios are recorded at acquired cost. Amortization expense is recognized on a straight-line basis over 10 years consistent for acquired entities. Management evaluates purchased merchant portfolios and other long-lived assets for impairment at each balance sheet date through review of actual attrition and projected undiscounted cash flows generated by each merchant portfolio in relation to the unamortized cost of each merchant portfolio. If, upon review, an impairment of the value of the purchased merchant portfolio is indicated, amortization will be accelerated to recognize the diminution in value. 39 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Reserve for chargebacks and merchant fraud Disputes between a cardholder and a merchant periodically arise as a result of cardholder dissatisfaction with merchandise quality or merchant services and the disputes may not be resolved in the merchant's favor. In these cases, the transaction is "charged back" to the merchant and the purchase price is refunded by the merchant. If the merchant is unable to grant a refund, the Company or, under limited circumstances, the Company and the processing bank, must bear the credit risk for the full amount of the transaction. The Company evaluates its risk and estimates its potential loss for chargebacks based on historical experience. A provision for these estimated losses is provided in the same period as the related revenues. Income taxes The liability method is used in accounting for income taxes, whereby deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The tax benefit of deductible temporary differences is reflected within the various components of deferred tax assets and recognized if the realization thereof is more likely than not (Note 15). Earnings per share Earnings per share for fiscal 1995, 1996 and 1997 is calculated based on weighted average shares of common stock outstanding of 27,105,717, 34,705,437 and 41,143,856 respectively. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 - Earnings per Share (SFAS 128). SFAS 128 requires companies with complex capital structures that have publicly held common stock or common stock equivalents to present both basic and diluted earning per share (EPS) on the face of the income statement. The presentation of basic EPS replaces the presentation of primary EPS previously required by Accounting Principles Board Opinion No. 15 (APB 15). Basic EPS is calculated as income available to common shareholders divided by the weighted average number of shares outstanding during the period. Diluted EPS (previously referred to as fully diluted EPS) is calculated using the "if converted" method for convertible securities and the treasury stock method for options and warrants as prescribed by APB 15. This statement is effective for financial statements issued for interim periods and annual periods ending after December 15, 1997. Earlier application is not permitted. The Company will adopt the provisions of this statement in the quarter ended January 31, 1998. Management believes the provisions of this statement will not have a material effect on earnings per share. 40 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Stock splits On December 14, 1995 the Board of Directors approved a two-for-one stock split and on May 17, 1996 approved a three-for-two stock split, each to be affected in the form of a stock dividend. The stock splits for December 14, 1995 and May 17, 1996 were effective for shareholders of record at the close of business on December 29, 1995 and May 28, 1996, respectively. All earnings per share information included in the accompanying financial statements has been adjusted to give retroactive effect to the stock splits for all periods presented. Additionally, all share information stated in Note 10 has been adjusted to give retroactive effect to the stock splits. NOTE 2 - STOCK OFFERINGS: In August 1994, the Company consummated an initial public offering of 3,565,000 shares of common stock, 2,315,000 shares of which were offered by the Company (the "Offering"). In connection with the Offering, the Company received net proceeds of approximately $15.9 million, after deducting underwriting discounts and commissions and expenses of the Offering. The net proceeds were used to repay a $4.9 million noninterest bearing note payable and all borrowings outstanding under the Company's revolving line of credit and bridge loan. The remainder of the net proceeds were used to fund merchant portfolio purchases, upgrade the Company's information systems and for working capital needs. Upon the effective date of the Offering, vesting of management stock awards for 439,084 shares of common stock was accelerated and the remaining unearned compensation of $241,000 was immediately recognized. The Company received a tax deduction in fiscal 1995 for the fair value of the vested stock on the effective date of the Offering. Compensation expense related to the stock awards was recognized in the financial statements based upon the fair value of the common stock at the date of the awards of $2.48 per share. The tax benefit arising from the excess of fair value at the vesting date over that at the award date of approximately $927,000 is recognized as additional paid-in capital. Warrants for 130,060 shares of the Company's common stock were exercised concurrent with the effective date of the Offering at a weighted average exercise price of $3.23. Additionally, the Company delivered 112,500 shares of common stock to the seller in connection with the March 1994 purchase of a merchant portfolio. In October 1995, the Company consummated a second public offering of 2,156,250 shares of common stock, 1,931,250 of which were offered by the Company. The Company received net proceeds of approximately $40.8 million, after deducting underwriting discounts and commissions and expenses of the offering, and repaid all borrowings outstanding under its revolving line of credit. 41 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Company offered 3,910,000 shares of its common stock in a third public offering consummated in April 1996. The Company received net proceeds of approximately $100 million after deducting underwriting discounts and commissions and estimated expenses of the offering. NOTE 3 - ACQUISITIONS: Operating Business Acquisitions During fiscal 1996, the Company began issuing common stock to acquire operating businesses with both existing merchant portfolios and sales organizations capable of generating new accounts. In fiscal 1996 and 1997, the Company consummated nine operating business acquisitions by issuing common stock in exchange for all the outstanding common stock of the companies acquired. These transactions were accounted for as poolings of interest. Six of these transactions were considered material for restatement and are summarized below: Company Acquired Date Shares Issued Martin Howe Associates, Inc. (MHA) July 1, 1996 594,011 Fairway Marketing Group (Fairway) December 23, 1996 424,999 Bancard Systems, Inc. (BSI) January 27, 1997 3,131,250 Retail Payment Services, Inc. (RPS) January 30, 1997 567,519 Eric Krueger, Incorporated (Krueger) June 3, 1997 579,000 LADCO Financial Group, Inc. (LFG) July 14, 1997 1,463,414 PMT's consolidated financial statements have been restated to include the accounts of the above named entities for all periods presented by including the historical results of these entities. The historical results of these six pooled entities reflect each of their actual operating cost structures and, as a result, do not necessarily reflect the cost structure of the newly combined entity. Significant, unusual and non-recurring costs affecting fiscal 1996 operating results of the pooled entities include a single fraud loss of $890,000, recognition of $400,000 in asset impairment losses in one entity, and executive bonuses of $330,000 (totaling approximately $1 million after-tax or $0.02 per share). Although PMT incurs merchant fraud losses each year, and recognizes an accrual each year for such possibilities, the Company's annual loss experience historically has been significantly less than the loss referenced to above. Additionally, no further asset impairment losses are expected from any of the assets acquired as a result of these operating business acquisitions. The historical results do not purport to be indicative of results which may occur in the future. 42 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) MHA had a calendar year end and, accordingly, the MHA statements of income for the years ended December 31, 1994, and 1995 have been combined with the Company's statements of income for the fiscal years ended July 31, 1995 and 1996, respectively. In order to conform MHA's year end to the Company's fiscal year end, results of operations for MHA for the six- month period ended June 30, 1996 have been excluded from the consolidated statement of income for the fiscal year ended July 31, 1996. Accordingly, an adjustment has been made in fiscal year 1996 to retained earnings for the exclusion of the net loss of $356,914 for such six-month period. MHA's results of operations for this six-month period include revenues of $10,743,645, expenses of $11,022,698 and net loss before provision of income taxes of $279,053. Fairway, RPS and Krueger were Subchapter S Corporations for income tax purposes; therefore, these entities did not pay U.S. federal income taxes. These entities will be included in the Company's U.S. federal income tax return effective from the date of merger. Separate revenues, net income and related per share amounts of the acquired operating businesses for the periods prior to the mergers are presented in the following table. In addition, the table includes unaudited pro forma net income and earnings per share amounts which reflect pro forma adjustments to present income taxes on the basis on which they will be reported in future periods.
Year Ended Year Ended Year Ended July 31, 1995 July 31, 1996 July 31, 1997 -------------- -------------- -------------- Revenues PMT $ 75,242,866 $136,254,139 $240,756,047 LFG 8,860,400 11,008,144 12,881,617 MHA 13,764,195 13,585,887 -- BSI 16,808,554 21,540,196 12,218,404 Fairway 18,072,187 19,524,072 7,125,352 Other 6,791,030 12,978,788 11,232,012 ------------ ------------ ------------ Revenues, as reported $139,539,232 $214,891,226 $284,213,432 ============ ============ ============ Net Income (Loss) PMT $ 4,032,000 $ 8,952,399 $ 13,805,887 LFG 917,608 1,024,212 1,318,778 MHA (391,845) (327,023) -- BSI 236,002 287,669 745,665 Fairway 164,381 (858,125) 183,262 Other 494,622 1,146,411 345,160 ------------ ------------ ------------ Net income, as reported 5,452,768 10,225,543 16,398,752 Pro forma tax effect of Subchapter S Corporations (256,032) (115,325) (268,666) ------------ ------------ ------------ Pro forma net income $ 5,196,736 $ 10,110,218 $ 16,130,086 ============ ============ ============
43 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Earnings per share: As reported $0.20 $0.29 $0.40 Pro forma $0.19 $0.29 $0.39 In addition to these six transactions, the Company completed three separate operating business acquisitions during fiscal 1997 with three unrelated entities by issuing an aggregate of 2,900,000 shares of its common stock in exchange for all the outstanding stock of the three entities. On an individual basis these transactions were not considered material for retroactive restatement. Asset Purchases The Company purchases merchant portfolios which provide the Company the right to service specific merchants under contract to processing banks for electronic authorization and payment processing. The Company purchased nine merchant portfolios in fiscal 1995, four merchant portfolios in fiscal 1996 and eight merchant portfolios in fiscal 1997. These acquisitions were accounted for as purchase transactions, and accordingly, the operating results of the merchant portfolios are included in the Company's results of operations from the effective dates of the acquisitions. In connection with the purchase of merchant portfolios, the Company may enter into a noncompetition agreement with the sellers of the portfolios. In such cases, a portion of the purchase price of each merchant portfolio is allocated to the related noncompetition agreement (Note 7). Amortization expense related to purchased merchant portfolios was $2,283,638, $5,642,084 and $8,886,428 in fiscal 1995, 1996 and 1997, respectively. Individually significant purchase transactions are as follows: ABC - The Company purchased a merchant portfolio from BankCard America, Inc. ("ABC") in April 1995 for a purchased price of $7,674,990. The Company paid $2,600,000 in cash, issued a $400,000 note payable with interest at 3% due May 1, 1995 and issued a $4,700,000 note payable with interest at 3% due July 1, 1995. The Company incurred direct costs and expenses related to the purchase of approximately $1,300,000. The purchase agreement provided additional consideration of $2,500,000 payable to the seller contingent upon the seller's ability to negotiate the transfer of the merchant accounts from the current processing bank to the Company's primary processing bank. In May 1995, an agreement was entered into providing for transfer of the merchant accounts and the Company paid $2,500,000 representing additional purchase price for the merchant portfolio. 44 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In connection with the purchase, the Company signed a guaranty for a $1,000,000 note payable to the current processing bank by ABC expiring May 9, 1998. The Company received a security interest in stock warrants to purchase 120,000 shares of the Company's common stock currently held by a shareholder of ABC. Additionally, beginning June 1995, the Company's primary processing bank required a security deposit of $1,500,000 for a period of six months due to the conversion of other merchant portfolios to this bank. Approximately $1,000,000 plus accrued interest was returned to the Company in March 1996. A sum of $500,000 will remain on deposit with this primary processing bank as long as the Company participates in the bank's Association Marketing Agreement. This amount is included in intangible and other assets on the Company's balance sheet at July 31, 1997. TERMNET AND CPS - In July 1995, the Company purchased two merchant portfolios which were financed under the Company's credit facility. The Company paid $6,200,000 to TermNet Merchant Services, Inc. ("TermNet") for a merchant portfolio and inventory. The Company paid $5,951,000 to Consumer Payment Services, Inc. ("CPS") for the second purchase in July 1995. In addition to the CPS merchant portfolio, the Company also obtained a merchant terminal lease portfolio, inventory and other office assets. IMPERIAL BANK - In October 1995, the Company purchased a merchant portfolio from Imperial Bank ("Imperial") for $8,650,000 with a portion of the proceeds from the Company's second public offering. UMB - In March 1996, the Company purchased a merchant portfolio from UMB Bank ("UMB") for $13,500,000 with a portion of the proceeds from the Company's second public offering. Additionally, the Company purchased merchant equipment inventory from UMB in the transaction. Unaudited pro forma operating results are presented below to provide additional information relative to the potential effect upon the Company's operations of significant acquisitions. Pro forma information is provided only for acquisitions meeting certain size and other requirements set forth by the Securities and Exchange Commission. Each of the above acquisitions meet these requirements and are included in the unaudited pro forma summary for the periods specified below. There were no asset purchases which met the significance requirements in fiscal 1997. 45 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) EFFECTIVE INCLUDED IN DATE OF PRO FORMA RESULTS PURCHASES BEGINNING FISCAL YEAR --------- --------------------- ABC April 1, 1995 1995 TermNet July 1, 1995 1995 CPS July 1, 1995 1995 Imperial October 1, 1995 1995 UMB March 1, 1995 1995 These unaudited pro forma results have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the purchases been made at the beginning of fiscal 1995 or fiscal 1996, or of results which may occur in the future. PRO FORMA PRO FORMA YEAR ENDED YEAR ENDED July 31, 1995 JULY 31, 1996 --------------- --------------- Revenues $212,376,315 $235,222,557 Net income $ 3,896,695 $ 10,320,854 Earnings per share $0.14 $0.30 Actual results during fiscal 1997 were not materially different than pro forma results. NOTE 4 - NET INVESTMENT IN DIRECT FINANCE LEASES:
