<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, 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
(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 October 31, 1997
----- ----------------------------------
Common Stock, $.01 par value 3,306,904 shares
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<PAGE>
PDS FINANCIAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
Page(s)
-------
<S> <C> <C>
Condensed Consolidated Statement of Income (Unaudited)
For the Three Months and Nine Months Ended September 30,
1997 and 1996 2
Condensed Consolidated Balance Sheet As of September 30, 1997
(Unaudited) and December 31, 1996 3
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months Ended September 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 8-16
PART II - OTHER INFORMATION
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 17-19
</TABLE>
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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Income from sales-type leases $13,048,913 $13,048,913
Rental revenue on operating leases 3,277,882 $ 634,436 9,090,165 $1,296,808
Fee income 819,919 788,836 2,328,457 1,846,921
Finance income 424,834 207,122 1,262,024 565,026
Other income, net (5,076) 5,309 3,152 134,387
----------- ----------- ----------- ----------
Total revenues 17,566,472 1,635,703 25,732,711 3,843,142
----------- ----------- ----------- ----------
COSTS AND EXPENSES
Sales-type leases 12,457,651 12,457,651
Depreciation on operating leases 2,506,687 486,269 6,797,827 982,850
Selling, general and administrative 900,595 690,602 2,206,183 1,827,967
Interest 1,246,520 262,483 3,312,440 678,051
----------- ----------- ----------- ----------
Total costs and expenses 17,111,453 1,439,354 24,774,101 3,488,868
----------- ----------- ----------- ----------
Income before income taxes 455,019 196,349 958,610 354,274
Provision for income taxes 175,000 72,000 366,000 131,000
----------- ----------- ----------- ----------
Net income $ 280,019 $ 124,349 $ 592,610 $ 223,274
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Earnings per share:
Primary $ .08 $ .04 $ .18 $ .07
Fully diluted $ .08 $ .04 $ .18 $ .07
Number of shares used to compute per share
amounts:
Primary 3,299,189 3,125,176 3,211,414 3,127,641
Fully diluted 3,364,128 3,126,457 3,336,952 3,127,974
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS (Unaudited)
Cash and cash equivalents $ 1,013,680 $ 2,760,200
Restricted cash 13,772 197,057
Accounts receivable 16,597,832 4,904,861
Notes receivable, net 6,737,841 6,392,194
Net investment in leasing operations:
Equipment under operating leases, net 32,264,816 20,560,731
Direct finance leases 5,527,914 2,121,162
Inventory - equipment held for lease or sale 5,818,396 69,216
Investment in purchased residuals 1,555,178
Deferred income taxes 761,000 1,032,000
Other assets 2,142,489 969,128
------------ ------------
Total assets $ 70,877,740 $ 40,561,727
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,763,084 $ 1,465,950
Deferred funds for pending transactions 10,023,882 4,975,987
Discounted lease rentals 19,650,875 17,986,776
Notes payable 28,673,412 5,791,956
Convertible subordinated debentures 664,098 1,862,485
Other liabilities 3,255,367 2,741,248
------------ ------------
Total liabilities 64,030,718 34,824,402
------------ ------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000
shares authorized; 3,231,372 and 3,119,816
issued and outstanding in 1997 and 1996 32,314 31,198
Additional paid-in capital 8,425,147 7,952,161
Retained earnings (accumulated deficit) (1,610,439) (2,246,034)
------------ ------------
Total stockholders' equity 6,847,022 5,737,325
------------ ------------
Total liabilities and stockholders' equity $ 70,877,740 $ 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>
Nine months ended September 30,
---------------------------------
1997 1996
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 592,610 $ 223,274
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation on operating leases 6,797,699 982,850
Gain on sale of financial assets (1,977,130) (722,995)
Purchases/originations of notes receivable
and direct finance leases (16,462,743) (8,755,119)
Proceeds from:
Sales of notes receivable and direct finance leases 18,578,609 15,168,883
Collections on notes receivable and direct finance leases 4,641,580 2,221,076
Changes in operating assets and liabilities, net (2,611,083) (2,939,460)
------------ ------------
Net cash provided by operating activities 9,559,542 6,178,509
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment for leasing (10,642,672) (6,022,978)
Proceeds from sale of leased equipment 145,064 983,018
Other, net (181,445) (48,548)
------------ ------------
Net cash used in investing activities (10,679,053) (5,088,508)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 5,430,193 470,000
Proceeds from discounted lease rentals 4,686,088 4,917,321
Payments on notes payable (3,495,486) (3,012,499)
Payments on discounted lease rentals (6,523,519) (1,235,643)
Payments on convertible subordinated debentures (724,285) (672,474)
------------ ------------
Net cash provided by (used in) financing activities (627,009) 466,705
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,746,520) 1,556,706
Cash and cash equivalents at beginning of period 2,760,200 870,109
------------ ------------
Cash and cash equivalents at end of period $ 1,013,680 $ 2,426,815
------------ ------------
------------ ------------
</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 September 30, 1997
and for the three and nine months ended September 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
September 30, 1997 and for the three and nine months ended September 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 are 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 line of credit through April 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 are collateralized by certain leases and related equipment, and
bear interest at 3 percent over comparable term U.S. Treasury Notes.
