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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, 1998
COMMISSION FILE NUMBER 0-23928
PDS FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1605970
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6171 MCLEOD DRIVE, LAS VEGAS, NEVADA 89120
(Address of principal executive offices)
(702) 736-0700
(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:
<TABLE>
<CAPTION>
Class Outstanding as of July 31, 1998
----- -------------------------------
<S> <C>
Common Stock, $.01 par value 3,641,641 shares
</TABLE>
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PDS FINANCIAL CORPORATION
INDEX
PART I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements Page(s)
-------
<S> <C>
Condensed Consolidated Statement of Income (Unaudited)
For the Three Months and Six Months Ended June 30,
1998 and 1997 2
Condensed Consolidated Balance Sheet
As of June 30, 1998 (Unaudited) and December 31, 1997 3
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended June 30, 1998 and 1997 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 8-14
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
1
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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,
---------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Equipment sales $ 10,226,479 $ 16,350,635
Rental revenue on operating leases 1,643,587 $ 3,335,241 3,624,683 $ 5,812,283
Revenue from sales-type leases 1,266,638 1,266,638
Fee income 343,324 838,162 1,367,853 1,508,538
Finance income 797,352 427,404 1,117,064 837,190
Other 172 4,834 724 8,228
----------- ----------- ----------- -----------
Total revenues 14,277,552 4,605,641 23,727,597 8,166,239
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Equipment sales 8,965,760 14,215,225
Depreciation on operating leases 1,290,322 2,471,559 2,848,588 4,291,140
Sales-type leases 1,027,243 1,027,243
Selling, general and administrative 1,257,942 682,838 2,349,311 1,305,588
Interest 1,266,931 1,196,894 2,094,107 2,065,920
----------- ----------- ----------- -----------
Total costs and expenses 13,808,198 4,351,291 22,534,474 7,662,648
----------- ----------- ----------- -----------
Income before income taxes 469,354 254,350 1,193,123 503,591
Provision for income taxes 178,000 96,000 453,000 191,000
----------- ----------- ----------- -----------
NET INCOME $ 291,354 $ 158,350 $ 740,123 $ 312,591
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share:
Basic $.08 $.05 $.21 $.10
Diluted $.08 $.05 $.19 $.10
Number of shares used to compute per share amounts:
Basic 3,604,673 3,119,816 3,576,761 3,119,816
Diluted 3,862,962 3,193,895 3,819,978 3,152,205
</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>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS (Unaudited)
Cash and cash equivalents $ 1,386,632 $ 1,865,468
Restricted cash 4,825,150
Accounts receivable 5,261,735 1,715,154
Notes receivable, net 16,789,686 3,140,964
Net investment in leasing operations:
Equipment under operating leases, net 13,786,102 18,327,490
Direct finance leases 6,929,138 5,976,368
Equipment held for sale or lease 10,231,110 6,289,900
Deferred income taxes 848,000 824,000
Other assets 3,254,865 1,824,488
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Total assets $ 63,312,418 $ 39,963,832
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------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 5,415,925 $ 2,094,178
Deferred funds for pending transactions 1,525,430 775,159
Discounted lease rentals 4,023,360 5,919,579
Notes payable 27,369,192 21,527,311
Subordinated debt 13,072,601 89,117
Other liabilities 1,381,609 929,142
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Total liabilities 52,788,117 31,334,486
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Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares
authorized, 3,641,641 and 3,523,972 issued
and outstanding in 1998 and 1997, respectively 36,416 35,240
Additional paid-in capital 10,848,712 9,695,056
Retained earnings (accumulated deficit) (360,827) (1,100,950)
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Total stockholders' equity 10,524,301 8,629,346
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Total liabilities and stockholders' equity $ 63,312,418 $ 39,963,832
------------ ------------
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</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>
Six months ended June 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 740,123 $ 312,591
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation on operating leases 2,848,588 4,291,140
Gain on sale of financial assets (2,205,285) (1,428,743)
Purchases/originations of notes receivable
and direct finance leases (12,114,078) (16,138,640)
Proceeds from:
Sale of notes receivable and direct finance leases 4,743,462 18,626,948
Collection of notes receivable and direct finance leases 1,805,655 2,232,900
Increase in equipment held for sale or lease (9,371,754) (559,485)
Changes in other operating assets and liabilities, net 636,678 255,634
------------ ------------
Net cash provided by (used in) operating activities (12,916,611) 7,592,345
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment for leasing (3,173,589) (6,936,982)
Proceeds from sale of leased equipment 3,697,076 128,263
Other, net (64,898) (70,555)
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Net cash provided by (used in) investing activities 458,589 (6,879,274)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from subordinated debt and warrants 13,800,000
Payment of debt issuance costs (1,550,134)
Proceeds from notes payable 11,699,574 1,309,385
Proceeds from discounted lease rentals 692,428 4,242,140
Payments on notes payable (10,537,762) (1,247,926)
Payments on discounted lease rentals (2,359,248) (4,661,127)
Payments on subordinated debentures (28,706) (494,990)
Proceeds from exercise of stock options 263,034 -
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Net cash provided by (used in) financing activities 11,979,186 (852,518)
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Net decrease in cash and cash equivalents (478,836) (139,447)
Cash and cash equivalents at beginning of period 1,865,468 2,760,200
----------- ------------
Cash and cash equivalents at end of period $ 1,386,632 $ 2,620,753
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements as of June 30, 1998 and for
the three and six months ended June 30, 1998 and 1997 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, 1997 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, 1997. PricewaterhouseCoopers LLP, the Company's
independent accountants, has performed limited reviews of the interim financial
statements included herein. Their report on such reviews accompanies this
filing.
The condensed consolidated financial statements presented herein as of June
30, 1998 and for the three and six months ended June 30, 1998 and 1997 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 May 1998, the Company renewed its agreement with a bank to provide a
$1.0 million working capital line of credit through May 31, 1999. Terms of the
renewed agreement are consistent with the prior agreement.
In May 1998, the Company completed a $13.8 million public debt offering.
The Company sold 13,800 investment units (the "Units"), each consisting of a
10% Senior Subordinated Note, due July 1, 2004, in the principal amount of
$1,000 (the "Notes") and fifty detachable warrants (the "Warrants") to
purchase fifty shares of the Company's common stock. Interest on the Notes
is payable quarterly, beginning October 1, 1998. Each year beginning July 1,
2000, Notes having an aggregate balance of $2.1 million will be selected at
random for mandatory redemption. The Warrants have a five year term and an
exercise price of $12.25 per share of common stock. The Units and the Notes
will not be listed on any securities exchange or on the Nasdaq System. The
Warrants are listed on The Nasdaq National Market under the trading symbol
"PDSFW." Net proceeds to the Company of $12.2 million, including proceeds
from the over-allotment, will be used to purchase gaming machines, to expand
the Company's leasing activities and for general corporate purposes.
Also in May 1998, the Company entered into an agreement with a financial
institution to provide the Company a $5.0 million loan. The net proceeds to the
Company of $4.8 million were deposited in a restricted escrow account. Advances
under the loan will be collateralized by certain leases, notes and related
equipment, and bear interest at 10.25%.
5
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. EARNINGS PER SHARE
The Company calculated basic and diluted earnings per share as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income, basic $ 291,354 $ 158,350 $ 740,123 $ 312,591
Interest expense on convertible
subordinated debentures, net of tax 443 - 1,350 -
---------- ---------- ---------- ----------
Net income, diluted $ 291,797 $ 158,350 $ 741,473 $ 312,591
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding:
Basic (actual shares outstanding) 3,604,673 3,119,816 3,576,761 3,119,816
Effect of dilutive options 210,315 74,079 194,945 32,389
Effect of dilutive warrants 41,177 35,883
Effect of convertible subordinated
debentures 6,797 - 12,389 -
---------- ---------- ---------- ----------
Diluted 3,862,962 3,193,895 3,819,978 3,152,205
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Per share amounts:
Basic $.08 $.05 $.21 $.10
---- ---- ---- ----
---- ---- ---- ----
Diluted $.08 $.05 $.19 $.10
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS
130 establishes new rules for the reporting of comprehensive income and its
components; however, the adoption of SFAS 130 had no impact on the Company's net
income or stockholders' equity. SFAS 130 requires unrealized gains or losses on
the Company's investments in equity securities to be included as a component of
other comprehensive income.
During the three months ended June 30, 1998 and 1997, total comprehensive
income amounted to $284,696 and $219,458, respectively. During the six months
ended Jun 30, 1998 and 1997, total comprehensive income amounted to $752,306 and
$355,667 respectively. Accumulated other comprehensive income (loss) at June
30, 1998 and December 31, 1997 was ($25,308) and ($37,491), respectively.
6
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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 June 30, 1998, and the related
condensed consolidated statements of income for the three and six month periods
ended June 30, 1998 and 1997, and the condensed consolidated statements of cash
flows for the six month periods ended June 30, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our reviews 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 reviews, we are not aware of any material modifications that
should be made to the accompanying 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, 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated March 20, 1998, 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.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
July 23, 1998
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is engaged in the business of financing and leasing gaming
equipment and supplying reconditioned gaming devices to casino operators. The
gaming equipment financed by the Company consists mainly of slot machines, video
gaming machines and other gaming devices. In addition, the Company finances
furniture, fixtures and other gaming related equipment, including gaming tables
and chairs, restaurant and hotel furniture, vehicles, security and surveillance
equipment, computers and other office equipment. In 1996, the Company
introduced SlotLease, a specialized operating lease 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 PDS Slot Source, a reconditioned gaming device sales and
distribution division, to complement its leasing and financing activities and to
generate equipment sales to casino operators.
The Company's strategy is to increase its portfolio of assets under lease
and reconditioned gaming device sales, and thereby increase revenues and cash
flows. 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 ability to recondition and distribute used
gaming devices enhances the gaming devices' values at the end of an operating
lease and facilitates additional financing transactions.
The Company's quarterly operating results, including net income, 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 and reconditioned gaming device division will lead to
increased recurring revenues, which will tend to lessen the fluctuations of its
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 financing transactions are structured as either notes
receivable or direct finance leases in which substantially all benefits and
risks of ownership are borne by the borrower or lessee. Direct finance leases
are afforded accounting treatment similar to that for notes receivable. In
1996, the Company began structuring some of its gaming equipment financings as
operating leases, under which the Company retains substantially all of the
benefits and risks of ownership. In the third quarter of 1997, the Company began
structuring certain of its gaming equipment transactions as sales-type leases.
8
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The Company's revenue generating activities can be categorized as follows:
(i) equipment sales; (ii) rental revenue on operating leases; (iii) revenue from
sales-type leases; (iv) fee income, resulting principally from the sale of lease
or note receivable transactions; and (v) finance income, resulting from
financing transactions in which the direct finance lease or note receivable is
retained by the Company.
The types of income are further described below:
EQUIPMENT SALES. In mid-1997, the Company established a reconditioned
gaming device sales and distribution division, PDS Slot Source. Used gaming
devices are obtained by the Company either from its customers at the end of an
applicable lease term, or in the marketplace. The cost of this equipment is
recorded in the consolidated balance sheet as equipment held for sale or lease.