JULY 31, ---------------------------- 1996 1997 ------------ ------------ Minimum lease payments................................................................. $ 45,674,278 $ 48,501,795 Residual values - unguaranteed......................................................... 5,773,731 5,725,153 Allowance for doubtful accounts........................................................ (1,659,203) (2,481,981) ------------ ------------ Net minimum lease payments receivable.................................................. 49,788,806 51,744,967 Unearned income........................................................................ (17,422,781) (17,858,333) ------------ ------------ Net investment in direct financing leases.............................................. $ 32,366,025 $ 33,886,634 ============ ============
Changes in the allowance for doubtful accounts were as follows:
For the year ended July 31, ---------------------------------------- 1995 1996 1997 ------------ ------------ ----------- Balance at beginning of year $ 1,513,455 $ 1,017,459 $ 1,659,203 Provision for bad debt expense 1,433,390 2,132,542 2,389,962 Charged off lease contracts (2,487,772) (1,637,744) (2,043,331) Bad debt recoveries 558,386 146,946 476,147 ------------ ------------ ----------- Balance at end of year $ 1,017,459 $ 1,659,203 $ 2,481,981 ============ ============ ===========
46 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) At July 31, 1997, minimum lease payments receivable, including estimated residual values receivable, are due as follows: Unguaranteed Minimum residual lease payments values receivable receivable -------------- ----------- 1998 $20,376,671 $ 176,456 1999 15,434,230 565,691 2000 9,402,650 2,187,321 2001 3,043,504 2,416,606 Thereafter 244,740 379,079 ----------- ---------- $48,501,795 $5,725,153 =========== ========== The Company's experience indicates a portion of the leases will terminate at dates other than the end of the contractual lease period. Accordingly, the foregoing table should not be regarded as a forecast of future collections. NOTE 5 - PROPERTY AND EQUIPMENT: JULY 31, -------------------------- 1996 1997 ------------ ------------ Office equipment...................... $ 5,422,730 $ 9,047,142 Credit card terminals held for lease.. 1,640,538 3,913,614 Office furniture and fixtures......... 702,494 856,104 Leasehold improvements................ 124,766 205,253 ----------- ----------- 7,890,528 14,022,113 Less: accumulated depreciation...... (2,787,301) (4,867,160) ----------- ----------- $ 5,103,227 $ 9,154,953 =========== =========== In addition to the direct financing leases described in Note 4, the Company leases point-of-sale terminals to merchants under operating leases on a month- to-month basis. Depreciation expense on all of the Company's property and equipment totaled $465,398, $1,074,644 and $1,949,774 in fiscal 1995, 1996 and 1997, respectively. NOTE 6 - NOTE RECEIVABLE: The Company entered into a leasing arrangement in March 1997 for a portion of the office space in a building that will serve as the Company's corporate headquarters completed in September 1997. The Company has advanced funds to an independent developer who purchased the building and is responsible for its renovation. The loan provided by the Company has a maximum available balance of $13,300,000 which bears interest at 5% (comparable to invested funds), payable monthly in arrears. The loan amount is being advanced in various draws by the building owner based on certain achieved milestones in the renovation. The outstanding principal balance at July 31, 1997 is $8,773,330. The Company's note receivable is secured by 47 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) a first lien on the property and has a term of ten years. The Company obtained an independent appraisal of the property in determining its fair value for the purpose of classifying the related leasing transaction in accordance with Statement of Financial Accounting Standards No. 13 - Accounting for Leases. The lease has a term of ten years and is classified as an operating lease. The Company's minimum lease commitment related to the property is included in Note 13 - Leases. NOTE 7 - INTANGIBLE AND OTHER ASSETS: July 31, ------------------------ 1996 1997 ----------- ----------- Noncompetition agreements........................ $3,345,193 $ 4,068,352 Restricted cash.................................. 3,329,913 7,724,597 Notes receivable from shareholders............... -- 2,513,186 Prepaid processing costs......................... -- 1,307,330 Deferred finance costs........................... 585,360 526,666 Other............................................ 626,424 1,405,239 ---------- ----------- $7,886,890 $17,545,370 ========== =========== Intangible and other assets include noncompetition agreements with various sellers of merchant portfolios purchased by the Company (Note 3). Amortization expense related to noncompetition agreements was $465,147, $860,323 and $1,243,676 in fiscal 1995, 1996 and 1997, respectively. Accumulated amortization of noncompetition agreements was $1,703,680 and $2,947,356 at July 31, 1996 and 1997, respectively. Restricted cash represents funds withheld by certain processing banks pursuant to processing agreements to cover potential merchant losses or by lending institutions pursuant to loan agreements to provide additional collateral. Amortization of deferred finance costs included in interest expense was $580,665, $550,318 and $607,642 in fiscal 1995, 1996 and 1997, respectively. Accumulated amortization of deferred finance costs was $1,413,345 and $2,020,987 at July 31, 1996 and 1997, respectively. 48 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8- ACCRUED LIABILITIES: July 31, ------------------------ 1996 1997 ----------- ----------- Income taxes payable........................................ $ 1,696,910 $ 1,030,799 Compensation and payroll taxes.............................. 969,817 1,503,250 Reserve for merchant losses................................. 1,459,602 1,093,290 Professional services....................................... 415,477 332,560 Accrued processing costs.................................... 238,189 193,640 State franchise taxes payable............................... 356,042 -- Sales and property taxes payable............................ 281,429 270,997 Interest payable on long-term debt.......................... 144,296 75,056 Sub-ISO deposits............................................ -- 63,711 Other....................................................... 489,421 494,105 ----------- ----------- $ 6,051,183 $ 5,057,408 =========== =========== NOTE 9 - LONG-TERM DEBT: July 31, ------------------------ 1996 1997 ----------- ----------- Notes payable, secured by the remaining payment stream of certain leases and restricted cash, principal and interest at a variable rate based on the one month Commercial Paper rate then in effect (6.05% at July 31, 1997), are payable monthly, with all unpaid principal and interest due in May 2003........................................... $ -- $ 5,258,258 Notes payable, secured by the remaining payment stream on certain leases and restricted cash, principal and interest at rates ranging from 10.11% to 12.21% per annum are payable monthly, with all unpaid principle and interest due by April 2000................. 10,237,459 5,084,577 Notes payable, secured by the remaining payment stream of certain leases and restricted cash, principal and interest at 7.22% per annum, are payable monthly, with all unpaid and interest due by May 2002.............. 13,310,790 18,760,944 Notes payable, secured by the remaining payment stream of certain leases and restricted cash, principal and interest at variable rates based on the one month LIBOR rate then in effect (various rates ranging from 10.06% to 10.38% at July 31, 1996), paid in fiscal 1997....................................... 3,210,195 --
49 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JULY 31, ---------------------------- 1996 1997 ------------- ------------- Notes payable, secured by remaining payment stream of certain leases and restricted cash, principal and interest at 7.39% per annum, paid in fiscal 1997.......... 696,413 -- Notes payable, secured by the remaining payment stream of certain leases and restricted cash, principal and interest at 12.0% per annum are payable monthly, with all unpaid principal and interest due by March 1999................................................ 1,149,487 481,204 Revolving line of credit obligation (maximum available balance of $3,000,000), secured by the remaining payment stream of certain leases and restricted cash, principal and interest at a varable rate based on the prime rate (9.5% at July 31, 1997), are payable monthly, with all unpaid principal and interest due on demand........... 1,034,350 1,290,048 Notes payable, secured by the remaining payment stream of certain leases and restricted cash, principal, and interest at 5.17% per annum, paid in fiscal 1997...... 642,576 -- Revolving line of credit obligation (maximum available balance of $1,500,000), secured by the remaining payment stream of certain leases and restricted cash, principal and interest at a variable rate based on the prime rate (10.0% at July 31, 1997), are payable monthly, with all unpaid principal and interest due by May 1998............. 996,545 346,457 Other debts repaid in 1997 or subsequent to acquisitions.............................................. 1,049,991 -- Other....................................................... 5,000 185,895 ------------ ------------ Total long-term debt........................................ 32,332,806 31,407,383 Less: current portion (13,281,646) (14,516,369) ------------ ------------ $ 19,051,160 $ 16,891,014 ============ ============
50 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Company entered into an agreement on March 22, 1994 for a $12,500,000 revolving line of credit and $2,368,000 bridge loan. This credit facility was amended and restated on May 31, 1995, July 18, 1995 and January 31, 1997, increasing the revolving line of credit to $20,000,000 and terminating the bridge loan. The current amendment expires January 31, 1998. Borrowings, if any, under the new credit facility will be used to finance future purchases of merchant portfolios and equipment and for general corporate purposes. Maturities of long-term debt are as follows as of July 31, 1997: Year Ending July 31, ------------ 1998 $14,516,369 1999 9,115,484 2000 5,209,256 2001 1,610,339 2002 579,164 Thereafter 376,771 ----------- $31,407,383 =========== NOTE 10 - SHAREHOLDERS' EQUITY: Changes in the shares of the Company's common stock are as follows:
Outstanding at July 31, 1994.......................................... 4,381,063 Shares issued......................................................... 2,420,872 Exercise of put options............................................... 1,922,372 Exercise of options and warrants...................................... 164,684 ----------- Outstanding at July 31, 1995.......................................... 8,888,991 Shares issued......................................................... 5,851,961 Exercise of options................................................... 44,805 Stock dividends....................................................... 23,692,517 ----------- Outstanding at July 31, 1996.......................................... 38,478,274 Shares issued......................................................... 2,900,966 Exercise of options................................................... 369,468 ----------- Outstanding at July 31, 1997.......................................... 41,748,708 ===========
Shares of common stock issued in operating business acquisitions accounted for as poolings of interests, for which the financial statements have been restated, have been reflected as outstanding on a pre-split basis for all periods presented above. The Company's shareholders approved an increase in the amount of authorized shares of Common Stock of the Company from 40,000,000 shares to 100,000,000 shares at the Company's December 16, 1996 Annual Meeting of Shareholders. 51 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 11 - STOCK OPTIONS AND WARRANTS: The Company has an incentive stock option plan, whereby the Company has reserved for issuance upon exercise of stock options a maximum of 3,795,000 shares of the Company's common stock. In addition to certain other provisions, the plan provides for the option price of the shares to be determined by the Board of Directors or their designees at the date of the grant provided, however, that in the case of incentive stock options, the option price shall be no less than 100% of the fair market value of the common stock on such date (110% in the case of an individual who owns more than 10% of the total combined voting power of all classes of stock of the Company). In the case of nonstatutory stock options, the option price shall be no less than 85% of the fair market value of the common stock on the date of grant. The options expire at such times as determined by the Board of Directors at the time of the grant, which shall be no later than ten years from the grant date (five years in the case of an individual who owns more than 10% of the total combined voting power of all classes of stock of the Company). The Company is authorized to loan, or guarantee loans for, the purchase price of shares issuable upon exercise of options granted under the plan. In May 1994, the Company adopted an outside director stock option plan and amended the plan at the December 1995 annual shareholders' meeting. The plan provides for the grant of non-qualified stock options to outside directors and authorizes the issuance of up to 300,000 shares of common stock pursuant to options having an exercise price equal to the fair market value of the common stock on the date the options are granted. Options were granted to each outside director on the effective date of the Offering to purchase 30,000 shares of the Company's common stock for a total of 120,000 shares (Note 2). Options granted under the plan are exercisable one-fourth each on the first, second, third and fourth anniversaries of the grant date and expire ten years after the grant date. The Company adopted Statement of Financial Accounting Standards No. 123-- Accounting for Stock Based Compensation (SFAS 123) as of August 1, 1996. In accordance with the provisions of SFAS No. 123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and accordingly, does not recognize compensation costs. If the Company had elected to recognize compensation costs based on the fair value of the options granted at grant date as prescribed by SFAS 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below: 52 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 1995 1996 1997 ---------- ----------- ----------- Net income as reported $5,452,768 $10,225,543 $16,398,752 Pro forma net income 5,148,588 9,593,109 15,037,710 Earnings per share as reported 0.20 0.29 0.40 Pro forma earnings per share 0.19 0.28 0.37 The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following assumptions:
1995 1996 1997 ---------- ---------- ------------ Expected dividend yield 0% 0% 0% Expected stock price volatility 40.8% 42.5% 47.4% Risk-free interest rate 7.3%-7.8% 5.7%-6.8% 6.3%-6.9% Expected life of options 6.7 years 6.7 years 6.7 years
The weighted average fair value at date of grant for options granted during 1995, 1996 and 1997 was $1.46, $5.88 and $9.45 per option, respectively.
