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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
August 17, 1998 (July 30, 1998)
-------------------------
PMT SERVICES, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 0-24420 62-1215125
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification
incorporation) Number)
3841 GREEN HILLS VILLAGE DRIVE
NASHVILLE, TENNESSEE 37215
(Address of principal executive offices) (Zip Code)
(615) 254-1539
(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS
PMT Services, Inc. (the "Company") has given retroactive effect in
the consolidated financial statements attached as an exhibit hereto for a merger
consummated on July 30, 1998. The merger was accounted for as a pooling of
interests and the consolidated financial statements attached as an exhibit
hereto have been restated for all periods presented in accordance with
Accounting Principles Bulletin No. 16 Paragraph 62.
The consolidated financial statements as restated may not be
indicative of future financial performance of the Company. The accompanying
notes to the Consolidated Financial Statements should be read in conjunction
with the financial statements.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(1) Supplemental Consolidated Financial Statements of PMT
Services, Inc. for fiscal 1997 (restated to give
retroactive effect to a merger accounted for as a pooling
of interests)
(2) Financial Statements Schedule: Schedule II
--Reserve for Merchant Losses
--Allowance for Bad Debts
(b) Pro Forma Financial Information
(1) Unaudited Pro Forma Consolidated Financial Statements
(c) Exhibits
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Restated Financial Data Schedule for the Year Ended
July 31, 1997
27.2 Restated Financial Data Schedule for the Year Ended
July 31, 1996
27.3 Restated Financial Data Schedule for the Year Ended
July 31, 1995
27.4 Restated Financial Data Schedule for the Nine Months Ended
April 30, 1997
27.5 Restated Financial Data Schedule for the Six Months Ended
January 31, 1997
27.6 Restated Financial Data Schedule for the Three Months
Ended October 31, 1996
27.7 Restated Financial Data Schedule for the Nine Months Ended
April 30, 1998
27.8 Restated Financial Data Schedule for the Six Months Ended
January 31, 1998
27.9 Restated Financial Data Schedule for the Three Months
Ended October 31, 1997
SIGNATURES
----------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED HEREUNTO DULY AUTHORIZED.
PMT SERVICES, INC.
BY: /S/ CLAY M. WHITSON
------------------------------
CLAY M. WHITSON
CHIEF FINANCIAL OFFICER AND
TREASURER
DATE: AUGUST 17, 1998
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................................... 2
Supplemental Consolidated Balance Sheet..................................... 3
Supplemental Consolidated Statement of Income............................... 4
Supplemental Consolidated Statement of Changes in Shareholders' Equity...... 5
Supplemental Consolidated Statement of Cash Flows........................... 6
Notes to Supplemental Consolidated Financial Statements..................... 8
Financial Statement Schedule: Schedule II
- --Reserve for Merchant Losses (Supplemental)
- --Allowance for Bad Debts (Supplemental).................................... 35
1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of PMT Services, Inc.
In our opinion, the accompanying supplementary consolidated balance sheet 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.
As described in Note 3, on July 30, 1998, PMT Services, Inc. merged with
Superior Bankcard Service, Inc. in a transaction accounted for as a pooling of
interests. The accompanying consolidated financial statements give retroactive
effect to the merger of PMT Services, Inc. with Superior Bankcard Service, Inc.
/s/ PricewaterhouseCoopers LLP
Nashville, TN
September 23, 1997,
except as to the poolings of interests as described
in Note 3, paragraph 3 which is as of July 30, 1998
2
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
JULY 31,
----------------------------
1996 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................................. $110,436,506 $ 26,084,161
Investments................................................. -- 49,167,521
Accounts receivable......................................... 9,945,187 19,552,245
Current portion of net investment in finance leases......... 10,331,271 9,249,753
Inventory................................................... 1,348,118 1,896,380
Deferred income taxes....................................... 945,934 1,543,379
Other current assets........................................ 1,061,855 2,061,295
------------ ------------
Total current assets....................................... 134,068,871 109,554,734
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................................. 6,928,905 9,747,565
Long-term note receivable................................... -- 8,773,330
Intangible and other assets................................. 8,509,738 18,848,234
------------ ------------
Total assets............................................... $233,617,858 $255,903,750
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................... $ 13,456,646 $ 14,611,730
Accounts payable............................................ 5,076,554 9,814,645
Accrued liabilities......................................... 9,285,533 10,210,055
Deferred revenues........................................... 230,496 291,493
------------ ------------
Total current liabilities.................................. 28,049,229 34,927,923
Long-term debt.............................................. 21,315,537 18,705,236
Deferred income taxes....................................... 994,721 624,777
------------ ------------
Total liabilities.......................................... 50,359,487 54,257,936
------------ ------------
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: 47,835,324
and 50,326,918 shares..................................... 478,353 503,269
Additional paid-in capital................................... 166,916,782 171,202,596
Treasury stock, at cost: 778,840 shares in 1996............. (2,093,152) --
Accumulated earnings......................................... 17,956,388 29,939,949
------------ ------------
183,258,371 201,645,814
------------ ------------
Commitments and contingent liabilities (Notes 3, 13 and 16)
Total liabilities and shareholders' equity................. $233,617,858 $255,903,750
============ ============
The accompanying notes are an integral part of these financial statements.
