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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
COMMISSION FILE NUMBER 0-23928
PDS FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1605970
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
6442 CITY WEST PARKWAY, SUITE 300, EDEN PRAIRIE, MN 55344
(Address of principal executive offices)
(612) 941-9500
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___X___ No _____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date:
CLASS OUTSTANDING AS OF MAY 1, 1996
----- -----------------------------
Common Stock, $.01 par value 3,119,816 shares
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PDS FINANCIAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
--------
Condensed Consolidated Statement of Operations (Unaudited)
For the Three Months Ended March 31,
1996 and 1995 2
Condensed Consolidated Balance Sheet (Unaudited)
As of March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Three Months Ended March 31, 1996 and 1995 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PDS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Fee income $ 224,683 $ 248,949
Finance income 242,818 584,630
Rental revenue on operating leases 371,367 436,480
Gain on sale of assets 122,872 37,604
Other income 274,598 --
---------- ----------
Total revenues 1,236,338 1,307,663
---------- ----------
Costs and expenses:
Depreciation on operating leases 275,146 320,367
Selling, general and administrative 574,259 735,941
Interest 258,519 369,915
---------- ----------
Total costs and expenses 1,107,924 1,426,223
---------- ----------
Income (loss) before income taxes 128,414 (118,560)
Provision (benefit) for income taxes 47,500 (44,000)
---------- ----------
Net income (loss) $ 80,914 $ (74,560)
---------- ----------
---------- ----------
Earnings (loss) per share:
Primary $.03 $(.02)
Fully diluted $.03 $(.02)
Number of shares used to compute per
share amounts:
Primary 3,130,463 3,013,837
Fully diluted 3,135,463 3,013,837
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PDS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 503,962 $ 870,109
Restricted cash 275,493 354,992
Accounts receivable 368,721 341,348
Notes receivable, net 7,458,034 6,636,649
Net investment in leasing operations:
Equipment under operating leases, net 1,657,719 2,913,226
Direct finance and sales-type leases 1,198,224 672,602
Investment in residuals 1,945,904 1,945,904
Income taxes receivable 1,043,000 1,041,000
Deferred income taxes 1,220,500 1,268,000
Other assets 685,857 345,424
----------- -----------
Total assets $16,357,414 $16,389,254
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,611,266 $ 1,434,354
Discounted lease rentals:
Nonrecourse 1,417,812 1,770,292
Recourse 398,765 441,721
Notes payable:
Nonrecourse 1,405,836 53,245
Recourse 3,043,789 4,205,660
Convertible subordinated debentures 2,554,292 2,772,128
Other liabilities 209,504 76,619
----------- -----------
Total liabilities 10,641,264 10,754,019
----------- -----------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000
shares authorized, 3,119,816 issued
and outstanding in 1996 and 1995 31,198 31,198
Additional paid-in capital 7,952,161 7,952,161
Retained earnings (accumulated deficit) (2,267,209) (2,348,124)
----------- -----------
Total stockholders' equity 5,716,150 5,635,235
----------- -----------
Total liabilities and
stockholders' equity $16,357,414 $16,389,254
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements
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PDS FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 80,914 $ (74,560)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation on operating leases 275,146 320,367
Gain on sale of notes receivable, leases and
leased equipment (125,298) (236,456)
Non-cash interest income ---- (122,822)
Non-cash investment in other assets (286,353) ----
Purchases of notes receivable (2,729,013) (7,901,604)
Proceeds from:
Sales of notes receivable 1,386,967 8,505,625
Sales of leases and leased equipment 458,688 1,002,317
Collections on notes receivable 827,533 2,272,586
Collections of principalon direct finance
leases 115,526 392,404
Changes in operating assets and liabilities:
Restricted cash 79,499 428,042
Accounts receivable (27,373) 409,864
Other assets (58,475) (169,967)
Accounts payable and accrued expenses (112,402) (642,675)
Other liabilities 132,885 (14,552)
Other 55,929 (41,902)
----------- -----------
Net cash provided by
operating activities 74,173 4,126,667
----------- -----------
Cash flows from investing activities:
Purchase of furniture and fixtures (9,907) (16,491)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 1,478,500 4,894,210
Principal payments on notes payable (1,295,641) (4,986,673)
Principal payments on subordinated debentures (217,836) ----
Principal payments on discounted lease rentals (395,436) (1,191,719)
Proceeds from exercise of employee stock options ---- 298,493
----------- -----------
Net cash used in financing activities (430,413) (985,689)
----------- -----------
Net increase (decrease) in cash and cash equivalents (366,147) 3,124,487
Cash and cash equivalents at beginning of period 870,109 445,905
----------- -----------
Cash and cash equivalents at end of period $ 503,962 $ 3,570,392
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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PDS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements as of March 31, 1996 and
for the three months ended March 31, 1996 and 1995 included in this Form 10-QSB
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations. These financial statements should be
read in conjunction with the financial statements and related notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
The condensed consolidated financial statements presented herein as of
March 31, 1996 and for the three months ended March 31, 1996 and 1995 are
unaudited, but in the opinion of management, reflect all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of financial
position, results of operations and cash flows for the periods presented. The
results of operations for any interim period are not necessarily indicative of
results for the full year.
