<PAGE>
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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 SEPTEMBER 30, 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 NOVEMBER 8, 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 and Nine Months Ended September 30,
1996 and 1995 2
Condensed Consolidated Balance Sheet (Unaudited)
As of September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 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 15
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Fee income $ 788,836 $ 2,582 $1,846,921 $ 662,052
Finance income 207,122 368,404 565,026 1,489,923
Rental revenue on operating leases 634,436 401,684 1,296,808 1,247,214
Gain on sale of assets 5,309 468 23,583 49,652
Other income, net -- -- 110,804 --
---------- ----------- ---------- ------------
Total revenues 1,635,703 773,138 3,843,142 3,448,841
---------- ----------- ---------- ------------
Costs and expenses:
Depreciation on operating leases 486,269 296,399 982,850 918,108
Provision for uncollectible receivables -- 7,000,000 -- 7,000,000
Selling, general and administrative 690,602 568,035 1,827,967 2,008,011
Interest 262,483 285,210 678,051 971,613
---------- ----------- ---------- ------------
Total costs and expenses 1,439,354 8,149,644 3,488,868 10,897,732
---------- ----------- ---------- ------------
Income (loss) before income taxes 196,349 (7,376,506) 354,274 (7,448,891)
Provision (benefit) for income taxes 72,000 (2,654,000) 131,000 (2,681,000)
---------- ------------ ---------- -------------
Net income (loss) $ 124,349 $(4,722,506) $ 223,274 $ (4,767,891)
========== ============ ========== =============
Earnings (loss) per share:
Primary $.04 $(1.51) $.07 $(1.55)
Fully diluted $.04 $(1.51) $.07 $(1.55)
Number of shares used to compute
per share amounts:
Primary 3,125,176 3,119,816 3,127,641 3,083,896
Fully diluted 3,126,457 3,119,816 3,127,974 3,083,896
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
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PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
Cash and cash equivalents $ 2,426,815 $ 870,109
Restricted cash 3,776,414 354,992
Accounts receivable 725,321 341,348
Notes receivable, net 3,915,867 6,636,649
Net investment in leasing operations:
Equipment under operating leases, net 17,385,672 2,913,226
Direct finance and sales-type leases 1,536,836 672,602
Investment in residuals 1,898,359 1,945,904
Income taxes receivable -- 1,041,000
Deferred income taxes 1,097,000 1,268,000
Other assets 637,130 345,424
----------- ----------
Total assets $33,399,414 $16,389,254
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $16,115,861 $ 1,434,354
Discounted lease rentals:
Nonrecourse 5,711,444 1,770,292
Recourse 182,248 441,721
Notes payable:
Nonrecourse 53,245 53,245
Recourse 3,056,304 4,205,660
Convertible subordinated debentures 2,099,654 2,772,128
Other liabilities 518,648 76,619
----------- -----------
Total liabilities 27,737,404 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) (2,321,349) (2,348,124)
------------ -----------
Total stockholders' equity 5,662,010 5,635,235
------------ -----------
Total liabilities and stockholders'
equity $33,399,414 $16,389,254
=========== ===========
See accompanying notes to condensed consolidated financial statements
3
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PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) $ 223,274 $(4,767,891)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation on operating leases 982,850 918,108
Provision for uncollectable receivables 7,000,000
Gain on sale of notes receivable, leases, leased
equipment and residuals (722,995) (250,309)
Purchases of notes receivable (8,755,119) (16,330,189)
Proceeds from:
Sales of notes receivable 15,168,883 12,706,871
Collections on notes receivable 1,456,836 3,654,275
Collections of principal on direct
finance leases 764,240 962,163
Changes in operating assets and liabilities:
Restricted cash (3,421,422) 516,007
Income taxes receivable 1,041,000 (2,530,786)
Accounts payable and accrued expenses (291,327) (1,033,776)
Other, net (267,711) 100,264
------------ ----------
Net cash provided by operating activities 6,178,509 944,737
------------ ----------
Cash flows from investing activities:
Purchase: Furniture and fixtures (48,548) (26,298)
Equipment for leasing (5,711,630)
Investment in residuals (311,348)
Proceeds from sale of leases, leased equipment
and residuals 983,018 1,369,415
----------- -----------
Net cash (used in) provided by investing
activities (5,088,508) 1,343,117
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 470,000 4,268,125
Proceeds from discounted lease rentals 4,917,321 1,894,210
Principal payments on notes payable (3,012,499) (6,904,826)
Principal payments on subordinated debentures (672,474)
Principal payments on discounted lease rentals (1,235,643) (2,144,137)
Proceeds from exercise of employee stock options 305,463
------------ -----------
Net cash provided by (used in) financing
activities 466,705 (2,581,165)
------------ -----------
Net increase (decrease) in cash and cash equivalents 1,556,706 (293,311)
Cash and cash equivalents at beginning of period 870,109 445,905
------------ -----------
Cash and cash equivalents at end of period $ 2,426,815 $ 152,594
=========== ===========
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements as of September 30,
1996 and for the three and nine months ended September 30, 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 September 30, 1996 and for the three and nine months ended September 30,
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 1995 net decrease 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. As of September 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. As a result 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. The
facility was closed in October 1995.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Canadian gaming management company. Upon signing
the agreement, the Company received 371,000 shares of Dion common stock. As
of September 30, 1996, the sale of the Company's interest in the loans has
not been consumated and the parties are attempting to renegotiate the
agreement.