3
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JULY 31,
---------------------------------------------
1995 1996 1997
---- ---- ----
Revenues................................ $163,663,332 $263,450,166 $355,010,297
Cost of revenues........................ 114,268,074 188,423,042 254,386,573
------------ ------------ ------------
Gross margin........................... 49,395,258 75,027,124 100,623,724
------------ ------------ ------------
Selling, general and administrative
expenses............................... 30,160,810 42,595,060 49,013,409
Depreciation and amortization expense... 3,811,825 8,012,663 12,944,769
Provision for merchant losses and bad
debts.................................. 2,324,454 5,054,115 6,494,017
Stock award compensation................ 241,477 -- --
Non-recurring operating expense......... 71,562 104,617 929,445
------------ ------------ ------------
Total operating expenses............... 36,610,128 55,766,455 69,381,640
------------ ------------ ------------
Income from operations.................. 12,785,130 19,260,669 31,242,084
Interest income......................... 313,073 2,108,283 5,260,915
Interest expense........................ (3,413,725) (4,053,473) (4,105,081)
Other income (expense), net............. -- 703,896 (2,243,792)
------------ ------------ ------------
Income before provision for income taxes 9,684,478 18,019,375 30,154,126
Provision for income taxes.............. 3,306,205 6,138,504 9,639,747
------------ ------------ ------------
Net income............................. $ 6,378,273 $ 11,880,871 $ 20,514,379
============ ============ ============
Per share data:
Earnings per share - basic............. $ 0.18 $ 0.28 $ 0.42
============ ============ ============
Earnings per share - diluted........... $ 0.18 $ 0.27 $ 0.41
============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
ADDITIONAL TOTAL
COMMON PAID-IN TREASURY UNEARNED ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL STOCK COMPENSATION EARNINGS EQUITY
-------- ------------ ---------- ------------ ------------ ------------
Balance at July 31, 1994.................. $ 75,000 $ 2,223,136 $ (42,000) $ (241,477) $ 2,554,556 $ 4,569,215
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
Acquisition of majority
interest in subsidiary................ (510,545) (510,545)
Purchase of treasury stock.............. (32,500) (32,500)
Distributions of Subchapter S
Corporations, prior to poolings....... (605,611) (605,611)
Reissuance of treasury stock............ (6,000) 6,000 --
Net income for the year................. 6,378,273 6,378,273
-------- ------------ ---------- ---------- ------------ ------------
Balance at July 31, 1995.................. 120,080 26,062,296 (68,500) -- 7,816,673 33,930,549
Shares issued........................... 58,520 140,746,488 140,805,008
Stock options exercised................. 448 157,659 158,107
Tax benefit from nonqualified
stock options......................... 318,144 318,144
Stock splits............................ 299,305 (299,305) --
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....... (1,504,242) (1,504,242)
Net income for the year................. 11,880,871 11,880,871
-------- ------------ ---------- ---------- ------------ ------------
Balance at July 31, 1996.................. 478,353 166,916,782 (2,093,152) -- 17,956,388 183,258,371
Shares issued........................... 10 14,844 14,854
Stock options exercised................. 3,695 771,034 774,729
Tax benefit from nonqualified
stock options......................... 1,986,174 1,986,174
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 stock.......... (7,789) (72,624) 2,093,152 (2,012,739) --
Minority shareholders' contribution..... 522,565 522,565
Distributions of Subchapter S
Corporations, prior to poolings....... (6,756,718) (6,756,718)
Net income for the year................. 20,514,379 20,514,379
-------- ------------ ---------- ---------- ------------ ------------
Balance at July 31, 1997.................. $503,269 $171,202,596 $ -- $ -- $ 29,939,949 $201,645,814
======== ============ ========== ========== ============ ============
The accompanying notes are an integral part of these financial statements.