Certain reclassifications have been made in the 1995 condensed consolidated
statement of cash flows to conform to the classifications used in 1996. These
reclassifications had no effect on the net increase in cash and cash equivalents
as previously reported.
2. EAGLES NEST
In November 1994, the Company entered into an agreement to finance the
development of a tribal gaming facility, Eagles Nest Gaming Palace ("Eagles
Nest"), in New Brunswick, Canada. Although the original commitment obligated
the Company to finance up to $13.2 million, in April 1995 the parties to the
agreement agreed to develop a downsized interim gaming facility. As of
September 30, 1995, the Company had made loans related to this project
aggregating $6.3 million, net of unamortized loan origination fees to the
Company of $312,000. In addition, the Company guaranteed a project-related
lease which requires the tribal owner of the gaming facility to make monthly
payments of $24,128 through August 1997. The amounts advanced under the loans
were contractually scheduled to be repaid over 60 months beginning in September
1995 and bear interest at 15%.
On September 22, 1995, after a comprehensive review, the Company concluded
that the Eagles Nest loans were impaired and recorded an after-tax charge in the
third quarter of approximately $4.6 million. Operating results from the
facility were substantially below projections, and the project experienced cash
shortfalls. The tribal owner's management company for the facility was unable
to meet its financial obligations to the Company and closed the facility
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in October 1995. As a result, the Company issued required default notices to
the management company under the appropriate finance documentation. In light
of the circumstances, the Company established an impairment allowance for the
full amount of its loans related to this project ($6.3 million) and accrued a
liability reflecting the net present value of its full obligation under the
lease guaranty, as well as an estimate of associated expenses, which together
totaled $447,000.
In March 1996, the Company signed an agreement to sell its interest in the
loans related to the Eagles Nest facility to Dion Entertainment Corp. ("Dion"),
a publicly-traded (Toronto Stock Exchange: DIO) Canadian gaming management
company that manages 16 bingo facilities across Canada. Under the terms of the
agreement, which remains subject to certain conditions, the Company will receive
approximately 4% of the outstanding common stock of Dion. Upon completion, the
transaction would result in a recovery of approximately $400,000 (pre-tax) of
the loss recognized in 1995. The amount includes the non-refundable issuance of
$200,000 of Dion common stock received by the Company and recognized in other
income in the first quarter ended March 31, 1996. As part of the transaction,
PDS has agreed to issue a warrant entitling Dion to purchase 250,000 shares of
PDS common stock at an exercise price of $2.50 per share.
3. WORKING CAPITAL LOAN
In June 1995, the Company entered into an agreement with a bank to provide
a $1 million working capital line of credit for the Company through May 31,
1996. Advances on the line of credit, which totaled $752,400 as of March 31,
1996, are collateralized by all assets of the Company, guaranteed by the
Company's principal shareholder and bear interest at 1 percent over the bank's
reference rate. The bank's reference rate was 8.25% at March 31, 1996.
On April 29, 1996, the Company renewed its agreement with the bank to
provide a $1 million working capital line of credit for the Company through
April 30, 1997. Advances under the renewed agreement will be collateralized by
certain of the Company's notes or leases having a value of 120% of the amount of
the borrowings (rather than all of the Company's assets) and will continue to
bear interest at 1 percent over the bank's reference rate. The renewed
agreement contains covenants which require, among other things, the Company to
maintain a leverage ratio, as defined, of less than 5:1. The Company is in
compliance with all covenants as of March 31, 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is principally engaged in the business of providing financing
to the gaming industry. These financings, typically in the form of a lease or
note, are generally related to, and collateralized by, gaming equipment and
other furniture, fixtures and equipment used in casino operations. The Company
also has financed riverboats and related casino amenities and, in 1994, entered
into an agreement to finance the construction and development of a tribally-
owned gaming facility in New Brunswick, Canada.