WEIGHTED AVERAGE NUMBER OF SHARES EXERCISE PRICE ---------------- ---------------- Outstanding at July 31, 1994............. 458,700 $ 0.88 Granted................................ 1,400,724 2.68 Exercised.............................. (103,872) 0.99 Terminated............................. (5,196) 1.13 ----------- --------- Outstanding at July 31, 1995............. 1,750,356 $ 2.31 Granted................................ 551,500 10.79 Exercised.............................. (119,775) 1.26 Terminated............................. (265,052) 2.73 ----------- --------- Outstanding at July 31, 1996............. 1,917,029 $ 4.76 Granted................................ 410,500 16.29 Exercised.............................. (369,468) 2.12 Terminated............................. (77,640) 9.66 ----------- --------- Outstanding at July 31, 1997............. 1,880,421 $ 7.59 =========== =========
53 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following table summarizes information concerning currently outstanding and exercisable options:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - ----------- ----------- ----------- --------- ----------- ------- $0.83-$1.13 77,950 4.7 $ 0.94 77,950 $ 0.94 $2.67-$3.54 914,956 7.0 $ 2.63 361,866 $ 2.67 $5.96-$8.78 132,240 8.3 $ 7.75 23,280 $ 8.00 $9.17-$13.75 470,000 8.9 $11.08 75,500 $10.16 $15.00-22.25 285,275 9.2 $19.33 23,401 $17.92 --------- ------- 1,880,421 561,997 ========= =======
The Company has granted stock warrants which give the holder the right to purchase 120,000 shares of the Company's common stock at an exercise price of $1.25 per share. These warrants expire March 22, 2004 (Note 3). In fiscal 1997, the Company granted warrants to purchase 10,000 shares of its common stock at an exercise price of $17.00 per share in conjunction with an immaterial acquisition. These warrants expire September 16, 2006. NOTE 12 - RETIREMENT PLANS: The Company initiated the PMT Services, Inc. 401(k) Retirement Plan, in fiscal 1996. Following the initial enrollment, employees become eligible for participation in the plan on the semi-annual enrollment date following the employee completing 12 consecutive months of employment and 1,000 hours of service or more. The Company contributes an amount equal to 50% of employee voluntary contributions up to a maximum of 6% of the employee's annual compensation. The plan expense for fiscal 1996 and 1997 was $64,015 and $114,720, respectively. 54 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE 13 - LEASES: The Company leases equipment and office space under noncancellable operating leases. Rent expense approximated $964,831, $1,175,073 and $1,621,296 during fiscal 1995, 1996 and 1997, respectively. Office space was leased from a partnership comprising two of the Company's shareholders during a portion of 1995. Rent expense paid to shareholders for office space amounted to $54,000 during fiscal 1995. This office space lease agreement terminated in 1995 and the Company relocated. None of the Company's current office space is with a related party. In March 1997, the Company entered into a leasing arrangement for a portion of the office space in a building that will serve as the Company's corporate headquarters (Note 6). Future minimum payments under all noncancellable leases with terms greater than one year at July 31, 1997 are: FISCAL YEAR ENDING JULY 31, ----------- 1998 $ 2,895,974 1999 3,276,032 2000 3,239,272 2001 2,560,611 2002 1,921,822 Thereafter 7,558,150 ----------- 21,451,861 Less: Sublease rentals (2,635,858) ----------- $18,816,003 =========== NOTE 14 - OTHER INCOME (EXPENSE) - NET: The Company recorded a non-taxable gain of $1,000,000 in the fourth quarter of fiscal 1996 for the receipt of insurance proceeds on the life of the former Chief Financial Officer of the Company. Additionally, the Company has included in this line item all non-recurring transaction costs related to operating business acquisitions, which were accounted for as poolings of interest. During fiscal 1997, LFG recorded a charge of $367,000 related to the buyout of a consulting agreement due to the death of their former Chief Financial Officer. This charge occurred prior to the effective date of the merger with this entity and is included in other expense on a restated basis. 55 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 15 - INCOME TAXES: The provision for income taxes comprises the following:
Year ended July 31, -------------------------------------- 1995 1996 1997 ----------- ----------- ------------ Current tax expense: Federal........................................... $2,425,471 $5,395,173 $ 8,955,618 State............................................. 517,847 1,042,180 1,616,868 ---------- ---------- ----------- 2,943,318 6,437,353 10,572,486 ---------- ---------- ----------- Deferred tax benefit: Federal........................................... 143,946 (470,526) (935,449) State............................................. 76,500 (30,469) (19,521) ---------- ---------- ----------- 220,446 (500,995) (954,970) ---------- ---------- ----------- Increase in valuation allowance......................................... 137,288 194,831 -- ---------- ---------- ----------- $3,301,052 $6,131,189 $ 9,617,516 ========== ========== ===========
The Company's effective tax rate differs from the statutory rate as follows:
Year ended July 31, ------------------------------------- 1995 1996 1997 ---------- ---------- ----------- Federal tax at statutory rate....................... 34.0% 34.0% 35.0% Increase (decrease) in taxes resulting from: State income taxes (net of federal tax benefit).......................... 4.5 4.1 4.0 Valuation allowance 1.6 1.2 0.0 Other............................................. (2.4) (1.8) (2.0) ---------- ---------- ----------- 37.7% 37.5% 37.0% ========== ========== ===========
Deferred income taxes under Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes, reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets at July 31, 1996 and 1997 are as follows: 56 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) JULY 31, ---------------------------- 1996 1997 ------------- ------------- Current tax assets: Compensation liabilities........... $ 30,897 $ 31,645 Loss reserves...................... 858,343 1,386,971 Other.............................. 56,694 124,763 ------------ ------------ Net current tax assets............... $ 945,934 $ 1,543,379 ============ ============ Noncurrent tax assets: Leased equipment................... 10,646,486 12,799,951 Unearned income.................... 7,143,341 8,005,899 Merchant portfolio amortization.... 1,586,194 3,345,402 Operating loss carryforwards and AMT credits....................... 1,222,814 1,299,321 Other.............................. 182,442 182,442 ------------ ------------ 20,781,277 25,633,015 Valuation allowance.................. (332,119) (332,119) Noncurrent tax liability: Gross lease receivable............. (18,726,454) (21,743,354) Residual values.................... (2,367,230) (2,566,975) Depreciation....................... (242,327) (517,919) Residual value of sold portfolios.. -- (788,371) Other.............................. (107,868) (309,054) ------------ ------------ (21,443,879) (25,925,673) ------------ ------------ Net noncurrent tax liability........ $ (994,721) $ (624,777) ============ ============ As of July 31, 1997, the Company has approximately $3,000,000 of federal and state net operating loss carryforwards and AMT credits available to offset future taxable income of certain subsidiaries of the Company. These carryforwards and credits expire at various dates through fiscal 2005. A valuation allowance has been established for these net operating losses and AMT credits as utilization is not reasonably assured. NOTE 16 - COMMITMENTS AND CONTINGENCIES: In addition to the third-party debt guaranty and operating leases described in Notes 3 and 13 above, the Company is subject to the following commitments and contingencies described herein. The Company entered into an agreement in July 1995 to purchase the rights to service merchant accounts to be generated by another independent sales and service provider ("service 57 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) provider") under a contract with the Company's primary processing bank. The Company's option to purchase may be exercised upon the earlier of default by the service provider under its loan agreement with a third party or December 1, 1997 and expires on January 31, 1998. The purchase price will be derived as a multiple of average monthly cash flow generated by the merchant accounts for the three months immediately prior to the purchase. The Company's agreement with its primary processing bank was amended to require the Company to purchase the service provider's merchant accounts by January 31, 1998. Additionally, the Company has indemnified the processing bank for any losses incurred by the processing bank with respect to the service provider's merchant accounts. In connection with the option agreement, the Company has guaranteed the service provider's loan to a third party in the amount of $250,000. The Company has also entered into a service agreement whereby the Company will provide customer service, processing equipment deployment and related services to the service provider's merchant accounts for a monthly fee per merchant. VISA and MasterCard require merchants accepting VISA and MasterCard credit cards to contract directly with a processing bank that is a member bank of the VISA or MasterCard associations. The Company is not a party to the merchant processing agreements and is therefore dependent upon its contractual arrangements with its processing banks in order to continue to service its merchant portfolio. The Company has a contractual right to receive revenues derived from the discount rate and fees earned on its merchant portfolio so long as the merchant continues to process transactions on the processing bank's system and the Company provides adequate service to the merchant and remains in compliance under its agreement with the processing bank. Under the terms of the Company's agreement with its primary processing bank, the Company is permitted to transfer merchants to another processing bank subject to time limitations and termination fees. This agreement provides mobility for substantially all of the Company's merchant base. However, in order to transfer merchant contracts, the Company must pay the processing bank a fee determined by a formula related to the annualized aggregate transaction volume of the merchants transferred. NOTE 17 - SUBSEQUENT EVENTS: On October 2, 1997, the Company consummated an operating business acquisition by issuing 3,870,988 shares of its common stock in exchange for all the outstanding common stock of Bancard, Inc. The transaction will be accounted for as a pooling of interests. Unaudited pro forma results assuming this acquisition had been consummated as of the beginning of the earliest period presented are as follows: 58 PMT SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Pro forma Pro forma Pro forma year ended year ended year ended July 31, 1995 July 31, 1996 July 31, 1997 ------------- ------------- ------------- Revenues $157,285,005 $246,742,712 $325,040,454 Net Income 6,039,927 11,405,167 19,054,451 Earnings per share 0.20 0.30 0.42 59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 60 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS NAME AGE POSITION ---- --- -------- Richardson M. Roberts... 39 Chairman of the Board and Chief Executive Officer Gregory S. Daily........ 38 President, Treasurer and Director Clay M. Whitson......... 39 Vice-President of Finance and Chief Financial Officer Joseph T. Stewart, Jr... 58 Chief Operating Officer Vickie G. Johnson....... 38 Chief Accounting Officer, Secretary and Controller
Mr. Roberts has served as Chief Executive Officer of the Company, Chairman of the Board and a director since co-founding the Company in August 1984. Mr. Roberts also served as President of the Company from August 1984 to December 1995. Mr. Roberts was previously employed with Comdata Network, Inc. as a national sales representative. Mr. Daily has served as Treasurer and a director of the Company since co- founding the Company in August 1984. Mr. Daily also served as Vice-President and Chief Operating Officer of the Company from August 1984 to December 1995, and currently serves as President and Treasurer of the Company. Mr. Daily was previously employed with Comdata Network, Inc. as a telemarketing representative. Mr. Whitson has served as Vice-President of Finance of the Company since joining the Company in January 1996 and currently serves as Chief Financial Officer of the Company. Mr. Whitson was previously employed as Chief Financial Officer of the Gemala Group, a diversified conglomerate based in Indonesia. Prior to joining the Gemala Group in 1990, Mr. Whitson was a Director in the Mergers and Acquisitions Department at The Chase Manhattan Bank, N.A. Mr. Stewart has served as Chief Operating Officer of the Company since joining the Company in January 1996. Mr. Stewart was previously employed as Executive Vice-President of the Electronic Funds Services unit of First Data Corporation. Ms. Johnson has served as Controller of the Company since joining the Company in October 1991. Ms. Johnson also serves as Chief Accounting Officer and Secretary of the Company. Ms. Johnson was previously employed with Historic Hotel Partners, Inc. as Regional Controller. DIRECTORS Information with respect to the Company's directors is incorporated herein by reference from the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 19, 1997. COMPLIANCE WITH REPORTING REQUIREMENTS OF THE EXCHANGE ACT Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth in the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 19, 1997, under the caption "Section 16(a) Beneficial Ownership Reporting Compliance." 61 ITEM 11. EXECUTIVE COMPENSATION This information is incorporated herein by reference from the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 19, 1997, except that the Comparative Performance Graph and the Compensation Committee Report on Executive Compensation included in the Proxy Statement are expressly not incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated herein by reference to the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 19, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated herein by reference to the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on December 19, 1997. 62 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following financial statements are included in Item 8 of Form 10-K: (1) Financial Statements: -------------------- Report of Independent Accountants Consolidated Balance Sheets as of July 31, 1997 and July 31, 1996 Consolidated Statements of Income, each of the three years ended July 31, 1997 Consolidated Statements of Changes in Shareholders' Equity, each of the three years ended July 31, 1997 Consolidated Statement of Cash Flows, each of the three years ended July 31, 1997 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Page ----------------------------- Independent Auditors' Report on Financial Statement Schedule................... 64 Schedule II - Reserve for Merchant Losses and Allowance for Bad Debts.................... 65 The other schedules are omitted because the required information is either inapplicable or has been disclosed in the consolidated financial statements and notes thereto. (3) Supplemental Financial Statements: --------------------------------- Report of Independent Accountants Consolidated Balance Sheets as of July 31, 1997 and July 31, 1996 Consolidated Statements of Income, each of the three years ended July 31, 1997 Consolidated Statements of Changes in Shareholders' Equity, each of the three years ended July 31, 1997 Consolidated Statement of Cash Flows, each of the three years ended July 31, 1997 Notes to Consolidated Financial Statements (4) Supplemental Financial Statement Schedules: ------------------------------------------- Independent Auditors' Report on Financial Statement Schedule Schedule II - Reserve for Merchant Losses and Allowance for Bad Debts The other schedules are omitted because the required information is either inapplicable or has been disclosed in the consolidated financial statements and notes thereto. (5) Other Supplemental Information: ------------------------------- Quarterly Information for each of the two years ended July 31, 1997 Five year Selected Financial Data (7) Exhibits The index to Exhibits is at page 97. (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K dated July 18, 1997 discussing a business combination requiring retroactive effect in the consolidated financial statements (as amended by Form 8-K/A(1) and Form 8-K/A(2), each filed July 29, 1997, and Form 8-K/A(3) filed September 16, 1997). The Company filed a Current Report on Form 8-K dated October 10, 1997 discussing a business combination requiring retroactive effect in the consolidated financial statements (as amended by Form 8-K/A filed October 14, 1997). 63 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of PMT Services, Inc. Our audits of the consolidated financial statements referred to in our report dated September 23, 1997, appearing on page 30 of this Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth herein when read in conjunction with the related financial statements. PRICE WATERHOUSE LLP Nashville, TN September 23, 1997, except as to NOTE 17 which describes the pooling of interests with Bancard, Inc. which is as of October 2, 1997 64 Schedule II PMT SERVICES, INC. RESERVE FOR MERCHANT LOSSES