3. WORKING CAPITAL, MANUFACTURER'S AND REVOLVING WAREHOUSING LOANS
In April 1996, the Company renewed its agreement with a bank to provide
a $1 million working capital line of credit for the Company through April 30,
1997. Advances under the agreement, of which there were none at September
30, 1996, are collateralized by certain of the Company's notes receivable or
leases having a value of 120% of the amount of the borrowings, are guaranteed
by the Company's principal shareholder, and bear interest at 1 percent over
the bank's reference rate. The bank's reference rate (prime rate) was 8.25%
at September 30, 1996. The 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
September 30, 1996.
In June 1996, the Company entered into an agreement with a major
equipment manufacturer to provide up to $20 million to finance the Company's
purchases of such manufacturer's equipment. Advances under the agreement
were $1.4 million at September 30, 1996, are collateralized by a security
interest in the related equipment and bear interest at 1 percent over the
prime rate.
In July 1996, the Company entered into an agreement with another bank to
provide a $5 million revolving warehousing loan for the Company through July
1997. Advances on the loan, of which there were none at September 30, 1996,
are collateralized by a security interest in the related notes, leases or
equipment, as applicable, are guaranteed by the Company's principal
shareholder, and bear interest at 1.5 percent over the bank's reference rate.
The loan contains covenants which require the Company to maintain certain
debt to net worth and cash flow ratios, as defined.
4. STOCKHOLDERS ACTION
On May 1, 1996, the stockholders of the Company approved an amendment to
the Company's 1993 Stock Option Plan to increase the number of shares of
Common Stock available for issuance thereunder from 1,000,000 shares to
1,100,000 shares.
6
<PAGE>
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. In 1996, the Company introduced SlotLease, a specialized leasing
program for slot machines and other electronic gaming devices.
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. Consistent with the Company's strategy to increase
its leasing activities, the 1996 originations involve a greater mix of
operating leases, which generate revenues throughout the lease term, as
opposed to notes which generate revenues primarily upon sale. The Company
retains in its portfolio a small amount of vehicle leases (originated in 1994
and earlier), 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; (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 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
7
<PAGE>
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 smaller 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 operations than a comparison of
relative gross revenues.