The Company generally sells some or all of its interest in the leases and
notes it originates to institutional investors. In some of its transactions,
the Company holds the leases or notes for a period of time after origination, or
will retain an ownership interest in the leases or notes.
The Company's quarterly operating results, including net income (loss) have
historically fluctuated due to the timing of completion of large financing
transactions, as well as the timing of recognition of the resulting fee income
upon subsequent sale. These transactions can be in the negotiation and
documentation stage for several months, and recognition of the resulting fee
income by the Company may fluctuate greatly from quarter to quarter. Thus, the
results of any quarter are not necessarily indicative of the results which may
be expected for any other period.
ACCOUNTING FOR COMPANY ACTIVITIES
The accounting treatment for the Company's financing activities varies
depending upon the underlying structure of the transaction. The majority of the
Company's equipment transactions are structured as either notes receivable or
direct finance leases in which substantially all benefits and risks of ownership
are transferred to the lessee. In accordance with the Statement of Financial
Accounting Standards No. 13 ("FAS No. 13"), direct finance leases are afforded
accounting treatment similar to that for notes receivable. The balance of the
equipment financings are structured as operating leases, under which the Company
retains some or all of the benefits and risks of ownership. The Company retains
in its portfolio a small amount of vehicle leases (originated in 1994 and
prior), for which the sales-type or operating lease accounting method is
utilized.
The Company's revenue generating activities can be categorized as follows:
(i) fee income, resulting principally from the sale of lease or note receivable
transactions which it originates; (ii) finance income, resulting from financing
transactions in which the direct finance lease or note receivable is retained by
the Company; (iii) rental income from operating lease activity involving
equipment and vehicles; (iv) gain on sale of assets; and (v) other.
The majority of the Company's gross originations are recorded, upon sale,
in the Company's condensed consolidated statement of operations as fee income
reflecting the net
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transaction contribution (gross sale price less carrying value of the related
asset), with no offsetting direct expense. Generally accepted accounting
principles require the Company to reflect gross revenues, rather than the net
transaction contribution, for certain other categories of financing
activities. These other categories generally relate to the Company's direct
finance and operating leases held by the Company and account for a small
percentage of the Company's gross financing originations, although such
transactions represent a relatively large percentage of total revenues before
the deduction of corresponding expenses. Therefore, a comparison of the
"transaction contribution" of each of the categories of activities as shown
in the following table provides a more meaningful analysis of the Company's
condensed consolidated statement of operations than a comparison of relative
gross revenues.
The following table sets forth the Company's condensed consolidated
statement of operations and origination data for the three months ended March
31, 1996 and 1995, calculating the transaction contribution derived from each of
the types of financing activities by matching the revenues with the
corresponding component of the Company's direct costs and expenses:
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1996 1995
---------- -----------
<S> <C> <C>
FEE INCOME $ 224,683 $ 248,949
---------- -----------
FINANCE INCOME, NET
Finance income 242,818 584,630
Less: Interest expense 172,042 234,496
---------- -----------
Finance income, net 70,776 350,134
---------- -----------
OPERATING LEASE ACTIVITY, NET
Rental revenue on operating leases 371,367 436,480
Less: Depreciation on operating leases 275,146 320,367
Interest expense 29,877 86,640
---------- -----------
Operating lease revenue, net 66,344 29,473
---------- -----------
GAIN ON SALE OF ASSETS 122,872 37,604
---------- -----------
OTHER INCOME 274,598 ----
---------- -----------
TOTAL TRANSACTION CONTRIBUTION 759,273 666,160
---------- -----------
Selling, general and administrative expenses 574,259 735,941
Interest expense attributable to residuals 56,600 48,779
---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 128,414 (118,560)
Provision (benefit) for income taxes 47,500 (44,000)
---------- -----------
NET INCOME (LOSS) $ 80,914 $ (74,560)
---------- -----------
---------- -----------
DATA REGARDING GROSS ORIGINATIONS:
Total gross gaming originations $5,110,857 $12,532,808
---------- -----------
---------- -----------
</TABLE>
8
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The four types of revenues generated by the Company's financing activities
are further described below:
FEE INCOME. The Company generally funds the equipment financing transactions
it originates through a sale of such transactions (i.e., the sale of all of the
Company's right, title and interest in the underlying equipment and future
payment stream from the related leases or notes). A sale may occur
simultaneously with the origination or several months thereafter. At the time
of sale, the Company records fee income equal to the difference between the
selling price and the carrying value of the related asset (including unamortized
initial direct costs). The calculation of fee income reflects any cash
discounts received by the Company from equipment manufacturers. Fee income also
includes commissions earned for arranging financing in which the Company is not
a party to the transaction.
