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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 JUNE 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 August 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.
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Condensed Consolidated Statement of Operations (Unaudited)
For the Three Months and Six Months Ended June 30,
1996 and 1995 2
Condensed Consolidated Balance Sheet (Unaudited)
As of June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Fee income $ 719,367 $ 410,521 $ 1,058,085 $ 659,470
Finance income 115,086 536,889 357,904 1,121,519
Rental revenue on operating leases 291,005 409,049 662,372 845,530
Gain on sale of assets 9,437 11,580 18,274 49,184
Other income (expense), net (163,794) --- 110,804 ---
----------- ----------- ----------- -----------
Total revenues 971,101 1,368,039 2,207,439 2,675,703
----------- ----------- ----------- -----------
Costs and expenses:
Depreciation on operating leases 221,435 301,343 496,581 621,709
Selling, general and administrative 563,106 704,033 1,137,365 1,439,976
Interest 157,049 316,488 415,568 686,403
----------- ----------- ----------- -----------
Total costs and expenses 941,590 1,321,864 2,049,514 2,748,088
----------- ----------- ----------- -----------
Income (loss) before income taxes 29,511 46,175 157,925 (72,385)
Provision (benefit) for income taxes 11,500 17,000 59,000 (27,000)
----------- ----------- ----------- -----------
Net income (loss) $ 18,011 $ 29,175 $ 98,925 $ (45,385)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per share:
Primary $.01 $.01 $.03 $(.01)
Fully diluted $.01 $.01 $.03 $(.01)
Number of shares used to compute per share amounts:
Primary 3,126,926 3,207,415 3,128,733 3,065,936
Fully diluted 3,126,926 3,207,415 3,128,733 3,065,936
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
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PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 986,299 $ 870,109
Restricted cash 148,637 354,992
Accounts receivable 2,548,064 341,348
Notes receivable, net 3,452,683 6,636,649
Net investment in leasing operations:
Equipment under operating leases, net 5,522,831 2,913,226
Direct finance and sales-type leases 2,492,096 672,602
Investment in residuals 1,907,304 1,945,904
Equipment held for lease or sale 190,000 ----
Income taxes receivable 1,043,000 1,041,000
Deferred income taxes 1,209,000 1,268,000
Other assets 727,649 345,424
------------ ------------
Total assets $ 20,227,563 $ 16,389,254
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 7,047,563 $ 1,434,354
Discounted lease rentals:
Nonrecourse 1,191,856 1,770,292
Recourse 280,921 441,721
Notes payable:
Nonrecourse 53,245 53,245
Recourse 3,323,264 4,205,660
Convertible subordinated debentures 2,330,194 2,772,128
Other liabilities 371,917 76,619
------------ ------------
Total liabilities 14,598,960 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) (2,354,756) (2,348,124)
------------ ------------
Total stockholders' equity 5,628,603 5,635,235
------------ ------------
Total liabilities and stockholders' equity $ 20,227,563 $ 16,389,254
------------ ------------
------------ ------------
</TABLE>
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
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 98,925 $ (45,385)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation on operating leases 496,581 621,709
Gain on sale of notes receivable, leases, leased
equipment and residuals (472,273) (247,768)
Non-cash interest income ---- (408,624)
Non-cash investment in other assets (286,353) ----
Purchases of notes receivable (5,737,057) (13,715,996)
Proceeds from:
Sales of notes receivable 8,032,848 10,948,091
Collections on notes receivable 1,117,393 3,156,234
Collections of principal on direct finance leases 261,714 728,931
Changes in operating assets and liabilities:
Restricted cash 206,355 292,855
Accounts receivable (145,922) 333,471
Other assets (183,746) (51,864)
Accounts payable and accrued expenses (322,892) (967,183)
Other liabilities 295,298 198,344
Other, net 79,104 (43,076)
---------- -----------
Net cash provided by operating activities 3,439,975 799,739
---------- -----------
Cash flows from investing activities:
Purchase: Furniture and fixtures (44,285) (23,612)
Equipment for leasing (171,554)
Investment in residuals (300,303)
Proceeds from sale of leases, leased equipment and
residuals 643,965 1,118,148
---------- -----------
Net cash provided by investing activities 127,823 1,094,536
---------- -----------
Cash flows from financing activities:
Proceeds from notes payable 282,500 3,993,250
Proceeds from discounted lease rentals ---- 1,894,210
Principal payments on notes payable (2,552,938) (6,588,548)
Principal payments on subordinated debentures (441,934) ----
Principal payments on discounted lease rentals (739,236) (1,665,939)
Proceeds from exercise of employee stock options ---- 305,463
----------- ----------
Net cash used in financing activities (3,451,608) (2,061,564)
----------- -----------
Net increase (decrease) in cash and cash equivalents 116,190 (167,289)
Cash and cash equivalents at beginning of period 870,109 445,905
