EXHIBIT 5.1
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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in fiscal 1994.
As described in Note 3 to the consolidated financial statements, PMT Services,
Inc. merged with Fairway Marketing Group (December 23, 1996), Bancard Systems,
Inc. (January 27, 1997) and Retail Payment Services, Inc. (January 30, 1997)
(the Acquired Entities) in transactions accounted for as poolings of interests.
The accompanying consolidated financial statements give retroactive effect to
the merger of PMT Services, Inc. with the Acquired Entities.
/s/ Price Waterhouse LLP
Nashville, TN
September 13, 1996,
except as to the poolings of interests with
the Acquired Entities which is as of January 30, 1997
1
PMT SERVICES, INC.
CONSOLIDATED BALANCE SHEET
JULY 31,
-------------------------
1995 1996
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,351,311 $106,329,848
Accounts receivable................................ 5,325,376 8,403,918
Inventory.......................................... 633,929 760,620
Deferred income taxes.............................. 262,966 265,661
Other current assets............................... 285,547 798,266
----------- ------------
Total current assets............................ 7,859,129 116,558,313
Purchased merchant portfolios, net of accumulated
amortization of 4,040,830 and $9,128,708........ $36,974,081 62,075,590
Property and equipment, net........................ 3,759,518 4,751,080
Deferred income taxes.............................. 581,453 1,343,867
Intangible and other assets........................ 6,193,790 6,219,235
----------- ------------
Total assets.................................... $55,367,971 $190,948,085
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................. $ 185,336 $ 40,000
Accounts payable.................................. 3,865,073 4,736,939
Accrued liabilities............................... 3,277,027 4,937,445
Deferred revenues................................. 285,728 230,496
----------- ------------
Total current liabilities...................... 7,613,164 9,944,880
Long-term debt.................................... 16,795,164 1,014,991
----------- ------------
Total liabilities.............................. 24,408,328 10,959,871
----------- ------------
Shareholders' equity:
Preferred stock, $0.01 par value, authorized:
10,000,000 shares; no shares outstanding
Common stock, $0.01 par value, authorized:
100,000,000 shares; issued
8,208,186 and 36,435,860 shares............... 82,082 364,359
Additional paid-in capital......................... 25,707,140 166,637,622
Treasury stock, at cost: 13,068 and 1,188 shares... (68,500) (12,000)
Accumulated earnings............................... 5,238,921 12,998,233
----------- ------------
30,959,643 179,988,214
----------- ------------
Commitments and contingent liabilities
(Notes 3, 11 and 14)
Total liabilities and shareholders' equity..... $55,367,971 $190,948,085
=========== ============
The accompanying notes are an integral part of these financial statements.
2
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JULY 31,
----------------------------------------
1994 1995 1996
----------- ------------ -------------
Revenues.................................. $88,151,049 $127,977,964 $197,657,449
Cost of revenues.......................... 67,637,663 95,968,781 149,139,941
----------- ------------ ------------
Gross margin............................. 20,513,386 32,009,183 48,517,508
Selling, general and administrative
expenses................................. 13,899,679 20,705,618 27,460,091
Depreciation and amortization expense..... 1,687,354 3,573,567 7,635,671
Provision for merchant losses............. 486,993 520,245 1,653,705
Stock award compensation.................. 239,659 241,477 --
---------- ------------ ------------
16,313,685 25,040,907 36,749,467
---------- ---------- -----------
Income from operations.................... 4,199,701 6,968,276 11,768,041
Interest income........................... 32,988 313,073 2,107,547
Interest expense.......................... (435,204) (285,933) (378,823)
Other income, net......................... -- -- 703,896
---------- ---------- -----------
Income before provision for income taxes
and change in accounting principle....... 3,797,485 6,995,416 14,200,661
Provision for income taxes................ 1,447,576 2,674,327 5,392,564
---------- ---------- -----------
Income before change in accounting
principle................................ 2,349,909 4,321,089 8,808,097
Cumulative effect of change in
accounting principle..................... 312,800 -- --
---------- ---------- -----------
Net income............................. $2,662,709 $4,321,089 $ 8,808,097
========== =========== ===========
Per share data:
Income before change in accounting
principle................................ $ 0.14 $ 0.17 $ 0.27
Cumulative effect of change in
accounting principle..................... 0.02 -- --
---------- ---------- -----------
Net income per share................... $ 0.16 $ 0.17 $ 0.27
========== =========== ===========
The accompanying notes are an integral part of these financial statements.
