<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 June 30, 1997
/ / 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
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(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, 1997
----- --------------------------------
Common Stock, $.01 par value 3,119,816 shares
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<PAGE>
PDS FINANCIAL CORPORATION
INDEX
PART I - Financial Information
Item 1. Financial Statements Page(s)
-------
Condensed Consolidated Statement of Income (Unaudited)
For the Three Months and Six Months Ended June 30,
1997 and 1996 2
Condensed Consolidated Balance Sheet As of June 30, 1997
(Unaudited) and December 31, 1996 3
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended June 30, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5-6
Report of Independent Accountants 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-15
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17-19
1
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Rental revenue on operating leases $ 3,335,241 $ 291,005 $ 5,812,283 $ 662,372
Fee income 838,162 719,367 1,508,538 1,058,085
Finance income 427,404 115,086 837,190 357,904
Other income, net 4,834 (154,357) 8,228 129,078
----------- --------- ---------- ---------
Total revenues 4,605,641 971,101 8,166,239 2,207,439
----------- --------- ---------- ---------
Costs and Expenses
Depreciation on operating leases 2,471,559 221,435 4,291,140 496,581
Selling, general and administrative 682,838 563,106 1,305,588 1,137,365
Interest 1,196,894 157,049 2,065,920 415,568
----------- --------- ---------- ---------
Total costs and expenses 4,351,291 941,590 7,662,648 2,049,514
----------- --------- ---------- ---------
Income before income taxes 254,350 29,511 503,591 157,925
Provision for income taxes 96,000 11,500 191,000 59,000
----------- --------- ---------- ---------
Net income $ 158,350 $ 18,011 $ 312,591 $ 98,925
----------- --------- ---------- ---------
----------- --------- ---------- ---------
Earnings per share:
Primary $ .05 $ .01 $ .10 $ .03
Fully diluted $ .05 $ .01 $ .10 $ .03
Number of shares used to compute
per share amounts:
Primary 3,193,895 3,126,926 3,152,205 3,128,733
Fully diluted 3,226,670 3,126,926 3,219,948 3,128,733
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ -------------
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,620,753 $ 2,760,200
Restricted cash 13,772 197,057
Accounts receivable 862,549 4,904,861
Notes receivable, net 12,891,132 6,392,194
Net investment in leasing operations:
Equipment under operating leases, net 33,408,928 20,560,731
Direct finance leases 2,339,903 2,121,162
Equipment held for lease or sale 3,863,650 69,216
Investment in purchased residuals 1,555,178
Deferred income taxes 908,000 1,032,000
Other assets 2,191,146 969,128
----------- -----------
Total assets $ 59,099,833 $ 40,561,727
----------- -----------
----------- -----------
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 1,473,955 $ 1,465,950
Deferred funds for pending transactions 4,664,617 4,975,987
Discounted lease rentals 22,686,866 17,986,776
Notes payable 19,701,174 5,791,956
Convertible subordinated debentures 1,367,495 1,862,485
Other liabilities 3,112,733 2,741,248
----------- -----------
Total liabilities 53,006,840 34,824,402
----------- -----------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000
shares authorized, 3,119,816 issued and
outstanding 31,198 31,198
Additional paid-in capital 7,952,161 7,952,161
Retained earnings (accumulated deficit) (1,890,366) (2,246,034)
----------- -----------
Total stockholders' equity 6,092,993 5,737,325
----------- -----------
Total liabilities and stockholders'
equity $59,099,833 $40,561,727
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 312,591 $ 98,925
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation on operating leases 4,291,140 496,581
Gain on sale of financial assets (1,428,743) (472,273)
Purchases/originations of notes receivable
and direct finance leases (16,138,640) (5,737,057)
Proceeds from:
Sales of notes receivable and direct
finance leases 18,626,948 8,032,848
Collections on notes receivable and
direct finance leases 2,232,900 1,379,107
Changes in operating assets and liabilities,
net (303,851) (358,156)
--------- ---------
Net cash provided by operating activities 7,592,345 3,439,975
--------- ---------
Cash Flows from Investing Activities
Purchases of equipment for leasing (6,936,982) (471,857)
Proceeds from sale of leased equipment 128,263 643,965
Other, net (70,555) (44,285)
--------- ---------
Net cash provided by (used in)
investing activities (6,879,274) 127,823
--------- ---------
Cash Flows from Financing Activities