Unlike the revenues from the other types of financing activities, fee income
in connection with these transactions is presented on a net transaction
contributions basis in the condensed consolidated statement of operations.
Therefore, in the preceding table, the revenues from the other types of
activities have been set forth on a net basis, matching the related costs and
expenses with the appropriate revenues, in order to provide a more meaningful
comparison with the Company's fee income.
Upon the sale of a lease or note held for a period of time, the Company
removes the underlying asset from its condensed consolidated balance sheet.
FINANCE INCOME, NET. For the period during which the Company holds a direct
finance lease, sales-type lease or note receivable, finance income is recognized
over the term of the underlying lease or note in a manner which produces a
constant percentage rate of return on the asset carrying cost. Over the same
period, the Company generally incurs interest expense as a result of any
corresponding external financing. In calculating the net amount of finance
income in the preceding table, the component of interest expense allocated to
carrying direct finance leases, sales-type leases and notes receivable has been
subtracted from finance income. The allocation of interest expense is based
first upon any borrowings specifically identified with a related asset, and,
secondarily, all remaining interest is allocated to direct finance leases,
operating leases, notes receivable and interest in residuals on a pro-rata
basis.
For those direct finance leases and sales-type leases held by the Company,
the present value of both the future minimum lease payments and estimated
residual asset values are recorded in the condensed consolidated balance
sheet as net investment in leasing operations -- direct finance and
sales-type leases. Note financing activity retained by the Company is
classified as notes receivable in the condensed consolidated balance sheet.
All related external financing is recorded in discounted lease rentals, notes
payable or convertible subordinated debentures.
OPERATING LEASE ACTIVITY, NET. All leases not qualifying as direct finance
or sales-type leases are classified by the Company as operating leases. In
connection with operating leases, the Company retains substantially all the
benefits and risks of ownership of the asset. Revenue from operating leases
consists of monthly rentals and is reflected in the condensed consolidated
statement of operations evenly over the life of the lease as rental revenue on
operating leases. The related equipment or vehicle cost is depreciated on a
straight-line basis over the lease term to the Company's estimate of residual
value. This depreciation is reflected in the condensed consolidated statement
of operations as depreciation on operating leases. The Company also
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incurs interest expense as a result of its external financing of these
leases. In calculating the operating lease activity, net, in the preceding
table, depreciation on operating leases and interest expense allocated to
operating leases have been subtracted from rental revenue from operating
leases. Depreciation is allocated on a specific identification basis, while
interest expense is allocated as described above.
For operating leases, the cost of equipment, less accumulated depreciation,
is recorded in the condensed consolidated balance sheet as net investment in
leasing operations -- equipment under operating leases, net. All related
external financing is included in discounted lease rentals, notes payable or
convertible subordinated debentures.
GAIN ON SALE OF ASSETS. In situations where the Company sells assets,
generally when a lessee elects to purchase the Company's equipment (previously
under operating leases), the Company removes the underlying asset from its
condensed consolidated balance sheet, and records a gain or loss in an amount
equal to the difference between the sale price and the underlying carrying cost
of the asset.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Revenues for the first quarter of 1996 totaled $1,236,000, a decrease of
5.5% from $1,308,000 in the first quarter last year. Gross originations of
financing transactions for the three months ended March 31, 1996 totaled $5.1
million compared to $12.5 million for the same period in 1995, a decrease of
59%. The Company generated fee income of $225,000 related to the sale of
transactions with a basis of $2.8 million in the three months ended March 31,
1996, compared to fee income of $249,000 on the sale of transactions with a
basis of $7.3 million in the three months ended March 31, 1995. The 1996 period
benefited from additional commissions earned for arranging financing in which
the Company is not a party to the transaction. The 1995 originations included
certain large financing transactions which did not recur in the first quarter of
1996. New jurisdictions have generally continued to adopt a more controlled
casino licensing process, creating increased competition for fewer licenses, and
favoring larger, established casino operators which often have access to
financing at rates below those offered by the Company. To counter these market
conditions and the cessation of business in early 1995 by the major purchaser of
the Company's transactions, the Company is introducing new financing products
(including its "SlotLease" operating lease program), expanding its presence
within the existing gaming markets and obtaining alternative funding sources for
its financing products.