3
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
ADDITIONAL ACCUMULATED TOTAL
COMMON PAID-IN EARNINGS TREASURY UNEARNED SHAREHOLDERS'
STOCK CAPITAL (DEFICIT) STOCK COMPENSATION EQUITY
--------- ------------- ------------ ---------- ------------- --------------
Balance at July 31, 1993............ $ 36,802 $ 1,556,480 ($ 569,134) ($481,136) $ 543,012
Stock awards vested............... 239,659 239,659
Shares issued..................... 200 53,500 53,700
Stock warrants issued............. 261,000 261,000
Purchase of treasury stock........ ($45,000) (45,000)
Distributions of Subchapter S
Corporations, prior to pooling.. (229,950) (229,950)
Reissuance of treasury stock...... (3,000) 3,000 --
Net income for the year.......... 2,662,709 2,662,709
-------- ------------ ----------- --------- ------------ ------------
Balance at July 31, 1994............ 37,002 1,867,980 1,863,625 (42,000) (241,477) 3,485,130
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 pooling. (435,248) (435,248)
Net income for the year............. 4,321,089 4,321,089
-------- ------------ ----------- --------- ------------ ------------
Balance at July 31, 1995............ 82,082 25,707,140 5,238,921 (68,500) -- 30,959,643
Shares issued..................... 58,520 140,746,488 140,805,008
Stock options exercised........... 448 475,803 476,251
Stock splits...................... 223,309 (223,309) --
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 pooling. (811,871) (811,871)
Net income for the year............. 8,808,097 8,808,097
-------- ------------ ----------- --------- ------------ ------------
Balance at July 31, 1996............ $364,359 $166,637,622 $12,998,233 ($12,000) $ -- $179,988,214
======== ============ =========== ========= ============ ============
The accompanying notes are an integral part of these financial statements.
4
PMT SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31,
-------------------------------------------
1994 1995 1996
------------ ------------- --------------
Reconciliation of net income to net cash provided by
operating activities:
Net income............................................ $ 2,662,709 $ 4,321,089 $ 8,808,097
Martin Howe fiscal year conversion.................... -- -- (356,914)
Adjustments:
Depreciation and amortization expense.............. 1,687,354 3,573,567 7,635,671
Provision for merchant losses...................... 486,993 520,245 1,653,705
Stock award compensation and other................. 239,659 241,477 --
Deferred income taxes.............................. (454,063) 48,220 (765,109)
Gain on sale of property and equipment............. -- (8,714) --
Gain on sale of merchant portfolio................. -- (80,198) --
Changes in assets and liabilities:
Accounts receivable............................. (1,663,173) (1,815,087) (3,078,542)
Inventory....................................... (50,261) (290,065) (126,691)
Other assets.................................... (2,147,733) (1,942,090) 82,751
Accounts payable................................ 1,786,084 61,431 871,866
Accrued liabilities............................. 1,620,963 297,255 324,857
Deferred revenues............................... (56,123) 169,677 (55,232)
----------- ------------ ------------
Net cash provided by operating activities................. 4,112,409 5,096,807 14,994,459
Cash flows from investing activities:
Purchase of merchant portfolios........................ (8,415,055) (24,752,658) (32,341,624)
Purchase of property and equipment..................... (1,507,291) (2,098,130) (2,008,033)
Proceeds from sale of merchant portfolio............... -- 80,198 --
Proceeds from sale of property and equipment........... -- 37,000 --
----------- ------------ ------------
Net cash used in investing activities...... (9,922,346) (26,733,590) (34,349,657)
----------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............... 7,650,000 16,587,500 789,656
Payments on long-term debt............................. (1,163,170) (12,841,003) (16,715,165)
Proceeds from issuance of common stock................. -- 17,098,894 140,963,115
Payments to repurchase treasury stock.................. (45,000) (32,500) (12,000)
Proceeds from minority shareholders' contributions..... -- -- 120,000
Distributions of Subchapter S Corporations............. (229,950) (435,248) (811,871)
----------- ------------ ------------
Net cash provided by financing activities.. 6,211,880 20,377,643 124,333,735
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents...... 401,943 (1,259,140) 104,978,537
Cash and cash equivalents at beginning of year............ 2,208,508 2,610,451 1,351,311
----------- ------------ ------------
Cash and cash equivalents at end of year.................. $ 2,610,451 $ 1,351,311 $106,329,848
=========== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes................................ $ 901,411 $ 2,820,755 $ 5,610,989
Cash paid for interest.................................... 425,204 268,613 362,873
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
In connection with the purchase of merchant portfolios in fiscal years 1994
and 1995, the Company issued promissory notes totaling $5,061,804 and $80,500,
respectively.
The Company recognized a tax benefit of $318,517 for the year ended July
31, 1996 for the excess of the fair market value at the exercise date over that
at the award date for stock options exercised.
In connection with the purchase of a merchant portfolio in March 1994,
the Company issued 312,500 shares of common stock.
In connection with an agreement between the Company and a processing bank
entered into simultaneously with the purchase of a merchant portfolio in March
1994, the Company issued warrants to purchase 120,000 shares of common stock.