Proceeds from notes payable 1,309,385 282,500
Proceeds from discounted lease rentals 4,242,140
Payments on notes payable (1,247,926) (2,552,938)
Payments on discounted lease rentals (4,661,127) (739,236)
Payments on convertible subordinated
debentures (494,990) (441,934)
--------- ---------
Net cash used in financing activities (852,518) (3,451,608)
--------- ---------
Net increase (decrease) in cash and cash
equivalents (139,447) 116,190
Cash and cash equivalents at beginning
of period 2,760,200 870,109
--------- ---------
Cash and cash equivalents at end of period $ 2,620,753 $ 986,299
--------- ---------
--------- ---------
</TABLE>
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 June 30, 1997 and for
the three and six months ended June 30, 1997 and 1996 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. The condensed consolidated balance
sheet at December 31, 1996 has been derived from the audited financial
statements as of that date and condensed. These condensed consolidated
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, 1996.
The condensed consolidated financial statements presented herein as of June
30, 1997 and for the three and six months ended June 30, 1997 and 1996 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.
2. Borrowings
----------
In April 1997, the Company entered into an agreement with a bank to provide
a $20 million, three-year revolving credit facility. Advances under the
facility will be collateralized by certain leases and related equipment, and
bear interest at 1 percent over the bank's reference rate.
Also in April 1997, the Company renewed its agreement with a bank to
provide a $1 million working capital line of credit through April 30, 1998.
Terms of the renewed agreement are consistent with the prior agreement.
In June 1997, the Company entered into an agreement with a financial
institution to provide a $10 million revolving term facility. Advances under
the facility will be collateralized by certain leases and related equipment,
and bear interest at 3 percent over comparable term U.S. Treasury Notes. The
addition of these credit facilities increases the Company's revolving
borrowing capability to $56 million.
5
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3. Recently Issued Accounting Standards
------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share". This statement modifies the methodology for
calculating earnings per share and will be adopted in the fourth quarter of
1997. There is no significant difference expected between the Company's
earnings per share as presented herein and as will be calculated under Statement
No. 128.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income". This statement establishes
standards for reporting and displaying comprehensive income and will be
adopted in the first quarter of 1998. The Company does not expect the
adoption of this new standard to have a material affect on its financial
position or results of operation.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information". This statement modifies standards for reporting information
about operating segments and is effective for 1998. The Company's current
business activities are conducted in one operating segment.
6
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of PDS Financial Corporation:
We have reviewed the accompanying condensed consolidated balance sheet
of PDS Financial Corporation and subsidiaries as of June 30, 1997, and the
related condensed consolidated statements of income and cash flows for the
three and six month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying 1997 condensed consolidated financial
statements for them to be in conformity with generally accepted accounting
principles.
We have audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PDS Financial Corporation and
subsidiaries as of December 31, 1996, and the related consolidated statements
of operations, stockholders' equity and cash flows for the year then ended
(not presented herein); and in our report dated March 14, 1997, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
financial statements is fairly stated, in all material respects, in relation
to the consolidated financial statement from which it has been derived.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
August 8, 1997
7
<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
has also financed gaming riverboats and related casino amenities. In 1996, the
Company introduced SlotLease-TM-, a specialized leasing program for slot
machines and other electronic gaming devices. The Company believes it is
currently the only independent leasing company licensed in the states of Nevada,
Colorado, Iowa and Minnesota to provide this financing alternative.