In August 1997, the Company entered into an agreement with a bank to
provide a $3 million, working capital line of credit. The Company intends to
utilize this facility to finance the receivables and inventory associated with
its used gaming device sales and distribution division, "PDS Slot Source."
Advances under the facility are limited to 65% of receivables and inventory, as
defined, and are collateralized by the same. This facility bears interest at 1
percent over the bank's prime rate. This facility replaced the $5 million
revolving warehousing loan with the same bank, which expired in July 1997.
5
<PAGE>
As of September 30, 1997, the Company's revolving borrowing capability is
$54 million and advances under these agreements aggregated $11.8 million.
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. The Company does not expect a significant difference between 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 will be adopted in 1998.
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 September 30, 1997, and the related
condensed consolidated statements of income for the three and nine month periods
then ended and cash flows for the nine month period 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
November 10, 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 equipment
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. 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,
New Jersey, Colorado, Iowa and Minnesota to provide this financing alternative.
In 1997, the Company established its used gaming device sales and distribution
division, "PDS Slot Source", to compliment its leasing and financing activities.
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 believes its
used gaming device division will help maximize end of lease term asset values
and facilitate additional financing transactions.
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. Beginning
in the third quarter of 1997, certain of the Company's equipment transactions
are structured as sales-type leases. 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.
8
<PAGE>
The Company's revenue generating activities can be categorized as follows:
(i) dealer profit on sales-type leases; (ii) rental income from operating lease
activity; (iii) fee income, resulting principally from the sale of lease or note
receivable transactions; (iv) finance income, resulting from financing
transactions in which the direct finance lease or note receivable is retained by
the Company; and (v) 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.
9
<PAGE>
The following table sets forth the Company's condensed consolidated
statement of income and origination data for the three and nine months ended
September 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 Nine months ended
------------------ -----------------
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
DEALER PROFIT ON SALES-TYPE LEASES
Income from sales-type leases $ 13,048,913 $ 13,048,913
Less: Sales-type lease costs 12,457,651 12,457,651
----------- -----------
Dealer profit 591,262 591,262
----------- -----------
OPERATING LEASE ACTIVITY, NET
Rental revenue 3,277,882 $ 634,436 9,090,165 $ 1,296,808
Less: Depreciation 2,506,687 486,269 6,797,827 982,850
Interest expense 831,338 105,192 2,389,531 198,660
----------- ----------- ----------- -----------
Operating lease activity, net (60,143) 42,975 (97,193) 115,298
----------- ----------- ----------- -----------
FEE INCOME 819,919 788,836 2,328,457 1,846,921
----------- ----------- ----------- -----------
FINANCE INCOME, NET
Finance income 424,834 207,122 1,262,024 565,026
Less: Interest expense 308,577 97,481 757,577 304,164
----------- ----------- ----------- -----------
Finance income, net 116,257 109,641 504,447 260,862
----------- ----------- ----------- -----------
OTHER INCOME, NET (5,076) 5,309 3,152 134,387
----------- ----------- ----------- -----------
TOTAL TRANSACTION CONTRIBUTION 1,462,219 946,761 3,330,125 2,357,468
----------- ----------- ----------- -----------
Selling, general and administrative expenses 900,595 690,602 2,206,183 1,827,967
Interest expense attributable to inventory and
purchased residuals 106,605 59,810 165,332 175,227
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 455,019 196,349 958,610 354,274
Provision for income taxes 175,000 72,000 366,000 131,000
----------- ----------- ----------- -----------
NET INCOME $ 280,019 $ 124,349 $ 592,610 $ 223,274
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
GROSS GAMING ORIGINATIONS $18,675,052 $37,374,667 $72,485,802 $61,510,935
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
10
<PAGE>
The types of revenues generated by the Company's financing activities are
further described below:
DEALER PROFIT ON SALES-TYPE LEASES. Beginning in the third quarter of
1997, the Company structured certain of its gaming equipment transactions as
sales-type leases. Sales-type leases, like direct finance leases, transfer
substantially all the benefits and risks of ownership of the leased asset to the
lessee. Unlike direct finance leases, sales-type leases also include dealer
profit, resulting from the Company leasing equipment which was purchased at a
discount that is not available to the lessee. This dealer profit is recognized
at the inception of the lease in the condensed consolidated statement of income
as the difference between income from sales-type leases and sales-type lease
cost. Income from sales-type leases is the present value of the future minimum
lease payments. Sales-type lease cost is the Company's equipment cost, net of
any discounts. Upon selling a sales-type lease to a third party, the Company
removes the underlying asset from its condensed consolidated balance sheet.