At the time of sale, the Company records revenue equal to the selling price of
the related asset. Upon selling reconditioned gaming devices, the Company
removes the underlying asset from its consolidated balance sheet and records the
cost, including reconditioning cost, as cost of revenues. Equipment sales also
includes the sale of equipment which may occur during the term of an operating
lease.
RENTAL REVENUE ON OPERATING LEASES. 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 consolidated income
statement 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 on the consolidated income statement as depreciation
on operating leases. For operating leases, the cost of equipment, less
accumulated depreciation, is recorded in the consolidated balance sheet as
equipment under operating leases, net.
REVENUE FROM 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 as the difference between revenue from sales-type
leases and sales-type lease cost. Revenue 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, less the present value of its
unguaranteed residual value. Upon selling a sales-type lease to a third party,
the Company removes the underlying asset from its consolidated balance sheet.
FEE INCOME. The Company funds much of the direct finance lease and note
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 leases or notes). A sale may occur simultaneously with the
origination or several months thereafter. At the time of sale, the Company
records fee income equal to the difference between the selling price and the
carrying value of the related financial asset. 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
9
<PAGE>
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, the Company
removes the underlying asset from its consolidated balance sheet.
FINANCE INCOME. 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. For those direct finance leases held
by the Company, the present value of the future minimum lease payments are
recorded in the consolidated balance sheet as direct finance leases.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
Revenues for the second quarter of 1998 totaled $14.3 million, an
increase of $9.7 million from $4.6 million in the second quarter last year.
The increase in revenues is primarily attributable to equipment sales. Gross
originations of financing transactions for the three months ended June 30,
1998 increased to $20.6 million compared to $18.1 million for the same period
in 1997.
Equipment sales totaled $10.2 million in the second quarter of 1998. The
Company did not sell equipment in the second quarter of 1997. The Company has
obtained its gaming equipment distributor licenses in Nevada, New Jersey,
Colorado, Iowa and Minnesota and in mid-1997 established its reconditioned
gaming device sales and distribution division, PDS Slot Source. The 1998
equipment sales include both equipment which had been under operating leases,
and used gaming devices which the Company purchased in the marketplace and
reconditioned prior to sale. The cost of equipment sold was $9.0 million.
The Company's average operating lease portfolio was $14.0 million during
the second quarter of 1998 as compared to $33.0 million one year earlier. The
decrease in the average portfolio resulted from the sale of certain of the
equipment which had been under operating leases. Rental revenue on operating
leases decreased to $1.6 million from $3.3 million. Related depreciation also
decreased to $1.3 million from $2.5 million. These leases are expected to
generate revenues throughout their lease terms, which range from 24 to 48 months
and are typically 36 months.
Revenue from sales-type leases was $1.3 million during the second quarter
of 1998. The Company did not originate sales-type leases during the second
quarter of 1997. The related cost of these sales-type leases was $1.0 million.
Consistent with the growth of the distribution business described above, the
Company intends to continue to offer this type of lease.
Fee income decreased $495,000 to $343,000 related to the sale of
transactions with a basis of $5.0 million in the three months ended June 30,
1998, compared to fee income of $838,000 on the sale of transactions with a
basis of $13.4 million in the three months ended June 30, 1997.
Finance income increased $370,000 to $797,000 for the three months ended
June 30, 1998 when compared to $427,000 during the three months ended June 30,
1997. The increase primarily reflects a larger portfolio of notes receivable
and direct finance leases held by the Company during the second quarter of 1998
as compared to the second quarter of 1997.
10
<PAGE>
Selling, general and administrative expenses increased to $1.3 million for
the three months ended June 30, 1998, compared to $.7 million in the same period
of 1997. The increase in the 1998 period is primarily attributable to higher
payroll and occupancy costs associated with the expansion of sales activities
and the formation of the reconditioned gaming device division in Las Vegas,
Nevada.
Interest expense increased $70,000 primarily because of the higher levels
of borrowings related to the larger portfolio of notes receivable, direct
finance leases and inventory held by the Company during the second quarter of
1998 as compared to the second quarter of 1997.
Income before income taxes increased $215,000 to $469,000 in the second
quarter of 1998, compared with $254,000 in the same period last year. The
improvement in 1998 primarily reflects the profit contributions from equipment
sales and higher level of finance income, partially offset by lower fee income
and higher related costs and expenses, as described above.
The effective income tax rate was 38% in the three months ended June 30,
1998 and 1997. In both periods, the effective rate was higher than the federal
statutory tax rate of 34%, due primarily to state income taxes.
Six Months Ended June 30, 1998 and 1997
Revenues for the six months ended June 30, 1998 totaled $23.7 million, an
increase of $15.5 million from $8.2 million in the first half of last year. The
increase in revenues is primarily attributable to equipment sales. Gross
originations of financing transactions for the six months ended June 30, 1998
were $32.2 million compared to $53.8 million for the same period in 1997.
Equipment sales totaled $16.4 million in the first half of 1998. The
Company did not sell equipment in the first half of 1997. The 1998 equipment
sales include both equipment which had been under operating leases, and used
gaming devices which the Company purchased in the marketplace and reconditioned
prior to sale. The cost of equipment sold was $14.2 million.
The Company's average operating lease portfolio was $15.8 million during
the first half of 1998 as compared to $29.4 million one year earlier. The
decrease in the average portfolio resulted from the sale of certain of the
equipment which had been under operating leases. Rental revenue on operating
leases decreased to $3.6 million from $5.8 million. Related depreciation also
decreased to $2.8 million from $4.3 million. These leases are expected to
generate revenues throughout their lease terms, which range from 24 to 48 months
and are typically 36 months.
Revenue from sales-type leases was $1.3 million during the first half of
1998. The Company did not originate sales-type leases during the first half of
1997. The related cost of these sales-type leases was $1.0 million. Consistent
with the growth of the distribution business described above, the Company
intends to continue to offer this type of lease.
Fee income decreased $100,000 to $1.4 million related to the sale of
transactions with a basis of $17.6 million in the six months ended June 30,
1998, compared to fee income of $1.5 million on the sale of transactions with a
basis of $35.5 million in the six months ended June 30,
11
<PAGE>
1997.
Finance income increased $300,000 to $1.1 million for the six months ended
June 30, 1998 when compared to $800,000 during the six months ended June 30,
1997. The increase primarily reflects a larger portfolio of notes receivable and
direct finance leases held by the Company during the first half of 1998 as
compared to the first half of 1997.
Selling, general and administrative expenses increased to $2.3 million for
the six months ended June 30, 1998, compared to $1.3 million in the same period
of 1997. The increase in the 1998 period is primarily attributable to higher
payroll and occupancy costs associated with the expansion of the sales
activities and the formation of the reconditioned gaming device division in Las
Vegas, Nevada.
Interest expense increased $30,000 primarily because of the higher levels
of borrowings related to the larger portfolio of notes receivable, direct
finance leases and inventory held by the Company during the first half of 1998
as compared to the first half of 1997.
Income before income taxes increased $689,000 to $1,193,000 in the first
half of 1998, compared with $504,000 in the same period last year. The
improvement in 1998 primarily reflects the profit contributions from equipment
sales and higher level of finance income, partially offset by lower fee income
and higher related costs and expenses, as described above.
The effective income tax rate was 38% in the three months ended June 30,
1998 and 1997. In both periods, the effective rate was 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 activities described above,
and various forms of recourse and nonrecourse borrowings. The Company's strategy
to increase its leasing activities and reconditioned gaming device sales
involves a higher level of investment in equipment under operating leases and
equipment held for sale or lease, financed through discounted lease rentals and
notes payable. The Company expects its lease portfolio to generate recurring
cash flow from operations throughout the lease term.
The Company's cash and cash equivalents totaled $1.4 million at June 30,
1998, a decrease of $.5 million from December 31, 1997. During the first half of
1998, cash used in operating activities totaled $12.9 million, compared with
cash provided by operations of $7.6 million in the first half of 1997. The
higher level of cash used in the 1998 period primarily reflects the Company's
higher level of investment in notes receivable and equipment held for sale or
lease related to the Company's reconditioned gaming device division. The cash
provided by investing activities in the 1998 period primarily reflects the
excess of the proceeds from the sale of leased equipment over the investment in
equipment for leasing. The $12.0 million of net cash provided by financing
activities in the first half of 1998 was driven by the subordinated debt
transaction, as discussed in the Notes to Condensed Consolidated Financial
Statements.
At June 30, 1998 total borrowings were $44.5 million, up from $27.5 million
at December
12
<PAGE>
31, 1997. The majority of the proceeds from the borrowings were invested in
notes receivable, equipment under operating lease and equipment held for sale or
lease. The Company's recourse debt to equity ratio was 3.5:1 at June 30, 1998
compared with 2.0:1 at December 31, 1997. The increase at June 30, 1998 was
primarily the result of the $13.8 million subordinated debt transaction
completed in May 1998. The following summarizes the significant borrowing
activities of the Company in addition to the subordinated debt transaction,
which is discussed in the Notes to Condensed Consolidated Financial Statements.
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 decreased from
$5.9 million as of December 31, 1997 to $4.0 as of June 30, 1998. The net
decrease of $1.9 million is primarily the result of cash proceeds from
discounting of $.7 million, more than offset by principal payments of $2.4
million.
NOTES PAYABLE. Total notes payable increased from $21.5 million as of
December 31, 1997 to $27.4 million as of June 30, 1998. The net increase of $5.9
million is primarily the result of additional cash proceeds of $11.7 million,
net noncash borrowings of $4.7 million, partially offset by payments of $ 10.5
million.
CAPITAL RESOURCES
At June 30, 1998, the Company's revolving credit and working capital
borrowing capability is $34.0 million. Advances under these agreements
aggregated $5.2 million at June 30, 1998.
The Company's current financial resources, including the proceeds from its
May 1998 subordinated debt offering, estimated cash flows 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.
Inflation has not been a significant factor in the Company's operations.
YEAR 2000 ISSUE
The Company is currently evaluating the potential impact of the situation
referred to as the "Year 2000 Issue." The Year 2000 Issue concerns the
inability of computer software programs to properly recognize and process date
sensitive information relating to the Year 2000. The Company has begun
evaluating its major automated systems to determine if they are Year 2000
compliant and has contacted the suppliers of certain of those systems to inquire
about Year 2000 compliance. The Company believes that its major automated
systems are Year 2000 compliant.
The Company also has electronic interfaces with certain of its suppliers.
The Company has made inquiries and received assurances from such suppliers with
respect to Year 2000 issues.