BALANCE AT BALANCE AT BEGINNING END OF FISCAL YEAR OF PERIOD ADDITIONS(1) OTHERS(2) DEDUCTIONS(3) PERIOD - ------------- ---------- ------------- ----------- ------------- ---------- 1995 $ 444,759 $ 520,245 -- $ 408,331 $ 556,673 1996 $ 556,673 $1,653,705 -- $ 750,776 $1,459,602 1997 $1,459,602 $1,858,256 $284,906 $2,509,474 $1,093,290
______________________ (1) Additions represent amounts charged to expense during the respective periods. (2) Other represents additions from immaterial operating business acquisitions, during the respective periods. (3) Deductions represent actual chargebacks incurred by the Company during the respective periods. ALLOWANCE FOR BAD DEBTS
BALANCE AT BALANCE AT BEGINNING END OF FISCAL YEAR OF PERIOD ADDITIONS(1) OTHER(2) DEDUCTIONS(3) PERIOD - ------------- ---------- ------------- ----------- ------------- ---------- 1995 $1,513,455 $1,433,390 $558,386 $2,487,772 $1,017,459 1996 $1,017,459 $2,132,542 $146,946 $1,637,744 $1,659,203 1997 $1,659,203 $2,389,962 $476,147 $2,043,331 $2,481,981
______________________ (1) Additions represent amounts charged to expense during the respective periods. (2) Other represents recoveries by the Company during the respective periods. (3) Deductions represent actual write-offs recorded by the Company during the respective periods. 65 PMT SERVICES, INC. SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
July 31, --------------------------- 1996 1997 ------------- ------------ ASSETS Current assets: Cash and cash equivalents........................... $109,351,788 $ 23,810,173 Investments.......................................... -- 49,167,521 Accounts receivable.................................. 9,402,725 18,303,296 Current portion of net investment in finance leases.. 10,331,271 9,249,753 Inventory............................................ 1,338,118 1,818,613 Deferred income taxes................................ 945,934 1,543,379 Other current assets................................. 1,061,855 2,061,295 ------------ ------------ Total current assets................................ 132,431,691 105,954,030 Purchased merchant portfolios, net of accumulated amortization of $9,668,708 and $18,689,846.......... 62,075,590 84,343,006 Long-term portion of net investment in finance leases 22,034,754 24,636,881 Property and equipment, net.......................... 6,667,474 9,379,056 Long-term note receivable............................ -- 8,773,330 Intangible and other assets.......................... 8,082,356 17,989,726 ------------ ------------ Total assets........................................ $231,291,865 $251,076,029 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt.................... $ 13,456,646 $ 14,516,369 Accounts payable..................................... 4,944,124 9,608,347 Accrued liabilities.................................. 6,864,404 5,721,670 Deferred revenues.................................... 230,496 291,493 ------------ ------------ Total current liabilities 25,495,670 30,137,879 Long-term debt....................................... 21,071,884 18,564,658 Deferred income taxes................................ 994,721 624,777 ------------ ------------ Total liabilities................................... 47,562,275 49,327,314 ------------ ------------ Shareholders' equity: Preferred stock, $0.01 par value, authorized: 10,000,000 shares; no shares outstanding Common stock, $0.01 par value, authorized: 100,000,000 shares; outstanding: 43,126,894 and 45,618,488 shares................... 431,269 456,185 Additional paid-in capital............................ 166,843,991 171,129,805 Treasury stock, at cost: 7,788 shares in 1996........ (2,093,152) 0 Accumulated earnings.................................. 18,547,482 30,162,725 ------------ ------------ 183,729,590 201,748,715 ------------ ------------ Commitments and contingent liabilities (Notes 3, 13 and 16) Total liabilities and shareholders' equity.......... $231,291,865 $251,076,029 ============ ============
The accompanying notes are an integral part of these financial statements. 66 PMT SERVICES, INC. SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
Year ended July 31, ------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- Revenues............................... $157,285,005 $246,742,712 $325,040,457 Cost of revenues 110,671,191 178,036,354 235,641,951 ------------ ------------ ------------ Gross margin....................... 46,613,814 68,706,358 89,398,506 ------------ ------------ ------------ Selling, general and administrative expenses........................... 28,101,479 37,958,846 41,869,703 Depreciation and amortization expense.. 3,772,872 7,913,535 12,804,471 Provision for merchant loss and bad debt expense....................... 2,056,355 4,055,591 4,395,497 Stock award compensation............... 241,477 -- -- Non-recurring operating expense........ -- -- 593,626 ------------ ------------ ------------ 34,172,183 49,927,972 59,663,297 ------------ ------------ ------------ Income from operations................. 12,441,631 18,778,386 29,735,209 Interest income........................ 313,073 2,107,547 5,226,188 Interest expense....................... (3,413,725) (4,053,473) (4,045,639) Other income (expense), net............ -- 703,896 (2,243,792) ------------ ------------ ------------ Income before provision for income taxes.............................. 9,340,979 17,536,356 28,671,966 Provision for income taxes............. 3,301,052 6,131,189 9,617,516 ------------ ------------ ------------ Net income......................... $ 6,039,927 $ 11,405,167 $ 19,054,450 ============ ============ ============ Earnings per share..................... $ 0.20 $ 0.30 $ 0.42 ============ ============ ============
The accompanying notes are an integral part of these financial statements. 67 PMT SERVICES, INC. SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Additional Accumulated Total Common Paid-in Treasury Unearned Earnings Shareholders' Stock Capital Stock Compensation (Deficit) Equity ---------- ------------ ----------- ------------ ----------- ------------- Balance at July 31, 1994......... $ 59,305 $ 2,118,956 $ (42,000) $(241,477) $ 3,747,084 $ 5,641,868 Stock awards vested............ 926,597 241,477 1,168,074 Shares issued.................. 24,209 15,891,283 15,915,492 Expiration of put options on redeemable common stock...... 19,224 6,502,083 6,521,307 Stock warrants exercised....... 1,301 418,615 419,916 Stock options exercised........ 346 106,582 106,928 Acquire majority interest in... subsidiary................... (510,545) (510,545) Purchase of treasury stock..... (32,500) (32,500) Reissuance of treasury stock... (6,000) 6,000 -- Distributions of Subchapter S Corporations prior to poolings..................... (524,614) (524,614) Net income for the year........ 6,039,927 6,039,927 ---------- ------------ ----------- ------------ ----------- ------------- Balance at July 31, 1995......... 104,385 25,958,116 (68,500) -- 8,751,852 34,745,853 Shares issued.................. 58,520 140,746,488 140,805,008 Stock options exercised........ 448 475,803 476,251 Stock splits................... 267,916 (267,916) -- Purchase of treasury stock..... (2,093,152) (2,093,152) Reissuance of treasury stock... (68,500) 68,500 -- Minority shareholders' contribution.................. 120,000 120,000 Martin Howe fiscal year conversion.................... (356,914) (356,914) Distributions of Subchapter S Corporations prior to poolings...................... (1,372,623) (1,372,623) Net income for the year........ 11,405,167 11,405,167 ---------- ------------ ----------- ------------ ----------- ------------- Balance at July 31, 1996......... 431,269 166,843,991 (2,093,152) -- 18,547,482 183,729,590 Shares issued................... 10 14,844 14,854 Stock options exercised......... 3,695 771,034 774,729 August 1996 pooling............. 5,000 (4,000) (115,762) (114,762) March 1997 pooling.............. 8,000 (7,000) 141,303 142,303 May 1997 pooling................ 16,000 1,074,821 213,098 1,303,919 Cancellation of treasury shares........................ (7,789) (72,624) 2,093,152 (2,012,739) -- Tax benefit from non- qualified stock options....... 1,986,174 1,986,174 Minority shareholders' contribution.................. 522,565 522,565 Distributions of Subchapter S Corporations, prior to poolings...................... (5,665,107) (5,665,107) Net income for the year......... 19,054,450 19,054,450 ---------- ------------ ----------- ------------ ----------- ------------- Balance at July 31, 1997......... $ 456,185 $171,129,805 -- -- $30,162,725 $201,748,715 ========== ============ =========== ============ =========== =============
The accompanying notes are an integral part of these financial statements. 68 PMT SERVICES, INC. SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended July 31, -------------------------------------------------- 1995 1996 1997 -------------------- ------------- ------------- Reconciliation of net income to net cash provided by operating activities: Net income......................................................... $ 6,039,927 $ 11,405,167 $ 19,054,450 Martin Howe fiscal year conversion................................. -- (356,914) -- Adjustments: Depreciation and amortization expense............................. 4,353,537 8,450,362 13,412,112 Provision for merchant losses and bad debt expense................ 2,056,355 4,055,591 4,395,497 Stock award compensation and other................................ 241,477 -- -- Deferred income taxes............................................. 357,734 (306,163) (954,970) Changes in assets and liabilities, excluding the effects of non-restated acquisitions: Accounts receivable............................................. (1,974,181) (3,227,295) (8,907,206) Inventory....................................................... (468,679) (87,959) (246,264) Other assets.................................................... (1,406,363) (119,006) (6,455,471) Accounts payable................................................ 28,427 (107,848) 4,021,848 Accrued liabilities............................................. (179,468) 1,134,179 (1,982,023) Deferred revenues............................................... (155,291) (59,105) (46,987) ------------ ------------ ------------ Net cash provided by operating activities..................... 8,893,475 20,801,009 22,290,986 Cash flows from investing activities: Purchase of merchant portfolios................................... (24,752,658) (32,341,624) (33,720,014) Purchase of property and equipment, net........................... (2,274,935) (2,627,903) (5,182,861) Purchase of equipment for leasing................................. (16,809,608) (20,865,015) (19,296,806) Purchase of investments, net...................................... -- -- (49,167,521) Acquisitions of businesses, net of cash acquired.................. -- (312,599) 356,050 Proceeds from receivable securitization........................... -- -- 1,076,317 Amounts received on leases, net of amortized unearned income............................................. 10,478,442 12,252,928 14,042,820 ------------ ------------ ------------ Net cash used in investing activities......................... (33,358,759) (43,894,213) (91,892,015) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of long-term debt.......................... 35,591,026 36,017,752 34,093,211 Payments on long-term debt........................................ (27,719,029) (46,284,340) (38,058,587) Proceeds from issuance of common stock............................ 17,098,894 140,963,115 789,583 Issuance of note receivable....................................... -- -- (8,773,330) Payments to repurchase treasury stock............................. (32,500) (12,000) -- Proceeds from minority shareholders' contributions................ -- 120,000 -- Distributions of Subchapter S Corporations........................ (524,614) (1,372,623) (3,991,463) ------------ ------------ ------------ Net cash provided (used) by financing activities.............. 24,413,777 129,431,904 (15,940,586) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents................. (51,507) 106,338,700 (85,541,615) Cash and cash equivalents at beginning of year....................... 3,064,595 3,013,088 109,351,788 ------------ ------------ ------------ Cash and cash equivalents at end of year............................. $ 3,013,088 $109,351,788 $ 23,810,173 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid for income taxes.......................................... $ 3,596,249 $ 5,772,989 $ 9,367,692 Cash paid for interest.............................................. 2,895,940 3,453,909 3,506,217
69 PMT SERVICES, INC. SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED) Supplemental schedule of noncash activities: In connection with the purchase of merchant portfolios in fiscal 1995, the Company issued promissory notes totaling $80,500. In connection with three separate operating business acquisitions in fiscal 1997, the Company issued 2,900,000 shares of common stock. The acquisitions were accounted for as poolings of interests which did not require retroactive restatement, because they had an insignificant impact on the Company. The Company recognized a tax benefit of $318,517 and $1,986,174 for the years ended July 31, 1996 and 1997, respectively, for the excess of the fair market value at the exercise date over that at the award date for stock options exercised. The accompanying notes are an integral part of these financial statements. 