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, inventory and 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.
11
<PAGE>
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 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 SEPTEMBER 30, 1997 AND 1996
Revenues for the third quarter of 1997 totaled $17.6 million, a significant
increase from $1.6 million in the third quarter last year. The significant
increase in revenues is primarily attributable to the Company's first sales-type
leases of new gaming equipment, which totaled $13.0 million in the 1997 quarter,
as well as the Company's expanded lease portfolio. This is consistent with the
Company's strategy to focus on gaming equipment replacements and upgrades, the
development of its distribution business in 1997, and the introduction last year
of its SlotLease-TM- product. Revenues have also benefited from the Company
becoming licensed to own gaming devices in Nevada and other jurisdictions in
1997. Gross originations of financing transactions for the three months ended
September 30, 1997 were $18.7 million compared to $37.4 million for the same
period in 1996. Included in the 1996 originations were certain sizable secured
equipment financing transactions for a then recently opened casino.
Dealer profit on sales-type leases was $591,000 in the third quarter of
1997, resulting from the Company's first sales-type leases of new gaming
equipment, as indicated above. The Company has obtained its gaming equipment
distributor licenses in Nevada, New Jersey, Colorado, Iowa and Minnesota, and
earlier this year established its used gaming device sales and distribution
division, and accordingly intends to continue to originate this type of lease.
The Company did not originate sales-type leases during 1996.
12
<PAGE>
Consistent with the Company's strategy, operating lease activity increased
significantly in the third quarter of 1997 as compared with the third quarter of
1996. The Company's operating lease portfolio grew substantially to $32.3
million at September 30, 1997 as compared to $17.4 million one year earlier.
Rental revenue on operating leases increased to $3.3 for the third quarter of
1997 from $634,000 in the comparable period in 1996. Related depreciation
increased similarly to $2.5 million from $486,000. Interest expense, incurred
in financing the purchase of the equipment under operating lease, increased to
$831,000 from $105,000. The net transaction contribution from operating lease
activities decreased approximately $103,000 for the three months ended September
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 $820,000 related to the sale of
transactions with a basis of $25.6 million in the three months ended September
30, 1997, compared to fee income of $789,000 on the sale of transactions with a
basis of $26.1 million in the three months ended September 30, 1996.
Finance income, net, increased approximately $7,000 for the three months
ended September 30, 1997 when compared to the three months ended September 30,
1996. The increase primarily reflects the larger portfolio of notes receivable
held by the Company during the third quarter of 1997 as compared to the third
quarter of 1996.
Selling, general and administrative expenses increased approximately
$210,000 or 30% for the three months ended September 30, 1997 when compared to
the same period in 1996. The increase is primarily attributable to the
expansion of the sales activities and the formation of the used gaming device
division in Las Vegas, Nevada in 1997. When compared with total revenues,
selling, general and administrative expenses decreased from approximately 42% of
total revenues for the three months ended September 30, 1996 to 5% of total
revenues in the comparable period in 1997.
Interest expense attributable to inventory and purchased residuals
increased $47,000 because of the Company's higher investment in inventory in the
three months ended September 30, 1997. The inventory consists of used gaming
devices and is utilized in the Company's recently formed used gaming device
sales and distribution division, "PDS Slot Source."