The Company believes that any costs associated with, and the potential
impact of, the Year 2000 Issue will not be material. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted n a timely manner, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's systems
would not have a material adverse effect on the Company.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein which are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may be
identified by the use of terminology such as "believe," "may," "will,"
"expect," "anticipate," "intend," designed," "estimate," "should," or
"continue" or the negatives thereof or other variations thereon or comparable
terminology. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, without limitation strict
regulation by gaming authorities, competition the Company faces or may face
in the future, uncertainty of market acceptance of the SlotLease program and
PDS Slot
13
<PAGE>
Source, the ability of the Company to continue to obtain adequate financing, the
ability of the Company to recover its investment in gaming equipment leased
under operating leases as well as its investment in used gaming machines
purchased for refurbishment and resale to customers, the risk of default with
respect to the Company's financing transactions, the Company's dependence on key
employees, potential fluctuations in the Company's quarterly results, general
economic and business conditions, and other risk factors detailed from time to
time in the Company's reports filed with the Securities and Exchange Commission.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 14, 1998 for the
purposes of (1) electing members of the Board of Directors of the Company, (2)
amending the Company's 1993 Stock Option Plan to increase the number of shares
of Common Stock available for issuance thereunder from 1,100,000 to 1,350,000
and (3) ratifying the appointment of Coopers & Lybrand L.L.P. as the independent
accountants of the Company for the fiscal year ending December 31, 1998.
There were 3,571,474 shares of Common Stock entitled to vote at the meeting
and a total of 3,288,330 shares (92.1%) were represented at the meeting. The
shareholder voting was as follows:
1. Election of Directors:
<TABLE>
<CAPTION>
Withhold
For Authority
--- ---------
<S> <C> <C>
Johan P. Finley 3,286,630 1,700
Peter D. Cleary 3,287,030 1,300
Charles R. Patterson 3,287,030 1,300
Joel M. Koonce 3,287,030 1,300
James L. Morrell 3,287,030 1,300
Lona M.B. Finley 3,280,530 7,800
</TABLE>
2. To amend the 1993 Stock Option Plan to increase the number of shares of
Common Stock available for issuance thereunder from 1,100,000 to 1,350,000:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-vote
--- ------- ------- ---------------
<S> <C> <C> <C>
1,957,324 180,786 9,400 1,140,820
</TABLE>
3. To ratify the appointment of Coopers & Lybrand L.L.P. as the independent
accountants of the Company for the fiscal year ending December 31, 1998:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
3,282,130 900 5,300
</TABLE>
15
<PAGE>
PART II- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are included with this quarterly report on Form
10-QSB as required by Item 601 of Regulation S-B.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
4.1 Form of Indenture between the Registrant and First Trust
National Association, dated as of May 4, 1998(1)
4.2 Form of Note (included as Article Two to Exhibit No. 4.1)
4.3 Form of Warrant Agreement between the Registrant and
Norwest Bank Minnesota, N.A., dated May 4, 1998(1)
4.4 Form of Warrant (included as Appendix A to Exhibit No.
4.3)
4.5 Warrant Agreement between the Registrant and Miller &
Schroeder Financial, Inc., dated May 4, 1998(1)
10.1 Master Loan Agreement by and among the Registrant, PDS
Financial Corporation-Nevada and Miller & Schroeder
Investments Corporation, dated May 26, 1998
15 Letter Regarding Unaudited Interim
Financial Information
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to Registrant's previously filed
Registration Statement on Form SB-2 (File No. 333-49199)
b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the quarter ended June 30, 1998 or during the period from June 30,
1998 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 14, 1998 By:/s/ Peter D. Cleary
---------------------------
Chief Financial Officer
(a duly authorized officer)
16
<PAGE>
Exhibit 10.1
- ----------------------------------------------------------------------------
MASTER LOAN AGREEMENT
BY AND AMONG
PDS FINANCIAL CORPORATION
PDS FINANCIAL CORPORATION - NEVADA
AND
MILLER & SCHROEDER INVESTMENTS CORPORATION
- ---------------------------------------------------------------------------
Drafted by:
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, Minnesota 55402-3397
<PAGE>
MASTER LOAN AGREEMENT
THIS AGREEMENT is made as of May 26, 1998, by and among PDS FINANCIAL
CORPORATION, a Minnesota corporation ("PDS"), PDS FINANCIAL CORPORATION-
NEVADA, a Nevada corporation ("PDS-Nevada") (PDS and PDS-Nevada are jointly
and severally, the "Borrower") and MILLER & SCHROEDER INVESTMENTS
CORPORATION, a Minnesota corporation ("M&S"), and certain other participating
institutions identified in the Participation Agreements among M&S and the
participants (M&S and the participants being collectively, the "Lender").
RECITALS
A. The Borrower has requested that the Lender make available to the
Borrower a multiple advance credit facility in an aggregate principal amount
of Five Million Dollars ($5,000,000) (the "Credit Facility") evidenced by a
Promissory Note dated the date hereof from the Borrower in favor of the
Lender (the "Note") and secured by a Master Security Agreement dated the date
hereof between the Borrower and the Lender (as such Master Security Agreement
may be amended from time to time, the "Security Agreement").
B. The Lender is willing to make advances under the Credit Facility
(each a "Loan") to the Borrower upon the terms and subject to the conditions
set forth herein.
C. The Lender has entered or will enter into one or more participation
agreements (the "Participation Agreements") pursuant to which the
participants named therein agree to participate in the Credit Facility.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS.
"Addendum and Assignment" is defined in Section 1 of the Security
Agreement.
"Capitalized Cost to Lessee" means the fair market value of the
Equipment as of the date of the Contract as reasonably determined by Borrower
in accordance with FASB 13, excluding any charges for insurance, maintenance,
delivery and sales or use taxes.
"Closing Date" means the date hereof.
"Collateral" is defined in Section 2 of the Security Agreement.
<PAGE>
"Contract" means any Contract which is identified in an Addendum and
Assignment, and which meets the eligibility criteria set forth in EXHIBIT A
attached hereto.
"Delinquent Contract" means any Contract where payment in full of all
installments then due have not been made within 30 days of the due date or
where any other material default has occurred and such default has continued
for a period of at least 30 days.
"Equipment" is defined in Section 1 of the Security Agreement.
"Equipment Value" means, (i) with respect to any Contract which is an
installment sales contract, the sales price of the Equipment subject to such
Contract, EXCLUDING sales or use tax, delivery charges, installation charges and
any security deposit in whatever form collected; (ii) with respect to any
Contract which is a finance lease, the Capitalized Cost to Lessee, EXCLUDING
sales or use tax, delivery charges, installation charges and any security
deposits; and (iii) with respect to any Contract which is an operating lease,
the Capitalized Cost to Lessee, EXCLUDING sales or use tax, delivery charges,
installation charges and any security deposits.
"GAAP" means generally accepted accounting principles as in effect from
time to time, which shall include the official interpretations thereof by the
Financial Accounting Standards Board, consistently applied.
"Loan Documents" means this Agreement, the Note, the Security Agreement,
the Addendum and Agreement, the Repossession Agreement, the UCC-1 and UCC-3
Financing Statements, and all other documents, instruments or agreements
(excluding the Contracts) necessary to give effect to this Agreement and the
transaction contemplated hereby.
"Maturity Date" means May 1, 2001.
"Obligor" means, with respect to any Contract, the person identified on a
Contract as the lessee or purchaser.
"Repossession Agreement" means that certain Repossession Agreement among
the Borrower and the Lender, dated the date hereof, as it may be amended from
time to time.
"Required Payment Amount" means as of any Installment Payment Date (as
defined in the Note), that amount equal to the monthly amount necessary to fully
amortize the then outstanding principal balance and accrued interest under the
Note in equal monthly installments by the Maturity Date, together with payment
of the Servicing Fee described in the Note.
2. THE CREDIT FACILITY. Subject to and upon the terms and conditions
hereof, and in reliance upon the representations and warranties of the Borrower
herein, the Lender will make Loans to the Borrower under the Credit Facility
from time to time from the date hereof until May 1, 2001, at such time and in
such amount as to each Loan as the Borrower may request up to but not exceeding
an aggregate principal amount of $5,000,000 for the purpose of funding
2
<PAGE>
Contracts to certain casino operators, and to pay all related transaction
costs. The Credit Facility will be advanced based on multiple Advance
Requests (as hereafter defined) but will not be a revolving credit facility
and the Borrower may not borrow, repay and reborrow amounts advanced. The
Advance amount of any Loan shall not exceed ninety percent (90%) of the
Equipment Value of any Contract(s) being financed therewith and no more than
$1,000,000 will be advanced on an individual Contract, and in no event shall
the aggregate principal amount of Loans, the proceeds of which are used to
finance Contracts where the Equipment subject to such Contracts is located on
ships or is subject to maritime laws, exceed twenty-five percent (25%) of the
aggregate principal amount of all Loans. The Loans under the Credit Facility
shall be evidenced by a single Note which will be made payable to the order
of the Lender. The Credit Facility shall bear interest at the rate of Ten
and 00/100th percent (10.00%) per annum. The Credit Facility shall be
payable over a thirty-six (36)-month term. Interest accruing on the Note
shall be paid on June 1, 1998 and on July 1, 1998. Commencing August 1,
1998, and continuing on each Installment Payment Date (as defined in the
Note) thereafter, the Borrower shall pay installments of principal and
interest equal to the Required Payment Amount; provided that the unpaid
principal balance of the Note, interest accrued thereon and all charges
payable pursuant to the terms of the Note shall become due and payable in
full on the earlier to occur of the following: (i) the Maturity Date, (ii)
the occurrence of an Event of Default and (iii) the Installment Payment Date
(as defined in the Note) next following the Installment Payment Date on which
the unpaid principal balance of the Note declines below $100,000. Any
prepayments made on any Contract shall be used to prepay the Credit Facility
to the extent required by paragraph 3.t. of the Security Agreement. The Note
may be prepaid in whole or in part at any time, provided that any prepayment
shall be made on fifteen (15) days' advance written notice to the Lender and
shall be made only on a regularly scheduled Installment Payment Date and
shall be made in denominations of no less than $100,000 or provide for
payment in full of the outstanding balance of the Note. After a prepayment,
the then outstanding principal balance and accrued interest will be
reamortized over the period remaining between the date of prepayment and the
Maturity Date. All amounts paid in respect of the Note shall be applied in
accordance with Section 5(b) of the Security Agreement. All payments and
prepayments of the principal of and interest on the Loan shall be made by the
Borrower to the Lender pursuant to the terms of the Note and other Loan
Documents, and shall be made by wire transfer in accordance with Lender's
instructions.
3. BORROWING PROCEDURE AND DISBURSEMENT OF LOAN PROCEEDS. On the date
hereof, the Lender has disbursed to the Borrower $174,850 for payment of closing
costs for the Credit Facility. The balance of the Credit Facility in the amount
of $4,825,150 has been advanced under the Note and deposited in an interest
bearing escrow account with the Lender (the "Escrow"). Each time the Borrower
desires to obtain a disbursement from the Escrow, the Borrower shall submit to
the Lender a written advance request, duly signed by the Borrower, substantially
in the form of EXHIBIT B attached hereto (each an "Advance Request"). Each
Advance Request shall be submitted by the Borrower to the Lender at least five
(5) business days prior to the date of the requested advance.
