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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 April 30, 1997
----- --------------------------------
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(s)
-------
Condensed Consolidated Statement of Income (Unaudited)
For the Three Months Ended March 31,
1997 and 1996 2
Condensed Consolidated Balance Sheet (Unaudited)
As of March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Three Months Ended March 31, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements
(Unaudited) 5
Report of Independent Accountants 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14-16
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 March 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
REVENUES
Rental revenue on operating leases $ 2,477,042 $ 371,367
Fee income 670,376 224,683
Finance income 409,786 242,818
Other income, net 3,394 397,470
----------- -----------
Total revenues 3,560,598 1,236,338
----------- -----------
COSTS AND EXPENSES
Depreciation on operating leases 1,819,581 275,146
Selling, general and administrative 622,750 574,259
Interest 869,026 258,519
----------- -----------
Total costs and expenses 3,311,357 1,107,924
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Income before income taxes 249,241 128,414
Provision for income taxes 95,000 47,500
----------- -----------
Net income $ 154,241 $ 80,914
----------- -----------
----------- -----------
Earnings per share:
Primary $ .05 $ .03
Fully diluted $ .05 $ .03
Number of shares used to compute per share amounts:
Primary 3,132,948 3,130,463
Fully diluted 3,140,794 3,135,463
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS (Unaudited)
Cash and cash equivalents $ 1,808,863 $ 2,760,200
Restricted cash 81,455 197,057
Accounts receivable 11,805,400 4,904,861
Notes receivable, net 16,593,895 6,392,194
Net investment in leasing operations:
Equipment under operating leases, net 30,923,833 20,560,731
Direct finance leases 1,414,097 2,121,162
Equipment held for lease or sale 3,402,045 69,216
Investment in residuals 1,555,178
Deferred income taxes 988,000 1,032,000
Other assets 1,315,634 969,128
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Total assets $ 68,333,222 $ 40,561,727
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,407,888 $ 1,465,950
Deferred funds for pending transactions 23,874,352 4,975,987
Discounted lease rentals 25,582,906 17,986,776
Notes payable 6,964,887 5,791,956
Convertible subordinated debentures 1,618,497 1,862,485
Other liabilities 3,011,158 2,741,248
------------ ------------
Total liabilities 62,459,688 34,824,402
------------ ------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000
shares authorized, 3,119,816 issued and
outstanding in 1997 and 1996 31,198 31,198
Additional paid-in capital 7,952,161 7,952,161
Retained earnings (accumulated deficit) (2,109,825) (2,246,034)
------------ ------------
Total stockholders' equity 5,873,534 5,737,325
------------ ------------
Total liabilities and stockholders' equity $ 68,333,222 $ 40,561,727
------------ ------------
------------ ------------
</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)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 154,241 $ 80,914
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation on operating leases 1,819,581 275,146
Gain on sale of financial assets (657,360) (125,298)
Purchases/originations of notes receivable
and direct finance leases (5,673,862) (2,729,013)
Proceeds from:
Sales of notes receivable and direct finance leases 5,148,333 1,386,967
Collections on notes receivable and direct finance leases 840,866 943,059
Changes in operating assets and liabilities, net (297,911) (216,290)
------------ ------------
Net cash provided by (used in) operating activities 1,333,888 (384,515)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment for leasing (3,369,810)
Proceeds from sale of leased equipment 63,368 458,688
Other, net (57,112) (9,907)
------------ ------------
Net cash (used in) provided by investing activities (3,363,554) 448,781
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 1,500,000 1,478,500
Proceeds from discounted lease rentals 1,691,914
Payments on notes payable (363,902) (1,295,642)
Payments on discounted lease rentals (1,505,696) (395,436)
Payments on subordinated debentures (243,987) (217,835)
------------ ------------
Net cash provided by (used in) financing activities 1,078,329 (430,413)
------------ ------------
Net decrease in cash and cash equivalents (951,337) (366,147)
Cash and cash equivalents at beginning of period 2,760,200 870,109
------------ ------------
Cash and cash equivalents at end of period $ 1,808,863 $ 503,962
------------ ------------
------------ ------------
</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 March 31, 1997 and
for the three months ended March 31, 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
March 31, 1997 and for the three months ended March 31, 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.
Certain reclassifications have been made in the 1996 condensed consolidated
statement of cash flows to conform to the classifications used in 1997. These
reclassifications had no effect on the net decrease in cash and cash equivalents
as previously reported.
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. The addition of this
credit facility increases the Company's revolving borrowing capability to $46
million.
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.