The Company's strategy is to increase its portfolio of assets under lease
and thereby increase revenues and cash flow. In addition to its leasing
activities, the Company also originates note transactions, which it generally
sells to institutional investors. In some of its transactions, the Company
holds the leases or notes for a period of time after origination, or retains a
partial ownership interest in the leases or notes.
The Company's quarterly operating results, including net income or 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. The Company believes that the development of
its lease portfolio will lead to increased recurring rental revenues, which will
tend to lessen the fluctuations of the historical operating results.
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 borrower/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 1997
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's revenue generating activities can be categorized as follows:
(i) rental income from operating lease activity; (ii) fee income, resulting
principally from the sale of lease or note
8
<PAGE>
receivable transactions; (iii) finance income, resulting from financing
transactions in which the direct finance lease or note receivable is retained
by the Company; and (iv) other.
The majority of the Company's gross originations have historically been
structured as either notes receivable or direct finance leases, which are then
generally sold to institutional investors. Upon sale, the Company's records fee
income, reflecting the net transaction contribution (gross sale price less
carrying value of the related asset), with no offsetting direct expense in its
condensed consolidated statement of income. Generally accepted accounting
principles require the Company to reflect gross revenues, rather than the net
transaction contribution, for the other categories of financing activities.
Therefore, a comparison of the "transaction contribution" of each of the
categories of activities as shown in the following table provides additional
analysis of the Company's condensed consolidated statement of income.
The following table sets forth the Company's condensed consolidated
statement of income and origination data for the three and six months ended June
30, 1997 and 1996, 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 costs and expenses:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------ ---------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Lease Activity, Net
Rental revenue $ 3,335,241 $ 291,005 $ 5,812,283 $ 662,372
Less: Depreciation 2,471,559 221,435 4,291,140 496,581
Interest expense 871,111 22,441 1,566,585 52,318
------------ ---------- ------------ ----------
Operating lease activity, net (7,429) 47,129 (45,442) 113,473
------------ ---------- ------------ ----------
Fee Income 838,162 719,367 1,508,538 1,058,085
------------ ---------- ------------ ----------
Finance Income, Net
Finance income 427,404 115,086 837,190 357,904
Less: Interest expense 325,783 77,714 468,778 249,756
------------ ---------- ------------ ----------
Finance income, net 101,621 37,372 368,412 108,148
------------ ---------- ------------ ----------
Other Income, Net 4,834 (154,357) 8,228 129,078
------------ ---------- ------------ ----------
Total Transaction Contribution 937,188 649,511 1,839,736 1,408,784
------------ ---------- ------------ ----------
Selling, general and administrative
expenses 682,838 563,106 1,305,588 1,137,365
Interest expense attributable to
purchased residuals 56,894 30,557 113,494
------------ ---------- ------------ ----------
Income Before Income Taxes 254,350 29,511 503,591 157,925
Provision for income taxes 96,000 11,500 191,000 59,000
------------ ---------- ------------ ----------
Net Income $ 158,350 $ 18,011 $ 312,591 $ 98,925
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
Gross Gaming Originations $18,097,653 $19,025,411 $53,810,750 $24,136,268
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
</TABLE>
9
<PAGE>
The types of revenues generated by the Company's financing activities are
further described below:
Operating lease activity, net. Operating leases are those leases in which
substantially all the benefits and risks of ownership of the leased asset are
retained by the Company. Revenue from operating leases consists of monthly
rentals and is reflected in the condensed consolidated statement of income
evenly over the life of the lease as rental revenue on operating leases. The
cost of the related equipment 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 income as depreciation on
operating leases. The Company also incurs interest expense as a result of
financing the purchase of the equipment under 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. 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 operating leases, notes
receivable, direct finance leases and investment in purchased residuals on a
pro-rata basis.
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.
Fee income. The Company funds much of 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 future payment stream from the
related notes or direct finance leases). 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 many factors, including the
credit quality of the borrowers or lessees, the type of underlying equipment,
credit enhancements, if any, and ultimately, the terms under which the
transaction was both originated and sold. Fee income also includes commissions
earned for arranging financing in which the Company is not a party to the
transaction.