3
<PAGE>
Each Advance Request shall specify (i) the advance date (which shall be a
business day), (ii) the Equipment being acquired or financed therewith and
the Equipment Value thereof, (iii) the terms of the Contract(s) to which such
Equipment will be sold or leased, and (iv) the amount of the requested Loan,
and shall set forth the information requested therein. Unless the Lender
reasonably determines any applicable condition specified in this Agreement
has not been satisfied, the Lender will make the amount of the requested Loan
available to the Borrower at the Lender's principal office in Minneapolis,
Minnesota not later than 5:00 p.m., Minneapolis time, on the date requested.
The Borrower shall be obligated to repay all Loans notwithstanding the fact
that the person requesting the same was not in fact authorized to do so. The
proceeds of each Loan will be disbursed to the Borrower upon delivery to the
Lender of the following documents or other items:
a. ITEMS NECESSARY AT TIME THIS AGREEMENT IS EXECUTED:
(1) this Agreement, the Note, the Security Agreement, and the
Repossession Agreement, each executed by the Borrower in favor of the Lender;
(2) resolutions of the executive committee of the board of
directors of the Borrower, certified by an officer of the Borrower,
authorizing the execution, delivery and performance of the Loan Documents and
related documents and the transactions contemplated thereby;
(3) evidence in form and substance acceptable to the Lender
that the Borrower has all licenses necessary to carry on its business and to
enable it to perform its obligations under the Repossession Agreement,
including without limitation all licenses required under Nevada gaming law
for the operation of the Borrower's business;
(4) Articles of Incorporation of PDS, certified by the
Minnesota Secretary of State, a copy of the Bylaws of PDS, certified by an
officer of PDS, and an unqualified certificate of good standing for PDS
issued by the Minnesota Secretary of State;
(5) Articles of Incorporation of PDS - Nevada, certified by the
Nevada Secretary of State, a copy of the Bylaws of PDS - Nevada, certified by an
officer of PDS - Nevada, and an unqualified certificate of good standing for PDS
- - Nevada issued by the Nevada Secretary of State;
(6) UCC searches with respect to each Borrower;
(7) an opinion of counsel to PDS as to the due organization and
good standing of PDS, the due authorization, execution and delivery by PDS of
the Loan Documents, the validity and enforceability of the Loan Documents, and
as to such other matters regarding PDS and the transactions and documents
contemplated hereby as the parties may agree;
(8) an opinion of counsel to PDS - Nevada as to the due
organization and good standing of PDS - Nevada, the due authorization, execution
and delivery by PDS - Nevada of the Loan Documents, the validity and
enforceability of the Loan Documents, the availability of and basic elements of
the procedure to perfect a purchase money security interest
4
<PAGE>
under Nevada state law, and as to such other matters regarding PDS - Nevada
and the transactions and documents contemplated hereby as the parties may
agree;
(9) a special opinion of Nevada counsel regarding the Loan and
Nevada gaming law;
(10) a certificate of an officer of each Borrower to the effect
that the representations, warranties and covenants of such Borrower contained
herein and in the other Loan Documents are true and correct as of the date of
such documents and as of the date of delivery of the certificate;
(11) certificates of insurance and insurance endorsements
required hereby;
(12) a certificate by each Borrower regarding Year 2000 computer
compliance.
b. BORROWER ITEMS NECESSARY BEFORE ANY LOAN:
(1) an Addendum and Assignment and UCC-1 and UCC-3 Financing
Statements, each executed by the Borrower in favor of the Lender with respect to
the Contract(s) being financed with the Loan, and an assignment of the
Borrower's interest as secured party in the UCC-1 Financing Statement as to the
related Equipment;
(2) with respect to each of the Contracts in which Borrower is
granting a security interest to the Lender pursuant to the Addendum and
Assignment, the executed original of each such Contract, with all collateral
schedules, and copies of such additional instruments, opinions, documents,
certificates, searches and reports as the Borrower has obtained in connection
with such Contract;
(3) a Notice, Consent and Acknowledgment of Assignment with
respect to the Contract(s) being financed with the Loan, duly executed by the
Borrower;
(4) updated UCC searches with respect to each Borrower who is
requesting a loan on a Contract owned by that Borrower;
(5) Except as to financing statements in favor of the Lender,
UCC-3 financing statements terminating security interests filed with respect to
the Contracts and the Equipment, including without limitation a release executed
by U.S. Bank (or any other creditor holding a blanket lien) with respect to the
Contracts and the Equipment;
(6) the first time a Loan is requested regarding a Contract
where the Equipment is located in a jurisdiction (other than Nevada), an opinion
of counsel to PDS as to
5
<PAGE>
the availability of and basic elements of the procedure to perfect a purchase
money security interest under the law of that jurisdiction;
(7) certificates of insurance and insurance endorsements
required hereby;
(8) all other items as may be required pursuant to the
eligibility criteria set forth in EXHIBIT A attached hereto.
c. OBLIGOR ITEMS NECESSARY BEFORE ANY LOAN:
(1) a Notice, Consent and Acknowledgment of Assignment duly
executed by the Obligor under each Contract being financed with the Loan;
(2) UCC-1 Financing Statements, executed by the Obligor in favor
of the Borrower and assigned to the Lender with respect to the Contract(s) being
financed with the Loan, and the related Equipment and releases, terminations or
other appropriate filings, if any;
(3) certificates of insurance and insurance endorsements
required hereby;
(4) all other items as may be required pursuant to the
eligibility criteria set forth in EXHIBIT A attached hereto.
4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. In order to induce
the Lender to advance the proceeds of each Loan, the Borrower hereby represents
and warrants to the Lender as follows:
a. PDS is a corporation duly organized and validly existing under
the laws of the State of Minnesota, and PDS-Nevada is a corporation duly
organized and validly existing under the laws of the State of Nevada. The
Borrower is duly qualified to do business and is in good standing in every other
jurisdiction wherein the nature of its business or the character of its
properties makes such qualification necessary and where failure to be so
qualified and in good standing, in the aggregate, would not have a material
adverse effect on the business, properties, operations, assets, liabilities or
condition (financial or otherwise) of the Borrower. The Borrower has all
requisite power and authority to carry on its business as now conducted and as
presently proposed to be conducted.
b. The Borrower has full power and authority to execute and deliver
the Loan Documents and to incur and perform its obligations hereunder and
thereunder. The execution, delivery and performance by the Borrower of the Loan
Documents and any and all other documents and transactions contemplated hereby
or thereby, have been duly authorized by all necessary corporate action, will
not violate any provision of law or of the Articles of Incorporation or the
Bylaws of the Borrower or result in the breach of, constitute a default under,
6
<PAGE>
or create or give rise to any lien under, any indenture or other agreement or
instrument to which the Borrower is a party or by which the Borrower or its
property may be bound or affected. The Loan Documents have been executed and
delivered to the Lender by an appropriate officer of the Borrower who is
authorized by and specified in the Borrower's Bylaws to execute and so deliver
such agreements. The Borrower is not in violation of or subject to any
contingent liability on account of any statute, law, rule, ordinance, order,
writ, injunction or decree to the extent that such violation or contingent
liability would result in a material adverse effect on the condition (financial
or otherwise), business, properties, or assets of Borrower. As used herein,
material adverse effect means a violation or contingent liability that would
result in a cost or loss to Borrower of $500,000 or more.
c. The Loan Documents constitute the legal, valid and binding
obligations of the Borrower, enforceable in accordance with their respective
terms.
d. Except as set forth in EXHIBIT C hereto, there is no action, suit
or proceeding pending or, to the knowledge of the Borrower, threatened against
or affecting the Borrower, or any basis therefor, which, if adversely
determined, would have a material adverse effect on the condition (financial or
otherwise), business, properties or assets of the Borrower or which would
question the validity of the Loan Documents or any instrument, document or other
agreement related hereto or required hereby, or impair the ability of the
Borrower to perform its obligations under the foregoing agreements.
e. The Borrower possesses adequate licenses, permits, franchises,
patents, copyrights, trademarks and trade names, or rights thereto (collectively
"Licenses"), to conduct its business substantially as now conducted and as
presently proposed to be conducted. Without limiting the foregoing, PDS -
Nevada possesses all licenses required under Nevada gaming law for the operation
of PDS - Nevada's business. Each License is validly issued and in full force
and effect. Borrower has fulfilled and performed all of its obligations with
respect thereto. No event has occurred which: (1) results in, or after notice
or lapse of time or both would result in, suspension, surrender, failure to
renew, revocation or termination of any material License; or (2) materially and
adversely affects or in the future may (so far as Borrower can now reasonably
foresee) materially adversely affect any of the rights of Borrower thereunder.
Borrower is not a party to and the Borrower does not have any knowledge of any
notice of violation, order or complaint issued by or before any court or
regulatory body or of any other proceedings which could in any manner result in
suspension, surrender, failure to renew, revocation or termination of any
material License or otherwise threaten or adversely affect the validity or
continued effectiveness of the Licenses of Borrower. Borrower has no reason to
believe that any Licenses will not be renewed in the ordinary course. Borrower
has fully cooperated with every regulatory body having jurisdiction over any of
the Licenses or the activities of Borrower with respect thereto, and Borrower
has filed all material reports, applications, documents, instruments, and
information required to be filed by it pursuant to applicable laws, rules and
regulations. Borrower has posted all required bonds required under its
Licenses.
7
<PAGE>
f. The Borrower owns the Contracts constituting part of the
Collateral, subject to no prior security interests, assignments, liens or
encumbrances. The Lender has a valid first perfected security interest in
the Collateral subject to no prior security interests or encumbrances. The
security interest of the Lender has been recorded with the appropriate
recording offices, and the Lender's security interest in the Equipment is a
first perfected security interest, subject only to the rights of the Obligors
and the Borrowers under the Collateral.
g. No director, shareholder, officer, employee of or consultant
to the Borrower is prohibited by law, regulation, contract or the terms of
any license, franchise, permit, certificate, approval or consent from
participating in the business of the Borrower as director, shareholder,
officer, employee of or as consultant to the Borrower.
h. Except with respect to reporting and compliance requirements
of the regulatory gaming authorities in the jurisdictions in which either of
the Borrowers or the Obligors conducts business, no consent, approval, order
or authorization of, or registration, declaration or filing with, or notice
to, any governmental authority or any third party is required in connection
with the execution and delivery of the Loan Documents or any of the
agreements or instruments contemplated thereby to which the Borrower is a
party, or in connection with the carrying out or performance of any of the
transactions required or contemplated hereby or thereby or, if required, such
consent, approval, order or authorization has been obtained or such
registration, declaration or filing has been accomplished or such notice has
been given prior to the date hereof.
i. The Borrower has filed all local, state, federal and other tax
returns required to be filed by it and either paid all taxes shown thereon to
be due, including interest and penalties, which are not being contested in
good faith and by appropriate proceedings, or provided adequate reserves for
payment thereof. The Borrower has no information or knowledge of any
objections to or claims for additional taxes in respect of local, state and
federal or other income or excess profits tax returns of the Borrower for
prior years.
j. The Borrower does not intend to, or believe that it will,
incur debts beyond its ability to pay such debts as they mature.
k. All financial and other information provided to the Lender by
or on behalf of the Borrower in connection with the Borrower's request for
the Loan fairly presented the financial condition of the Borrower as of the
dates thereof and disclosed fully all liabilities of the Borrower. Since the
date of such financial and other information, there has been no material
adverse change in the financial condition of the Borrower.
l. Each qualified retirement plan of the Borrower, if any,
presently conforms to and is administered in a manner consistent with the
Employee Retirement Income Security Act of 1974.
m. As of the date hereof, no Contract is a Delinquent Contract.