5
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........................................... $ 6,378,273 $ 11,880,871 $ 20,514,379
Martin Howe fiscal year conversion................... -- (356,914) --
Adjustments:
Depreciation and amortization...................... 4,367,490 8,549,490 13,552,412
Provision for merchant losses and bad debts........ 2,324,454 5,054,115 6,494,017
Stock award compensation and other................. 241,477 -- --
Deferred income taxes.............................. 357,734 (306,163) (954,971)
Changes in assets and liabilities:
Accounts receivable............................... (2,174,960) (3,511,693) (9,613,693)
Inventory......................................... (471,179) (90,459) (314,031)
Other assets...................................... (1,278,720) 32,958 (6,886,597)
Accounts payable.................................. 54,145 (16,136) 4,095,716
Accrued liabilities............................... (265,795) 814,907 (2,013,289)
Deferred revenues................................. (155,291) (59,105) (46,987)
------------ ------------ ------------
Net cash provided by operating activities........ 9,377,628 21,991,871 24,826,956
Cash flows from investing activities:
Purchase of investments.............................. -- -- (49,167,521)
Purchase of merchant portfolios...................... (24,182,050) (32,036,760) (33,393,964)
Purchase of property and equipment................... (2,951,546) (2,819,157) (5,424,563)
Purchase of equipment for leasing.................... (16,809,608) (20,865,015) (19,296,806)
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............ (33,464,762) (43,468,004) (92,163,717)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.............. 35,788,623 36,017,752 34,188,572
Payments on long-term debt............................ (27,719,029) (46,363,034) (38,137,335)
Proceeds from issuance of common stock................ 16,442,336 140,963,115 789,583
Issuance of long-term note receivable................. -- -- (8,773,330)
Payments to repurchase treasury stock................. (32,500) (629,463) --
Proceeds from minority shareholders' contributions.... -- 120,000 --
Distributions of Subchapter S Corporations............ (605,611) (1,504,242) (5,083,074)
------------ ------------ ------------
Net cash provided by financing activities........ 23,873,819 128,604,128 (17,015,584)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.... (213,315) 107,127,995 (84,352,345)
Cash and cash equivalents at beginning of year.......... 3,521,826 3,308,511 110,436,506
------------ ------------ ------------
Cash and cash equivalents at end of year................ $ 3,308,511 $110,436,506 $ 26,084,161
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes.............................. $ 2,680,369 $ 5,465,514 $ 9,412,556
Cash paid for interest.................................. 2,895,940 3,453,909 3,565,659
The accompanying notes are an integral part of these financial statements.
6
PMT SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
In connection with the purchase of merchant portfolios in fiscal years 1996
and 1997, the Company issued promissory notes totaling $80,500 and $433,100,
respectively. In addition, the Company issued a warrant to purchase 10,000
shares of common stock at $17.00 per share in conjunction with the purchase of
residual agency rights.
The Company recognized a tax benefit of $926,597, $318,144 and $1,986,174
in fiscal years 1995, 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.
Prior to acquisition, an operating business purchased approximately 550,000
shares of treasury stock in exchange for notes payable totaling $1,463,689 in
fiscal 1996.
Prior to acquisition, an operating business sold its office building in
fiscal 1997, to an entity owned by shareholders of the acquired operating
business. The buyer assumed the note payable of $846,972 and issued the
acquired operating business a promissory note in the amount of $420,184.
Prior to acquisition, an operating business issued a note payable in fiscal
1997 to its majority shareholder in the amount of $1,673,644 related to a
distribution of accumulated earnings.
In connection with three individual operating business acquisitions in
fiscal 1997, the Company issued 2,900,000 shares of common stock. The
acquisitions were accounted for as poolings of interest, but were not material
for restatement.
The accompanying notes are an integral part of these financial statements.
7
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations
PMT Services, Inc. (the "Company") markets and services electronic credit
card authorization and payment systems to merchants, 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 agreements 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 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.
8
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Revenues related to the direct sale of credit card authorization equipment
are recognized when the equipment is shipped. Installation fees related to both
the direct sale and the marketing of this equipment are recognized when
installation is completed. Fees received in advance of shipment or installation
are not recognized as revenue until earned.
Revenues related to direct finance leasing of credit card point-of-sale
processing equipment are recognized over the term of the lease agreement using
the interest method.
Cost of revenues includes interchange fees paid to the credit card-issuing
bank and fees paid to the network service provider, VISA and MasterCard and the
processing bank. These costs are recognized at the time the merchants'
transactions are processed and the related revenue is recorded.