Upon the sale of a note or direct finance lease 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 note
receivable or direct finance lease, finance income is recognized over the term
of the underlying note or lease 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 notes receivable
and direct finance leases has been subtracted from finance income. The
allocation of interest expense is as described above.
For those direct finance leases held by the Company, the present value of
both the future minimum lease payments and estimated residual asset values, if
any, are recorded in the condensed
10
<PAGE>
consolidated balance sheet as net investment in leasing operations -- direct
finance 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 notes payable or convertible
subordinated debentures.
Other income, net. Other income, net primarily reflects the gain or loss
on the sale of leased assets. In situations where a lessee elects to return the
asset to the Company rather than exercise the purchase option, the Company
generally sells the asset 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, 1997 and 1996
Revenues for the second quarter of 1997 totaled $4.6 million, a significant
increase from $1.0 million in the second quarter last year. Gross originations
of financing transactions for the three months ended June 30, 1997 were $18.1
million compared to $19.0 million for the same period in 1996. The significant
increase in revenues is primarily attributable to the Company's expanded lease
portfolio. This is consistent with the Company's strategy to focus on gaming
equipment replacements and upgrades, the introduction in early 1996 of its
SlotLease-TM- product, the opening of a sales office in Las Vegas, Nevada, the
development of additional, diversified funding sources and the Company's
improved liquidity. Revenues and originations have also benefited from the
Company becoming licensed to own gaming devices in Nevada in early 1997.
Consistent with the Company's strategy, operating lease activity increased
significantly in the second quarter of 1997 as compared with the second quarter
of 1996. The Company's operating lease portfolio grew substantially to $33.4
million at June 30, 1997 as compared to $5.5 million one year earlier. Rental
revenue on operating leases increased to $3,335,000 for the second quarter of
1997 from $291,000 in the comparable period in 1996. Related depreciation
increased similarly to $2,472,000 from $221,000. Interest expense, incurred in
financing the purchase of the equipment under operating lease, increased to
$871,000 from $22,000. The net transaction contribution from operating lease
activities decreased approximately $55,000 for the three months ended June 30,
1997 compared with the same period in 1996. The decrease in transaction
contribution is attributable to a disproportionately higher interest expense in
1997, resulting from borrowing most of the funds required to purchase the new
equipment under operating leases. Conversely, the much smaller 1996 lease
portfolio was more mature and less leveraged and thus bore a relatively smaller
interest charge. The Company's 1997 operating lease portfolio, on a weighted
average basis, is in an earlier stage of the lease term, when depreciation and
interest may exceed rental revenue. These leases are expected to generate
revenues throughout their lease term, which is generally 36 months, and make a
positive transaction contribution in the latter stage of the lease term.
The Company generated fee income of $838,000 related to the sale of
transactions with a basis of $13.4 million in the three months ended June 30,
1997, compared to fee income of $719,000 on the sale of transactions with a
basis of $16.7 million in the three months ended June 30, 1996. The higher
level of fee income is attributable to certain of the factors described
above, including more favorable pricing.
11
<PAGE>
Finance income, net, increased approximately $64,000 for the three months
ended June 30, 1997 when compared to the three months ended June 30, 1996. The
increase primarily reflects the larger portfolio of notes receivable held by the
Company during the second quarter of 1997 as compared to the second quarter of
1996.
Other income, net in the three months ended June, 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 enabled
the Company to pursue other opportunities.
Selling, general and administrative expenses increased approximately
$120,000 or 21% for the three months ended June 30, 1997 when compared to the
same period in 1996. The increase is primarily attributable to the opening of
the sales office in Las Vegas, Nevada in June 1996. When compared with total
revenues, selling, general and administrative expenses decreased from
approximately 58% of total revenues for the three months ended June 30, 1996 to
15% of total revenues in the comparable period in 1997.