The accompanying notes are an integral part of these financial statements.
5
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations
PMT Services, Inc. (the "Company") markets and services electronic credit card
authorization and payment systems to merchants. The Company provides these
services to merchants pursuant to contracts between the Company and various
processing banks. Generally the Company's agreements with the processing banks
contain certain aspects of both marketing and service. Although the marketing
portion of the agreements is limited as to time, the service portion of
substantially all of these agreements is not. The marketing aspects expire at
dates ranging from 1996 to 2002 unless extended by either party.
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. Interests in the majority-owned
subsidiaries are reported using the full consolidation method. All material
intercompany balances and transactions are eliminated.
Basis of presentation
Certain financial statement items have been reclassified to conform to
the current year's presentation. The consolidated financial statements give
retroactive effect to certain mergers consummated in the fourth quarter of
fiscal 1996 and subsequent to July 31, 1996 which were accounted for as poolings
of interests (Note 3).
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and cost recognition
Revenues derived from the electronic processing of transactions
(merchant discount rate and related fees) on the credit card authorization
equipment are recognized at the time the merchants' transactions are processed.
Related commissions and processing charges are also recognized at that time.
6
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenues related to the direct sale of credit card authorization
equipment are recognized when the equipment is shipped. Installation fees
related to both the direct sale and the marketing of this equipment are
recognized when installation is completed. Fees received in advance of shipment
or installation are not recognized as revenue until earned.
Cost of revenues includes interchange fees paid to the credit card-
issuing bank and fees paid to the network service provider, VISA and MasterCard
and the processing bank. These costs are recognized at the time the merchants'
transactions are processed and the related revenue is recorded.
The Company recognizes as revenue in its statement of income the full
discount rate and fees collected from the merchant. The various costs incurred
by the Company, including amounts paid to the card-issuing bank, the processor
and network service provider, are reflected as costs of revenues. In accordance
with the Company's contracts with its processing banks, all of the funds
collection and most of the disbursement function is performed on behalf of the
Company by the processing bank. At month end, the processing bank collects the
total discount rate and fees from the merchants and disburses to each of the
service providers their fees. Disbursements for the interchange fee paid to the
card-issuing bank are made daily. Shortly after month end, the processing bank
disburses to the Company the remainder of the funds collected from the merchant
which represents a significant portion of the Company's gross margin.
The Company presents its consolidated Statement of Cash Flows on the
indirect method as allowed by SFAS 95. Certain amounts in prior periods have
been reclassified to conform with this presentation.
Cash equivalents
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
Financial instruments
The Company has various financial instruments, including cash, time
deposits, receivables, accounts payable, revolving credit facilities and accrued
liabilities. 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 at July 31, 1995 and 1996.
7
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.
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.
Purchased merchant portfolios are evaluated by management for impairment at each
balance sheet date through review of actual attrition and projected undiscounted
cash flows generated by each merchant portfolio in relation to the unamortized
cost of each merchant portfolio. If, upon review, an impairment of the value of
the purchased merchant portfolio is indicated, amortization will be accelerated
to recognize the diminution in value.
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.
8
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Income taxes
On August 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109) as required. Under SFAS 109,
the liability method is used in accounting for income taxes, whereby deferred
tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. The tax benefit of deductible temporary differences
is reflected within the various components of deferred tax assets and recognized
if the realization thereof is more likely than not (Note 13). The Company
recognized a benefit of $312,800 for deductible temporary differences upon
adoption of SFAS 109. This amount is presented as the cumulative effect of
change in accounting principle in the Company's statement of income for the year
ended July 31, 1994.
Net income per share
Net income per share for the fiscal years 1994, 1995 and 1996 is
calculated based on weighted average shares of common stock outstanding of
17,131,684, 25,063,303 and 32,663,023, respectively.
Stock splits
On May 13, 1994, the Board of Directors approved a stock split of four
shares of $0.01 par value common stock for one to be effected in the form of a
stock dividend. The stock split was effective June 10, 1994. On December 14,
1995 the Board of Directors approved a two for one stock split and on May 17,
1996 approved a three-for-two stock split, each to be effected in the form of a
stock dividend. The stock splits for December 14, 1995 and May 17, 1996 were
effective for shareholders of record at the close of business on December 29,
1995 and May 28, 1996, respectively. All earnings per share information included
in the accompanying financial statements has been adjusted to give retroactive
effect to the stock splits for all periods presented. Additionally, all share
information stated in Note 9 has been adjusted to give retroactive effect to the
stock splits.
9
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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.
10
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 - MERGERS AND ASSET PURCHASES:
Mergers
During fiscal year 1996, the Company began issuing common stock to acquire
companies with both existing merchant portfolios and sales organizations capable
of generating new accounts.