The following table sets forth the Company's operations and origination
data for the three and nine months ended September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
1996 1995 1996 1995
----- ---- ---- ----
<S> <C> <C> <C> <C>
FEE INCOME $ 788,836 $ 2,582 $ 1,846,921 $ 662,052
-------- ---------- ---------- ----------
FINANCE INCOME, NET
Finance income 207,122 368,404 565,026 1,489,923
Less: Interest expense 97,481 182,266 304,164 617,673
-------- ---------- ----------- ----------
Finance income, net 109,641 186,138 260,862 872,250
-------- ---------- ----------- ----------
OPERATING LEASE REVENUE, NET
Rental revenue on operating leases 634,436 401,684 1,296,808 1,247,214
Less: Depreciation on operating leases 486,269 296,399 982,850 918,108
Interest expense 105,192 49,490 198,660 195,083
-------- ---------- ---------- ----------
Operating lease revenue, net 42,975 55,795 115,298 134,023
-------- ---------- ---------- ----------
GAIN ON SALE OF ASSETS 5,309 468 23,583 49,652
-------- ---------- ---------- ----------
OTHER INCOME, NET --- --- 110,804 ---
-------- ---------- ---------- ----------
TOTAL TRANSACTION CONTRIBUTION 946,761 244,983 2,357,468 1,717,977
-------- ---------- ---------- ----------
Provision for uncollectible receivables --- 7,000,000 --- 7,000,000
Selling, general and administrative expenses 690,602 568,035 1,827,967 2,008,011
Interest expense attributable to residuals 59,810 53,454 175,227 158,857
-------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 196,349 (7,376,506) 354,274 (7,448,891)
Provision (benefit) for income taxes 72,000 (2,654,000) 131,000 (2,681,000)
---------- ----------- ---------- -----------
NET INCOME (LOSS) $ 124,349 $(4,722,506) $ 223,274 $ (4,767,891)
========== =========== =========== ===========
DATA REGARDING GROSS ORIGINATIONS:
Total gross gaming originations $37,374,667 $ 2,539,738 $61,510,935 $ 29,457,443
=========== =========== =========== ============
</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 REVENUE, 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.
9
<PAGE>
This depreciation is reflected in the condensed consolidated statement of
operations as depreciation on operating leases. The Company also incurs
interest expense as a result of its external financing of these leases. In
calculating the operating lease revenue, 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 SEPTEMBER 30, 1996 AND 1995
Revenues for the third quarter of 1996 totaled $1,636,000, an increase
of 112% from $773,000 in the third quarter last year. Gross originations of
financing transactions for the three months ended September 30, 1996 totaled
$37.4 million compared to $2.5 million for the same period in 1995. The 1996
originations included a larger percentage of operating leases, which generate
revenues throughout the lease term, as opposed to notes, which generate
revenues primarily upon sale. The Company generated fee income of $789,000
related to the sale of transactions with a basis of $26.1 million in the
three months ended September 30, 1996, compared to fee income of $3,000 on
the sale of transactions with a basis of $1.0 million in the three months
ended September 30, 1995.
New jurisdictions have generally adopted a more controlled casino
licensing process, creating increased competition for fewer licenses, and
favoring larger, established casino operators which generally have lower cost
of capital. To counter these market conditions, the Company has introduced
new financing products, expanded its presence within the existing gaming
markets and obtained alternative funding sources for its financing products.
Specifically, in the first quarter of 1996, the Company introduced its
"SlotLease" operating lease program, and, during the second quarter, opened a
sales office in Las Vegas, Nevada. In addition, recently signed revolving
agreements have increased the Company's funding capability by $25 million
(see Note 3). In order to further its strategy of increasing its leasing
activities, the Company is pursuing licenses that would permit it to own or
possess gaming equipment in various jurisdictions. In October 1996, the
Company received its license to distribute gambling devices and/or associated
gaming equipment for use in Iowa. The Company is also licensed as a gaming
equipment distributor in Minnesota, and has gaming license applications
pending in other jurisdictions.
10
<PAGE>
Although the development of new gaming establishments in emerging
markets has slowed since 1994, management believes that smaller financings
with existing operators for equipment replacement, expansion and upgrades
will continue to 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, would reduce
the Company's fee income fluctuations inherent in large emerging market
transactions. In addition, management continues to explore additional funding
sources and investment opportunities in the gaming industry.
Finance income, net, decreased approximately $76,000 for the three
months ended September 30, 1996 when compared to the three months ended
September 30, 1995. The decrease primarily reflects the effect of the
impairment of the Eagles Nest loans, recognized in the third quarter of 1995.
The transaction contribution from operating lease revenue, net, for the
three months ended September 30, 1996 decreased approximately $13,000 when
compared to the same period in 1995, primarily attributable to higher
depreciation and interest in 1996. The Company's operating lease portfolio
on a weighted basis is in the early stage of the lease term, when
depreciation and interest reduce the income contribution to the Company.
These leases are expected to generate revenues throughout their lease term,
which is generally 36 months, and make a positive income contribution in the
latter stage of the lease term.