The Company recognizes as revenue in its statement of income the full
discount rate and fees collected from the merchant. The various costs incurred
by the Company, including amounts paid to the card-issuing bank, the processor
and network service provider, are reflected as costs of revenues. In accordance
with the Company's contracts with its processing banks, all of the funds
collection and most of the disbursement function is performed on behalf of the
Company by the processing bank. At month end, the processing bank collects the
total discount rate and fees from the merchants and disburses to each of the
service providers their fees. Disbursements for the interchange fee paid to the
card-issuing bank are made daily. Shortly after month end, the processing bank
disburses to the Company the remainder of the funds collected from the merchant
which represents a significant portion of the Company's gross margin.
Cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Investments
The Company's investments of $49,167,521 at July 31, 1997 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 on Equity
Securities (SFAS No. 115), and 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.
9
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 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 agreement, at the conclusion of the
agreement the Company and the counterparty will exchange an amount calculated by
reference to the agreed notional amount and a specified index, reducing the
Company's exposure to interest rate fluctuations on certain floating rate debt.
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.
10
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
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
11
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 is 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
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 - Earnings Per Share (SFAS No. 128).
SFAS 128 required companies with complex capital structures that have publicly
held common stock or common stock equivalents to present both basic and diluted
earnings per share (EPS) on the face of the income statement. The presentation
of basic EPS replaces the presentation of primary EPS previously required by
Accounting Principals Board Opinion No. 15 (APB No. 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. Earnings per share has been calculated using the
provisions of this statement.
Earnings per share - basic for fiscal years 1995, 1996 and 1997 is
calculated based on weighted average shares of common stock outstanding of
34,846,567, 41,905,903 and 48,541,821, respectively.
Earnings per share - diluted for the fiscal years 1995, 1996 and 1997 is
calculated based upon weighted average shares of common stock outstanding of
35,685,115, 43,284,835 and 49,723,254, respectively.
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
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 10 has been
adjusted to give retroactive effect to the stock splits.
12
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL 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 approximately $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 $3.22.
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 expenses of the offering.
13
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3 - ACQUISITIONS:
Operating Business Acquisitions
During fiscal year 1996, the Company began issuing common stock to acquire
businesses with both existing merchant portfolios and sales organizations
capable of generating new accounts.
In fiscal years 1996 and 1997, the Company consummated eleven 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 interests. These supplemental consolidated
financial statements have been prepared to reflect the restatement of all
periods presented. Eight of these transactions were considered material for
restatement and are summarized below.
COMPANY ACQUIRED DATE SHARES ISSUED
Martin-Howe Associates (MHA) July 1, 1996 594,011
Fairway Marketing Group (Fairway) December 23, 1996 424,999
Bancard Systems, Inc. (BSI) January 27, 1997 3,131,250
Retail Payment Services, Inc. (RPS) January 30, 1997 567,519
Erik Krueger Inc. (Krueger) June 3, 1997 579,000
LADCO Financial Group (LFG) July 14, 1997 1,463,414
Bancard, Inc. (BCI) October 2, 1997 3,870,968
MBN National, Inc. (MBN) May 14, 1998 987,500
Superior Bankcard Service, Inc. (Superior) July 30, 1998 3,720,930
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 eight 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 or non-recurring costs
affecting fiscal year 1996 operating results of the pooled entities include a
single fraud loss of $890,000, recognition of $400,000 in asset impairment
losses in one entity and executive bonuses of $330,000. In addition, a pooled
entity incurred a separate fraud loss of $2,300,000 which impacted fiscal years
1996 and 1997. 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 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.
14
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, Bancard, MBN and Superior 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
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 net
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.
15
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
MBN 5,271,581 8,788,388 12,651,402
Superior 1,106,746 7,919,066 17,318,438
Other 6,791,030 12,978,788 11,232,012
------------ ------------ ------------
Revenues, as reported $163,663,332 $263,450,166 $355,010,297
============ ============ ============
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
MBN 205,456 (118,164) (1,041,022)
Superior 132,890 593,868 2,500,951
Other 494,622 1,146,411 345,160
------------ ------------ ------------
Net income, as reported 6,378,273 11,880,871 20,514,379
Pro forma tax effect of
Subchapter S Corporations (614,388) (754,417) (1,798,811)
------------ ------------ ------------
Pro forma net income $ 5,763,885 $ 11,126,454 $ 18,715,568
============ ============ ============
Earnings per share - basic:
As reported $ 0.18 $ 0.28 $ 0.42
Pro forma $ 0.17 $ 0.27 $ 0.39
Earnings per share - diluted:
As reported $ 0.18 $ 0.27 $ 0.41
Pro forma $ 0.16 $ 0.26 $ 0.38
In addition to these transactions, the Company completed three separate
mergers during fiscal year 1997 with three unrelated entities by issuing an
aggregate of 2,900,000 shares of its common stock in exchange for all the
outstanding stock of the three entities. On an individual basis, these
transactions were not considered material for retroactive restatement.