In the fourth quarter of fiscal year 1996 and the first and second quarters
of fiscal year 1997, the Company consummated five acquisitions by issuing
common stock in exchange for all of the outstanding common stock of the
companies acquired, four of which were material for retroactive restatement.
These transactions were accounted for as poolings of interests and are
summarized below:
COMPANY ACQUIRED DATE SHARES ISSUED
Martin-Howe Associates (MHA) July 1, 1996 594,011
Fairway Marketing Group (Fairway) December 23, 1996 424,999
Bancard Systems, Inc. (BSI) January 27, 1997 3,131,250
Retail Payment Services, Inc. (RPS) January 30, 1997 567,519
PMT's consolidated financial statements have been restated to include the
accounts of MHA, Fairway, BSI and RPS for all periods presented by including the
historical results of the Acquired Entities. The historical results of these
four pooled entities reflect each of their actual operating cost structures and,
as a result, do not necessarily reflect the cost structure of the newly combined
entity. Significant, unusual and non-recurring costs affecting fiscal year 1996
operating results of the pooled entities include a single fraud loss of
$890,000, recognition of $400,000 for the write-down of certain assets in one
entity, and executive bonuses of $330,000. In aggregate, the items above
comprised $1 million after-tax or $0.03 per share. Although PMT incurs merchant
fraud losses each year, and recognizes an accrual each year for such
possibilities, the Company's annual loss experience has historically been
significantly less than the above single loss in one of the pooled entities.
Additionally, no further asset impairment losses are expected from any of the
assets acquired in these mergers. The historical results do not purport to be
indicative of results which may occur in the future.
MHA had a calendar year end and, accordingly, the MHA statements of income
for the years ended December 31, 1993, 1994 and 1995 have been combined with the
Company's statements of income for the fiscal years ended July 31, 1994, 1995
and 1996, respectively. In order to conform MHA's year end to the Company's
fiscal year end, results of operations for MHA for the six-month period ended
June 30, 1996 have been excluded from the consolidated statement of income for
the fiscal year ended July 31, 1996. Accordingly, an adjustment has been made in
fiscal year 1996 to retained earnings for the exclusion of the net loss of
$356,914 for such six-month period. MHA's results of operations for this six-
month period include revenues of $10,743,645, expenses of $11,022,698 and net
loss before provision of income taxes of $279,053.
Fairway and RPS were Subchapter S Corporations for income tax purposes;
therefore, these entities did not pay U.S. federal income taxes. Fairway and
RPS will be included in the Company's U.S. federal income tax return effective
December 23, 1996 and January 30, 1997, respectively.
11
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Separate revenues, net income and related per share amounts of the merged
entities for the periods prior to the mergers are presented in the following
table. In addition, the table includes unaudited pro forma net income and net
income per share amounts which reflect pro forma adjustments to present income
taxes on the basis on which they will be reported in future periods.
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1994 JULY 31, 1995 JULY 31, 1996
------------- -------------- --------------
Revenues
PMT $53,506,857 $ 75,242,866 $136,254,139
MHA 7,689,671 13,764,195 13,585,887
BSI 9,668,196 16,808,554 21,540,196
Other 17,286,325 22,162,349 26,277,227
----------- ------------ ------------
Revenues, as reported $88,151,049 $127,977,964 $197,657,449
----------- ------------ ------------
Net Income (Loss)
PMT $ 2,492,514 $ 4,032,000 $ 8,952,399
MHA 99,930 (391,845) (327,023)
BSI 56,679 236,002 287,669
Other 13,586 444,932 (104,948)
----------- ------------ ------------
Net income, as reported 2,662,709 4,321,089 8,808,097
Pro forma tax effect of
Subchapter S Corporations (5,287) (172,544) 38,036
----------- ------------ ------------
Proforma net income $ 2,657,422 $ 4,148,545 $ 8,846,133
----------- ------------ ------------
Net income per share
As reported $0.16 $0.17 $0.27
Pro forma $0.16 $0.17 $0.27
These unusual costs in fiscal year 1996 described above in the pooled
entities, coupled with the additional common shares issued to complete the
poolings, result in the restated earnings per share being less than previously
reported. The decrease in fiscal year 1994 earnings per share results from each
of the pooled entities being much smaller in size in that year and not
contributing any significant level of earnings.
In addition to these transactions, the Company completed a merger during
the first quarter of fiscal year 1997 with Data Transfer Associates, Inc. (DTA)
by issuing 500,000 shares of its common stock in exchange for all the
outstanding stock of DTA. This transaction was not considered material for
retroactive restatement.
Asset Purchases
The Company purchases merchant portfolios which provide the Company
the right to service specific merchants under contract to processing banks for
electronic authorization and payment processing. The Company purchased five
portfolios in fiscal year 1994 and nine portfolios in fiscal year 1995. In
fiscal year 1996, the Company purchased four merchant portfolios. These
acquisitions were accounted for as purchase 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 5). Amortization expense
related to purchased merchant portfolios was $947,278, $2,283,638 and $5,642,084
in fiscal years 1994, 1995 and 1996, respectively.