70 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Operations The Company markets and services electronic credit card authorization and payment systems to merchants, including sale and leasing of related equipment. The Company provides these services to merchants pursuant to contracts between the Company and various processing banks. Generally, the Company's agreements with the processing banks contain certain aspects of both marketing and service. Although the marketing portion of the agreements is limited as to time, the service portion of substantially all of these agreements is not. The marketing aspects expire at various dates unless renewed automatically, if applicable, or extended by the parties. There can be no assurance that PMT's contractual arrangements with its processing banks will be renewed or that PMT will be able to obtain favorable replacement arrangements, whether upon expiration, termination or otherwise. Basis of consolidation The supplemental consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Interests in the majority- owned subsidiaries are reported using the full consolidation method. All material intercompany balances and transactions are eliminated. Basis of presentation Certain financial statement items, in prior periods, have been reclassified to conform to the current year's presentation. The supplemental consolidated financial statements give retroactive effect to certain acquisitions of operating businesses consummated subsequent to year end but prior to filing of the Company's Annual Report on Form 10-K which were accounted for as a pooling of interests (Note 3). Management estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 71 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Revenue and cost recognition Revenues derived from the electronic processing of transactions (merchant discount rate and related fees) on the credit card authorization equipment are recognized at the time the merchants' transactions are processed. Related commission expense and processing charges are also recognized at that time. Revenues related to the direct sale of credit card authorization equipment are recognized when the equipment is shipped. Installation fees related to both the direct sale and the marketing of this equipment are recognized when installation is completed. Fees received in advance of shipment or installation are not recognized as revenue until earned. Revenue related to finance leasing of credit card point-of-sale processing equipment are recognized over the term of the lease agreement using the interest method. Cost of revenues includes interchange fees paid to the credit card-issuing bank and fees paid to the network service provider, VISA and MasterCard and the processing bank. These costs are recognized at the time the merchants' transactions are processed and the related revenue is recorded. The Company recognizes as revenue in its statement of income the full discount rate and fees collected from the merchant. The various costs incurred by the Company, including amounts paid to the card-issuing bank, the processor and network service provider, are reflected as costs of revenues. In accordance with the Company's contracts with its processing banks, all of the funds collection and most of the disbursement function is performed on behalf of the Company by the processing bank. At month end, the processing bank collects the total discount rate and fees from the merchants and disburses to each of the service providers their fees. Disbursements for the interchange fee paid to the card-issuing bank are made daily. Shortly after month end, the processing bank disburses to the Company the remainder of the funds collected from the merchant which represents a significant portion of the Company's gross margin. Cash equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. 72 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Investments The Company's investments of $49,167,521 are in United States Government Treasury notes for a term less than one year. These investments are classified as held-to-maturity according to Statement of Financial Accounting Standard No. 115 - Accounting for Certain Debt and Equity Securities (SFAS 115), and are carried at amortized cost as determined by specific identification. The fair value of these investments is $49,198,891 at July 31, 1997. No such investments were outstanding at July 31, 1996. Financial instruments The Company has various financial instruments, including cash, time deposits, receivables, accounts payable, revolving credit facilities, accrued liabilities and a hedging contract. Cash, time deposits, receivables, accounts payable and accrued liabilities are settled within a year and are not subject to market rate fluctuations. Revolving credit facilities are at variable market rates. The carrying value of these financial instruments approximates their fair market values. Notes payable with a carrying amount of $34,528,530 at July 31, 1996 and $33,081,027 at July 31, 1997 had a market value of $36,186,641 and $33,963,585, respectively, using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Hedging contract The Company entered a forward rate lock agreement during fiscal 1996 to minimize its exposure to interest rate risk. The notional amount of the agreement totaled $15,000,000. The notional amount does not represent amounts exchanged by parties and, thus, is not a measure of the Company's exposure to loss through its use of these agreements. The hedging contract, with no carrying amount, had a fair value of ($126,563) at July 31, 1996. In fiscal 1997, the Company entered into another forward rate lock agreement in the amount of $20,000,000. Both forward rate lock agreements settled in fiscal 1997 and the amounts exchanged under these agreements had no material impact on the financial statements. Such settlements were deferred and are being amortized, using the effective interest rate method, over the remaining life of the underlying debt hedged. There were no outstanding hedging contracts at July 31, 1997. Under the Company's forward rate lock agreements, the Company and the counter party exchange, upon maturity of the agreement, an amount calculated by reference to the agreed notional amount and a specified index. These forward rate lock agreements allow the Company to reduce its exposure to interest rate fluctuations on certain floating rate debt. 73 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Accounts receivable Accounts receivable primarily comprise amounts due from processing banks which represent the discount rate and fees earned, after related interchange fees and other processing costs, on transactions processed during the month ending on the balance sheet date. Such balances are received from processing banks approximately 20 days following the end of each month. Financing leases The Company provides direct financing leases and sales-type leases to its customers. The significant difference between the two types of leases is dealer profit recognized by the Company in a sales-type lease. At inception of a lease of point-of-sale equipment, the Company records an investment in direct financing leases which is equal to the total of future lease rentals and the estimated residual value of the leased equipment, less unearned income. The unearned income is the difference between the cost of the equipment and the total of future lease rentals plus the estimated residual value of the leased equipment. Residual value is the estimated proceeds from the sale or lease of the asset at the end of the lease term. Amortization of unearned income is recorded on the interest method. The Company's investment in finance leases is reduced by an allowance for rental payments that are expected to be uncollectible. Inventory Inventory of credit card authorization equipment is stated at the lower of cost or market, with cost being determined by specific identification. Property and equipment Property and equipment are recorded at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets ranging from 3 to 10 years. Purchased merchant portfolios Purchased merchant portfolios are recorded at acquired cost. Amortization expense is recognized on a straight-line basis over 10 years consistent for acquired entities. Management evaluates purchased merchant portfolios and other long-lived assets for impairment at each balance sheet date through review of actual attrition and projected undiscounted cash flows generated by each merchant portfolio in relation to the unamortized cost of each merchant portfolio. If, upon review, an impairment of the value of the purchased merchant portfolio is indicated, amortization will be accelerated to recognize the diminution in value. 74 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Reserve for chargebacks and merchant fraud Disputes between a cardholder and a merchant periodically arise as a result of cardholder dissatisfaction with merchandise quality or merchant services and the disputes may not be resolved in the merchant's favor. In these cases, the transaction is "charged back" to the merchant and the purchase price is refunded by the merchant. If the merchant is unable to grant a refund, the Company or, under limited circumstances, the Company and the processing bank, must bear the credit risk for the full amount of the transaction. The Company evaluates its risk and estimates its potential loss for chargebacks based on historical experience. A provision for these estimated losses is provided in the same period as the related revenues. Income taxes The liability method is used in accounting for income taxes, whereby deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The tax benefit of deductible temporary differences is reflected within the various components of deferred tax assets and recognized if the realization thereof is more likely than not (Note 15). Earnings per share Earnings per share for fiscal 1995, 1996 and 1997 is calculated based on weighted average shares of common stock outstanding of 30,976,685, 38,576,405 and 45,014,824 respectively. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 - Earnings per Share (SFAS 128). SFAS 128 requires companies with complex capital structures that have publicly held common stock or common stock equivalents to present both basic and diluted earning per share (EPS) on the face of the income statement. The presentation of basic EPS replaces the presentation of primary EPS previously required by Accounting Principles Board Opinion No. 15 (APB 15). Basic EPS is calculated as income available to common shareholders divided by the weighted average number of shares outstanding during the period. Diluted EPS (previously referred to as fully diluted EPS) is calculated using the "if converted" method for convertible securities and the treasury stock method for options and warrants as prescribed by APB 15. This statement is effective for financial statements issued for interim periods and annual periods ending after December 15, 1997. Earlier application is not permitted. The Company will adopt the provisions of this statement in the quarter ended January 31, 1998. Management believes the provisions of this statement will not have a material effect on earnings per share. 75 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Stock splits On December 14, 1995 the Board of Directors approved a two-for-one stock split and on May 17, 1996 approved a three-for-two stock split, each to be affected in the form of a stock dividend. The stock splits for December 14, 1995 and May 17, 1996 were effective for shareholders of record at the close of business on December 29, 1995 and May 28, 1996, respectively. All earnings per share information included in the accompanying financial statements has been adjusted to give retroactive effect to the stock splits for all periods presented. Additionally, all share information stated in Note 10 has been adjusted to give retroactive effect to the stock splits. NOTE 2 - STOCK OFFERINGS: In August 1994, the Company consummated an initial public offering of 3,565,000 shares of common stock, 2,315,000 shares of which were offered by the Company (the "Offering"). In connection with the Offering, the Company received net proceeds of approximately $15.9 million, after deducting underwriting discounts and commissions and expenses of the Offering. The net proceeds were used to repay a $4.9 million noninterest bearing note payable and all borrowings outstanding under the Company's revolving line of credit and bridge loan. The remainder of the net proceeds were used to fund merchant purchases, upgrade the Company's information systems and for working capital needs. Upon the effective date of the Offering, vesting of management stock awards for 439,084 shares of common stock was accelerated and the remaining unearned compensation of $241,000 was immediately recognized. The Company received a tax deduction in fiscal 1995 for the fair value of the vested stock on the effective date of the Offering. Compensation expense related to the stock awards was recognized in the financial statements based upon the fair value of the common stock at the date of the awards of $2.48 per share. The tax benefit arising from the excess of fair value at the vesting date over that at the award date of approximately $927,000 is recognized as additional paid-in capital. Warrants for 130,060 shares of the Company's common stock were exercised concurrent with the effective date of the Offering at a weighted average exercise price of $3.23. Additionally, the Company delivered 112,500 shares of common stock to the seller in connection with the March 1994 purchase of a merchant portfolio. In October 1995, the Company consummated a second public offering of 2,156,250 shares of common stock, 1,931,250 of which were offered by the Company. The Company received net proceeds of approximately $40.8 million, after deducting underwriting discounts and commissions and expenses of the offering, and repaid all borrowings outstanding under its revolving line of credit. 76 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Company offered 3,910,000 shares of its common stock in a third public offering consummated in April 1996. The Company received net proceeds of approximately $100 million after deducting underwriting discounts and commissions and estimated expenses of the offering. NOTE 3 - ACQUISITIONS: Operating Business Acquisitions During fiscal 1996, the Company began issuing common stock to acquire operating businesses with both existing merchant portfolios and sales organizations capable of generating new accounts. In fiscal 1996, 1997 and 1998, the Company consummated ten operating business acquisitions by issuing common stock in exchange for all the outstanding common stock of the companies acquired. These transactions were accounted for as poolings of interest. The October 2, 1997 acquisition of Bancard, Inc. is subsequent to the Company's fiscal year end. These supplemental consolidated financial statements have been prepared to reflect the restatement of all periods presented. Seven of these transactions were considered material for restatement and are summarized below:
Company Acquired Date Shares Issued Martin-Howe Associates, Inc. (MHA) July 1, 1996 594,011 Fairway Marketing Group (Fairway) December 23, 1996 424,999 Bancard Systems, Inc. (BSI) January 27, 1997 3,131,250 Retail Payment Services, Inc. (RPS) January 30, 1997 567,519 Eric Krueger, Incorporated (Krueger) June 3, 1997 579,000 LADCO Financial Group, Inc. (LFG) July 14, 1997 1,463,414 Bancard, Inc. (BCI) October 2, 1997 3,870,968
PMT's supplemental consolidated financial statements have been restated to include the accounts of the above named entities for all periods presented by including the historical results of these entities. The historical results of these seven pooled entities reflect each of their actual operating cost structures and, as a result, do not necessarily reflect the cost structure of the newly combined entity. Significant, unusual and non-recurring costs affecting fiscal 1996 operating results of the pooled entities include a single fraud loss of $890,000, recognition of $400,000 in asset impairment losses in one entity, and executive bonuses of $330,000 (totaling approximately $1 million after-tax or $0.02 per share). Although PMT incurs merchant fraud losses each year, and recognizes an accrual each year for such possibilities, the Company's annual loss experience historically has been significantly less than the loss referred to above. Additionally, no further asset impairment losses are expected from any of the assets acquired as a result of these operating business acquisitions. The historical results do not purport to be indicative of results which may occur in the future. 77 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) MHA had a calendar year end and, accordingly, the MHA statements of income for the years ended December 31, 1994, and 1995 have been combined with the Company's statements of income for the fiscal years ended July 31, 1995 and 1996, respectively. In order to conform MHA's year end to the Company's fiscal year end, results of operations for MHA for the six- month period ended June 30, 1996 have been excluded from the consolidated statement of income for the fiscal year ended July 31, 1996. Accordingly, an adjustment has been made in fiscal year 1996 to retained earnings for the exclusion of the net loss of $356,914 for such six-month period. MHA's results of operations for this six-month period include revenues of $10,743,645, expenses of $11,022,698 and net loss before provision of income taxes of $279,053. Fairway, RPS, Krueger and Bancard were Subchapter S Corporations for income tax purposes; therefore, these entities did not pay U.S. federal income taxes. These entities will be included in the Company's U.S. federal income tax return effective from the date of merger. Separate revenues, net income and related per share amounts of the acquired operating businesses for the periods prior to the mergers are presented in the following table. In addition, the table includes unaudited pro forma net income and earnings per share amounts which reflect pro forma adjustments to present income taxes on the basis on which they will be reported in future periods.