---------- -----------
Cash and cash equivalents at end of period $ 986,299 $ 278,616
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements as of June 30, 1996 and for
the three and six months ended June 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 June
30, 1996 and for the three and six months ended June 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 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. The original commitment obligated the Company
to finance up to $13.2 million, however 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
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
company for the facility was unable to meet its financial obligations to the
Company and closed the facility 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. Under the terms of the agreement, which remains subject to certain
conditions, the Company received 371,000 shares of Dion common stock in the
first quarter ended March 31, 1996 and, if completed, would receive an
additional 700,000 shares of Dion common stock. In addition, PDS would, upon
completion, 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, 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 renewed agreement, which were $200,000 at June 30,
1996, are collateralized by certain of the Company's notes or leases having a
value of 120% of the amount of the borrowings, 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 June 30, 1996. 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 June 30, 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's
purchase of their equipment. Advances under the agreement were $1.4 million at
June 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 will be collateralized by a security interest in the
related notes, leases or equipment, as applicable, 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. STOCKHOLDER 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
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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.
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 transaction contribution (gross sale price less carrying
value of the related asset), with no
7
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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 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 six months ended June 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
FEE INCOME $ 719,367 $ 410,521 $ 1,058,085 $ 659,470
------------- ------------- ------------- -------------
FINANCE INCOME, NET
Finance income 115,086 536,889 357,904 1,121,519
Less: Interest expense 77,714 205,929 249,756 440,425
------------- ------------- ------------- -------------
Finance income, net 37,372 330,960 108,148 681,094
------------- ------------- ------------- -------------
OPERATING LEASE ACTIVITY, NET
Rental revenue on operating leases 291,005 409,049 662,372 845,530
Less: Depreciation on operating leases 221,435 301,343 496,581 621,709
Interest expense 22,441 60,458 52,318 147,098
------------- ------------- ------------- -------------
Operating lease revenue, net 47,129 47,248 113,473 76,723
------------- ------------- ------------- -------------
GAIN ON SALE OF ASSETS 9,437 11,580 18,274 49,184
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE) (163,794) ---- 110,804 ----
------------- ------------- ------------- -------------
TOTAL TRANSACTION CONTRIBUTION 649,511 800,309 1,408,784 1,466,471
------------- ------------- ------------- -------------
Selling, general and administrative expenses 563,106 704,033 1,137,365 1,439,976
Interest expense attributable to residuals 56,894 50,101 113,494 98,880
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 29,511 46,175 157,925 (72,385)
Provision (benefit) for income taxes 11,500 17,000 59,000 (27,000)
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 18,011 $ 29,175 $ 98,925 $ (45,385)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
DATA REGARDING GROSS ORIGINATIONS:
Total gross gaming originations $ 19,025,411 $ 14,384,897 $ 24,136,268 $ 26,917,705
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</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 JUNE 30, 1996 AND 1995
Revenues for the second quarter of 1996 totaled $971,000, a decrease of 29%
from $1,368,000 in the second quarter last year. Gross originations of
financing transactions for the three months ended June 30, 1996 totaled $19.0
million compared to $14.4 million for the same period in 1995, an increase of
32%. 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
$719,000 related to the sale of transactions with a basis of $16.7 million in
the three months ended June 30, 1996, compared to fee income of $411,000 on the
sale of transactions with a basis of $12.3 million in the three months ended
June 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 is introducing new financing
products, expanding its presence within the existing gaming markets and
obtaining 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, the largest gaming market in the country. In addition, recently
signed revolving agreements have increased the Company's funding capability by
$25 million (see Note 3).