16
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 year 1995, four merchant portfolios in 1996 and
nine merchant portfolios in 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 years 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.
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.
17
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
TERMNET AND CPS - In July 1995, the Company purchased two merchant
portfolios which were financed under the Company's credit facility. The Company
paid $6,200,000 to TermNet Merchant Services, Inc. ("TermNet") for a merchant
portfolio and inventory. The Company paid $5,951,000 to Consumer Payment
Services, Inc. ("CPS") for the second purchase in July 1995. In addition to the
CPS merchant portfolio, the Company also obtained a merchant terminal lease
portfolio, inventory and other office assets.
IMPERIAL BANK - In October 1995, the Company purchased a merchant portfolio
from Imperial Bank ("Imperial") for $8,650,000 with a portion of the proceeds
from the Company's second public offering.
UMB - In March 1996, the Company purchased a merchant portfolio from UMB
Bank ("UMB") for $13,500,000 with a portion of the proceeds from the Company's
second public offering. Additionally, the Company purchased merchant equipment
inventory from UMB in the transaction.
Unaudited pro forma operating results are presented below to provide
additional information relative to the potential effect upon the Company's
operations of significant acquisitions. Pro forma information is provided only
for acquisitions meeting certain size and other requirements set forth by the
Securities and Exchange Commission. Each of the above acquisitions meet these
requirements and are included in the unaudited pro forma summary for the periods
specified below. There were no asset purchases which met the significance
requirements in fiscal 1997.
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, 1996 1996
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 1995 or fiscal 1996, or of
results which may occur in the future.
18
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
PRO FORMA PRO FORMA
YEAR ENDED YEAR ENDED
JULY 31, 1995 JULY 31, 1996
------------- -------------
Pro forma revenues $236,500,415 $283,781,497
Pro forma net income $ 4,822,200 $ 11,976,182
Pro forma earnings per share - basic $ 0.14 $ 0.29
Pro forma earnings per share - diluted $ 0.14 $ 0.28
Actual results during fiscal 1997 were not materially different than pro
forma results.
NOTE 4 - NET INVESTMENT IN DIRECT FINANCING 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
=========== =========== ===========
19
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.....................$ 6,410,211 $10,103,268
Credit card terminals held for lease. 1,864,032 4,043,489
Office furniture and fixtures........ 702,494 856,104
Leasehold improvements............... 1,469,094 265,818
----------- -----------
10,445,831 15,268,679
Less: accumulated depreciation...... (3,516,926) (5,521,114)
----------- -----------
$ 6,928,905 $ 9,747,565
=========== ===========
In addition to the direct financing leases described in Note 4, the Company
leases point-of-sale credit card terminals to merchants under operating leases
on a month-to-month basis. Depreciation expense on all of the Company's
property and equipment totaled $655,228, $1,352,369 and $2,224,156 in fiscal
years 1995, 1996 and 1997, respectively.
20
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6 - NOTE RECEIVABLE:
The Company entered into a leasing agreement 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 principle 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
transactions 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......................... 3,587,243 8,426,160
Notes receivable from shareholders...... 211,650 2,981,403
Prepaid processing costs................ -- 1,307,330
Deferred finance costs.................. 585,360 526,666
Other................................... 780,292 1,538,323
---------- -----------
$8,509,738 $18,848,234
========== ===========
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 years 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 on deposit with certain processing banks
pursuant to processing agreements to cover potential merchant losses or by
lending institutions pursuant to loan agreements to provide additional
collateral.
21
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Amortization of deferred finance costs included in interest expense was
$580,665, $536,827 and $607,643 in fiscal years 1995, 1996 and 1997,
respectively. Accumulated amortization of deferred finance costs was $1,413,345
and $2,020,988 at July 31, 1996 and 1997, respectively.