Although the development of new facilities in emerging markets has slowed
since 1994, management believes that further development of smaller financings
with existing operators for equipment replacement, expansion and upgrades will
provide additional financing opportunities. The Company continues to devote
considerable resources to develop expanded warehousing lines and a network of
funding sources focused on smaller transactions. The successful development of
this program, involving a higher volume of transaction originations to a broader
base of casino operators, will reduce the Company's fee income fluctuations
inherent in large emerging market gaming transactions. In addition, management
continues to explore additional investment opportunities in the gaming industry.
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Finance income, net, decreased approximately $279,000 for the three months
ended March 31, 1996 when compared to the three months ended March 31, 1995.
The decrease reflects a lower yield on the portfolio of transactions held by the
Company as a result of the aforementioned change in market fundamentals in late
1994, as well as the effect of the impairment of the Eagles Nest loans,
recognized in the third quarter of 1995.
Operating lease activity, net, increased approximately $37,000 for the
three months ended March 31, 1996 compared with the same period in 1995. The
increase is attributable to a higher yield on its investment in operating
leases, as well as lower overall borrowings and therefore a smaller allocation
of interest in 1996.
Gain on sale of assets increased $85,000 in the three months ended March
31, 1996 when compared with the same period in 1995, due primarily to the sale
by the Company of certain equipment, which it had previously leased to a
customer under an operating lease.
Other income in the three months ended March 31, 1996 primarily includes
the recognition of the $200,000 of Dion common stock, as discussed above.
Selling, general and administrative expenses decreased approximately
$162,000 for the three months ended March 31, 1996 when compared to the same
period in 1995. The decrease is primarily attributable to lower payroll and
marketing expenses in the 1996 period.
Income before income taxes was $128,000 in the first quarter of 1996,
compared with a loss before income taxes of $119,000 in the same period last
year. The improvement in 1996 reflects the $93,000 increase in total
transaction contribution, as well as lower selling, general and administrative
expenses, as described above.
INCOME TAXES
The effective income tax rate in both the three months ended March 31, 1996
and 1995 was approximately 37%, which is higher than the federal statutory tax
rate of 34%, due primarily to state income taxes.
The Company recognized a $2,590,000 income tax benefit in 1995 relating to
the pre-tax loss of $7.2 million (a 36.0% effective rate). The Company expects
to realize approximately $1.0 million of this benefit in 1996 by carrying back
the net operating loss and thereby receiving a refund of federal income taxes
paid related to 1994. The remaining net operating loss carryforward will be an
available deduction from future taxable income through 2008. Realization of
approximately $1.2 million of the deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforward.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced if estimates
of future taxable income during the carryforward period are reduced.
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LIQUIDITY AND CAPITAL RESOURCES
The funds necessary to support the Company's activities have been provided
by cash flows generated primarily from the financing activities described above,
the proceeds of the Company's initial public offering of common stock and
various forms of borrowings (both recourse and non-recourse). The lower level
of cash provided by operating activities in the three months ended March 31,
1996, when compared with the same period in 1995, primarily reflects the $1.9
million reduction in net cash provided by the purchase and sale of notes
receivable and the $1.7 million net reduction in the cash collections on notes
and leases in the 1996 period. The greater magnitude of financing activities in
the three months ended March 31, 1995 reflects the higher level of originations
discussed above, when compared with the same period in 1996. The lower level
of cash used in financing activities in the three months ended March 31, 1996
primarily reflects the Company's lower debt service requirements on its
discounted lease rentals when compared with the same period in 1995.
The following summarizes the significant funding sources and activities of
the Company.
INITIAL PUBLIC OFFERING
In the second quarter of 1994, the Company received net proceeds of
$6,762,000 from the sale of 1,550,000 shares of its common stock in connection
with its initial public offering. These proceeds were used to fund various
financing transactions originated by the Company and the development of the
Company's investment portfolio.
DEBT FINANCING
DISCOUNTED LEASE RENTALS. Subsequent to origination of selected
equipment and vehicle leases, the Company discounts the remaining lease
payments, including residuals, with various financial institutions in return
for a cash payment based on the present value of such payments. Proceeds
from discounting are recorded in the Company's condensed consolidated balance
sheet as discounted lease rentals. The discounted lease rentals are
generally non-recourse to the Company as to the monthly lease payments and
recourse as to the residual values. As lessees make payments directly to the
respective financial institution, interest income on sales-type leases or
rental revenue on operating leases is recorded by the Company with an
offsetting charge to interest expense and a reduction in the discounted lease
rentals in the condensed consolidated balance sheet. The decrease of
$395,000 from December 31, 1995 to March 31, 1996 reflects payments in the
normal course of business.