3. EARNINGS PER SHARE
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 between the Company's earnings per
share as presented herein and as calculated under Statement No. 128.
5
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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 March 31, 1997, and the related
condensed consolidated statements of income and cash flows for the three-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
May 8, 1997
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
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,
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 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.
7
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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 months ended March 31,
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 direct costs and expenses:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING LEASE ACTIVITY, NET
Rental revenue on operating leases $ 2,477,042 $ 371,367
Less: Depreciation 1,819,581 275,146
Interest expense 695,474 29,877
------------ ------------
Operating lease activity, net (38,013) 66,344
------------ ------------
FEE INCOME 670,376 224,683
------------ ------------
FINANCE INCOME, NET
Finance income 409,786 242,818
Less: Interest expense 142,995 172,042
------------ ------------
Finance income, net 266,791 70,776
------------ ------------
OTHER INCOME, NET 3,394 397,470
------------ ------------
TOTAL TRANSACTION CONTRIBUTION 902,548 759,273
------------ ------------
Selling, general and administrative expenses 622,750 574,259
Interest expense attributable to residuals 30,557 56,600
------------ ------------
INCOME BEFORE INCOME TAXES 249,241 128,414
Provision for income taxes 95,000 47,500
------------ ------------
NET INCOME $ 154,241 $ 80,914
------------ ------------
------------ ------------
GROSS GAMING ORIGINATIONS $ 35,713,097 $ 5,110,857
------------ ------------
------------ ------------
</TABLE>
8
<PAGE>
The types of revenues generated by the Company's financing activities are
further described below:
OPERATING LEASE ACTIVITY, NET. Operating leases are defined as 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 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. 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 interest in 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 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 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 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.
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 note
receivable or direct finance lease, 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 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
9
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consolidated balance sheet. All related external financing is recorded in
discounted lease rentals, 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 MARCH 31, 1997 AND 1996
Revenues for the first quarter of 1997 totaled $3,561,000, an increase of
188% from $1,236,000 in the first quarter last year. Gross originations of
financing transactions for the three months ended March 31, 1997 increased
substantially to $35.7 million compared to $5.1 million for the same period in
1996. The significant increase in revenues and originations is attributable to
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 first quarter of 1997 as compared with the first quarter of
1996. The Company's operating lease portfolio grew substantially to $30.9
million at March 31, 1997 as compared to $1.7 million one year earlier. Rental
revenue on operating leases increased to $2,477,000 from $371,000. Related
depreciation also increased to $1,820,000 from $275,000. Interest expense,
incurred in financing the purchase of the equipment under operating lease,
increased to $695,000 from $30,000. The net transaction contribution from
operating lease activities decreased approximately $104,000 for the three months
ended March 31, 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 less leveraged and thus bore a relatively smaller interest
charge. The Company's 1997 operating lease portfolio on a weighted average
basis is in the early stage of the lease term, when depreciation and interest
reduce the income contribution. These leases are expected to generate revenues
throughout their lease term, which is generally 36 months, and make a positive
income contribution in the latter stage of the lease term.
The Company generated fee income of $670,000 related to the sale of
transactions with a basis of $22.1 million in the three months ended March 31,
1997, compared to fee income of $225,000 on the sale of transactions with a
basis of $2.8 million in the three months ended March 31, 1996. The higher
level of fee income is attributable to certain of the factors described above.
Finance income, net, increased approximately $196,000 for the three months
ended March 31, 1997 when compared to the three months ended March 31, 1996.
The increase primarily reflects
10
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the larger portfolio of notes receivable and direct finance leases held by the
Company during the first quarter of 1997 as compared to the first quarter of
1996.
Other income in the three months ended March 31, 1996 primarily includes
gains upon the sale of certain leased equipment and loans.
Selling, general and administrative expenses increased approximately
$48,000 or 8% for the three months ended March 31, 1997 when compared to the
same period in 1996. The increase is primarily attributable to higher business
development expenses in the 1997 period.
Interest expense attributable to purchased residuals decreased $26,000
primarily because of the lower investment therein during the first quarter of
1997 as compared to the first quarter of 1996.
Income before income taxes increased $121,000 or 95% to $249,000 in the
first quarter of 1997, compared with $128,000 in the same period last year. The
improvement in 1997 reflects the $143,000 increase in total transaction
contribution, as a result of the factors described above.