NOTE 8 - ACCRUED LIABILITIES:
JULY 31,
------------------------
1996 1997
---- ----
Income taxes payable................. $ 1,816,498 $ 1,127,754
Compensation and payroll taxes....... 1,697,131 2,170,076
Reserves for merchant losses......... 3,749,097 5,326,536
Professional services................ 415,477 332,560
Accrued processing costs............. 258,189 236,640
State franchise taxes payable........ 356,042 --
Sales and property taxes payable..... 305,138 285,505
Interest payable on long-term debt... 150,399 82,179
Other................................ 537,562 648,805
----------- -----------
$ 9,285,533 $10,210,055
=========== ===========
22
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
(6.1% 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 10.1% to 12.2% per
annum are payable monthly, with all unpaid
principal 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
7.2% 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 10.1% to 10.4% at July 31,
1996), paid in fiscal 1997.................................. 3,210,195 --
Notes payable, secured by remaining
payment stream of certain leases and
restricted cash, principal and
interest at 7.4% 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
23
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
JULY 31,
-------------------------------------
1996 1997
---- ----
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, 1996), 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
5.2% 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, 1996), 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................................................ 3,489,368 1,909,583
Other....................................................... 5,000 185,895
------------ ------------
Total long-term debt........................................ 34,772,183 33,316,966
Less: current portion............................... (13,456,646) (14,611,730)
------------ ------------
$ 21,315,537 $ 18,705,236
============ ============
24
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company entered into an agreement on March 22, 1994 for a $12,500,000
revolving line of credit and $2,368,000 bridge loan. This credit facility was
amended and restated on May 31, 1995 and July 18, 1995 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 line of credit facility will be used to finance future
purchases of merchant portfolios and equipment for general corporate purposes.
Maturities of long-term debt are as follows as of July 31, 1997:
YEAR ENDING
JULY 31
-------
1998 $14,611,730
1999 10,929,705
2000 5,209,256
2001 1,610,339
2002 579,164
Thereafter 376,772
-----------
$33,316,966
===========
25
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10 - SHAREHOLDERS' EQUITY;
Changes in the shares of the Company's common stock are as follows:
Outstanding at July 31, 1994....... 7,501,080
Shares issued...................... 2,420,872
Exercise of put options........... 1,922,372
Exercise of options and warrants... 164,684
----------
Outstanding at July 31, 1995....... 12,009,008
Shares issued...................... 5,851,961
Exercise of options................ 44,805
Stock dividends.................... 29,929,550
----------
Outstanding at July 31, 1996....... 47,835,324
Shares issued...................... 2,900,966
Exercise of options................ 369,468
Cancellation of treasury shares.... (778,840)
----------
Outstanding at July 31, 1997....... 50,326,918
==========
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 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.
26
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In May 1994, the Company adopted an outside director stock option plan and
amended the plan at the December 1995 annual shareholders' meeting. The plan
provides for the grant of non-qualified stock options to outside directors and
authorizes the issuance of up to 300,000 shares of common stock pursuant to
options having an exercise price equal to the fair market value of the common
stock on the date the options are granted. Options were granted to each outside
director on the effective date of the Offering to purchase 30,000 shares of the
Company's common stock for a total of 120,000 shares (Note 2). Options granted
under the plan are exercisable one-fourth each on the first, second, third and
fourth anniversaries of the grant date and expire ten years after the grant
date.
The Company adopted Statement of Financial Accounting Standards No. 123 -
Accounting for Stock Based Compensation (SFAS No.123) as of August 1, 1996. In
accordance with the provisions of SFAS No. 123, the Company applies APB Opinion
No. 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 No. 123, net income and earnings per share
would have been reduced to the pro forma amounts indicated in the table below:
1995 1996 1997
---- ---- ----
Net income as reported $6,378,273 $11,880,871 $20,514,379
Pro forma net income 6,074,095 11,248,437 19,153,337
Earnings per share - basic:
As reported $ 0.18 $ 0.28 $ 0.42
Pro forma $ 0.17 $ 0.27 $ 0.39
Earnings per share diluted:
As reported $ 0.18 $ 0.27 $ 0.41
Pro forma $ 0.17 $ 0.26 $ 0.39
27
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
========= ======
28
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 WEIGHTED
RANGE OF AVERAGE REMAINING AVERAGE WEIGHTED AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) 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 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 $12.50 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
the purchase of residual agency rights. These warrants expire September 16,
2006.
29
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 12 - 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 and
1997 was $64,015 and $114,720, respectively.
NOTE 13 - LEASES:
The Company leases equipment and office space under noncancellable
operating leases. Rent expense approximated $1,096,715, $1,360,848 and
$1,885,105 during fiscal years 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 $89,000, $40,000 and $71,000 during fiscal years 1995, 1996 and
1997, respectively.