Gain on sale of assets increased $5,000 in the three months ended
September 30, 1996 when compared with the same period in 1995. These gains
relate to the Company's vehicle portfolio. The Company has not engaged in
vehicle originations since 1994.
Selling, general and administrative expenses increased approximately
$123,000, or 22%, for the three months ended September 30, 1996 when
compared to the same period in 1995. The increase is primarily attributable
to higher payroll costs related to the higher level of originations, gaming
licensing costs, and costs associated with increasing the Company's funding
capabilities.
Income before income taxes was $196,000 in the third quarter of 1996,
compared with a loss before income taxes of $7,377,000 in the same period
last year. The improvement in 1996 reflects the $702,000 increase in total
transaction contribution and the provision for uncollectible receivables in
1995 described in Note 2.
11
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues for the nine months ended September 30, 1996 totaled
$3,843,000, an increase of 11% from $3,449,000 in the same period last year.
Gross originations of financing transactions for the nine months ended
September 30, 1996, more than doubled to $61.5 million compared to $29.5
million for the same period in 1995. The Company generated fee income of
$1,847,000 related to the sale of transactions with a basis of $46.5 million
in the nine months ended September 30, 1996, compared to fee income of
$662,000 on the sale of transactions with a basis of $20.6 million in the
nine months ended September 30, 1995.
Finance income, net, decreased approximately $611,000 for the nine
months ended September 30, 1996 when compared to the nine months ended
September 30, 1995. The decrease primarily reflects the effect of the
impairment of the Eagles Nest loans, recognized in the third quarter of 1995.
Operating lease revenue, net, decreased approximately $19,000 for the
nine months ended September 30, 1996 compared with the same period in 1995,
primarily attributable to higher depreciation in 1996. The Company's
operating lease portfolio on a weighted basis is in the early stage of the
lease term, when depreciation and interest reduce the income contribution to
the Company. These leases are expected to generate revenues throughout
their lease term, which is generally 36 months, and make a positive income
contribution in the latter stage of the lease term.
Gain on sale of assets decreased approximately $26,000 in the nine
months ended September 30, 1996 when compared with the same period in 1995,
due primarily to the smaller vehicle portfolio to which it relates. The
Company has not engaged in vehicle originations since 1994.
Other income, net, in the nine months ended September 30, 1996 primarily
reflects the recognition of $200,000 of income relating to the receipt of
371,000 shares of Dion common stock, as discussed in Note 2. This was
partially offset by a loss on the sale in the second quarter of certain notes
receivable, which had been held in the Company's portfolio. While these
notes were performing, the yield was below the Company's target. The sale of
these notes improved liquidity and enabled the Company to pursue other
opportunities.
Selling, general and administrative expenses decreased approximately
$180,000, or 9%, for the nine months ended September 30, 1996 when compared
to the same period in 1995. The decrease is primarily attributable to costs
related to uncompleted debt offerings in 1995.
Income before income taxes was $354,000 in the first nine months of
1996, compared with a loss before income taxes of $7,449,000 in the same
period last year. The improvement in 1996 primarily reflects the 37%
increase in total transaction contribution in 1996 and the provision for
uncollectible receivables in 1995 described in Note 2.
12
<PAGE>
INCOME TAXES
The effective income tax rate in 1996 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 effective
income tax rate in 1995 was lower than in 1996 because the Company may not
realize the tax benefit of its net operating loss in all states in which it
does business. In July 1996, the Company realized approximately $1.0 million
of this benefit via receipt of 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 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.
LIQUIDITY AND CAPITAL RESOURCES
The funds necessary to support the Company's activities have been
provided by cash flows generated primarily from the operating and financing
activities described above, and various forms of borrowings (both recourse
and non-recourse). The higher level of net cash provided by operating
activities in the nine months ended September 30, 1996, when compared with
the same period in 1995, primarily reflects the $2.7 million of net cash
provided by the sale of notes receivable, the $1.0 million income tax refund,
both discussed above, as well as lower purchases of notes receivable in the
1996 period. The higher level of cash used in investing activities in the
nine months ended September 30, 1996 primarily reflects the $5.7 million
investment in equipment for operating leases. The Company's strategy to
increase its leasing activities involves a higher level of investment in
equipment under operating leases, financed primarily through discounted lease
rentals. The higher level of net cash used in financing activities in the
nine months ended September 30, 1995 is primarily the result of greater
principal payment on notes payable and discounted lease rentals in the
ordinary course of business during the 1995 period.