Year Ended Year Ended Year Ended July 31, 1995 July 31, 1996 July 31, 1997 -------------- -------------- ------------- Revenues PMT $ 75,242,866 $136,254,139 $240,756,047 BCI 17,745,773 31,851,486 40,827,025 LFG 8,860,400 11,008,144 12,881,617 MHA 13,764,195 13,585,887 -- BSI 16,808,554 21,540,196 12,218,404 Fairway 18,072,187 19,524,072 7,125,352 Other 6,791,030 12,978,788 11,232,012 ------------ ------------ ------------ Revenues, as reported $157,285,005 $246,742,712 $325,040,457 ============ ============ ============ Net Income (Loss) PMT $ 4,032,000 $ 8,952,399 13,805,887 BCI 587,159 1,179,624 2,655,698 LFG 917,608 1,024,212 1,318,778 MHA (391,845) (327,023) -- BSI 236,002 287,669 745,665 Fairway 164,381 (858,125) 183,262 Other 494,622 1,146,411 345,160 ------------ ------------ ------------ Net income, as reported 6,039,927 11,405,167 19,054,450 Pro forma tax effect of Subchapter S Corporations (484,437) (574,199) (1,277,831) ------------ ------------ ------------ Pro forma net income $ 5,555,490 $ 10,830,968 $ 17,776,619 ============ ============ ============
78 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Earnings per share: As reported $0.20 $0.30 $0.42 Pro forma $0.18 $0.28 $0.39 In addition to these seven transactions, the Company completed three separate operating business acquisitions during fiscal 1997 with three unrelated entities by issuing an aggregate of 2,900,000 shares of its common stock in exchange for all the outstanding stock of the three entities. On an individual basis these transactions were not considered material for retroactive restatement. Asset Purchases The Company purchases merchant portfolios which provide the Company the right to service specific merchants under contract to processing banks for electronic authorization and payment processing. The Company purchased nine merchant portfolios in fiscal 1995, four merchant portfolios in fiscal 1996 and nine merchant portfolios in fiscal 1997. These acquisitions were accounted for as purchase transactions, and accordingly, the operating results of the merchant portfolios are included in the Company's results of operations from the effective dates of the acquisitions. In connection with the purchase of merchant portfolios, the Company may enter into a noncompetition agreement with the sellers of the portfolios. In such cases, a portion of the purchase price of each merchant portfolio is allocated to the related noncompetition agreement (Note 7). Amortization expense related to purchased merchant portfolios was $2,283,638, $5,642,084 and $8,886,428 in fiscal 1995, 1996 and 1997, respectively. Individually significant purchase transactions are as follows: ABC - The Company purchased a merchant portfolio from BankCard America, Inc. ("ABC") in April 1995 for a purchased price of $7,674,990. The Company paid $2,600,000 in cash, issued a $400,000 note payable with interest at 3% due May 1, 1995 and issued a $4,700,000 note payable with interest at 3% due July 1, 1995. The Company incurred direct costs and expenses related to the purchase of approximately $1,300,000. The purchase agreement provided additional consideration of $2,500,000 payable to the seller contingent upon the seller's ability to negotiate the transfer of the merchant accounts from the current processing bank to the Company's primary processing bank. In May 1995, an agreement was entered into providing for transfer of the merchant accounts and the Company paid $2,500,000 representing additional purchase price for the merchant portfolio. 79 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In connection with the purchase, the Company signed a guaranty for a $1,000,000 note payable to the current processing bank by ABC expiring May 9, 1998. The Company received a security interest in stock warrants to purchase 120,000 shares of the Company's common stock currently held by a shareholder of ABC. Additionally, beginning June 1995, the Company's primary processing bank required a security deposit of $1,500,000 for a period of six months due to the conversion of other merchant portfolios to this bank. Approximately $1,000,000 plus accrued interest was returned to the Company in March 1996. A sum of $500,000 will remain on deposit with this primary processing bank as long as the Company participates in the bank's Association Marketing Agreement. This amount is included in intangible and other assets on the Company's balance sheet at July 31, 1997. TERMNET AND CPS - In July 1995, the Company purchased two merchant portfolios which were financed under the Company's credit facility. The Company paid $6,200,000 to TermNet Merchant Services, Inc. ("TermNet") for a merchant portfolio and inventory. The Company paid $5,951,000 to Consumer Payment Services, Inc. ("CPS") for the second purchase in July 1995. In addition to the CPS merchant portfolio, the Company also obtained a merchant terminal lease portfolio, inventory and other office assets. IMPERIAL BANK - In October 1995, the Company purchased a merchant portfolio from Imperial Bank ("Imperial") for $8,650,000 with a portion of the proceeds from the Company's second public offering. UMB - In March 1996, the Company purchased a merchant portfolio from UMB Bank ("UMB") for $13,500,000 with a portion of the proceeds from the Company's second public offering. Additionally, the Company purchased merchant equipment inventory from UMB in the transaction. Unaudited pro forma operating results are presented below to provide additional information relative to the potential effect upon the Company's operations of significant acquisitions. Pro forma information is provided only for acquisitions meeting certain size and other requirements set forth by the Securities and Exchange Commission. Each of the above acquisitions meet these requirements and are included in the unaudited pro forma summary for the periods specified below. There were no asset purchases which met the significance requirements in fiscal 1997. 80 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Effective Included in date of pro forma results purchases BEGINNING FISCAL YEAR --------- --------------------- ABC April 1, 1995 1995 TermNet July 1, 1995 1995 CPS July 1, 1995 1995 Imperial October 1, 1995 1995 UMB March 1, 1995 1995
These unaudited pro forma results have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the purchases been made at the beginning of fiscal 1995 or fiscal 1996, or of results which may occur in the future.
PRO FORMA PRO FORMA YEAR ENDED YEAR ENDED July 31, 1995 JULY 31, 1996 --------------- --------------------- Revenues $212,376,315 $235,222,557 Net income $ 3,896,695 $ 10,320,854 Earnings per share $0.14 $0.30
Actual results during fiscal 1997 were not materially different than pro forma results. NOTE 4 - NET INVESTMENT IN DIRECT FINANCE LEASES:
JULY 31, --------------------------- 1996 1997 ------------ ------------ Minimum lease payments................................................................. $ 45,674,278 $ 48,501,795 Residual values - unguaranteed......................................................... 5,773,731 5,725,153 Allowance for doubtful accounts........................................................ (1,659,203) (2,481,981) ------------ ------------ Net minimum lease payments receivable.................................................. 49,788,806 51,744,967 Unearned income........................................................................ (17,422,781) (17,858,333) ------------ ------------ Net investment in direct financing leases.............................................. $ 32,366,025 $ 33,886,634 ============ ============
Changes in the allowance for doubtful accounts were as follows:
For the year ended July 31, ---------------------------------------- 1995 1996 1997 ------------ ------------ ----------- Balance at beginning of year $ 1,513,455 $ 1,017,459 $ 1,659,203 Provision for bad debt expense 1,433,390 2,132,542 2,389,962 Charged off lease contracts (2,487,772) (1,637,744) (2,043,331) Bad debt recoveries 558,386 146,946 476,147 ------------ ------------ ----------- Balance at end of year $ 1,017,459 $ 1,659,203 $ 2,481,981 ============ ============ ===========
81 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) At July 31, 1997, minimum lease payments receivable, including estimated residual values receivable, are due as follows:
Unguaranteed Minimum residual lease payments values receivable receivable -------------- ----------- 1998 $20,376,671 $ 176,456 1999 15,434,230 565,691 2000 9,402,650 2,187,321 2001 3,043,504 2,416,606 Thereafter 244,740 379,079 ----------- ---------- $48,501,795 $5,725,153 =========== ==========
The Company's experience indicates a portion of the leases will terminate at dates other than the end of the contractual lease period. Accordingly, the foregoing table should not be regarded as a forecast of future collections.
NOTE 5 - PROPERTY AND EQUIPMENT: JULY 31, -------------------------- 1996 1997 ------------ ------------ Office equipment...................... $ 6,066,655 $ 9,551,203 Credit card terminals held for lease.. 1,864,032 4,043,489 Office furniture and fixtures......... 702,494 856,104 Leasehold improvements................ 1,456,291 205,253 ----------- ----------- 10,089,472 14,656,049 Less: accumulated depreciation...... (3,421,998) (5,276,993) ----------- ----------- $ 6,667,474 $ 9,379,056 =========== ===========
In addition to the direct financing leases described in Note 4, the Company leases point-of-sale terminals to merchants under operating leases on a month- to-month basis. Depreciation expense on all of the Company's property and equipment totaled $616,275, $1,253,241 and $2,083,858 in fiscal 1995, 1996 and 1997, respectively. NOTE 6 - NOTE RECEIVABLE: The Company entered into a leasing arrangement in March 1997 for a portion of the office space in a building that will serve as the Company's corporate headquarters completed in September 1997. The Company has advanced funds to an independent developer who purchased the building and is responsible for its renovation. The loan provided by the Company has a maximum available balance of $13,300,000 which bears interest at 5% (comparable to invested funds), payable monthly in arrears. The loan amount is being advanced in various draws by the 82 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) building owner based on certain achieved milestones in the renovation. The outstanding principal balance at July 31, 1997 is $8,773,330. The Company's note receivable is secured by a first lien on the property and has a term of ten years. The Company obtained an independent appraisal of the property in determining its fair value for the purpose of classifying the related leasing transaction in accordance with Statement of Financial Accounting Standards No. 13 - Accounting for Leases. The lease has a term of ten years and is classified as an operating lease. The Company's minimum lease commitment related to the property is included in Note 13 - Leases.
NOTE 7 - INTANGIBLE AND OTHER ASSETS: July 31, ------------------------ 1996 1997 ----------- ----------- Noncompetition agreements.............. $3,345,193 $ 4,068,352 Restricted cash........................ 3,329,913 7,724,597 Notes receivable from shareholders..... 171,598 2,957,542 Prepaid processing costs............... -- 1,307,330 Deferred finance costs................. 585,360 526,666 Other.................................. 650,292 1,405,239 ---------- ----------- $8,082,356 $17,989,726 ========== ===========
Intangible and other assets include noncompetition agreements with various sellers of merchant portfolios purchased by the Company (Note 3). Amortization expense related to noncompetition agreements was $465,147, $860,323 and $1,243,676 in fiscal 1995, 1996 and 1997, respectively. Accumulated amortization of noncompetition agreements was $1,703,680 and $2,947,356 at July 31, 1996 and 1997, respectively. Restricted cash represents funds withheld by certain processing banks pursuant to processing agreements to cover potential merchant losses or by lending institutions pursuant to loan agreements to provide additional collateral. Amortization of deferred finance costs included in interest expense was $580,665, $550,318 and $607,642 in fiscal 1995, 1996 and 1997, respectively. Accumulated amortization of deferred finance costs was $1,413,345 and $2,020,987 at July 31, 1996 and 1997, respectively. 83 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 8- ACCRUED LIABILITIES:
July 31, ------------------------ 1996 1997 ----------- ----------- Income taxes payable........................................ $ 1,696,910 1,030,799 Compensation and payroll taxes.............................. 1,534,631 1,912,576 Reserve for merchant losses................................. 1,681,002 1,331,290 Professional services....................................... 415,477 332,560 Accrued processing costs.................................... 238,189 193,640 State franchise taxes payable............................... 356,042 -- Sales and property taxes payable............................ 298,792 274,159 Interest payable on long-term debt.......................... 150,399 82,179 Other....................................................... 492,962 564,467 ----------- ----------- $ 6,864,404 $ 5,721,670 =========== =========== NOTE 9 - LONG-TERM DEBT: July 31, ------------------------ 1996 1997 ----------- ----------- Notes payable, secured by the remaining payment stream of certain leases and restricted cash, principal and interest at a variable rate based on the one month Commercial Paper rate then in effect (6.05% at July 31, 1997), are payable monthly, with all unpaid principal and interest due in May 2003........................................... $ -- $ 5,258,258 Notes payable, secured by the remaining payment stream on certain leases and restricted cash, principal and interest at rates ranging from 10.11% to 12.21% per annum are payable monthly, with all unpaid principle and interest due by April 2000.................. 10,237,459 5,084,577 Notes payable, secured by the remaining payment stream of certain leases and restricted cash, principal and interest at 7.22% per annum, are payable monthly, with all unpaid and interest due by May 2002............. 13,310,790 18,760,944 Notes payable, secured by the remaining payment stream of certain leases and restricted cash, principal and interest at variable rates based on the one month LIBOR rate then in effect (various rates ranging from 10.06% to 10.38% at July 31, 1996), paid in fiscal 1997....................................... 3,210,195 --
84 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JULY 31, ---------------------------- 1996 1997 ------------- ------------- Notes payable, secured by remaining payment stream of certain leases and restricted cash, principal and interest at 7.39% per annum, paid in fiscal 1997.......... 696,413 -- Notes payable, secured by the remaining payment stream of certain leases and restricted cash, principal and interest at 12.0% per annum are payable monthly, with all unpaid principal and interest due by March 1999................................................ 1,149,487 481,204 Revolving line of credit obligation (maximum available balance of $3,000,000), secured by the remaining payment stream of certain leases and restricted cash, principal and interest at a variable rate based on the prime rate (9.5% at July 31, 1997), are payable monthly, with all unpaid principal and interest due on demand............................................. 1,034,350 1,290,048 Notes payable, secured by the remaining payment stream of certain leases and restricted cash, principal, and interest at 5.17% per annum, paid in fiscal 1997...................................................... 642,576 -- Revolving line of credit obligation (maximum available balance of $1,500,000), secured by the remaining payment stream of certain leases and restricted cash, principal and interest at a variable rate based on the prime rate (10.0% at July 31, 1997), are payable monthly, with all unpaid principal and interest due by May 1998............................................... 996,545 346,457 Other debts repaid in 1996 or subsequent to acquisitions.............................................. 3,245,715 1,673,644 Other....................................................... 5,000 185,895 ------------ ------------ Total long-term debt........................................ 34,528,530 33,081,027 Less: current portion (13,456,646) (14,516,369) ------------ ------------ $ 21,071,884 $ 18,564,658 ============ ============
85 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Company entered into an agreement on March 22, 1994 for a $12,500,000 revolving line of credit and $2,368,000 bridge loan. This credit facility was amended and restated on May 31, 1995, July 18, 1995 and January 31, 1997, increasing the revolving line of credit to $20,000,000 and terminating the bridge loan. The current amendment expires January 31, 1998. Borrowings, if any, under the new credit facility will be used to finance future purchases of merchant portfolios and equipment and for general corporate purposes. Maturities of long-term debt are as follows as of July 31, 1997:
Year Ending July 31 ----------- 1998 $14,516,369 1999 10,789,127 2000 5,209,256 2001 1,610,339 2002 579,164 Thereafter 376,772 ----------- $33,081,027 ===========
NOTE 10 - SHAREHOLDERS' EQUITY: Changes in the shares of the Company's common stock are as follows:
Outstanding at July 31, 1994.......................................... 5,930,603 Shares issued......................................................... 2,420,872 Exercise of put options.............................................. 1,922,372 Exercise of options and warrants...................................... 164,684 ----------- Outstanding at July 31, 1995.......................................... 10,438,531 Shares issued......................................................... 5,851,961 Exercise of options................................................... 44,805 Stock dividends....................................................... 26,791,597 ----------- Outstanding at July 31, 1996.......................................... 43,126,894 Shares issued......................................................... 2,900,966 Exercise of options................................................... 369,468 Cancellation of treasury shares....................................... (778,840) ----------- Outstanding at July 31, 1997.......................................... 45,618,448 ===========
Shares of common stock issued in operating business acquisitions accounted for as poolings of interests, for which the financial statements have been restated, have been reflected as outstanding on a pre-split basis for all periods presented above. 86 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Company's shareholders approved an increase in the amount of authorized shares of Common Stock of the Company from 40,000,000 shares to 100,000,000 shares at the Company's December 16, 1996 Annual Meeting of Shareholders. NOTE 11 - STOCK OPTIONS AND WARRANTS: The Company has an incentive stock option plan, whereby the Company has reserved for issuance upon exercise of stock options a maximum of 3,795,000 shares of the Company's common stock. In addition to certain other provisions, the plan provides for the option price of the shares to be determined by the Board of Directors or their designees at the date of the grant provided, however, that in the case of incentive stock options, the option price shall be no less than 100% of the fair market value of the common stock on such date (110% in the case of an individual who owns more than 10% of the total combined voting power of all classes of stock of the Company). In the case of nonstatutory stock options, the option price shall be no less than 85% of the fair market value of the common stock on the date of grant. The options expire at such times as determined by the Board of Directors at the time of the grant, which shall be no later than ten years from the grant date (five years in the case of an individual who owns more than 10% of the total combined voting power of all classes of stock of the Company). The Company is authorized to loan, or guarantee loans for, the purchase price of shares issuable upon exercise of options granted under the plan. In May 1994, the Company adopted an outside director stock option plan and amended the plan at the December 1995 annual shareholders' meeting. The plan provides for the grant of non-qualified stock options to outside directors and authorizes the issuance of up to 300,000 shares of common stock pursuant to options having an exercise price equal to the fair market value of the common stock on the date the options are granted. Options were granted to each outside director on the effective date of the Offering to purchase 30,000 shares of the Company's common stock for a total of 120,000 shares (Note 2). Options granted under the plan are exercisable one-fourth each on the first, second, third and fourth anniversaries of the grant date and expire ten years after the grant date. The Company adopted Statement of Financial Accounting Standards No. 123 - Accounting for Stock Based Compensation (SFAS 123) as of August 1, 1996. In accordance with the provisions of SFAS No. 123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and accordingly, does not recognize compensation costs. If the Company had elected to recognize compensation costs based on the fair value of the options granted at grant date as prescribed by SFAS 123, net income and 87 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) earnings per share would have been reduced to the pro forma amounts indicated in the table below: 1995 1996 1997 ---- ---- ----
Net income as reported $6,039,927 $11,405,167 $19,054,450 Pro forma net income 5,735,749 10,772,733 17,693,408 Net income per share as reported 0.20 0.30 0.42 Pro forma net income per share 0.19 0.29 0.39
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following assumptions:
1995 1996 1997 ---------- ---------- ----------- Expected dividend yield 0% 0% 0% Expected stock price volatility 40.8% 42.5% 47.4% Risk-free interest rate 7.3%-7.8% 5.7%-6.8% 6.3%-6.9% Expected life of options 6.7 years 6.7 years 6.7 years
The weighted average fair value at date of grant for options granted during 1995, 1996 and 1997 was $1.46, $5.88 and $9.45 per option, respectively.