10
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Although the development of new facilities 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 $294,000 for the three months
ended June 30, 1996 when compared to the three months ended June 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 activity, net, for the
three months ended June 30, 1996 was comparable with the same period in 1995.
The Company originated approximately $4.0 million of operating leases in the
latter portion of the second quarter of 1996, which as a result of the timing
late in the quarter, had little contribution impact on the three months ended
June 30, 1996. These leases are expected to generate revenues throughout their
lease term, which is generally 36 months.
Gain on sale of assets decreased $2,000 in the three months ended June 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 (expense) in the three months ended June 30, 1996 primarily
reflects the loss on the sale of $2.7 million of notes receivable, which had
been held in the Company's portfolio. While the notes were performing, the
yield was below the Company's target. The sale of these notes improved
liquidity and will enable the Company to pursue other opportunities.
Selling, general and administrative expenses decreased approximately
$141,000, or 20%, for the three months ended June 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 $30,000 in the second quarter of 1996,
compared with income before income taxes of $46,000 in the same period last
year. The decrease in 1996 reflects the $151,000 decrease in total transaction
contribution, offset by the lower level of selling, general and administrative
expenses, described above.
11
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SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues for the six months ended June 30, 1996 totaled $2,207,000, a
decrease of 18% from $2,676,000 in the same period last year. Gross
originations of financing transactions for the six months ended June 30, 1996,
totaled $24.1 million compared to $26.9 million for the same period in 1995.
The Company generated fee income of $1,058,000 related to the sale of
transactions with a basis of $20.4 million in the six months ended June 30,
1996, compared to fee income of $659,000 on the sale of transactions with a
basis of $19.6 million in the six months ended June 30, 1995.
Finance income, net, decreased approximately $573,000 for the six months
ended June 30, 1996 when compared to the six months ended June 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 activity, net, increased approximately $37,000 for the six
months ended June 30, 1996 compared with the same period in 1995, primarily
attributable to lower overall borrowings and therefore a smaller allocation of
interest in 1996.
Gain on sale of assets decreased approximately $31,000 in the six months
ended June 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 (expense) in the six months ended June 30, 1996 primarily
reflects the recognition of $200,000 of income relating to the receipt of
371,000 shares of Dion common stock, offset by the loss on the sale of the notes
receivable, both as discussed above.
Selling, general and administrative expenses decreased approximately
$303,000, or 21%, for the six months ended June 30, 1996 when compared to the
same period in 1995. The decrease is primarily attributable to costs related to
uncompleted debt offerings in 1995, and lower payroll and marketing expenses in
the 1996 period.
Income before income taxes was $158,000 in the first half of 1996, compared
with a loss before income taxes of $72,000 in the same period last year. The
improvement in 1996 primarily reflects the 21% decrease in selling, general and
administrative expenses when compared with the same period in 1995.
12
<PAGE>
INCOME TAXES
The effective income tax rate in all periods presented 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). 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 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.
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 higher level
of net cash provided by operating activities in the six months ended June 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 as discussed above.
The higher level of net cash used in financing activities in the six months
ended June 30, 1996 is primarily the result of $1.9 million of proceeds from
discounted lease rentals in the first half of 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
13
<PAGE>
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 $739,000 from December 31, 1995 to June 30, 1996
reflects payments in the normal course of business.
