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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date:
Class Outstanding as of April 30, 1998
----- --------------------------------
Common Stock, $.01 par value 3,593,830 shares
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PDS FINANCIAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page(s)
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<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statement of Income (Unaudited)
For the Three Months Ended March 31, 1998 and 1997 2
Condensed Consolidated Balance Sheet (Unaudited)
As of March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Three Months Ended March 31, 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 8-12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13-14
</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 March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES
Equipment sales $ 6,124,156
Rental revenue on operating leases 1,981,096 $ 2,477,042
Fee income 1,024,529 670,376
Finance income 319,712 409,786
Other 552 3,394
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Total revenues 9,450,045 3,560,598
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COSTS AND EXPENSES
Equipment sales 5,249,465
Depreciation on operating leases 1,558,266 1,819,581
Selling, general and administrative 1,091,369 622,750
Interest 827,176 869,026
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Total costs and expenses 8,726,276 3,311,357
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Income before income taxes 723,769 249,241
Provision for income taxes 275,000 95,000
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NET INCOME $ 448,769 $ 154,241
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Earnings per share:
Basic $ .13 $ .05
Diluted $ .12 $ .05
Number of shares used to compute per share amounts:
Basic 3,548,849 3,119,816
Diluted 3,761,673 3,132,948
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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<S> <C> <C>
(Unaudited)
ASSETS
Cash and cash equivalents $ 878,837 $ 1,865,468
Accounts receivable 14,469,910 1,715,154
Notes receivable, net 8,393,143 3,140,964
Net investment in leasing operations:
Equipment under operating leases, net 15,907,874 18,327,490
Direct finance leases 3,907,858 5,976,368
Equipment held for sale or lease 7,084,565 6,289,900
Deferred income taxes 683,000 824,000
Other assets 1,925,776 1,824,488
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Total assets $53,250,963 $39,963,832
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 2,539,693 $ 2,094,178
Deferred funds for pending transactions 4,484,300 775,159
Discounted lease rentals 5,836,596 5,919,579
Notes payable 28,650,000 21,527,311
Convertible subordinated debentures 34,407 89,117
Other liabilities 2,365,455 929,142
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Total liabilities 43,910,451 31,334,486
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Stockholders' equity:
Common stock, $.01 par value, 20,000,000
shares authorized, 3,571,474 and 3,523,972
issued and outstanding in 1998 and 1997,
respectively 35,715 35,240
Additional paid-in capital 9,956,978 9,695,056
Retained earnings (accumulated deficit) (652,181) (1,100,950)
----------- ------------
Total stockholders' equity 9,340,512 8,629,346
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Total liabilities and stockholders'
equity $53,250,963 $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>
Three months ended March 31,
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1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 448,769 $ 154,241
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation on operating leases 1,558,266 1,819,581
Gain on sale of financial assets (1,498,771) (657,360)
Purchases/originations of notes receivable
and direct finance leases (9,912,919) (5,673,862)
Proceeds from:
Sale of notes receivable and direct finance leases 4,556,770 5,148,333
Collection of notes receivable and direct finance leases 660,825 840,866
Increase in accounts receivable (2,462,490) (309,059)
Changes in other operating assets and liabilities, net 348,788 11,148
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Net cash provided by (used in) operating activities (6,300,762) 1,333,888
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment for leasing (1,538,410) (3,369,810)
Proceeds from sale of leased equipment 4,000 63,368
Other, net (26,420) (57,112)
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Net cash used in investing activities (1,560,830) (3,363,554)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 9,019,197 1,500,000
Proceeds from discounted lease rentals 692,428 1,691,914
Payments on notes payable (2,240,602) (363,902)
Payments on discounted lease rentals (775,411) (1,505,696)
Payments on subordinated debentures (16,500) (243,987)
Proceeds from exercise of stock options 195,849 -
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Net cash provided by financing activities 6,874,961 1,078,329
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Net decrease in cash and cash equivalents (986,631) (951,337)
Cash and cash equivalents at beginning of period 1,865,468 2,760,200
----------- -----------
Cash and cash equivalents at end of period $ 878,837 $ 1,808,863
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</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements as of March 31, 1998 and
for the three months ended March 31, 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. Coopers &
Lybrand L.L.P., the Company's independent accountants, have 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
March 31, 1998 and for the three months ended March 31, 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 April 1998, the Company extended its agreement with a bank to provide
a $1.0 million working capital line of credit through May 31, 1998. The
Company expects to renew the agreement for a one year period on terms which
are consistent with the prior agreement. As of May 13, 1998, there were no
borrowings outstanding under this agreement.