Interest expense attributable to purchased residuals decreased $57,000
because during the second quarter of 1997 the Company had no investment therein.
Income before income taxes increased $224,000 to $254,000 in the second
quarter of 1997, compared with $30,000 in the same period last year. The
improvement in 1997 reflects the $288,000 increase in total transaction
contribution, partially offset by higher related costs and expenses, as
described above.
The effective income tax rate was 38% in the three months ended June 30,
1997 as compared to 39% in the same period of 1996. Both effective rates are
higher than the federal statutory tax rate of 34%, due primarily to state income
taxes.
Six Months Ended June 30, 1997 and 1996
Revenues for the six months ended June 30, 1997 totaled $8.2 million, a
significant increase from $2.2 million in the first half of last year. Gross
originations of financing transactions for the six months ended June 30, 1997
were $53.8 million compared to $24.1 million for the same period in 1996. The
significant increase in revenues and originations is primarily attributable to
the Company's expanded lease portfolio and the other factors described above.
Rental revenue on operating leases increased to $5,812,000 from $662,000.
Related depreciation increased similarly to $4,291,000 from $497,000. Interest
expense, incurred in financing the purchase of the equipment under operating
lease, increased to $1,567,000 from $52,000. The net transaction contribution
from operating lease activities decreased approximately $159,000 for the six
months ended June 30, 1997 compared with the same period in 1996. The decrease
in transaction contribution is attributable to the same factors as in the three
months ended June 30, 1997, as described above.
12
<PAGE>
The Company generated fee income of $1,509,000 related to the sale of
transactions with a basis of $35.5 million in the six months ended June 30,
1997, compared to fee income of $1,058,000 on the sale of transactions with a
basis of $20.4 million in the six months ended June 30, 1996. The higher level
of fee income is primarily attributable greater volume resulting from certain of
the factors described above.
Finance income, net, increased approximately $260,000 for the six months
ended June 30, 1997 when compared to the six months ended June 30, 1996. The
increase primarily reflects the larger portfolio of notes receivable and direct
finance leases held by the Company during the first half of 1997 as compared to
the first half of 1996.
Other income, net in the six months ended June 30, 1996 primarily reflects
the gain on the sale of certain assets.
Selling, general and administrative expenses increased approximately
$168,000 or 15% for the six months ended June 30, 1997 when compared to the same
period in 1996. The increase is primarily attributable to the opening of the
sales office in Las Vegas, Nevada in June 1996. When compared with total
revenues, selling, general and administrative expenses decreased from
approximately 52% of total revenues for the six months ended June 30, 1996 to
16% of total revenues in the comparable period in 1997.
Interest expense attributable to purchased residuals decreased $83,000
primarily because during the second quarter of 1997 the Company had no
investment therein.
Income before income taxes increased $346,000 to $504,000 in the first
half of 1997, compared with $158,000 in the same period last year. The
improvement in 1997 reflects the $431,000 increase in total transaction
contribution, partially offset by higher related costs and expenses, as
described above.
The effective income tax rate was 38% in the six months ended June 30, 1997
as compared to 37% in the same period of 1996. Both effective rates are higher
than the federal statutory tax rate of 34%, due primarily to state income taxes.
Liquidity and Capital Resources
The funds necessary to support the Company's activities have been provided
by cash flow generated primarily from the operating and financing activities
described above, and various forms of recourse and nonrecourse borrowings. The
Company's cash and cash equivalents totaled $2.6 million at June 30, 1997, a
decrease of $139,000 from December 31, 1996, and an increase of $1.6 million
from June 30, 1996.
The Company's strategy to increase its leasing activities involves a higher
level of investment in equipment under operating lease, financed through
discounted lease rentals and notes payable. The Company's lease portfolio is
expected to generate recurring cash flow from operations throughout the lease
term. During the first half of 1997, cash flow provided by operating activities
totaled $7.6 million, an increase of $4.2 million from the first half of 1996.