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n. The Borrower is not engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulation U issued by the Board of Governors of the Federal
Reserve System), and no proceeds of the Loan will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.
o. No proceeds of the Loan will be used to acquire any security in
any transaction which is subject to Sections 13 and 14 of the Securities
Exchange Act of 1934.
p. The transaction evidenced by this Agreement does not violate any
law pertaining to usury or the payment of interest on loans.
q. The Borrower will use the proceeds of the Loan solely for lawful
and proper corporate purposes of the Borrower.
5. AFFIRMATIVE COVENANTS. The Borrower covenants and agrees as follows:
a. The Borrower will use the proceeds of each Loan solely for the
financing of Contracts to certain casino operators.
b. The Borrower will pay all of its taxes (including payroll and
withholding taxes), levies, assessments and governmental charges prior to the
time when any penalties or interest accrue, unless contested in good faith with
an adequate reserve for payment.
c. The Borrower will continue the conduct of its business, maintain
its corporate existence, maintain all rights, licenses and franchises necessary
or desirable in the normal conduct of its business, comply with all rules,
regulations and orders of any governmental or other authority or agency and all
applicable federal and state laws and regulations. Without in any way limiting
the generality of the foregoing, the Borrower will maintain all licenses
required under Nevada gaming law for the operation of Borrower's business, and
will timely file all reports as the Nevada Gaming Commission may from time to
time require or request.
d. The Borrower shall use best efforts to cause the Obligors to
maintain and service the Equipment so as to keep such Equipment in good
operating condition, ordinary wear and tear from normal use excepted.
e. The Borrower will deliver to the Lender:
(1) Within one hundred twenty (120) days after the end of each
fiscal year, the consolidated audited financial statements of the Borrower for
such fiscal year, certified (without qualification as to the opinion or scope of
examination) by a firm of independent certified public accountants selected by
the Borrower and acceptable to the Lender.
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(2) Within forty-five (45) days after the end of each fiscal
quarter, consolidated quarterly financial statements of the Borrower.
(3) Upon the reasonable request of the Lender, all backup data
regarding the Contracts and the Equipment.
(4) Within thirty (30) days after the end of each calendar
quarter, a Contract Status report setting forth the information set forth on
EXHIBIT D hereto.
(5) As soon as practicable, but in any event within thirty
(30) days after the end of each calendar month, a certificate of the
Controller of the Borrower substantially in the form of EXHIBIT E hereto
stating (i) whether or not such officer has knowledge of the occurrence of
any Event of Default under any of the Loan Documents or any event which with
the giving of notice or the passage of time would constitute an Event of
Default under any of the Loan Documents, other than Events of Default
previously reported and remedied and, if so, stating in reasonable detail the
facts with respect to such Event of Default, and (ii) that the Borrower is in
compliance with each of the covenants set forth in SECTIONS 5 AND 6 of this
Agreement. Without limiting the foregoing, the certificate shall
specifically state (A) the aggregate number and aggregate unpaid payments of
Delinquent Contracts, and (B) the aggregate amount of prepayments on the
Contracts in such month.
(6) Copies of any and all reports, filings, financial statements
or other information as and when filed with the United States Securities and
Exchange Commission and with the Nevada Gaming Commission (only if in connection
with the Loan, the Contracts, the Equipment, the Lender or its participants),
and copies of all information and notices as and when delivered to the
Borrower's shareholders.
(7) Promptly upon becoming aware thereof, notice of any default
with respect to any other indebtedness, whether owed to the Lender or any other
creditor.
f. Upon reasonable notice of not less than 48 hours, the Borrower
will permit any officer, employee, attorney or accountant for the Lender to
review, make extracts from, or
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copy any and all corporate and financial books and records of the Borrower
relating to the Contracts at all times during ordinary business hours, to
send and discuss with Obligors requests for verification of amounts owed to
the Borrower if Lender has a reasonable basis for believing such a
verification is necessary, and to discuss the affairs of the Borrower with
any of its officers. After the occurrence of an Event of Default, the rights
to review and copy books and records shall not be limited to those relating
to the Contracts but will be all of the Borrower's books and records.
g. The Borrower will provide the Lender with an insurance
certificate, issued by Obligor's insurer, in form and content and from an
insurer acceptable to the Lender, providing for ten (10) days' written notice
to the Lender of cancellation or non-renewal (without qualification), and
evidencing the following categories and amounts of coverage:
(1) In the case of finance lease or operating lease
transactions, comprehensive public liability coverage for the Obligor.
(2) Comprehensive physical damage insurance for the full
insurable value of the Equipment, naming the Lender as loss payee, as their
interests may appear.
(3) If circumstances warrant, warehouse and transportation
insurance on the Equipment which is being stored or transported, as the case may
be, for the full insurable value of the Equipment naming the Lender as loss
payee, as their interests may appear.
(4) With respect to any Equipment which is located on any ship
or which is otherwise subject to any maritime laws, shipwreck, piracy,
abandonment and hull insurance in such amounts as the Lender may request, with a
lender's loss payable endorsement provided to the Lender.
h. The Borrower will notify the Lender promptly of (i) any
material disputes or claims by any Obligor; (ii) any Equipment returned to or
recovered by the Borrower or damaged, destroyed or stolen from the Borrower
or an Obligor; (iii) any change in the persons constituting the directors or
officers of the Borrower; (iv) the occurrence of any breach, default or event
of default by or attributable to the Borrower under this Agreement or any of
the Loan Documents; (v) the occurrence of any breach, default or event of
default by or attributable to any Obligor under the Obligor's Contract; and
(vi) any event which may have any effect on the enforceability of any lien in
favor of the Lender, or on the ability of the Borrower or the Obligor to
perform its obligations under the Loan Documents or any Contract, as the case
may be.
i. The Borrower will notify the Lender in writing promptly after
the commencement of any lawsuit, legal proceeding or proceedings before any
governmental or regulatory agency against the Borrower which would have a
material adverse effect on the Loan, the Contracts, the Equipment, the Lender
or its participants or the business of Borrower. As used herein, material
adverse effect means a lawsuit or proceeding involving a potential cost or
loss to Borrower of $500,000 or more.
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<PAGE>
j. The Borrower will maintain, on a consolidated basis, the
following financial covenant:
At all times, a Tangible Net Worth at an amount not less than
$6,000,000 plus 15% of positive Net Income earned after January 1, 1998. As
used herein, "Tangible Net Worth" means, at a particular date, (a) the
aggregate amount of all assets of the Borrower on a consolidated basis as may
be properly classified as such in accordance with GAAP excluding such other
assets as are properly classified as intangible assets under GAAP, less (b)
the aggregate amount of all liabilities of the Borrower on a consolidated
basis. As used herein, "Net Income" means, with respect to any period, the
aggregate of the net income of the Borrower on a consolidated basis for such
period determined in accordance with GAAP.
k. With respect to any Delinquent Contract, the Borrower shall,
within fifteen (15) days, either (i) pay to the Lender an amount equal to the
unamortized amount of the loan proceeds advanced with respect to such
Contract, and such payment shall be applied to the unpaid principal balance
of the Note, or (ii) execute and deliver to the Lender an Addendum and
Assignment (and appropriate UCC financing statements) respecting one or more
other Contracts with an aggregate Equipment Value multiplied by 90% equal to
or greater than the unamortized amount of the loan proceeds advanced with
respect to such Delinquent Contract, and Obligor Acknowledgment(s) relating
to such Contract(s) duly executed by each Obligor under such Contract, and
all such other documents, instruments and agreements as required under
SECTION 3(b) AND 3(c) or as the Lender may request.
l. The Borrower will keep full and complete books of record and
accounts for itself and other records reflecting the results of the
Borrower's operations, all in accordance with GAAP.
m. At any time upon request from the Lender after the occurrence
of an Event of Default, the Borrower will cause the Obligors under the
Contracts which constitute a part of the Collateral to be notified to make
payment directly to the Lender, and the Lender shall be entitled to take
control of any proceeds thereof.
n. After the occurrence of an Event of Default, all proceeds of
Collateral not released from the lien of the Security Agreement pursuant to
Section 3 of the Security Agreement, including without limitation, proceeds
from the sale or re-leasing of the Equipment, proceeds of insurance and all
other unscheduled recoveries, shall be paid by the Borrower into a collateral
account administered by the Lender in the manner described in Section 5 of
the Security Agreement.
o. In the event any Equipment has been repossessed, the Borrower
shall pay promptly to the Lender the proceeds of the sale or other disposition
of the Equipment, together with a cash payment equal to the amount necessary to
fully pay the unamortized amount of the loan proceeds advanced with respect to
Contract(s) relating to such Equipment.
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<PAGE>
p. In the event any Equipment is damaged, destroyed, lost or
stolen, the Borrower shall pay promptly to the Lender the proceeds of any
insurance on the Equipment, together with a cash payment equal to the amount
necessary to fully pay the unamortized amount of the loan proceeds advanced
with respect to Contract(s) relating to such Equipment.
q. The Borrower shall service the Contracts which form a part of
the Collateral in accordance with the industry standards applicable to
servicers of such contracts, and the Borrower shall have ultimate
responsibility for such servicing. If the Borrower shall fail in any
material respect in the performance of its duties hereunder, and such failure
shall continue for thirty (30) days, the Lender shall appoint a servicer,
chosen at the discretion of the Lender, to perform such duties, and the
Borrower shall promptly make available to such servicer all books and records
in any and all formats with respect to the Collateral, and shall also make
available to the servicer without fee any and all computer software necessary
to service the Collateral. Fees of the servicer shall be paid in the manner
described in the Security Agreement.
r. The Borrower will provide notice to all applicable gaming
authorities, to the extent required by the applicable gaming law, of the
Lender's security interest in the Contracts and the Equipment.
s. After the occurrence of an Event of Default and not later than
two (2) days prior to a date on which a payment is due under the Note, the
Borrower shall provide the Lender with a detailed report with respect to all
monies, if any, deposited in the collateral account pursuant to Section 5 of
the Security Agreement, including amounts paid in respect of Payments on all
Contracts (as due and as a prepayment) and amounts paid in respect of
interest. The report shall be prepared in such manner as may be required by
the Lender for purposes of properly applying funds in accordance with Section
5(b) of the Security Agreement, if applicable.
t. With respect to each of the Contracts, the Borrower shall:
(i) perform all acts necessary to preserve the validity and enforceability of
each such Contract; (ii) take all actions reasonably necessary to assist
Lender in collecting when due all amounts owing to Borrower with respect to
each such Contract; (iii) at all times keep accurate and complete records of
performance by Borrower and the Obligor under each such Contract; and (iv)
upon request of Lender verify with the Obligor under each Contract the
payments due to Borrower under such Contract, except that (A) prior to the
occurrence of an Event of Default or an event which with the passage of time
or the giving of notice, or both, would be an Event of Default, such requests
shall not occur any more frequently than once each year and (B) after the
occurrence and during the continuance of an Event of Default or an event
which with the passage of time or the giving of notice, or both, would be an
Event of Default such requests may occur as often as Lender shall require.
u. The Borrower will store the Equipment (which is not in the
possession of an Obligor) only in the Borrower's warehouses or in bonded
warehouses.