Year ending
July 31
-------
1998 $ 3,059,974
1999 3,502,032
2000 3,447,272
2001 2,816,611
2002 2,082,822
2003 7,558,150
-----------
Thereafter 22,466,861
Less: sublease rentals (2,635,858)
-----------
$19,831,003
===========
30
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 14 - 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.
During fiscal 1997, LFG recorded a charge of $367,000 related to the buyout
of a consulting agreement due to the death of the former Chief Financial
Officer. This charge occurred prior to the effective date of the merger with
this entity and is included on other expense on a restated basis.
Additionally, the Company has included in this line item all non-recurring
transaction costs related to mergers which were accounted for as a pooling of
interests.
NOTE 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............... 523,000 1,049,495 1,639,099
---------- ---------- -----------
2,948,471 6,444,668 10,594,717
---------- ---------- -----------
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 --
---------- ---------- -----------
$3,306,205 $6,138,504 $ 9,639,747
========== ========== ===========
31
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 in taxes resulting
from:
State income taxes (net
of federal tax benefit)...... 4.1 3.8 3.7
Subchapter S Corporations
income not subject to tax.... (6.4) (4.1) (5.7)
Valuation allowance........... 1.4 1.1 --
Other......................... 1.0 (0.7) (1.0)
----- ----- -----
34.1% 34.1% 32.0%
===== ===== =====
Deferred income taxes under SFAS No. 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, 1996 and
1997 are as follows:
32
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, 1996, 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 a subsidiary 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 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
33
PMT SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 discount 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.
34
SCHEDULE II
PMT SERVICES, INC.
RESERVE FOR MERCHANT LOSSES (SUPPLEMENTAL)
BALANCE AT BALANCE AT
BEGINNING END
OF PERIOD ADDITIONS(1) OTHER (2) DEDUCTIONS(3) OF PERIOD
--------- ------------ -------- ------------- ----------
Fiscal Year 1995 $1,804,759 $ 891,064 $ -- $ 505,150 $2,190,673
1996 $2,190,673 $2,921,573 $ -- $1,363,149 $3,749,097
1997 $3,749,097 $4,104,055 $284,906 $2,811,522 $5,326,536
______________________
(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 PERIOD ADDITIONS(1) OTHER (2) DEDUCTIONS(3) OF PERIOD
---------- ------------ --------- ------------- ----------
Fiscal Year 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.
35
PMT SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
INTRODUCTION
The following unaudited pro forma consolidated financial statements present a
unaudited pro forma consolidated balance sheet as of April 30, 1998 and
unaudited pro forma consolidated statements of income for the nine months ended
April 30, 1997 and April 30, 1998. The unaudited pro forma consolidated balance
sheet and unaudited pro forma consolidated statements of income include, on a
pro forma basis, the impact of the recently completed merger with Superior
Bankcard Service, Inc. (Superior) accounted for as a pooling of interests as
described in Note 1. The unaudited pro forma consolidated financial statements
should be read in conjunction with the supplemental audited financial statements
and the notes thereto included in Item 7 (a)(1) of this filing.
1
PMT SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
APRIL 30, 1998
PMT SUPERIOR COMBINED
ASSETS
Current assets:
Cash and cash equivalents................ $ 36,545,274 $ 2,307,220 $ 38,852,494
Investments.............................. 13,679,645 -- 13,679,645
Accounts receivable...................... 31,943,921 1,114,822 33,058,743
Current portion of net investment in
finance leases.......................... 10,333,536 -- 10,333,536
Inventory................................ 3,314,557 198,380 3,512,937
Deferred income taxes.................... 1,694,152 -- 1,694,152
Other current assets..................... 3,055,249 323,776 3,379,025
------------ ----------- ------------
Total current assets................... 100,566,334 3,944,198 $104,510,532
Purchased merchant portfolios, net of
accumulated amortization of $27,448,206... 92,760,997 -- 92,760,997
Long-term portion of net investment in
finance leases............................ 29,665,147 -- 29,665,147
Property and equipment, net................ 13,739,990 359,141 14,099,131
Long-term note receivable.................. 13,300,000 -- 13,300,000
Intangible and other assets................ 19,844,516 747,632 20,592,148
------------ ----------- ------------
Total assets $269,876,984 $ 5,050,971 $274,927,955
============ =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........ $ 14,092,415 -- $ 14,092,415
Accounts payable......................... 12,013,164 $ 181,044 12,194,208
Accrued liabilities...................... 6,932,424 2,247,711 9,180,135
Deferred revenues........................ 1,372,669 -- 1,372,669
------------ ----------- ------------
Total current liabilities.............. 34,410,672 2,428,755 36,839,427
Long-term debt........................... 19,296,864 40,578 19,337,442
Deferred income taxes.................... 570,958 -- 570,958
------------ ----------- ------------
Total liabilities...................... 54,278,494 2,469,333 56,747,827
------------ ----------- ------------
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; 52,630,711 shares.......... 489,098 37,209 526,307
Additional paid-in capital................. 172,312,177 72,791 172,384,968
Accumulated earnings....................... 42,797,215 2,471,638 45,268,853
------------ ----------- ------------
Total shareholders' equity............. 215,598,490 2,581,638 218,180,128
------------ ----------- ------------
Total liabilities and stockholders'
equity................................ $269,876,984 $ 5,050,971 $274,927,955
============ =========== ============
The accompanying note is an integral part of these unaudited pro forma
consolidated financial statements.