The higher level of cash provided in the 1997 period primarily results from the
Company's expanded leasing activities. The
13
<PAGE>
cash used in investing activities in the 1997 period primarily reflects $6.9
million of investment in equipment for leasing. The greater magnitude of
operating and financing activities in the six months ended June 30, 1997
reflect the higher level of originations and larger lease portfolio, both as
discussed above, when compared with the same period in 1996.
At June 30, 1997 total borrowings were $43.8 million, up from $25.6 million
at December 31, 1996. The increase in total borrowings was primarily invested
in equipment in the Company's leasing operations. The Company's recourse debt
to equity ratio was 1.5: 1 at June 30, 1997 compared with 1.3: 1 at December 31,
1996. The following summarizes the significant borrowing activities of the
Company.
Discounted Lease Rentals. Subsequent to origination of certain leases,
the Company discounts the remaining lease payments 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 nonrecourse to the Company. As lessees make payments,
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
utilizing the interest method. Total discounted lease rentals increased from
$18.0 million as of December 31, 1996 to $22.7 million as of June 30, 1997. The
net increase of $4.7 million is primarily the result of noncash borrowings of
$5.2 million and cash proceeds from discounting of $4.2 million, partially
offset by principal payments of $4.7million.
Notes Payable. Total notes payable increased from $5.8 million as of
December 31, 1996 to $19.7 million as of June 30, 1997. The net increase of
$13.9 million is primarily the result of additional noncash borrowings of $13.8
million, cash proceeds of $1.3 million, partially offset by payments of $1.2
million.
Convertible Subordinated Debentures. As of June 30, 1997, the Company has
outstanding $1.4 million 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 five remaining equal
quarterly installments of $298,000 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.
As of June 30, 1997, there have been no such conversions or prepayments.
Capital Resources
In April 1997, the Company entered into an agreement with a bank to provide
a $20.0 million, three year revolving credit facility. In June 1997, the
Company entered into an agreement with a financial institution to provide a
$10.0 million revolving term facility. The addition of these credit facilities
increase the Company's revolving borrowing capability to $56.0 million.
Advances under these agreements aggregated $5.8 million at June 30, 1997. The
Company's current financial resources, including estimated cash flow from
operations and the revolving credit facilities are expected to be sufficient to
fund the Company's anticipated working capital needs. In addition to the
borrowing activities summarized above, the Company has developed a network of
financial institutions to which it sells transactions on a regular basis. The
Company is, from time to time,
14
<PAGE>
dependent upon the need to liquidate or externally finance transactions
originated and held in its investment portfolio. The Company continues to
explore other possible sources of capital, however, there is no assurance
that additional debt financing, if required, can be obtained or will be
available on terms acceptable to the Company.
Forward-Looking Statements
The statements contained herein which are not historical facts are
forward-looking statements with respect to events, the occurrence of which
involve risks and uncertainties, including without limitation, demand and
competition for the Company's products and services, the continued
availability to the Company of adequate financing, changes in laws and
regulations affecting the gaming industry, the ability of the Company to
recover its investment in equipment, the ability of the Company to manage its
growth and other risk factors detailed from time to time in the Company's
reports filed with the Securities and Exchange Commission.
15
<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 14, 1997 for the
purposes of (1) electing members of the Board of Directors of the Company and
(2) ratifying the appointment of Coopers & Lybrand L.L.P. as the independent
accountants of the Company for the fiscal year ending December 31, 1997.