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6. NEGATIVE COVENANTS. The Borrower covenants and agrees that, except
with the prior written approval of the Lender:
a. The Borrower will not create, incur or cause to exist any
mortgage, security interest, encumbrance, lien or other charge of any kind upon
any of the Collateral, whether now owned or hereafter acquired, except for the
security interests created by the Loan Documents. Except as permitted by the
Security Agreement, the Borrower will not sell, dispose of, lease, mortgage,
assign, sublet or transfer all or any part of the Borrower's right, title or
interest in or to all or any portion of the Collateral.
b. The Borrower will not substantially alter the nature of the
business in which it is engaged, or engage in any line of business substantially
different from its current business.
c. Following the occurrence of and during the continuance of an
Event of Default, the Borrower will not declare or pay any distributions or
purchase or redeem any of its capital stock, or otherwise distribute any
property on account of its capital stock, or enter into any agreement therefor.
d. The Borrower will not permit any material breach, default or
event of default to occur under any note, loan agreement, indenture, lease,
mortgage, contract for deed, security agreement or other contractual obligation
binding upon the Borrower which is not cured within the applicable cure
provisions thereof.
e. The Borrower will not materially amend, supplement, modify,
compromise or waive any of the terms of any Contract, without the prior written
consent of the Lender, provided that Borrower will have the right to substitute
Equipment subject to any Contract with other Equipment that is like-kind in
value as long as Borrower files an amended or updated UCC financing statement
signed by Lender as to the substituted Equipment within the time period required
by the law of the applicable jurisdiction to perfect a purchase money security
interest and delivers such filed financing statements to the Lender with its
quarterly Contract Status Report.
f. If any of the following transactions would result in the
surviving entity not complying with the Tangible Net Worth test set forth in
Section 5.j. hereof or otherwise cause an Event of Default hereunder, the
Borrower will not consolidate with or merge into any person or entity, or permit
any other person or entity to merge into it, or acquire (in a transaction
analogous in purpose or effect to a consolidation or merger) all or
substantially all of the assets of any other person or entity, or enter into any
partnership or joint venture.
g. The Borrower will not make any payments on any of the Borrower's
indebtedness to any of the Borrower's affiliated entities, or to any of the
Borrower's shareholders, officers, directors or employees, following the
occurrence of and during the
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<PAGE>
continuance of an Event of Default or a failure to comply with a covenant
contained in SECTION 5 or this SECTION 6.
h. After delivery of the Equipment to Obligor, the Borrower will not
cause or allow any movement of the Equipment, except as permitted under Section
6.e. hereof or in connection with any repossession by the Borrower of such
Equipment.
7. EVENT OF DEFAULT. Each of the following occurrences shall constitute
an Event of Default under this Agreement and under the Loan Documents (herein
called an "Event of Default"):
a. The Borrower shall fail to pay any or all of the indebtedness
arising out of this Agreement or Loan Documents (the "Obligations") when due or,
if payable on demand, on demand and such failure shall continue for a period of
five (5) days after such payment becomes due; or
b. The Borrower shall fail to observe or perform any covenant or
agreement binding on the Borrower under this Agreement or under any other
assignment, conveyance, instrument or agreement now in effect or hereafter made
between the Borrower and the Lender, or under the Loan Documents for a period of
thirty (30) days for any default which can be reasonably cured within thirty
(30) days and a reasonable period of time for a default not reasonably capable
of cure within thirty (30) days, provided the Borrower diligently commences and
continues a course of action acceptable to the Lender to so cure; or
c. The Borrower shall make any representations or warranties in this
Agreement or in any such other assignment, conveyance, instrument, agreement,
financial statements, reports or certificates heretofore or at any time
hereafter submitted by or on behalf of the Borrower to the Lender, and such
representations or warranties, shall prove to have been false or materially
misleading when made; or
d. As a result of a default or failure by Borrower, payment of any
substantial indebtedness of the Borrower (other than the Obligations) shall be
demanded, or the maturity of any substantial indebtedness shall be accelerated,
or any precondition or circumstance permitting any creditor of the Borrower
(acting individually or with the consent of other creditors) to accelerate the
maturity of any substantial indebtedness shall have occurred; for this purpose
indebtedness shall be deemed substantial if it exceeds $500,000; or
e. The Borrower shall become insolvent or shall commit an act of
bankruptcy under the United States Bankruptcy Act, or shall file or have filed
against it, voluntarily or involuntarily, a petition in bankruptcy or for
reorganization or for the adoption of an arrangement or plan under the United
States Bankruptcy Act or shall procure or suffer the appointment of a receiver
for any substantial portion of its properties, or shall initiate or have
initiated against it, voluntarily or involuntarily, any act, process or
proceeding under any insolvency law or other statute or law providing for the
modification or adjustment of the rights of creditors and such
15
<PAGE>
petition, receiver, act, process or proceeding shall not be dismissed or
discharged within ninety (90) days; or
f. A garnishment summons or writ of attachment for an amount in
excess of $500,000 shall have been issued against or served upon the Lender
for the attachment of any property of the Borrower in the Lender's possession
or any indebtedness owing the Borrower; or
g. The Borrower shall have been dissolved, whether voluntarily or
by operation of law; or
h. Any of Borrower's licenses required under the gaming laws of
Nevada, New Jersey or any other jurisdiction in which any of the Collateral
is located is revoked or rescinded, lapses, or is otherwise no longer
maintained by or available to the Borrower.
8. RIGHTS AND REMEDIES UPON DEFAULT. Upon the occurrence of an Event of
Default and at any time thereafter, the Lender may exercise one or more of the
following rights and remedies:
a. The Lender may declare all unmatured Obligations to be
immediately due and payable, and the same shall thereupon be immediately due and
payable, without presentment or other notice or demand;
b. Subject to the rights of the Obligors, the Lender may exercise
and enforce any and all rights and remedies available upon default to a secured
party under the Uniform Commercial Code including, without limitation, the right
to take possession of the Collateral, or any evidence thereof, proceeding
without judicial process or by judicial process (without a prior hearing or
notice thereof, which the Borrower hereby expressly waives) and the right to
sell, lease or otherwise dispose of any or all of the Collateral, and the
Borrower agrees to make the Collateral available to the Lender at a place to be
designated by the Lender which is reasonably convenient to both parties. If
notice to the Borrower of any intended disposition of the Collateral or any
other intended action is required by law in a particular instance, such notice
shall be deemed commercially reasonable if given at least ten (10) calendar days
prior to the date of intended disposition or other action;
c. The Lender may request the Borrower to, and upon such request the
Borrower will, assist the Lender in repossessing and selling the Equipment in
compliance with all applicable laws and in accordance with the Repossession
Agreement (this provision in no way limits the Lender's ability to use any other
person or entity to repossess and sell the Equipment);
d. Without notice or demand, the Lender may offset any
indebtedness the Lender or any of its participants, successors or assigns
then owes to the Borrower whether or not then due, against any Obligation
then owed to the Lender or any of its participants, successors or assigns by
Borrower, whether or not then due;
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e. The Lender may exercise the recourse rights of the Borrower
against the Obligor on any Contracts; and
f. The Lender may exercise or enforce any and all other rights or
remedies available by law or agreement against the Collateral, against the
Borrower or against any other person or property.
9. MISCELLANEOUS. The Borrower agrees that:
a. The performance or observance of any promise or condition set
forth in this Agreement may be waived in writing by the Lender, but not
otherwise. No delay in the exercise of any power, right or remedy of the
Lender, shall operate as a waiver thereof, nor shall any single or partial
exercise thereof or the exercise of any other power, right or remedy operate
as a waiver thereof.
b. This Agreement shall be binding upon the Borrower and its
successors and assigns and shall inure to the benefit of the Lender and its
participants and the successors and assigns of any of them, provided that the
Borrower may not transfer or assign its rights hereunder without the prior
written consent of the Lender. This Agreement shall be effective the date
written above. All rights and powers specifically conferred upon the Lender
may be transferred or delegated by the Lender to any of its successors or
assigns. Except to the extent otherwise required by law, this Agreement and
the transactions evidenced hereby shall be governed by the substantive laws
of the State of Minnesota without regard to principles of conflicts of laws.
If any provision or application of this Agreement is held unlawful or
unenforceable in any respect, such illegality or unenforceability shall not
affect other provisions or applications which can be given effect, and this
Agreement shall be construed as if the unlawful or unenforceable provision or
application had never been contained herein or prescribed hereby. All
representations and warranties contained in this Agreement or in any other
agreement between the Borrower and the Lender shall survive the execution,
delivery and performance of this Agreement and the creation and payment of
any indebtedness to the Lender. This Agreement may be executed in any number
of counterparts, each of which is to be deemed to be an original and all of
which constitute one agreement.
10. NOTICES. All notices, consents, requests, demands and other
communications hereunder shall be given to or made upon the respective
parties hereto at their respective addresses specified below or, as to any
party, at such other address as may be designated by it in a written notice
to the other party. All notices, requests, consents and demands hereunder
shall be effective when personally delivered or five (5) days after
depositing in the United States mail, certified or registered, postage
prepaid, or when sent by confirmed facsimile, or when delivered by overnight
courier.
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If to Borrower: PDS Financial Corporation
6171 McLeod Drive
Las Vegas, NV 89120
Attn: Johan Finley
Telephone: 702-736-0700
Fax: 702-740-8692
With a copy to: David Mylrea, Esq.
Frommelt & Eide, Ltd.
Suite 580
900 Second Avenue South
Minneapolis, MN 55402
If to M&S: Miller & Schroeder Investments Corporation
220 South Sixth Street, Suite 300
Minneapolis, Minnesota 55402
Attn: Gaming Department
Telephone: 612/376-1500
Fax: 612/376-1410
11. JURISDICTION. THE BORROWER HEREBY SUBMITS ITSELF TO THE
JURISDICTION OF THE STATE OF MINNESOTA AND THE FEDERAL COURTS OF THE UNITED
STATES LOCATED IN SUCH STATE IN RESPECT OF ALL ACTIONS ARISING OUT OF OR IN
CONNECTION WITH THE INTERPRETATION OR ENFORCEMENT OF THIS AGREEMENT AND THE
DOCUMENTS RELATED THERETO.
12. DUTIES OF LENDER WITH RESPECT TO COLLATERAL. Except with respect
to the exercise of remedies under this Agreement or the Security Agreement,
the Lender shall have no duty, responsibility or obligation of any nature
whatsoever to service, collect, administer, enforce or account for the
Contracts. The Borrower shall service, account for, administer, collect all
payments and enforce all rights with respect to such Contracts. Upon the
occurrence of an Event of Default, the Borrower shall deposit such payments
promptly upon receipt and in the form received in the collateral account
established by the Lender pursuant to Section 5 of the Security Agreement.