In May 1998, the Company completed a $12.0 million public debt offering.
The Company sold 12,000 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. On May 11, 1998, the
underwriter exercised its over-allotment option to sell an additional 1,800
Units, which is expected to close on May 14, 1998. Interest on the Notes is
payable quarterly, beginning October 1, 1998. Each year beginning July 1,
2000, Notes having an aggregate balance of $1.8 million ($2.1 million upon
closing of the over-allotment) 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 $12.4 million, including proceeds from the over-allotment,
will be used to expand the Company's leasing activities and for general
corporate purposes.
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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
for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
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<S> <C> <C>
Net income, basic $ 448,769 $ 154,241
Interest expense on convertible
subordinated debentures, net of tax 907 -
---------- ----------
Net income, diluted $ 449 676 $ 154,241
---------- ----------
---------- ----------
Weighted average shares outstanding:
Basic (actual shares outstanding) 3,548,849 3,119,816
Effect of dilutive options 174,635 13,132
Effect of dilutive warrants 20,208
Effect of convertible subordinated debentures 17,981 -
---------- ----------
Diluted 3,761,673 3,132,948
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---------- ----------
Per share amounts:
Basic $ .13 $ .05
---------- ----------
---------- ----------
Diluted $ .12 $ .05
---------- ----------
---------- ----------
</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 first quarters of 1998 and 1997, total comprehensive income
amounted to $467,610 and $136,209, respectively. Accumulated other
comprehensive income (loss) at March 31, 1998 and December 31, 1997 was
($18,650) 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 March 31, 1998, and the
related condensed consolidated statements of income and cash flows for the
three-month periods ended March 31, 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.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
April 22, 1998
7
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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
8
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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. Consistent
with the Company's strategy to increase its leasing activities, the 1996 and
1997 originations involve a greater mix of operating leases, which generate
revenues throughout the lease term, as opposed to notes or direct finance
leases, which generate revenues primarily upon sale.
The Company's revenue generating activities can be categorized as
follows: (i) equipment sales; (ii) rental revenue on operating leases;
(iii) fee income, resulting principally from the sale of lease or note
receivable transactions; and (iv) 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.
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 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.
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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 net
investment in leasing operations--direct finance leases.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
Revenues for the first quarter of 1998 totaled $9.5 million, an increase
of $5.9 million from $3.6 million in the first quarter last year. The
increase in revenues is primarily attributable to equipment sales. Gross
originations of financing transactions for the three months ended March 31,
1998 decreased to $11.6 million compared to $35.7 million for the same period
in 1997.
Equipment sales totaled $6.1 million in the first quarter of 1998. The
Company did not sell equipment in the first 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 $5.2 million
The Company's average operating lease portfolio was $17.6 million during
the first quarter of 1998 as compared to $25.8 million one year earlier. The
decrease in the average portfolio results from the sale of certain of the
equipment which had been under operating leases. Rental revenue on operating
leases decreased to $2.0 million from $2.5 million. Related depreciation
also decreased to $1.6 million from $1.8 million. These leases are expected
to generate revenues throughout their lease terms, which range from 24 to 48
months and are typically 36 months.
Fee income increased $300,000 to $1.0 million related to the sale of
transactions with a basis of $12.6 million in the three months ended March 31,
1998, compared to fee income of $.7 million on the sale of transactions with a
basis of $22.1 million in the three months ended March 31, 1997. The higher
level of fee income is primarily attributable to more favorable pricing on the
sale of certain of the leases and notes receivable, which the Company had held
in its portfolio.
Finance income decreased $90,000 to $320,000 for the three months ended
March 31, 1998 when compared to $410,000 during the three months ended March 31,
1997. The decrease primarily reflects a smaller portfolio of notes receivable
held by the Company during the first quarter of 1998 as compared to the first
quarter of 1997.
Selling, general and administrative expenses increased to $1.1 million
for the three months ended March 31, 1998, compared to $.6 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
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expansion of the sales activities and the formation of the reconditioned
gaming device division in Las Vegas, Nevada.
Interest expense decreased $42,000 primarily because of the lower levels
of borrowings related to the smaller portfolio of notes receivable held by
the Company during the first quarter of 1998 as compared to the first quarter
of 1997.
Income before income taxes increased $475,000 to $724,000 in the first
quarter of 1998, compared with $249,000 in the same period last year. The
improvement in 1998 primarily reflects the profit contributions from
equipment sales and higher level of fee income, partially offset by higher
related costs and expenses, as described above.