Income before income taxes increased $259,000 to $455,000 in the third
quarter of 1997, compared with $196,000 in the same period last year. The
improvement in 1997 reflects the $515,000 increase in total transaction
contribution, partially offset by higher related costs and expenses, as
described above.
The effective income tax rate was 38.5% in the three months ended September
30, 1997 as compared to 36.7% 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.
13
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues for the nine months ended September 30, 1997 totaled $25.7
million, a significant increase from $3.8 million in the first nine months of
last year. The significant increase in revenues is primarily attributable to
the Company's first sales-type leases of new gaming equipment, which totaled
$13.0 million in the 1997 period, as well as the Company's expanded lease
portfolio, both as described above. Gross originations of financing
transactions for the nine months ended September 30, 1997 increased 18% to $72.5
million compared to $61.5 million for the same period in 1996. The significant
increase in revenues is largely attributable to the same factors as in the three
months ended September 30, 1997, as described above.
Rental revenue on operating leases increased to $9.1 million from $1.3
million. Related depreciation increased similarly to $6.8 million from $1.0
million. Interest expense, incurred in financing the purchase of the equipment
under operating lease, increased to $2.4 million from $199,000. The net
transaction contribution from operating lease activities decreased approximately
$212,000 for the nine months ended September 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 September 30, 1997, as described
above.
The Company generated fee income of $2.3 million related to the sale of
transactions with a basis of $61.1 million in the nine months ended September
30, 1997, compared to fee income of $1.8 million on the sale of transactions
with a basis of $46.5 million in the nine months ended September 30, 1996. The
higher level of fee income is primarily attributable to greater origination
volume resulting from the expansion of sales activities in Las Vegas, Nevada and
certain other factors described above.
Finance income, net, increased approximately $244,000 for the nine months
ended September 30, 1997 when compared to the nine months ended September 30,
1996. The increase primarily reflects the larger portfolio of notes receivable
and direct finance leases held by the Company during the first nine months of
1997 as compared to the same period of 1996.
Other income, net in the nine months ended September 30, 1996 primarily
reflects the gain on the sale of certain assets.
Selling, general and administrative expenses increased approximately
$378,000 or 21% for the nine months ended September 30, 1997 when compared to
the same period in 1996. The increase is primarily attributable to the
expansion of the sales activities and the formation of the used gaming device
division in Las Vegas, Nevada. When compared with total revenues, selling,
general and administrative expenses decreased from approximately 48% of total
revenues for the nine months ended September 30, 1996 to 9% of total revenues in
the comparable period in 1997.
14
<PAGE>
Interest expense attributable to inventory and purchased residuals
decreased $10,000, because during most of 1997 the Company had no investment in
purchased residuals, partially offset by the Company's higher investment in
inventory in the nine months ended September 30, 1997.
Income before income taxes increased $604,000 to $958,000 in the first nine
months of 1997, compared with $354,000 in the same period last year. The
improvement in 1997 reflects the $973,000 increase in total transaction
contribution, partially offset by higher related costs and expenses, as
described above.
The effective income tax rate was 38.2% in the nine months ended September
30, 1997 as compared to 37.0% 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 $1.0 million at September 30, 1997,
a decrease of $1.7 million from December 31, 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 nine months of 1997, cash flow provided by operating
activities totaled $9.6 million, an increase of $3.4 million from the first nine
months of 1996. The higher level of cash provided in the 1997 period primarily
results from the Company's expanded leasing activities. The cash used in
investing activities in the 1997 period primarily reflects $10.6 million of
investment in equipment for leasing. The greater magnitude of operating and
financing activities in the nine months ended September 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 September 30, 1997 total borrowings were $49.0 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 2.0: 1 at September 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 $19.7 million as of September 30, 1997.
The net increase of $1.7 million is primarily the result of noncash borrowings
of $3.5 million and cash proceeds from discounting of $4.7 million, partially
offset by principal payments of $6.5 million.
15
<PAGE>
NOTES PAYABLE. Total notes payable increased from $5.8 million as of
December 31, 1996 to $28.7 million as of September 30, 1997, in part as a result
of advances under the new revolving borrowing agreements, described in the
accompanying Notes to Condensed Consolidated Financial Statements. The net
increase of $22.9 million is primarily the result of additional net noncash
borrowings of $21.0 million, cash proceeds of $5.4 million, partially offset by
payments of $3.5 million.