The effective income tax rate was 38% in the three months ended March 31,
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 $1.8 million at March 31, 1997, a
decrease of $950,000 from December 31, 1996, and an increase of $1.3 million
from March 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 quarter of 1997, cash flow provided by operating
activities totaled $1.3 million, an increase of $1.7 million from the first
quarter of 1996. The higher level of cash provided in the 1997 quarter
primarily results from the Company's expanded leasing activities. The cash used
in investing activities in the 1997 quarter primarily reflects $3.4 million of
investment in equipment for leasing. The greater magnitude of financing
activities in the three months ended March 31, 1997 reflects the higher level of
originations and larger lease portfolio, both as discussed above, when compared
with the same period in 1996. The $1.1 million of net cash provided by
financing activities in the first quarter of 1997 was primarily utilized to
purchase equipment for leasing.
The following summarizes the significant borrowing activities of the
Company.
11
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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 to
the respective financial institution, interest income on direct finance 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 utilizing the interest method. Total discounted lease rentals increased
from $18.0 million as of December 31, 1996 to $25.6 as of March 31, 1997. The
net increase of $7.6 million is primarily the result of noncash borrowings of
$7.4 million and cash proceeds from discounting of $1.7 million, partially
offset by principal payments of $1.5 million.
NOTES PAYABLE. Total notes payable increased from $5.8 million as of
December 31, 1996 to $7.0 million as of March 31, 1997. The net increase of
$1.2 million is primarily the result of additional borrowings of $1.5 million,
partially offset by payments of $.4 million.
CONVERTIBLE SUBORDINATED DEBENTURES. As of March 31, 1997, the Company has
outstanding $1.6 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 six 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 March 31, 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. The addition of this
credit facility increases the Company's revolving borrowing capability to $46.0
million. Advances under these agreements aggregated $4.0 million at April 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.
Inflation has not been a significant factor in the Company's operations.
12
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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.
13
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are included with this quarterly report on
Form 10-QSB as required by Item 601 of Regulation S-B.
Exhibit Page
Number Description Number
------- ----------- ------
11 Computation of Per Share Earnings 15
15 Letter Regarding Unaudited Interim
Financial Information 16
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 March 31, 1997 or during the period from
March 31, 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: May 8, 1997 By:/s/ Peter D. Cleary
------------------------------------
Chief Financial Officer
(a duly authorized officer)
14
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EXHIBIT 11
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Net income, primary $ 154,241 $ 80,914
------------ ------------
------------ ------------
Net income, fully diluted $ 154,241 $ 80,914
------------ ------------
------------ ------------
PER SHARE DATA
Net income per common and
common equivalent shares, primary $ .05 $ .03
------------ ------------
------------ ------------
Net income per common and
common equivalent shares, fully diluted $ .05 $ .03
------------ ------------
------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
Primary:
Weighted average number of common
shares outstanding 3,119,816 3,119,816
Common equivalent shares:
Dilutive stock options and warrants
using the treasury stock method 13,132 10,647
------------ ------------
3,132,948 3,130,463
------------ ------------
------------ ------------
Fully Diluted:
Weighted average number of common
shares outstanding 3,119,816 3,119,816
Common equivalent shares:
Dilutive stock options and warrants
using the treasury stock method 20,978 15,647
------------ ------------
3,140,794 3,135,463
------------ ------------
------------ ------------
</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%.
15
<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 May 8, 1997, on our review of interim
financial information of PDS Financial Corporation for the period ended March
31, 1997, and included in the Company's quarterly report on Form 10-QSB for the
quarter ended March 31, 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
May 8, 1997
16
<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 THREE
MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,890,318
<SECURITIES> 0
<RECEIVABLES> 60,737,225
<ALLOWANCES> 0
<INVENTORY> 3,402,045
<CURRENT-ASSETS> 0<F1>
<PP&E> 2,303,634<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 68,333,222
<CURRENT-LIABILITIES> 28,293,398
<BONDS> 34,166,290<F3>
0
0
<COMMON> 31,198
<OTHER-SE> 5,842,336
<TOTAL-LIABILITY-AND-EQUITY> 68,333,222
<SALES> 0
<TOTAL-REVENUES> 3,560,598
<CGS> 0
<TOTAL-COSTS> 3,311,357
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F4>
<INCOME-PRETAX> 249,241
<INCOME-TAX> 95,000
<INCOME-CONTINUING> 154,241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 154,241
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<FN>
<F1>THE COMPANY DOES NOT PREPARE A CONSOLIDATED BALANCE SHEET
<F2>INCLUDES DEFERRED TAX ASSET OF $988,000
<F3>INCLUDES NONRECOURSE DISCOUNTED LEASE RENTALS OF $25,473,938
<F4>AMOUNT, $869,026 IS INCLUDED IN TAG 29, "TOTAL COSTS"
</FN>
</TABLE>