Individually significant purchase transactions are as follows:
CROWN CARD SERVICES - The Company acquired the merchant portfolio and
retained the sales force of Crown Card Services, Inc. ("Crown Card") on January
1, 1994. The total purchase price for the merchant portfolio was $853,700, of
which $630,000 was paid in cash. A noninterest bearing note payable for
$170,000 and 20,000 shares of common stock valued at $53,700 were issued to
Crown Card.
12
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
In connection with the purchase, the Company signed a guaranty for a
$1,000,000 note payable to the current processing bank by ABC expiring May 9,
1998. The Company received a security interest in stock warrants to purchase
120,000 shares of the Company's common stock currently held by a shareholder of
ABC. Additionally, beginning June 1995, the Company's primary processing bank
required a security deposit of $1,500,000 for a period of six months due to the
conversion of other merchant portfolios to this bank. Approximately $1,000,000
plus accrued interest was returned to the Company in March 1996. A sum of
$500,000 will remain on deposit with this primary processing bank as long as the
Company participates in the bank's Association Marketing Agreement. This amount
is reflected as other current assets on the Company's balance sheet at July 31,
1996.
TERMNET AND CPS - In July 1995, the Company purchased two merchant
portfolios which were financed under the Company's credit facility. The Company
paid $6,200,000 to TermNet Merchant Services, Inc. ("TermNet") for a merchant
portfolio and inventory. The Company paid $5,951,000 to Consumer Payment
Services, Inc. ("CPS") for the second purchase in July 1995. In addition to the
CPS merchant portfolio, the Company also obtained a merchant terminal lease
portfolio, inventory and other office assets.
IMPERIAL BANK - In October 1995, the Company purchased a merchant
portfolio from Imperial Bank ("Imperial") for $8,650,000 with a portion of the
proceeds from the Company's second public offering.
UMB - In March 1996, the Company purchased a merchant portfolio from
UMB Bank ("UMB") for $13,500,000 with a portion of the proceeds from the
Company's second public offering. Additionally, the Company purchased merchant
equipment inventory from UMB in the transaction.
Unaudited pro forma operating results are presented below to provide
additional information relative to the potential effect upon the Company's
operations of significant acquisitions. Pro forma information is provided only
for acquisitions meeting certain size and other requirements set forth by the
Securities and Exchange Commission. Each of the above acquisitions meet these
requirements and are included in the unaudited pro forma summary for the periods
specified below.
EFFECTIVE INCLUDED IN
DATE OF PRO FORMA RESULTS
PURCHASES BEGINNING FISCAL YEAR
--------- ---------------------
Crown Card January 1, 1994 1994
ABC April 1, 1995 1994
TermNet July 1, 1995 1994
CPS July 1, 1995 1994
Imperial October 1, 1995 1995
UMB March 1, 1996 1995
13
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
These unaudited pro forma results have been prepared for comparative
purposes and do not purport to be indicative of what would have occurred had the
purchases been made at the beginning of fiscal year 1994 or fiscal year 1995, or
of results which may occur in the future.
PRO FORMA PRO FORMA PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1994 JULY 31, 1995 JULY 31, 1996
------------- ------------- -------------
Revenues $131,196,533 $200,815,047 $217,988,780
Income before extraordinary item
and change in accounting principle $ 803,311 $ 2,765,016 $ 8,903,408
Net income $ 1,116,211 $ 2,765,016 $ 8,903,408
Income per share before extraordinary
item and change in accounting principle $ 0.05 $ 0.11 $ 0.27
Net income per share $ 0.07 $ 0.11 $ 0.27
In addition to the above transactions, the Company consummated acquisitions
of four merchant portfolios subsequent to July 31, 1996, accounted for as
purchase transactions. These merchant portfolio acquisitions accounted for
approximately 19,000 merchant accounts. Operating results of the merchant
portfolios will be included in the Company's financial statements beginning on
the effective dates of the purchases.
14
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 - PROPERTY AND EQUIPMENT:
JULY 31,
--------------------------
1995 1996
------------ ------------
Office equipment...................... $ 2,350,182 $ 3,862,560
Studio equipment...................... 639,021 945,779
Credit card terminals held for lease.. 1,318,931 1,640,538
Office furniture and fixtures......... 459,600 645,420
Leasehold improvements................ 72,575 124,766
----------- -----------
4,840,309 7,219,063
Less: accumulated depreciation.. (1,080,791) (2,467,983)
----------- -----------
$ 3,759,518 $ 4,751,080
----------- -----------
The Company leases credit card terminals to merchants generally under
operating leases on a month-to-month basis. Depreciation expense was $539,658,
$416,970 and $979,547 in fiscal years 1994, 1995 and 1996, respectively.