WEIGHTED AVERAGE NUMBER OF SHARES EXERCISE PRICE ---------------- ---------------- Outstanding at July 31, 1994............................ 458,700 $ 0.88 Granted............................................... 1,400,724 2.68 Exercised............................................. (103,872) 0.99 Terminated............................................ (5,196) 1.13 ----------- -------------- Outstanding at July 31, 1995............................ 1,750,356 $ 2.31 Granted............................................... 551,500 10.79 Exercised............................................. (119,775) 1.26 Terminated............................................ (265,052) 2.73 ----------- -------------- Outstanding at July 31, 1996............................ 1,917,029 $ 4.76 Granted............................................... 410,500 16.29 Exercised............................................. (369,468) 2.12 Terminated............................................ (77,640) 9.66 ----------- -------------- Outstanding at July 31, 1997............................ 1,880,421 $ 7.59 =========== ===============
88 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following table summarizes information concerning currently outstanding and exercisable options:
Options Outstanding Options Exercisable -------------------------- ----------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - -------------- ----------- ----------- ------------------- ------------------- -------- $0.83-$1.13 77,950 4.7 $ 0.94 77,950 $ 0.94 $2.67-$3.54 914,956 7.0 $ 2.63 361,866 $ 2.67 $5.96-$8.78 132,240 8.3 $ 7.75 23,280 $ 8.00 $9.17-$13.75 470,000 8.9 $11.08 75,500 $10.16 $15.00-22.25 285,275 9.2 $19.33 23,401 $17.92 --------- ------- 1,880,421 561,997 ========= =======
In fiscal 1995, the Company has granted stock warrants which give the holder the right to purchase 120,000 shares of the Company's common stock at an exercise price of $1.25 per share. These warrants expire March 22, 2004 (Note 3). In fiscal 1997, the Company granted warrants to purchase 10,000 shares of its common stock at an exercise price of $17.00 per share in conjunction with an immaterial acquisition. These warrants expire September 16, 2006. NOTE 12 - RETIREMENT PLANS: The Company initiated the PMT Services, Inc. 401(k) Retirement Plan, in fiscal 1996. Following the initial enrollment, employees become eligible for participation in the plan on the semi-annual enrollment date following the employee completing 12 consecutive months of employment and 1,000 hours of service or more. The Company contributes an amount equal to 50% of employee voluntary contributions up to a maximum of 6% of the employee's annual compensation. The plan expense for fiscal 1996 and 1997 was $64,015 and $114,720, respectively. 89 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 13 - LEASES: The Company leases equipment and office space under noncancellable operating leases. Rent expense approximated $981,374, $1,200,997 and $1,654,116 during fiscal 1995, 1996 and 1997, respectively. Office space was leased from a partnership comprising two of the Company's shareholders during a portion of 1995. Rent expense paid to shareholders for office space amounted to $54,000 during fiscal 1995. This office space lease agreement terminated in 1995 and the Company relocated. None of the Company's current office space is with a related party. In March 1997, the Company entered into a leasing arrangement for a portion of the office space in a building that will serve as the Company's corporate headquarters (Note 6). Future minimum payments under all noncancellable leases with terms greater than one year at July 31, 1997 are:
FISCAL YEAR ending July 31 --------- 1998 $ 2,988,974 1999 3,431,032 2000 3,447,272 2001 2,816,611 2002 2,082,822 Thereafter 7,558,150 ----------- 22,324,861 Less: Sublease rentals (2,635,858) ----------- $ 19,689,003 ============
NOTE 14 - OTHER INCOME (EXPENSE) - NET: The Company recorded a non-taxable gain of $1,000,000 in the fourth quarter of fiscal 1996 for the receipt of insurance proceeds on the life of the former Chief Financial Officer of the Company. Additionally, the Company has included in this line item all non-recurring transaction costs related to operating business acquisitions, which were accounted for as poolings of interest. During fiscal 1997, LFG recorded a charge of $367,000 related to the buyout of a consulting agreement due to the death of their former Chief Financial Officer. This charge occurred prior to the effective date of the merger with this entity and is included in other expense on a restated basis. 90 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 15 - INCOME TAXES: The provision for income taxes comprises the following:
Year ended July 31, -------------------------------------- 1995 1996 1997 ----------- ----------- ------------ Current tax expense: Federal.................................... $2,425,471 $5,395,173 $ 8,955,618 State...................................... 517,847 1,042,180 1,616,868 ---------- ---------- ----------- 2,943,318 6,437,353 $10,572,486 ---------- ---------- ----------- Deferred tax benefit: Federal.................................... 143,946 (470,526) (935,449) State...................................... 76,500 (30,469) (19,521) ---------- ---------- ----------- 220,446 (500,995) (954,970) ---------- ---------- ----------- Increase in valuation allowance.................................. 137,288 194,831 -- ---------- ---------- ----------- $3,301,052 $6,131,189 $ 9,617,516 ========== ========== ===========
The Company's effective tax rate differs from the statutory rate as follows:
Year ended July 31, ------------------------------------ 1995 1996 1997 ---------- ---------- ----------- Federal tax at statutory rate......................... 34.0% 34.0% 35.0% Increase (decrease) in taxes resulting from: State income taxes (net of federal tax benefit)............................ 4.5 4.1 4.0 Subchapter S Corporations income not subject to tax................................................ (3.4) (3.3) (4.2) Valuation allowance 1.6 1.2 0.0 Other............................................... (1.4) (1.0) (1.3) ---------- ---------- ----------- 35.3% 35.0% 33.5% ========== ========== ===========
Deferred income taxes under Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes, reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets at July 31, 1996 and 1997 are as follows: 91 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JULY 31, --------------------------- 1996 1997 ------------ ------------ Current tax assets: Compensation liabilities........... $ 30,897 $ 31,645 Loss reserves...................... 858,343 1,386,971 Other.............................. 56,694 124,763 ------------ ------------ Net current tax assets............... $ 945,934 $ 1,543,379 ============ ============ Noncurrent tax assets: Leased equipment................... 10,646,486 12,799,951 Unearned income.................... 7,143,341 8,005,899 Merchant portfolio amortization.... 1,586,194 3,345,402 Operating loss carryforwards and AMT credits....................... 1,222,814 1,299,321 Other.............................. 182,442 182,442 ------------ ------------ 20,781,277 25,633,015 Valuation allowance........... (332,119) (332,119) Noncurrent tax liability: Gross lease receivable............. (18,726,454) (21,743,354) Residual values.................... (2,367,230) (2,566,975) Depreciation....................... (242,327) (517,919) Residual value of sold portfolios.. -- (788,371) Other.............................. (107,868) (309,054) ------------ ------------ (21,443,879) (25,925,673) ------------ ------------ Net noncurrent tax liability........ $ (994,721) $ (624,777) ============ ============
As of July 31, 1997, the Company has approximately $3,000,000 of federal and state net operating loss carryforwards and AMT credits available to offset future taxable income of certain subsidiaries of the Company. These carryforwards and credits expire at various dates through fiscal 2005. A valuation allowance has been established for these net operating losses and AMT credits as utilization is not reasonably assured. NOTE 16 - COMMITMENTS AND CONTINGENCIES: In addition to the third-party debt guaranty and operating leases described in Notes 3 and 13 above, the Company is subject to the following commitments and contingencies described herein. 92 PMT SERVICES, INC. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The Company entered into an agreement in July 1995 to purchase the rights to service merchant accounts to be generated by another independent sales and service provider ("service provider") under a contract with the Company's primary processing bank. The Company's option to purchase may be exercised upon the earlier of default by the service provider under its loan agreement with a third party or December 1, 1997 and expires on January31, 1998. The purchase price will be derived ass a multiple of average monthly cash flow generated by the merchant accounts for the the immediately prior to the purchase. The Company's agreement with its primary processing bank was amended to require the Company to purchase the service provider's provider's accounts by January 31, 1998. Additionally,t he Company has indemnified the processing bank for any losses incurred by the processing bank with respect to the service provider's merchant accounts. In connection with the option agreement, the Company has guaranteed the service provider's loan to a third party in the amount of $250,000. The Company has also entered into a service agreement whereby the Company will provide customer service, processing equipment deployment and related services to the service provider's merchant accounts for a monthly fee per merchant. VISA and MasterCard require merchants accepting VISA and MasterCard credit cards to contract directly with a processing bank that is a member bank of the processing agreements and is therefore dependent upon its contractual arrangements with a processing banks in order to continue to service its merchant portfolio. The Company has a contractual right to receive revenues as derived from the discount rate and fee earned on its merchant portfolio so long as the merchant continues to process transactions on the processing bank's system and the Company provides adequate service to the merchant and remains in compliance under its agreement with the processing bank. Under the terms of the Company's agreement with its primary processing bank, the Company is permitted to transfer merchants to another processing bank subject to time limitations and termination fees. This agreement provides mobility for substantially all of the Company's merchant base. However, in order to transfer merchant contracts, the Company must pay the processing bank a fee determined by a formula related to the annualized aggregate transaction volume of the merchants transferred. 93 SCHEDULE II PMT SERVICES, INC. RESERVE FOR MERCHANT LOSSES (SUPPLEMENTAL)
BALANCE AT BALANCE AT BEGINNING END OF FISCAL YEAR OF PERIOD ADDITIONS(1) OTHERS(2) DEDUCTIONS(3) PERIOD - ------------- ---------- ------------- ----------- ------------- ---------- 1995 $ 554,759 $ 622,965 -- $ 421,051 $ 756,673 1996 $ 756,673 $1,923,049 -- $ 998,720 $1,681,002 1997 $1,681,002 $2,005,535 $284,906 $2,640,153 $1,331,290 ______________________ (1) Additions represent amounts charged to expense during the respective periods. (2) Other represents additions from immaterial operating business acquisitions, during the respective periods. (3) Deductions represent actual chargebacks incurred by the Company during the respective periods.