NOTES PAYABLE. Total notes payable decreased $882,000 from $4,259,000 as
of December 31, 1995 to $3,377,000 as of March 31, 1996. The net decrease is
the result of additional borrowings of $1.7 million ($1.4 million of which was a
noncash investment in equipment under operating leases), offset by payments of
$2.6 million. Included in the six months ended June 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 June 30, 1996, the Company has
outstanding $2,330,000 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 9 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 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. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 1, 1996 for the
purposes of (1) electing members of the Board of Directors of the Company, (2)
amending 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 and (3) ratifying the appointment of Coopers & Lybrand L.L.P.
as the independent accountants of the Company for the fiscal year ending
December 31, 1996.
There were 3,119,816 shares of Common Stock entitled to vote at the meeting
and a total 2,883,434 shares (92.4%) were represented at the meeting. The
shareholder voting was as follows:
1. Election of Directors:
Withhold
For Authority
--- ---------
Johan P. Finley 2,849,884 33,550
David R. Mylrea 2,850,957 32,477
Peter D. Cleary 2,853,384 30,050
Charles R. Patterson 2,853,884 29,550
Joel M. Koonce 2,853,884 29,550
James L. Morrell 2,853,884 29,550
2. To amend 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.
For Against Abstain
--- ------- -------
2,755,659 83,400 16,575
3. To ratify the appointment of Coopers & Lybrand L.L.P. as the independent
accountants of the Company for the fiscal year ending December 31, 1996.
For Against Abstain
--- ------- -------
2,847,534 28,200 7,700
15
<PAGE>
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 18
27 Financial data schedule 19
b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the quarter ended June 30, 1996.
16
<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: August 8, 1996 By:/s/ Peter D. Cleary
------------------------------------
Chief Financial Officer
(a duly authorized officer)
17
<PAGE>
Exhibit 11
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PER SHARE DATA
Net income (loss), primary $ 18,011 $ 29,175 $ 98,925 $ (45,385)
---------- --------- --------- ---------
---------- --------- --------- ---------
Net income (loss), fully diluted $ 18,011 $ 29,175 $ 98,925 $ (45,385)
---------- --------- --------- ---------
---------- --------- --------- ---------
Net income (loss) per common and common
equivalent shares, primary $.01 $.01 $.03 $(.01)
---------- --------- --------- ---------
---------- --------- --------- ---------
Net income (loss) per common and common
equivalent shares, fully diluted $.01 $.01 $.03 $(.01)
---------- --------- --------- ---------
---------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES
Primary:
Weighted average number of
common shares outstanding 3,119,816 3,118,035 3,119,816 3,065,936
Common equivalent shares:
Dilutive stock options and warrants,
using the treasury method 7,110 89,380 8,917
---------- --------- --------- ---------
3,126,926 3,207,415 3,128,733 3,065,936
---------- --------- --------- ---------
---------- --------- --------- ---------
Fully diluted:
Weighted average number of
common shares outstanding 3,119,816 3,118,035 3,119,816 3,065,936
Common equivalent shares:
Dilutive stock options and
warrants using the treasury
stock method 7,110 89,380 8,917
---------- --------- --------- ---------
3,126,926 3,207,415 3,128,733 3,065,936
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
18
<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 SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,134,936
<SECURITIES> 0
<RECEIVABLES> 17,155,978
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,936,649<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,227,563
<CURRENT-LIABILITIES> 7,419,480
<BONDS> 7,179,480
0
0
<COMMON> 31,198
<OTHER-SE> 5,597,405
<TOTAL-LIABILITY-AND-EQUITY> 20,227,563
<SALES> 0
<TOTAL-REVENUES> 2,207,439
<CGS> 0
<TOTAL-COSTS> 2,049,514
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F3>
<INCOME-PRETAX> 157,925
<INCOME-TAX> 59,000
<INCOME-CONTINUING> 98,925
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 98,925
<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 $416,000 IS INCLUDED IN TAG 29, "TOTAL COSTS"
</FN>
</TABLE>