NOTE 5 - INTANGIBLE AND OTHER ASSETS:
JULY 31,
------------------------
1995 1996
----------- -----------
Noncompetition agreements.............. $3,148,016 $3,345,193
Restricted cash........................ 2,591,748 2,397,465
Other.................................. 454,026 476,577
---------- ----------
$6,193,790 $6,219,235
---------- ----------
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
$228,620, $465,147 and $860,323 in fiscal years 1994, 1995 and 1996,
respectively. Accumulated amortization of noncompetition agreements was
$843,357 and $1,703,680 at July 31, 1995 and 1996, respectively.
Restricted cash represents funds withheld by certain processing banks
pursuant to processing agreements to cover potential merchant losses.
NOTE 6 - ACCRUED LIABILITIES:
JULY 31,
----------------------
1995 1996
---------- ----------
Income taxes payable................ $ 862,146 $1,408,830
Compensation and payroll taxes...... 1,088,393 739,981
Accrued rent........................ 55,863 --
Professional services............... -- 227,861
Accrued processing costs............ 262,894 234,556
Reserve for merchant losses......... 556,673 1,459,602
State franchise taxes payable....... -- 356,042
Sales and property taxes payable.... 94,480 85,938
Interest payable on long-term debt.. 67,320 83,270
Other............................... 289,258 341,365
---------- ----------
$3,277,027 $4,937,445
---------- ----------
15
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7 - LONG-TERM DEBT:
JULY 31,
--------------------------
1995 1996
------------ ------------
Revolving line of credit, due November 1, 1996
unless converted to a term loan with monthly
installments due over 48 months, interest
payable monthly at prime minus .25% (8.5%
at July 31, 1995)................................ $15,293,000 --
Noninterest bearing notes payable with interest
imputed at 8%, issued in connection with the
Company's purchase of merchant portfolios;
maturing at various dates through October 1996... 80,500 $ 40,000
Various lines of credit at 9% fixed rate initiated
in 1994 and 1995; no repayment terms; debt
serviced as funds allow.......................... 225,000 570,000
Other debts repaid in 1996 or subsequent to
acquisitions..................................... 1,362,000 439,991
Other............................................... 20,000 5,000
----------- ----------
Total long-term debt................................ 16,980,500 1,054,991
Less: current portion........................ (185,336) (40,000)
----------- ----------
$16,795,164 $1,014,991
----------- ----------
The Company entered into an agreement on March 22, 1994 for a
$12,500,000 revolving line of credit and $2,368,000 bridge loan. This credit
facility was amended and restated on May 31, 1995 and July 18, 1995, increasing
the revolving line of credit to $17,500,000 and terminating the bridge loan.
The proceeds from the loans were used to purchase merchant portfolios, to repay
debt and for general working capital purposes. The revolving credit facility
matures on November 1, 1996 unless converted to a term loan payable in monthly
installments over four years. Notes issued under the credit facility will bear
interest at a rate based on LIBOR, the bank's prime rate or at a fixed rate
based on the bond equivalent bid side yield of the U.S. Treasury Note.
Borrowings under the agreement are secured by substantially all the Company's
assets and life insurance policies on the lives of two of the Company's
executive officers. The agreement contains restrictive covenants which include,
among other items, maintenance of specified ratios of fixed charge coverage,
debt to earnings before interest, taxes, depreciation and amortization and to
net worth. The covenants also include restrictions on capital expenditures and
prohibition of new indebtedness and cash dividends.
16
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 - SHAREHOLDERS' EQUITY;
Changes in the shares of the Company's common stock are as follows:
Issued at July 31, 1993........... 3,680,258
Shares issued..................... 20,000
----------
Issued at July 31, 1994........... 3,700,258
Shares issued..................... 2,420,872
Exercise of put options.......... 1,922,372
Exercise of options and warrants.. 164,684
----------
Issued at July 31, 1995........... 8,208,186
Shares issued..................... 5,851,961
Exercise of options............... 44,805
Stock dividends................... 22,330,908
----------
Outstanding at July 31, 1996...... 36,435,860
----------
The Company's shareholders approved an increase in the amount of authorized
shares of Common Stock of the Company from 40,000,000 shares to 100,000,000
shares at the Company's 1996 Annual Meeting of Shareholders.
NOTE 9 - STOCK OPTIONS AND WARRANTS:
The Company has an incentive stock option plan, whereby the Company has
reserved for issuance upon exercise of stock options a maximum of 2,295,000
shares of the Company's common stock. In addition to certain other provisions,
the plan provides for the option price of the shares to be determined by the
Board of Directors at the date of the grant provided, however, that in the case
of incentive stock options, the option price shall be no less than 100% of the
fair market value of the common stock on such date (110% in the case of an
individual who owns more than 10% of the total combined voting power of all
classes of stock of the Company). In the case of nonstatutory stock options,
the option price shall be no less than 85% of the fair market value of the
common stock on the date of grant.