ALLOWANCE FOR BAD DEBTS (SUPPLEMENTAL)
BALANCE AT BALANCE AT beginning END OF FISCAL YEAR OF PERIOD ADDITIONS(1) OTHER(2) DEDUCTIONS(3) PERIOD - ------------- ---------- ------------- ----------- ------------- ---------- 1995 $1,513,455 $1,433,390 $558,386 $2,487,772 $1,017,459 1996 $1,017,459 $2,132,542 $146,946 $1,637,744 $1,659,203 1997 $1,659,203 $2,389,962 $476,147 $2,043,331 $2,481,981 ______________________ (1) Additions represent amounts charged to expense during the respective periods. (2) Other represents recoveries by the Company during the respective periods. (3) Deductions represent actual write-offs recorded by the Company during the respective periods.
94 Quarterly Information (Supplemental basis) The following table sets forth statements of income data for each of the eight quarters in the two year period ended July 31, 1997. This income data has been restated to Bancard, Inc. which was acquired by PMT Services, Inc. in a transaction accounted for as a pooling of interests. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein and, in management's opinion includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the selected quarterly information when read in conjunction with the financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for the entire fiscal year or for any future period.
First Second Third Fourth Quarter Quarter Quarter Quarter Total -------------------------------------------- (in thousands) 1996 ---- Revenues $54,076 $55,995 $61,930 $74,742 $246,743 Gross margin 15,330 16,428 17,234 19,714 68,706 Income from operations 4,118 4,148 4,882 5,630 18,778 Income before provision for income taxes 3,057 3,585 4,208 6,686 17,536 Net income 1,956 2,273 2,634 4,542 11,405 1997 ---- Revenues $78,990 $75,411 $75,865 $94,774 $325,040 Gross margin 21,160 21,090 21,369 25,780 89,399 Income from operations 6,803 6,554 6,850 9,528 29,735 Income before provision for income taxes 6,780 5,757 6,645 9,490 28,672 Net income 4,566 3,634 4,543 6,311 19,054
95
Selected (Supplemental) Financial Data Year Ended July 31, ----------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues................................. $69,955 $110,202 $157,285 $246,743 $325,040 Cost of revenues......................... 50,845 77,244 110,671 178,037 235,641 ------- -------- -------- -------- -------- Gross margin............................. 19,110 32,958 46,614 68,706 89,399 Selling, general & administrative expenses................................ 12,922 20,184 28,101 37,959 41,870 Depreciation and amortization............ 599 1,910 3,773 7,914 12,805 Provision for merchant loss and bad debt expense.................... 1,586 3,130 2,057 4,055 4,395 Stock award compensation................. 281 240 241 -- -- Non-recurring operating expense................................. -- -- -- -- 594 ------- -------- -------- -------- -------- Income from operations................... 3,722 7,494 12,442 18,778 29,735 Interest income (expense), net........... (1,251) (2,481) (3,101) (1,946) 1,181 Other income (expense), net.............. -- -- -- 704 (2,244) ------- -------- -------- -------- -------- Income before provision for taxes, extraordinary item and change in accounting principle............................... 2,471 5,013 9,341 17,536 28,672 Provision for income taxes............... 772 1,756 3,301 6,131 9,618 ------- -------- -------- -------- -------- Income before extraordinary item and change in accounting principle............................... 1,699 3,257 6,040 11,405 19,054 Net income............................... $ 2,289 $ 3,257 $ 6,040 $ 11,405 $ 19,054 PER SHARE INFORMATION: Income before extraordinary item.................................... $ 0.07 $ 0.14 $ 0.20 $ 0.30 $ 0.42 Extraordinary item - net operating loss carryforward............. 0.03 0.00 0.00 0.00 0.00 ------- -------- -------- -------- -------- Income before change in accounting principle.................... 0.10 0.14 0.20 0.30 0.42 Cumulative effect of change in accounting principle................. 0.00 0.01 0.00 0.00 0.00 ------- -------- -------- -------- -------- Earnings per share....................... $ 0.10 $ 0.15 $ 0.20 $ 0.30 $ 0.42 ======= ======== ======== ======== ======== Weighted average shares outstanding............................. 22,850 23,045 30,977 38,576 45,015
__________________________ (1) Revenue increased for fiscal 1993 through 1997 primarily from the purchase of merchant portfolios and new merchant contracts generated by the Company as well as fee enhancements with existing merchants. (2) Net income for fiscal 1993 has increased through the utilization of net operating loss carryforward of $589,471, the benefit of which has partially offset the provision for income taxes. For the fiscal year ended July 31, 1994, net income has increased by $312,800 because of a change in accounting principle relating to income taxes. (3) Earnings per share for fiscal 1997 includes non-recurring, after-tax operating and merger expenses of $2,633,000 or $0.06 per share. Earnings per share for fiscal 1996 includes non-recurring income of $1,000,000 life insurance proceeds and $296,000 of merger expenses or a net of $0.02 per share. 96 (3) EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBITS 3.1 Amended and Restated Charter of the Registrant (1) 3.2 Bylaws of the Registrant (1) 3.3 Articles of Amendment to the Amended and Restated Charter of the Registrant (8) 4.1 Section 6 of the Amended and Restated Charter of the Registrant (included in Exhibit 3.1) 4.2 Specimen of Common Stock certificate (1) 10.1(a) Purchase Agreement, dated April 28, 1995, between the Registrant, BankCard America, Inc., and each of Paul L. Alperstein, Samuel Buchbinder and Sol Alperstein. (2) 10.1(b) Option Agreement, dated July 25, 1995, between the Registrant and Money Transfer Systems, Inc., Mel Ora and Greg Mohr. (5) 10.1(c) Purchase Agreement, dated March 12, 1996, between the Registrant and UMB Bank, n.a. (6) 10.1(d) Agreement and Plan of Merger, dated June 28, 1996, by and among the Registrant, PMT Acquisition Corporation and Martin Howe Associates, Inc. (7) 10.1(e) Agreement and Plan of Merger, dated June 9, 1997, between the Registrant, PMT LADCO Acquisition Corporation, LADCO and the Ladd Family Trust (11) 10.1(f) Agreement and Plan of Merger dated October 2, 1997, by and among the Registrant, PMT BCI Acquisition Corporation, Bancard Inc. and Jay W. Hearst, Anthony Sdao, Scott J. Bahneman, Jack W. Hearst, Gillian G. Hearst and Stephen M. Hearst as shareholders of Bancard, Inc. (12) 10.1(g) Processing Agreement, dated March 1, 1994, between the Registrant and First National Bank of Omaha, relating to the processing of BankCard transactions. (1) 10.1(h) Amendment to Processing Agreement, dated May 10, 1995, between the Registrant and First National Bank of Omaha. (5) 10.1(i) Amendment to Processing Agreement, dated July 18, 1995, between the Registrant and First National Bank of Omaha. (5) 10.1(j) Amendment to Processing Agreement, dated August 7, 1995, between the Registrant and First National Bank of Omaha. (5) 10.1(k) Amendment to Agreement, dated November 1, 1995 between the Registrant and First National Bank of Omaha. (7) 97 10.1(l) Fifth Amendment to Processing Agreement, dated May 29, 1996, between the Registrant and First National Bank of Omaha. (7) 10.1(m) Provider Agreement, dated June 15, 1995, between the Registrant and Harris Trust and Savings Bank Charge-it Division, relating to the processing of BankCard transactions. (5) 10.1(n) Processing Agreement, dated March 12, 1996, between the Registrant and UMB Bank, n.a., relating to the processing of BankCard transactions. (6) 10.1(o) Private-Label Credit Card Processing Agreement, dated March 12, 1996, between the Registrant and UMB Bank, n.a., relating to the processing of charge card transactions. (6) 10.1(p) Assignment and Assumption Agreement, dated March 12, 1996, between Registrant and UMB Bank, n.a. (6) 10.1(q) Marketing Agreement, dated March 12, 1996, between the Registrant and UMB Bank, n.a. (6) 10.1(r) Service Agreement, dated March 28, 1997, between the Registrant and Global Payment Systems LLC. 10.1(s) Consulting Agreement, dated April 1, 1997, between the Registrant and Stephen D. Kane. 10.1(t) Transaction Processing Services Agreement, dated August 15, 1997, between the Registrant and Paymentech Network Services, Inc. 10.1(u) Lease, dated August 31, 1994, between the Registrant and Eastpark, L.P. (3) 10.1(v) First Amendment to Lease, dated September 30, 1994 between Registrant and Eastpark, L.P. (5) 10.1(w) Second Amendment to Lease, dated May 11, 1995 between Registrant and Eastpark, L.P. (5) 10.1(x) Third Amendment to Lease, dated March 1, 1996, between Registrant and Eastpark, L.P. (7) 10.1(y) Fourth Amendment to Lease, dated May 1, 1996, between Registrant and Highwoods/Forsyth Limited Partnership (Successor-in-Interest to Eastpark, L.P.) (7) 10.1(z) Lease Agreement, dated July 31, 1996, between Registrant and Centoff Realty Company, Inc. (7) 10.1(aa) Lease Agreement, dated April 2, 1997, between the Registrant and Battleship, LLC. (10) 10.1(bb) Purchase Option Agreement, dated April 2, 1997, between the Registrant and Battleship, LLC. (10) 98 10.1(cc) Business Property Lease, dated June 20, 1997, between the Registrant and John P. Chudy. 10.2(a) 1994 Non-Employee Director Stock Option Plan. (1) 10.2(b) Non-Employee Director Restricted Stock Award Plan. (7) 10.2(c) 1994 Incentive Stock Plan. (1) 10.2(d) PMT Services, Inc. 401(k) Retirement Plan. (4) 10.2(e) 1994 Incentive Stock Plan Amendment No. 1. (8) 10.2(f) 1997 Non qualified Stock Option Plan. (10) 10.3(a) Amended and Restated Loan Agreement, dated May 31, 1995, between the Registrant and First Union National Bank of Tennessee. (5) 10.3(b) Amended and Restated Security Amendment, dated May 31, 1995, between the Registrant and First Union National Bank of Tennessee. (5) 10.3(c) First Amendment to Amended and Restated Loan Agreement, dated July 18, 1995, between the Registrant and First Union National Bank of Tennessee. (5) 10.3(d) Second Amendment to the Amended and Restated Loan Agreement, dated January 31, 1997, between the Registrant and First Union National Bank of Tennessee. (9) 10.3(e) Loan Agreement, dated April 2, 1997, between the Registrant and Battleship, LLC. (10) 10.3(f) Note, dated April 2, 1997, between the Registrant and Battleship, LLC. (10) 10.3(g) Deed of Trust and Security Agreement, dated April 2, 1997, between the Registrant and Battleship, LLC. (10) 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Accountants dated September 23, 1997. 27.1 Financial Data Schedule. - ----------------------- (1) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1, Registration No. 33-79064. (2) Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K, filed on May 15, 1995, Commission No. 0-24420. (3) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended July 31, 1994. 99 (4) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-8, Registration No. 33-97000. (5) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended July 31, 1995. (6) Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K, filed on March 27, 1996, Commission No. 0-24420. (7) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended July 31, 1996. (8) Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K, filed on December 23, 1996, Commission No. 0-24420. (9) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1997. (10) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended April 30, 1997. (11) Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K, filed on July 18, 1997, Commission No. 0-24420. (12) Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K, filed on October 10, 1997, Commission No. 0-24420. 100 EXECUTIVE COMPENSATION PLAN AND ARRANGEMENTS The following is a list of all executive compensation plans and arrangements filed as exhibits to this Annual Report on form 10-K: Exhibit Number Exhibit ------ ------- *10.2(a) 1994 Non-Employee Director Stock Option Plan. ***10.2(b) Non-Employee Director Restricted Stock Award Plan. *10.2(c) 1994 Incentive Stock Plan. **10.2(d) PMT Services, Inc. 401(K) Retirement Plan. ****10.2(e) 1994 Incentive Stock Plan Amendment No. 1. *****10.2(f) 1997 Non qualified Stock Option Plan. - ---------------------- * Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1 Registration No. 33-79064. ** Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-8, Registration No. 33-97000. *** Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended July 31, 1996. **** Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K, filed on December 23, 1996, Commission No. 0-24420. ***** Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended April 30, 1997. 101 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nashville, State of Tennessee, on October 31, 1997. PMT SERVICES, INC. By: /s/ Richardson M. Roberts ------------------------- Richardson M. Roberts Chairman of the Board and Chief Executive Officer 102 EX-23.1 2 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-3 (Nos. 333-00164, 333-16757, 333-19157, 333-24783, 333-26075, 333-27403 and 333-37849 and the Registration Statements on Form S-8 (Nos. 33-88974, 33-88976, 33-97000 and 333-33021) of PMT Services, Inc. of our report dated September 23, 1997, except as to Note 17 which describes the pooling of interests with Bancard, Inc. which is as of October 2, 1997, appearing on page 30 of this Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page 65 of such annual report on Form 10-K. PRICE WATERHOUSE LLP Nashville, Tennessee October 29, 1997 -----END PRIVACY-ENHANCED MESSAGE-----