The following summarizes the significant funding sources and
activities of the Company.
DEBT FINANCING
DISCOUNTED LEASE RENTALS. Subsequent to origination of selected
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 net increase of
13
<PAGE>
$3,682,000 from December 31, 1995 to September 30, 1996 primarily reflects
additional borrowings to finance the Company's investment in equipment for
operating leases.
NOTES PAYABLE. Total notes payable decreased $1,149,000 from $4,259,000
as of December 31, 1995 to $3,110,000 as of September 30, 1996. The net
decrease is the result of additional borrowings of $1.9 million ($1.4 million
of which was a noncash investment in equipment under operating leases),
offset by payments of $3.0 million. Included in the nine months ended
September 30, 1996 is the payment in full of the $741,000 balance of a bridge
note advanced to the Company in 1995, which was due and made in January 1996.
In June 1996, the Company entered into an agreement with a major
equipment manufacturer to provide up to $20 million in financing for the
Company. In July 1996, the Company entered into an agreement with a bank to
provide a $5 million revolving warehousing loan for the Company for a one
year term.
CONVERTIBLE SUBORDINATED DEBENTURES. As of September 30, 1996, the
Company has outstanding $2,100,000 of unsecured Convertible Subordinated
Debentures (the "Debentures"), which are subordinated to other borrowings of
the Company. The Debentures require payments of principal and interest in 8
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.
CAPITAL RESOURCES
The Company's current financial resources, including estimated cash
flows from operations, the bank working capital line of credit and revolving
warehousing loans, and the manufacturer's credit facility 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, in order to continue to focus on its strategy of
increasing its leasing activities. 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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are 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
27 Financial data schedule 17
b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the quarter ended September 30, 1996.
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: November 8, 1996 By: /s/ PETER D. CLEARY
----------------------
Chief Financial Officer
(a duly authorized officer)
15
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
Three Months ended Nine Months ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net income (loss), primary $ 124,349 $(4,722,506) $ 223,274 $(4,767,891)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Net income (loss), fully diluted $ 124,349 $(4,722,506) $ 223,274 $(4,767,891)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Net income (loss) per common and
common equivalent shares, primary $0.04 $(1.51) $.07 $(1.55)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Net income (loss) per common and
common equivalent shares, fully
duluted $0.04 $(1.51) $.07 $(1.55)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT SHARES:
Primary:
Weighted average number of
common shares outstanding 3,119,816 3,119,816 3,119,816 3,083,896
Common equivalent shares:
Dilutive stock options and
warrants, using the treasury
stock method 5,360 -- 7,825 --
----------- ----------- ----------- -----------
3,125,176 3,119,816 3,127,641 3,083,896
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Fully diluted:
Weighted average number of
common shares outstanding 3,119,816 3,119,816 3,119,816 3,083,896
Common equivalent shares:
Dilutive stock options and
warrants using the treasury
stock method 6,641 -- 8,158 --
----------- ------------ ----------- -----------
3,126,457 3,119,816 3,127,974 3,083,896
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
<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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,203,229
<SECURITIES> 0
<RECEIVABLES> 25,462,055
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,734,130<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,399,414
<CURRENT-LIABILITIES> 16,634,509
<BONDS> 11,102,895
0
0
<COMMON> 31,198
<OTHER-SE> 5,630,812
<TOTAL-LIABILITY-AND-EQUITY> 33,399,414
<SALES> 0
<TOTAL-REVENUES> 3,843,142
<CGS> 0
<TOTAL-COSTS> 3,488,868
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F3>
<INCOME-PRETAX> 354,274
<INCOME-TAX> 131,000
<INCOME-CONTINUING> 223,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 223,274
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<FN>
<F1> THE COMPANY DOES NOT PREPARE A CLASSIFIED BALANCE SHEET
<F2> INCLUDES DEFERRED INCOME TAX ASSET OF $1.1 MILLION
<F3> AMOUNT, $678,000 IS INCLUDED IN TAG 29, "TOTAL COSTS"
</TABLE>