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<PAGE>
13. INDEMNIFICATION. Except for losses, claims, damages or liability
arising out of the gross negligence or wilful misconduct of the Lender, the
Borrower agrees to indemnify and hold harmless the Lender, its officers,
agents (including outside legal counsel) and employees, against any and all
losses, claims, damages or liability to which the Lender, its officers,
agents and employees, may become subject under any law in connection with the
carrying out of the transactions contemplated by this Agreement or any other
Loan Document, or the conduct of any activity related to the Equipment and to
reimburse the Lender, its officers, agents and employees, for any
out-of-pocket legal and other expenses (including reasonable attorneys' fees,
whether incurred at trial, on appeal, in bankruptcy proceedings, or
otherwise) incurred by the Lender, its officers, agents and employees, in
connection with investigating any such losses, claims, damages or liabilities
or in connection with defending any actions relating thereto. The Lender
agrees, at the request and reasonable expense of the Borrower, to cooperate
in the making of any investigation in defense of any such claim and promptly
to assert any or all of the rights and privileges and defenses which may be
available to the Lender. The Borrower further releases and agrees to hold
harmless the Lender, its officers, agents and employees, from and against all
losses, damages, penalties, liabilities, or expenses (including reasonable
legal fees, whether incurred at trial, on appeal, in bankruptcy proceedings,
or otherwise) due to or arising out of any misrepresentation of information
furnished to Lender by Borrower or out of a breach of any covenant,
representation or undertaking of the Borrower contained in this Agreement or
any other Loan Document. The Borrower's liability hereunder shall not be
limited to the extent of such insurance or subject to any exclusions from
coverage in any insurance policy. The provisions of this Section shall
survive the payment of the Note and the Loan.
14. PLACEMENT FEE/PARTICIPATION SERVICING FEE. The Borrower shall pay
to the Lender the following amounts: (i) a placement fee that will be
deducted from the proceeds of the Note on the Closing Date, and (ii) a
participation servicing fee on the unpaid principal balance of the Note from
time to time outstanding (computed on the basis of a year consisting of
twelve (12) thirty (30) day months) accruing at a rate equal to one-fourth of
one percent (0.25%), payable monthly on each payment date under the Note.
15. ATTORNEYS FEES AND TAXES. The Borrower shall reimburse the Lender,
upon demand, for all reasonable costs and expenses actually incurred,
including without limitation reasonable attorney's fees paid or incurred by
the Lender in connection with:
a. The preparation or review of the Loan Documents (provided,
however, that the Borrower's obligation to pay legal fees to the Lender for
legal services rendered by counsel for the Lender in connection with the
preparation and review of the Loan Documents shall be limited to $15,000),
the perfection, protection, enforcement or foreclosure of the security
interests created by the Loan Documents, the protection or enforcement of the
interests and collateral security of the Lender in any litigation or
bankruptcy or insolvency proceeding or the prosecution or defense of any
action or proceeding relating in any way to the transactions contemplated by
this Agreement, travel to and from the offices and place of business of the
Borrower, the negotiation and preparation of the Loan Documents and all other
documents
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<PAGE>
necessary or desirable in connection with the original execution and delivery
of Loan Documents;
b. Subsequent to the initial Closing, the negotiation of any
amendments or modifications to any of the Loan Documents requested by or
consented to by Borrower or, if an Event of Default has occurred and is
continuing, requested by Lender, and any related documents, instruments or
agreements and the preparation of any and all documents necessary or
desirable to effect such amendments or modifications; and
c. The enforcement by the Lender during the term hereof or
thereafter of the rights or remedies of the Lender hereunder or under any of
the foregoing documents, instruments or agreements, including without
limitation reasonable costs and expenses of collection in the Event of
Default, whether or not suit is filed with respect thereto and whether such
costs are paid or incurred, or to be paid or incurred, prior to or after
entry of judgment.
The Borrower agrees to pay all stamp, document, transfer, recording or filing
taxes or fees and similar impositions now or hereafter reasonably determined
by the Lender to be payable in connection with the Loan Documents, or any
other documents, instruments or transactions pursuant to or in connection
herewith or therewith, and the Borrower agrees to save the Lender harmless
from and against any and all present or future claims, liabilities or losses
with respect to or resulting from any omission to pay or delay in paying any
such taxes, fees or impositions, unless such omission or delay is due to
gross negligence or willful misconduct on the part of Lender. All such
expenses, taxes or attorney's fees shall be payable to the Lender on demand.
The obligations of Borrower under this SECTION 15 shall survive the repayment
of the Note and Loan.
16. RELATIONSHIP AMONG BORROWERS.
a. JOINT AND SEVERAL LIABILITY. BY SIGNING THIS AGREEMENT, EACH
OF THE BORROWERS AGREES THAT IT IS LIABLE, JOINTLY AND SEVERALLY WITH THE
OTHER BORROWER, FOR THE PAYMENT OF THE NOTE AND ALL OTHER OBLIGATIONS OF THE
BORROWERS UNDER THIS AGREEMENT, AND THAT LENDER CAN ENFORCE SUCH OBLIGATIONS
AGAINST EITHER BORROWER, IN LENDER'S SOLE AND UNLIMITED DISCRETION.
b. LENDER RIGHTS TO ADMINISTER THE LOAN. Lender may at any time
and from time to time, without the consent of, or notice to, either Borrower,
without incurring responsibility to either Borrower, and without affecting,
impairing or releasing any of the obligations of either Borrower hereunder:
(1) alter, change, modify, extend, release, renew, cancel,
supplement or amend in any manner the Loan Documents provided at least one
Borrower has consented thereto, and the Borrowers' joint and several
liability shall continue to apply after giving effect to
20
<PAGE>
any such alteration, change, modification, extension, release, renewal,
cancellation, supplement or amendment;
(2) sell, exchange, surrender, realize upon, release (with or
without consideration) or otherwise deal with in any manner and in any order
any property of any person or entity mortgaged to Lender or otherwise
securing the Borrowers' joint and several liability, or otherwise providing
recourse to Lender with respect thereto;
(3) exercise or refrain from exercising any rights against
either Borrower or others with respect to the Borrowers' joint and several
liability, or otherwise act or refrain from acting;
(4) settle or compromise any of the Borrowers' joint and
several liability, any security therefor or other recourse with respect
thereto, or subordinate the payment or performance of all or any part thereof
to the payment of any liability (whether due or not) of either Borrower to
any creditor of either Borrower, including without limitation, Lender and
either Borrower;
(5) apply any sum received by Lender from any source in
respect of any liabilities of either Borrower to Lender to any of such
liabilities, regardless of whether the Note remains unpaid;
(6) fail to set off and/or release, in whole or in part, any
balance of any account or any credit on its books in favor of either
Borrower, or of any other person, and extend credit in any manner whatsoever
to either Borrower, and generally deal with either Borrower and any security
for the Borrowers' joint and several liability or any recourse with respect
thereto as Lender may see fit; and/or
(7) consent to or waive any breach of, or any act, omission
or default under, this Agreement or any other Loan Document, including,
without limitation, any agreement providing collateral security for the
payment of the Borrowers' joint and several liability or any other
indebtedness of either Borrower or Lender.
c. PRIMARY OBLIGATION. No invalidity, irregularity or
unenforceability of all or any part of either Borrower's joint and several
liability or of any security therefor or other recourse with respect thereto
shall affect, impair or be a defense to the other Borrower's joint and
several liability, and all obligations under the Note and this Agreement are
primary obligations of each Borrower.
d. PAYMENTS RECOVERED FROM LENDER. If any payment received by the
Lender and applied to any obligations is subsequently set aside, recovered,
rescinded or required to be returned for any reason (including, without
limitation, the bankruptcy, insolvency or reorganization of a Borrower or any
other obligor), the obligations to which such payment was applied shall be
deemed to have continued in existence, notwithstanding such application, and
21
<PAGE>
each Borrower shall be jointly and severally liable for such obligations as
fully as if such application had never been made. References in this
Agreement to amounts "irrevocably paid" or to "irrevocable payment" refer to
payments that cannot be set aside, recovered, rescinded or required to be
returned for any reason.
e. NO RELEASE. Until the Note and all other obligations under
this Agreement have been paid in full and each and every one of the covenants
and agreements of this Agreement are fully performed, the obligations of
either Borrower hereunder shall not be released, in whole or in part, by any
action or thing (other than irrevocable payment in full) which might, but for
this provision of this Agreement, be deemed a legal or equitable discharge of
a surety or guarantor, or by reason of any waiver, extension, modification,
forbearance or delay or other act or omission of Lender or its failure to
proceed promptly or otherwise, or by reason of any action taken or omitted by
Lender whether or not such action or failure to act varies or increases the
risk of, or affects the rights or remedies of, either Borrower, nor shall any
modification of any of the Note or this Agreement or release of any security
therefor by operation of law or by the action of any third party affect in
any way the obligations of either Borrower hereunder, and each Borrower
hereby expressly waives and surrenders any defense to its liability hereunder
based upon any of the foregoing acts, omissions, things, agreements, or
waivers of any of them. Neither Borrower shall be exonerated with respect to
its liabilities under this Agreement by any act or thing except irrevocable
payment and performance of the obligations, it being the purpose and intent
of this Agreement that the obligations constitute the direct and primary
obligations of each Borrower and that the covenants, agreements and all
obligations of each Borrower hereunder be absolute, unconditional and
irrevocable.
f. ACTIONS NOT REQUIRED. Each Borrower hereby waives any and all
right to cause a marshalling of the other Borrower's assets or any other
action by any court or other governmental body with respect thereto insofar
as the rights of Lender hereunder are concerned or to cause Lender to proceed
against any security for the Borrowers' joint and several liability or any
other recourse which Lender may have with respect thereto, and further waives
any and all requirements that Lender institute any action or proceeding at
law or in equity against the other Borrower or anyone else, or with respect
to this Agreement, the Loan Documents, or any collateral security for the
Borrowers' joint and several liability, as a condition precedent to making
demand on, or bringing an action or obtaining and/or enforcing a judgment
against, either Borrower. Each Borrower further waives any requirement that
Lender seek performance by the other Borrower or any other person, of any
obligation under this Agreement, the Loan Documents or any collateral
security for the Borrowers' joint and several liability as a condition
precedent to making a demand on, or bringing an action or obtaining and/or
enforcing a judgment against, either Borrower. No Borrower shall have any
right of setoff against Lender with respect to any of its obligations
hereunder. Any remedy or right hereby granted which shall be found to be
unenforceable as to any person or under any circumstance, for any reason,
shall in no way limit or prevent the enforcement of such remedy or right as
to any other person or circumstance, nor shall such unenforceability limit or
prevent enforcement of any other remedy or right hereby granted.