The effective income tax rate was 38% in the three months ended March 31,
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 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 $.9 million at March 31,
1998, a decrease of $1.0 million from December 31, 1997. During the first
quarter of 1998, cash used in operating activities totaled $6.3 million, an
increase of $7.6 million from the first quarter of 1997. The higher level of
cash used in the 1998 quarter primarily reflects the Company's higher level
of note receivable originations and an increase in accounts receivable
related to the Company's reconditioned gaming device division. The cash used
in investing activities in the 1998 quarter primarily reflects $1.5 million
of investment in equipment for leasing. The $6.9 million of net cash
provided by financing activities in the first quarter of 1998 was primarily
utilized to originate the note receivable transactions discussed above.
At March 31, 1998 total borrowings were $34.5 million, up from $27.5
million at December 31, 1997. The majority of the proceeds from the
borrowings were invested in equipment in the Company's leasing operations.
The Company's recourse debt to equity ratio was 2.6:1 at March 31, 1998
compared with 2.0:1 at December 31, 1997. The following summarizes the
significant borrowing activities of the Company.
DISCOUNTED LEASE RENTALS. Subsequent to origination of certain leases,
the Company discounts the remaining lease payments with various financial
institutions in return for a cash payment based on the present value of such
payments. Proceeds from discounting are recorded in the Company's condensed
consolidated balance sheet as discounted lease rentals. The discounted
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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 $5.8 as of March 31,
1998. The net decrease of $.1 million is the result of cash proceeds from
discounting of $.7 million, more than offset by principal payments of $.8
million.
NOTES PAYABLE. Total notes payable increased from $21.5 million as of
December 31, 1997 to $28.6 million as of March 31, 1998. The net increase of
$7.1 million is primarily the result of additional cash proceeds of $9.0
million, noncash borrowings of $.3 million, partially offset by payments of
$2.2 million.
CAPITAL RESOURCES
At March 31, 1998, the Company's revolving credit and working capital
borrowing capability is $34.0 million. Advances under these agreements
aggregated $11.4 million at March 31, 1998. In addition, in May 1998, the
Company completed a $12.0 million public debt offering, as discussed in Note 2.
to Condensed Consolidated Financial Statements. The net proceeds to the
Company of $12.4 million will be used to expand the Company's leasing
activities and for general corporate purposes.
The Company's current financial resources, including the proceeds from its
May 1998 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.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein which are not historical facts are
forward-looking statements with respect to events, the occurrence of which
involves risks and uncertainties, including 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 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.
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PART II- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are included with this quarterly report on Form
10-QSB as required by Item 601 of Regulation S-B.
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------- ----------- ------
<S> <C> <C>
15 Letter Regarding Unaudited Interim
Financial Information 14
27 Financial Data Schedule (EDGAR filing only)
</TABLE>
b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the quarter ended March 31, 1998 or during the period from March 31,
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: May 13, 1998 By: /s/ Peter D. Cleary
Chief Financial Officer
(a duly authorized officer)
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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 April 22, 1998 on our reviews of interim
financial information of PDS Financial Corporation for the period ended
March 31, 1998 and included in the Company's quarterly report on Form 10-QSB
for the quarter ended March 31, 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.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
May 13, 1998
14
<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
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 878,837
<SECURITIES> 0
<RECEIVABLES> 42,678,785
<ALLOWANCES> 0
<INVENTORY> 7,084,565
<CURRENT-ASSETS> 0<F1>
<PP&E> 2,608,776<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 53,250,963
<CURRENT-LIABILITIES> 9,389,448
<BONDS> 34,521,003<F3>
0
0
<COMMON> 35,715
<OTHER-SE> 9,304,797
<TOTAL-LIABILITY-AND-EQUITY> 53,250,963
<SALES> 6,124,156
<TOTAL-REVENUES> 9,450,045
<CGS> 5,249,465
<TOTAL-COSTS> 8,726,276
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F4>
<INCOME-PRETAX> 723,769
<INCOME-TAX> 275,000
<INCOME-CONTINUING> 448,769
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 448,769
<EPS-PRIMARY> .13
<EPS-DILUTED> .12
<FN>
<F1>THE COMPANY DOES NOT PREPARE A CLASSIFIED BALANCE SHEET
<F2>INCLUDES DEFERRED INCOME TAX ASSET OF $683,000
<F3>INCLUDES NONRECOURSE OBLIGATIONS OF $10,246,125
<F4>AMOUNT, $827,176 IS INCLUDED IN TAG 30 "TOTAL COSTS"
</FN>
</TABLE>