There were 3,119,816 shares of Common Stock entitled to vote at the meeting
and a total of 3,029,630 shares (97.1%) were represented at the meeting. The
shareholder voting was as follows:
1. Election of Directors:
Withhold
For Authority
--- ---------
Johan P. Finley 3,008,980 20,650
David R. Mylrea 3,008,980 20,650
Peter D. Cleary 3,010,480 19,150
Charles R. Patterson 3,010,480 19,150
Joel M. Koonce 3,010,480 19,150
James L. Morrell 3,010,480 19,150
2. To ratify the appointment of Coopers & Lybrand L.L.P. as the independent
accountants of the Company for the fiscal year ending December 31, 1997:
For Against Abstain
--- ------- -------
3,005,280 4,700 19,650
16
<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 Computation of Per Share Earnings 18
15 Letter Regarding Unaudited Interim
Financial Information 19
27 Financial Data Schedule (EDGAR filing only)
b) Reports on Form 8-K - There were no reports on Form 8-K filed during the
quarter ended June 30, 1997 or during the period from June 30, 1997 to
the date of this quarterly report on Form 10-QSB.
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, 1997 By: /s/ Peter D. Cleary
-------------------
Chief Financial Officer
(a duly authorized officer)
17
<PAGE>
EXHIBIT 11
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income, primary $ 158,350 $ 18,011 $ 312,591 $ 98,925
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net income, fully diluted $ 158,350 $ 18,011 $ 312,591 $ 98,925
---------- --------- ---------- ---------
---------- --------- ---------- ---------
PER SHARE DATA
Net income per common and
common equivalent shares, primary $ .05 $ .01 $ .10 $ .03
------ ------ ------ ------
------ ------ ------ ------
Net income per common and
common equivalent shares, fully
diluted $ .05 $ .01 $ .10 $ .03
------ ------ ------ ------
------ ------ ------ ------
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 3,119,816
Common equivalent shares:
Dilutive stock options and warrants
using the treasury stock method 74,079 7,110 32,389 8,917
---------- ---------- ---------- ----------
3,193,895 3,126,926 3,152,205 3,128,733
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully Diluted:
Weighted average number of common
shares outstanding 3,119,816 3,119,816 3,119,816 3,119,816
Common equivalent shares:
Dilutive stock options and warrants
using the treasury stock method 106,854 7,110 100,132 8,917
---------- ---------- ---------- ----------
3,226,670 3,126,926 3,219,948 3,128,733
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The fully diluted calculation is submitted in accordance with Regulation S-K
item 601 (b) (11), despite not being required by APB Opinion No. 15 because it
results in dilution of less than 3%.
18
<PAGE>
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 10549
RE: PDS Financial Corporation
Registration Statement on Form S-8 (Registration No. 33-85966)
We are aware that our report dated August 8, 1997, on our review of interim
financial information of PDS Financial Corporation for the period ended June 30,
1997, and included in the Company's quarterly report on Form 10-QSB for the
quarter ended June 30, 1997, is incorporated by reference in this registration
statement. Pursuant to Rule 436 (c) under the Securities Act of 1933, this
report should not be considered a part of the registration statement prepared or
certified by us within the meaning of Sections 7 and 11 of that Act.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
August 8, 1997
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,634,525
<SECURITIES> 0
<RECEIVABLES> 49,502,512
<ALLOWANCES> 0
<INVENTORY> 3,863,650
<CURRENT-ASSETS> 0<F1>
<PP&E> 3,099,146<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 59,099,833
<CURRENT-LIABILITIES> 9,251,305
<BONDS> 43,755,535<F3>
0
0
<COMMON> 31,198
<OTHER-SE> 6,061,795
<TOTAL-LIABILITY-AND-EQUITY> 59,099,833
<SALES> 0
<TOTAL-REVENUES> 8,166,239
<CGS> 0
<TOTAL-COSTS> 7,662,648
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F4>
<INCOME-PRETAX> 503,591
<INCOME-TAX> 191,000
<INCOME-CONTINUING> 312,591
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 312,591
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
<FN>
<F1>THE COMPANY DOES NOT PREPARE A CLASSIFIED BALANCE SHEET.
<F2>INCLUDES DEFERRED TAX ASSET OF $908,000.
<F3>INCLUDES NONRECOURSE OBLIGATIONS OF $34,604,090.
<F4>AMOUNT, $2,065,920 IS INCLUDED IN TAG 29 "TOTAL COSTS".
</FN>
</TABLE>