NOTES PAYABLE. Total notes payable increased from $4,259,000 as of
December 31, 1995 to $4,450,000 as of March 31, 1996. The net increase is the
result of additional borrowings of $1.5 million, offset by payments of $1.3
million. Included in the three months ended March 31, 1996 is the payment in
full of the $741,000 balance from a bridge note advanced to the Company in 1995,
which was due and made in January 1996.
CONVERTIBLE SUBORDINATED DEBENTURES. As of March 31, 1996, the Company has
outstanding $2,554,000 of unsecured Convertible Subordinated Debentures (the
"Debentures"), which are subordinated to other borrowings of the Company. The
Debentures require payments
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of principal and interest in 10 remaining equal quarterly installments of
$297,534 through September 30, 1998. Interest on the Debentures accrues at
an annual rate of 11.5%. At the option of the holders, the Debentures are
convertible into shares of the Company's common stock at a price of $4.25 per
share. The Company may prepay any unconverted Debentures. Upon issuance of
the warrant to Dion (see Note 2), the conversion price of the Company's
existing Debentures would be reduced from $4.25 to $2.50, pursuant to the
terms of the Debentures.
CAPITAL RESOURCES
The Company's current financial resources, including estimated cash flows
from operations, the bank working capital line of credit, and the income tax
refund are expected to be sufficient to fund the Company's anticipated working
capital needs. The Company is, from time to time, dependent upon the need to
liquidate or externally finance transactions originated and held in its
investment portfolio. The Company is continuing to explore other possible
sources of capital, primarily debt. There is no assurance that additional
equity or debt financing, if required, can be obtained or will be available on
terms acceptable to the Company.
Inflation has not been a significant factor in the Company's operations.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibit is included with this quarterly report on Form
10-QSB as required by Item 601 of Regulation S-B.
Exhibit Page
Number Description Number
------- ----------- ------
11 Calculation of earnings per share 16
b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the quarter ended March 31, 1996.
14
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PDS FINANCIAL CORPORATION
Dated: May 9, 1996 By: /s/ Peter D. Cleary
--------------------------
Chief Financial Officer
(a duly authorized officer)
15
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
PER SHARE DATA
Net income (loss), primary $ 80,914 $ (74,560)
--------- ---------
--------- ---------
Net income (loss), fully diluted $ 80,914 $ (74,560)
--------- ---------
--------- ---------
Net income (loss) per common and
common equivalent shares, primary $ .03 $ (.02)
----- ------
----- ------
Net income (loss) per common and
common equivalent shares, fully diluted $ .03 $ (.02)
----- ------
----- ------
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
Primary:
Weighted average number of common
shares outstanding 3,119,816 3,013,837
Common equivalent shares:
Dilutive stock options and warrants,
using the treasury stock method 10,647 ----
--------- ---------
3,130,463 3,013,837
--------- ---------
--------- ---------
Fully Diluted:
Weighted average number of common
shares outstanding 3,119,816 3,013,837
Common equivalent shares:
Dilutive stock options and warrants
using the treasury stock method 15,647 ----
--------- ---------
3,135,463 3,013,837
--------- ---------
--------- ---------
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AS OF AND FOR
THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 779,455
<SECURITIES> 0
<RECEIVABLES> 13,671,602
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 1,906,357 <F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,357,414
<CURRENT-LIABILITIES> 1,820,770
<BONDS> 8,820,494
0
0
<COMMON> 31,198
<OTHER-SE> 5,684,952
<TOTAL-LIABILITY-AND-EQUITY> 16,357,414
<SALES> 0
<TOTAL-REVENUES> 1,236,338
<CGS> 0
<TOTAL-COSTS> 1,107,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0 <F3>
<INCOME-PRETAX> 128,414
<INCOME-TAX> 47,500
<INCOME-CONTINUING> 80,914
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,914
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
<FN>
<F1> THE COMPANY DOES NOT PREPARE A CLASSIFIED BALANCE SHEET
<F2> INCLUDES DEFERRED INCOME TAX ASSET OF $1.2 MILLION
<F3> AMOUNT, $259,000, IS INCLUDED IN TAG 29 (TOTAL COSTS)
</FN>
</TABLE>