22
<PAGE>
g. DEFICIENCIES. Each Borrower specifically agrees that in the
event of a foreclosure under the Security Agreement, any other security
agreement or other similar agreement held by Lender which secures any part or
all of the Borrowers' joint and several liability and in the event of a
deficiency resulting therefrom, each Borrower shall be, and hereby is
expressly made, liable to Lender for the full amount of such deficiency
notwithstanding any other provision of this Agreement or provision of such
agreement, any document or documents evidencing the indebtedness secured by
such agreement or any other document or any provision of applicable laws
which might otherwise prevent Lender from enforcing and/or collecting such
deficiency. Each Borrower hereby waives any right to notice of a foreclosure
under any security agreement or other similar agreement given to Lender by
any other Borrower which secures any part or all of the Borrowers' joint and
several liability.
h. BORROWERS BANKRUPTCY. Each Borrower expressly agrees that its
liability and obligations under the Note and this Agreement shall not in any
way be affected by the institution by or against the other Borrower or any
other person or entity of any bankruptcy, reorganization, arrangement,
insolvency or liquidation proceedings, or any other similar proceedings for
relief under any bankruptcy law or similar law for the relief of debtors, or
any action taken or not taken by Lender in connection therewith, and that any
discharge of either Borrower's joint and several liability pursuant to any
such bankruptcy or similar law or other laws shall not discharge or otherwise
affect in any way the obligations of the other Borrower under the Note and
this Agreement, and that upon or at any time after the institution of any of
the above actions, at Lender's sole discretion, the Borrowers' joint and
several obligations shall be enforceable against either Borrower that is not
itself the subject of such proceedings. Each Borrower expressly waives any
right to argue that Lender's enforcement of any remedies against that
Borrower is stayed by reason of the pendency of any such proceedings against
the other Borrower.
i. NO SUBROGATION. Notwithstanding any payment or payments made
by either Borrower hereunder or any setoff or application of funds of either
Borrower by the Lender, such Borrower shall not be entitled to be subrogated
to any of the rights of the Lender against the other Borrower or any other
guarantor or any collateral security or guaranty or right of offset held by
the Lender for the payment of the obligations, nor shall such Borrower seek
or be entitled to seek any contribution or reimbursement from the other
Borrower or any other guarantor in respect of payments made by such Borrower
hereunder, until all amounts owing to the Lender by the Borrowers on account
of the obligations are irrevocably paid in full. If any amount shall be paid
to a Borrower on account of such subrogation rights at any time when all of
the obligations shall not have been irrevocably paid in full, such amount
shall be held by that Borrower, and shall, forthwith upon receipt by the
Borrower, be turned over to the Lender in the exact form received by the
Borrower (duly endorsed by the Borrower to the Lender, if required), to be
applied against the obligations, whether matured or unmatured, in such order
as the Lender may determine.
j. BORROWERS' FINANCIAL CONDITION. Each Borrower is familiar
with the financial condition of the other Borrower, and each Borrower has
executed and delivered this
23
<PAGE>
Agreement and the Note based on that Borrower's own judgment and not in
reliance upon any statement or representation of the Lender. The Lender
shall have no obligation to provide either Borrower with any advice
whatsoever or to inform either Borrower at any time of the Lender's actions,
evaluations or conclusions on the financial condition or any other matter
concerning the Borrowers.
k. RELATIONSHIP OF BORROWERS. Each Borrower represents that it
expects to derive benefits from the extension of credit accommodations to the
Borrowers by the Lender and finds it advantageous, desirable and in its best
interests to execute and deliver this Agreement and the Note to the Lender.
17. PARTICIPATION DISCLOSURE. The Borrower hereby acknowledges that
and consents to the Lender selling participation interests in the Loan, and
hereby authorizes the Lender to disclose to any potential participant the
Loan Documents and any and all financial and other information relating to
the Borrower and delivered to the Lender in connection with this transaction,
provided that Lender shall comply with all laws, including but not limited to
federal and state securities laws, in connection with the offer or sale of
such participation interests. The Lender and anyone claiming by or through
the Lender shall not hold Borrower responsible for any false representations
Lender may have made to its participants.
18. AMENDMENTS. No amendment, modification or waiver of any provision
of the Loan Documents and no consent to any departure by the Borrower
therefrom shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such amendment, modification, waiver or
consent shall be effective only in the specific instance and for the purpose
for which given. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against whom enforcement of the change,
waiver, discharge or termination is sought.
19. MARSHALLING; PAYMENTS SET ASIDE. The Lender shall be under no
obligation to marshall any assets in favor of the Borrower or any other
Person or against or in payment of the Loan and other Indebtedness of the
Borrower to the Lender. To the extent that the Borrower makes a payment or
payments to the Lender or the Lender exercises its rights of setoff, and such
payment or payments or the proceeds of such setoff or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set
aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy law, state or federal law, common law or equitable
cause, then to the extent of such recovery, the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full
force and effect as if such payment had not been made or such enforcement or
setoff had not occurred.
20. INVALID PROVISIONS. If fulfillment of any provision hereof, or any
transaction related thereto at the time performance of any such provision shall
be due, shall involve transcending the limit of validity prescribed by law,
then, ipso facto, the obligation to be fulfilled shall be reduced to the limit
of such validity; and such clause or provision shall be deemed
24
<PAGE>
invalid as though not herein contained, and the remainder of this Agreement
shall remain operative in full force and effect.
21. NOT JOINT VENTURES. The Lender is not, and shall not by reason of any
provision of any of the Loan Documents be deemed to be, a joint venturer with or
partner or agent of the Borrower.
22. ESTOPPEL CERTFICATE. At any time and from time to time, within
fifteen (15) Business Days after receipt from the other party hereto of a
written request therefor, Borrower or Lender, as the case may be, shall prepare,
execute and deliver to the such party, and/or any other party which Borrower or
Lender, as the case may be, may designate, an estoppel certificate stating: (a)
the amount of the unpaid principal balance and accrued interest on the date
thereof; (b) the date upon which the last payment was made and the date the next
payment is due; and (c) that Borrower has no defenses, claims or offsets against
full enforcement hereof according to the terms hereof, or listing and describing
any such amendments, changes, defaults, events of default, defenses, claims or
offsets which do exist.
23. NOTICE OF CHANGE OF LOCATION. Borrower shall promptly notify Lender
of any change in location of Borrower's principal places of business or the
offices where it keeps its records concerning accounts and contract rights.
24. TAX IDENTIFICATION NUMBER. The federal tax identification number
for PDS Financial Corporation is 41-1605970. The federal tax identification
number for PDS Financial Corporation - Nevada is 88-0357859.
25. SETOFFS. If the unpaid principal amount of the Loan, interest
accrued thereon or any other amount owing by the Borrower under the Loan
Documents shall have become due and payable (by demand, acceleration or
otherwise), the Lender shall have the right, in addition to all other rights
and remedies available to it, without notice to the Borrower, to set off
against, and to appropriate and apply to such due and payable amounts any
debt owing to, and any other funds held in any manner by the Lender for the
account of, the Borrower. Such right shall exist whether or not the Lender
shall have made any demand hereunder or under any other Loan Document,
whether or not such debt owing to or funds held for the account of the
Borrower is or are matured or unmatured, and regardless of the existence or
adequacy of any collateral, guaranty or any other security, right or remedy
available to the Lender.
26. REMEDIES CUMULATIVE. The rights and remedies herein specified of the
parties hereto are cumulative and not exclusive of any rights or remedies which
the parties hereto would otherwise have at law or in equity or by statute.
27. INTEGRATION; CONFLICTING TERMS. This Agreement together with the
other Loan Documents comprises the entire agreement of the parties on the
subject matter hereof and supersedes and replaces all prior agreements, oral and
written, on such subject matter. If any term of any of the other Loan Documents
expressly conflicts with the provisions of this
25
<PAGE>
Agreement, the provisions of this Agreement shall control; provided, however,
that the inclusion of supplemental rights and remedies of Lender in any of
the other Loan Documents shall not be deemed a conflict with this Agreement.
28. GOVERNING LAW; CONSTRUCTION. The Loan Documents shall be governed
by, and construed in accordance with, Minnesota law. Whenever possible,
each, provision of the Loan Documents and any other statement, instrument or
transaction contemplated hereby or thereby or relating hereto or thereto
shall be interpreted in such manner as to be effective and valid under such
applicable law, but, if any provision of the Loan Documents or any other
statement, instrument or transaction contemplated hereby or thereby or
relating hereto or thereto shall be held to be prohibited or invalid under
such applicable law, such provision shall be ineffective only to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of the Loan Documents or any other
statement, instrument or transaction contemplated hereby or thereby or
relating hereto or thereto. The parties shall endeavor in good-faith
negotiations to replace any invalid, illegal or unenforceable provisions with
a valid provision the economic effect of which comes as close as possible to
that of the invalid, illegal or unenforceable provision. The provisions of
this Section are irrevocable and may not be rescinded, revoked or amended
without the prior written consent of Lender. Borrower acknowledges Lender
has relied upon them in entering into the Loan Documents.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the proper officers thereunto duly authorized on the day and year first
above written.
MILLER & SCHROEDER PDS FINANCIAL CORPORATION
INVESTMENTS CORPORATION
By: /s/ Jay A. Tabolich By: /s/ Peter D. Cleary
-------------------------- ----------------------------
Its: Senior Vice President Its: Chief Financial Officer
------------------------- ---------------------------
PDS FINANCIAL CORPORATION -
NEVADA
By: /s/ Peter Cleary
---------------------------
Its: Secretary
--------------------------
26
<PAGE>
LIST OF EXHIBITS
- ----------------
A. Contract Eligibility Criteria
B. Form of Advance Request
C. Pending Litigation
D. Contract Status Report Format
E. Compliance Certificate
27
<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 July 23, 1998 on our reviews of interim
financial information of PDS Financial Corporation for the periods ended June
30, 1998 and 1997, and included in the Company's quarterly report on Form 10-QSB
for the quarter ended June 30, 1998 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.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 12, 1998
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT AS OF AND FOR THE QUARTER ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,211,782
<SECURITIES> 0
<RECEIVABLES> 42,766,661
<ALLOWANCES> 0
<INVENTORY> 10,231,110
<CURRENT-ASSETS> 0<F1>
<PP&E> 4,102,865<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 63,312,418
<CURRENT-LIABILITIES> 8,322,964
<BONDS> 44,465,153<F3>
0
0
<COMMON> 36,416
<OTHER-SE> 10,487,885
<TOTAL-LIABILITY-AND-EQUITY> 63,312,418
<SALES> 16,350,635
<TOTAL-REVENUES> 23,727,597
<CGS> 14,215,225
<TOTAL-COSTS> 22,534,474
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F4>
<INCOME-PRETAX> 1,193,123
<INCOME-TAX> 453,000
<INCOME-CONTINUING> 740,123
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 740,123
<EPS-PRIMARY> .21
<EPS-DILUTED> .19
<FN>
<F1>THE COMPANY DOES NOT PREPARE A CLASSIFIED BALANCE SHEET
<F2>INCLUDES DEFERRED INCOME TAX ASSET OF $848,000
<F3>INCLUDES NONRECOURSE OBLIGATIONS OF $7,645,631
<F4>AMOUNT, $2,094,107 IS INCLUDED IN TAG 30 "TOTAL COSTS"
</FN>
</TABLE>