The options expire at such times as determined by the Board of Directors at
the time of the grant, which shall be no later than ten years from the grant
date (five years in the case of an individual who owns more than 10% of the
total combined voting power of all classes of stock of the Company). The
Company is authorized to loan, or guarantee loans for, the purchase price of
shares issuable upon exercise of options granted under the plan.
17
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In May 1994, the Company adopted an outside director stock option plan and
amended the plan at the December 1995 annual shareholders' meeting. The plan
provides for the grant of non-qualified stock options to outside directors and
authorizes the issuance of up to 300,000 shares of common stock pursuant to
options having an exercise price equal to the fair market value of the common
stock on the date the options are granted. Options were granted to each outside
director on the effective date of the Offering to purchase 30,000 shares of the
Company's common stock for a total of 120,000 shares (Note 2). Options granted
under the plan are exercisable one-fourth each on the first, second, third and
fourth anniversaries of the grant date and expire ten years after the grant
date. The status of options under the plan (reflecting all stock splits) is as
follows:
NUMBER EXERCISE EXPIRATION
OF OPTIONS PRICE DATE
---------- ---------- -----------
Outstanding at July 31, 1993.. 458,700
---------
Outstanding at July 31, 1994.. 458,700
Granted.................... 1,361,724 $ 2.67 August 11-12, 2004
Granted.................... 24,000 $ 2.83 December 15, 2002
Granted.................... 15,000 $ 3.54 February 21, 2005
Terminated................. (5,196)
Exercised.................. (103,872) $0.83 - $2.67
---------
Outstanding at July 31, 1995.. 1,750,356
Granted.................... 69,000 $ 5.96 August 15, 2005
Granted.................... 16,500 $ 9.17 November 9, 2005
Granted.................... 84,000 $ 8.78 December 12, 2005
Granted.................... 150,000 $ 10.29 December 12, 2005
Granted.................... 24,000 $ 10.94 December 15, 2005
Granted.................... 120,000 $ 10.00 December 28, 2005
Granted.................... 48,000 $ 15.67 March 29, 2006
Granted.................... 40,000 $ 22.25 July 16, 2006
Terminated................. (265,052)
Exercised.................. (119,775) $0.83 - $2.67
---------
Outstanding at July 31, 1996.. 1,917,029
=========
Exercisable at July 31, 1996.. 558,175
=========
Options for 740,772 and 550,324 shares were available for future grant
under the plan at July 31, 1995 and 1996, respectively.
The Company has granted stock warrants which give the holder the right
to purchase 120,000 shares of the Company's common stock at an exercise price of
$1.25 per share. These warrants expire March 22, 2004 (Note 3).
18
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 - RETIREMENT PLANS:
The Company initiated a 401(k) retirement plan, the PMT Services, Inc.
401(k) Retirement Plan, in fiscal 1996. Following the initial enrollment,
employees become eligible for participation in the plan on the semi-annual
enrollment date following the employee completing 12 consecutive months of
employment and 1,000 hours of service or more. The Company contributes
an amount equal to 50% of employee voluntary contributions up to a maximum of 6%
of the employee's annual compensation. The plan expense for fiscal 1996 was
$64,015.
Prior to the merger with the Company, MHA's employees could
participate in the Martin-Howe 401(k) plan. MHA matched 50% of the employee
contributions up to 6% of salary. This plan was terminated subsequent to the
merger with PMT Services, Inc. MHA employees became eligible for participation
in the PMT 401(k) Plan effective with the merger.
NOTE 11 - LEASES:
The Company leases equipment and office space under noncancellable
operating leases. Rent expense approximated $403,576, $808,007 and $1,012,194
during fiscal years 1994, 1995 and 1996, respectively. Office space was leased
from a partnership comprising two of the Company's shareholders during fiscal
year 1994 and a portion of 1995. Rent expense paid to shareholders for office
space amounted to $113,000 and $54,000 during fiscal years 1994 and 1995,
respectively. This office space lease agreement terminated in 1995 and the
Company relocated. None of the Company's current office space is with a related
party. Subsequent to July 31, 1996, the Company entered into an agreement to
lease additional office space beginning October 1, 1996. Future minimum
payments under all noncancellable leases with terms greater than one year at
July 31, 1996 are:
FISCAL YEAR ENDING
JULY 31
-------
1997 $1,160,845
1998 1,059,477
1999 949,646
2000 896,572
2001 385,286
Thereafter --
NOTE 12 - OTHER INCOME - NET:
The Company recorded a non-taxable gain of $1,000,000 in the fourth
quarter of fiscal year 1996 for the receipt of insurance proceeds on the life of
the former Chief Financial Officer of the Company. Additionally, the Company
has included in this line item all non-recurring transaction costs related to
mergers, including MHA, which was accounted for as a pooling of interests.