CONVERTIBLE SUBORDINATED DEBENTURES. As of September 30, 1997, the Company
has outstanding $664,000 of unsecured Convertible Subordinated Debentures
("Debentures"), which are subordinated to other borrowings of the Company.
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. During the quarter ended September 30,
1997, $474,000 of Debentures were converted to approximately 112,000 shares of
common stock. An additional $321,000 of Debentures were converted to
approximately 76,000 shares of common stock during October 1997. The Company
may prepay any unconverted Debentures. As of October 31, 1997, there have been
no such prepayments and $343,000 of the Debentures remain outstanding. Such
Debentures, if not converted, require payments of principal and interest in four
remaining equal quarterly installments of approximately $91,000 through
September 30, 1998.
CAPITAL RESOURCES
In April 1997, the Company entered into an agreement with a bank to provide
a $20 million, three-year revolving credit facility. In June 1997, the Company
entered into an agreement with a financial institution to provide a $10 million
revolving term facility. In August 1997, the Company replaced its $5 million
revolving warehousing loan facility with a $3 million working capital line of
credit at the same bank. The addition of these credit facilities increases the
Company's revolving borrowing capability to $54 million. Advances under these
agreements aggregated $11.8 million at September 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, 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.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Certain holders of the Company's Convertible Subordinated Debentures
("Debentures") have converted $474,000 of Debentures to approximately 112,000
shares of the Company's common stock during the quarter ended September 30,
1997. An additional $321,000 of Debentures were converted to approximately
76,000 shares of common stock during October 1997.
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 September 30, 1997 or during the period from September
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: November 10, 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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income, primary $ 280,019 $ 124,349 $ 592,610 $ 223,274
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income, fully diluted $ 280,019 $ 124,349 $ 592,610 $ 223,274
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PER SHARE DATA
Net income per common and
common equivalent shares, primary $ .08 $ .04 $ .18 $ .07
------- ------- ------- -------
------- ------- ------- -------
Net income per common and
common equivalent shares, fully diluted $ .08 $ .04 $ .18 $ .07
------- ------- ------- -------
------- ------- ------- -------
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
Primary:
Weighted average number of common
shares outstanding 3,134,441 3,119,816 3,124,691 3,119,816
Common equivalent shares:
Dilutive stock options and warrants
using the treasury stock method 164,748 5,360 86,723 7,825
---------- ---------- ---------- ----------
3,299,189 3,125,176 3,211,414 3,127,641
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully Diluted:
Weighted average number of common
shares outstanding 3,134,441 3,119,816 3,124,691 3,119,816
Common equivalent shares:
Dilutive stock options and warrants
using the treasury stock method 229,687 6,641 212,261 8,158
---------- ---------- ---------- ----------
3,364,128 3,126,457 3,336,952 3,127,974
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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 November 10, 1997, on our review of interim
financial information of PDS Financial Corporation for the period ended
September 30, 1997, and included in the Company's quarterly report on Form
10-QSB for the quarter ended September 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
November 10, 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 NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,027,452
<SECURITIES> 0
<RECEIVABLES> 61,128,403
<ALLOWANCES> 0
<INVENTORY> 5,818,396
<CURRENT-ASSETS> 0<F1>
<PP&E> 2,903,489<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 70,877,740
<CURRENT-LIABILITIES> 15,042,333
<BONDS> 48,988,385<F3>
0
0
<COMMON> 32,314
<OTHER-SE> 6,814,708
<TOTAL-LIABILITY-AND-EQUITY> 70,877,740
<SALES> 0
<TOTAL-REVENUES> 25,732,711<F5>
<CGS> 0
<TOTAL-COSTS> 24,774,101<F6>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F4>
<INCOME-PRETAX> 958,610
<INCOME-TAX> 366,000
<INCOME-CONTINUING> 592,610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 592,610
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
<FN>
<F1>THE COMPANY DOES NOT PREPARE A CLASSIFIED BALANCE SHEET
<F2>INCLUDES DEFERRED TAX ASSET OF $761,000
<F3>INCLUDES NONRECOURSE OBLIGATIONS OF $35,238,606
<F4>AMOUNT, $3,312,440 IS INCLUDED IN TAG 29 "TOTAL COSTS"
<F5>INCLUDES $13,048,913 OF SALES-TYPE LEASES
<F6>INCLUDES $12,457,651 OF COST OF SALES-TYPE LEASES
</FN>
</TABLE>