2
PMT SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED APRIL 30, 1997 AND 1998
NINE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, 1997 APRIL 30, 1998
------------------------------------------ -----------------------------------------
PMT PMT
SERVICES, INC. SUPERIOR COMBINED SERVICES, INC. SUPERIOR COMBINED
-------------- -------- ----------- -------------- -------- --------
Revenues.................. $239,184,681 $12,052,126 $251,236,807 $307,079,850 $20,273,273 $327,353,123
Cost of revenues.......... 172,766,633 7,068,082 179,834,715 218,202,162 11,360,277 229,562,439
------------ ----------- ------------ ------------ ----------- ------------
Gross margin.......... 66,418,048 4,984,044 71,402,092 88,877,688 8,912,996 97,790,684
------------ ----------- ------------ ------------ ----------- ------------
Selling, general and
administrative
expenses................ 32,319,154 3,116,674 35,435,828 42,368,253 4,400,706 46,768,959
Depreciation and
amortization
expense................. 9,224,822 56,250 9,281,072 12,404,087 75,000 12,479,087
Provision for
merchant losses
and bad debts........... 4,656,641 104,605 4,761,246 4,039,116 170,000 4,209,116
Nonrecurring operating
expenses, net........... 858,567 -- 858,567 343,151 -- 343,151
------------ ----------- ------------ ------------ ----------- ------------
Total operating
expenses............. 47,059,184 3,277,529 50,336,713 59,154,607 4,645,706 63,800,313
------------ ----------- ------------ ------------ ----------- ------------
Income from
operations.............. 19,358,864 1,706,515 21,065,379 29,723,081 4,267,290 33,990,371
Interest income, net...... 766,532 (19,394) 747,138 1,445,920 86,089 1,532,009
Other expense, net........ (1,791,190) -- (1,791,190) (933,158) (1,350,000) (2,283,158)
------------ ----------- ------------ ------------ ----------- ------------
Income before provision
for income taxes........ 18,334,206 1,687,121 20,021,327 30,235,843 3,003,379 33,239,222
Provision for income
taxes................... 6,426,166 25,305 6,451,471 10,884,564 45,050 10,929,614
------------ ----------- ------------ ------------ ----------- ------------
Net income............ $ 11,908,040 $ 1,661,816 $ 13,569,856 $ 19,351,279 $ 2,958,329 $ 22,309,608
============ =========== ============ ============ =========== ============
Earnings per share -
basic................... $ 0.27 $ 0.28 $ 0.40 $ 0.43
Earnings per share -
diluted................. $ 0.26 $ 0.27 $ 0.40 $ 0.42
Weighted average
shares outstanding -
basic................... 44,223,447 47,944,377 47,868,845 51,589,775
Weighted average
shares outstanding -
diluted................. 45,424,907 49,145,837 48,972,380 52,693,310
The accompanying note is an integral part of these unaudited pro forma
consolidated financial statements.
3
NOTE TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CONSUMMATED ACQUISITION
The unaudited pro forma consolidated balance sheet and statements of income
reflect the recently completed merger with Superior Bankcard Service, Inc.
(Superior). This transaction was accounted for as a pooling of interests. The
Company's historical financial statements have been restated for all periods
presented by including the historical results of Superior. The historical
results of PMT Services, Inc. and Superior reflect each of its actual operating
structures and, as a result, do not necessarily reflect the cost structure of
the newly combined entity.
APPROXIMATE TOTAL
DATE OF ASSETS AT
COMPANY MERGER CONSIDERATION DATE OF MERGER
Superior Bankcard Service, Inc. July 30, 1998 3,720,930 shares $5.1 million
4