19
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13 - INCOME TAXES:
The provision for income taxes comprises the following:
YEAR ENDED JULY 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Current tax expense:
Federal.............................. $1,326,735 $2,195,712 $5,181,642
State................................ 251,733 430,395 976,031
---------- ---------- ----------
1,578,468 2,626,107 6,157,673
---------- ---------- ----------
Deferred tax benefit:
Federal.............................. (109,215) (80,238) (820,922)
State................................ (21,677) (8,830) (139,018)
---------- ---------- ----------
(130,892) (89,068) (959,940)
---------- ---------- ----------
Increase in valuation
allowance............................ -- 137,288 194,831
---------- ---------- ----------
$1,447,576 $2,674,327 $5,392,564
---------- ---------- ----------
The Company's effective tax rate differs from the statutory rate as follows:
YEAR ENDED JULY 31,
-----------------------------------
1994 1995 1996
--------- ---------- ----------
Federal tax at statutory rate............. 34.0% 34.0% 34.0%
Increase in taxes resulting from:
State income taxes (net
of federal tax benefit)................ 3.9 3.9 3.9
Minority interest....................... -- 1.3 0.8
Valuation allowance..................... -- 2.0 1.4
Other................................... 0.2 (3.0) (2.1)
--------- ---------- ----------
38.1% 38.2% 38.0%
--------- ---------- ----------
Deferred income taxes under SFAS 109 reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets at July 31, 1995 and
1996 are as follows:
20
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JULY 31,
-----------------------
1995 1996
---------- -----------
Current tax assets:
Compensation liabilities.......... $ 24,321 $ 30,897
Loss reserves..................... 200,896 178,069
Other............................. 37,749 56,695
--------- ----------
Net current tax assets.............. $ 262,966 $ 265,661
--------- ----------
Noncurrent tax assets:
Merchant portfolio amortization... $ 682,907 $1,586,194
Net operating loss of subsidiary.. 137,288 332,119
--------- ----------
820,195 1,918,313
Noncurrent tax liability:
Depreciation...................... (101,454) (242,327)
--------- ----------
Net noncurrent tax assets.......... 718,741 1,675,986
--------- ----------
Valuation allowance................ (137,288) (332,119)
--------- ----------
$ 581,453 $1,343,867
--------- ----------
As of July 31, 1996, the Company has approximately $874,000 of federal and
state net operating loss carryforwards available to offset future taxable income
of a subsidiary of the Company. A valuation allowance has been established for
these net operating losses.
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
In addition to the third-party debt guaranty and operating leases described
in Notes 3 and 9 above, the Company is subject to the following commitments and
contingencies described herein.
The Company entered into an agreement in July 1995 to purchase the rights
to service merchant accounts to be generated by another independent sales and
service provider ("service provider") under a contract with the Company's
primary processing bank. The Company's option to purchase may be exercised upon
the earlier of default by the service provider under its loan agreement with a
third party or December 1, 1997 and expires on January 31, 1998. The purchase
price will be derived as a multiple of average monthly cash flow generated by
the merchant accounts for the three months immediately prior to the purchase.
21
PMT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's agreement with its primary processing bank was amended to
require the Company to purchase the service provider's merchant accounts by
January 31, 1998. Additionally, the Company has indemnified the processing bank
for any losses incurred by the processing bank with respect to the service
provider's merchant accounts.
In connection with the option agreement, the Company has guaranteed the
service provider's loan to a third party in the amount of $250,000. The Company
has also entered into a service agreement whereby the Company will provide
customer service, processing equipment deployment and related services to the
service provider's merchant accounts for a monthly fee of $4.75 per merchant
account. At July 31, 1996, the service provider was a newly developed entity
without significant merchant accounts generated.
VISA and MasterCard require merchants accepting VISA and MasterCard credit
cards to contract directly with a processing bank that is a member bank of the
VISA or MasterCard associations. The Company is not a party to the merchant
processing agreements and is therefore dependent upon its contractual
arrangements with its processing banks in order to continue to service its
merchant portfolio. The Company has a contractual right to receive revenues
derived from the discount rate and fees earned on its merchant portfolio so long
as the merchant continues to process transactions on the processing bank's
system and the Company provides adequate service to the merchant and remains in
compliance under its agreement with the processing bank. Under the terms of the
Company's agreement with its primary processing bank, the Company is permitted
to transfer merchants to another processing bank subject to time limitations and
termination fees. This agreement provides mobility for substantially all of the
Company's merchant base. However, in order to transfer merchant contracts, the
Company must pay the processing bank a fee determined by a formula related to
the annualized aggregate transaction volume of the merchants transferred.
22