PDS FINANCIAL CORP, 424B4, 1998-05-05

PDS FINANCIAL CORP
424B4, 1998-05-05
FINANCE LESSORS

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<PAGE>

PROSPECTUS

12,000 INVESTMENT UNITS

PDS FINANCIAL
CORPORATION

$12,000,000 10% SENIOR SUBORDINATED NOTES, DUE JULY 1, 2004 AND
WARRANTS TO PURCHASE 600,000 SHARES OF COMMON STOCK
---------------------

Each investment unit (the "Unit") offered hereby consists of a 10% Senior
Subordinated Note, due July 1, 2004, in the principal amount of $1,000 (the
"Note") of PDS Financial Corporation (the "Company" or "PDS") and fifty
detachable warrants (the "Warrants") to purchase fifty shares of the Company's
common stock, $.01 par value (the "Common Stock"). Interest on the Notes is
payable on the first day of each calendar quarter, beginning October 1, 1998.
Each year, beginning on July 1, 2000, the Trustee shall select by lot, or other
similar method, Notes having an aggregate principal amount of $1,800,000
($2,070,000 if the over-allotment option is exercised in full) for mandatory
redemption. Notes selected for mandatory redemption shall be redeemed in full at
par plus accrued interest. In addition to mandatory redemptions, the Company
also has the option to redeem the Notes, in whole or in part, at any time on or
after July 1, 1998 at par plus accrued interest and any premium, if applicable.
The entire unpaid principal balance of, and interest on, the Notes is due and
payable on July 1, 2004. See "Description of Units-- Notes." The Notes will be
issued only in fully registered form and in denominations of $1,000 and integral
multiples thereof. The Notes are unsecured general obligations of the Company
and will be subordinated to all existing and future "Senior Debt" (as defined in
the Indenture) of the Company. At March 31, 1998, the Company's Senior Debt was
$24.2 million.

The Notes and Warrants are immediately detachable and the Warrants are
immediately exercisable upon closing of the Offering. The Warrants expire on the
fifth anniversary of the date of this Prospectus. The exercise price of each
Warrant shall be $12.25. After the first anniversary of the date of this
Prospectus, the Warrants are subject to optional redemption by the Company at
$.01 per Warrant upon 30 days notice, provided that the closing price for the
Common Stock for a period of 20 consecutive trading days prior to such notice is
equal to or greater than $30.62.

Prior to this offering there has been no market for the Units, the Notes and
the Warrants, and there can be no assurance that an active trading market will
develop. Although the Underwriter has advised the Company that it intends
initially to make a market in the Notes and the Warrants, the Underwriter has no
obligation to do so. The Warrants have been approved for inclusion on The Nasdaq
National Market, subject to notice of issuance, under the trading symbol
"PDSFW." The Units and the Notes will not be listed on any securities exchange
or on the Nasdaq System. See "Underwriting."

The approval of the Nevada Gaming Commission is required before the Company
may sell the Units and the Company received such approval on April 28, 1998.

SEE "RISK FACTORS" FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS BEGINNING ON PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNTS(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit................................................. $1,000.00 6.5% $935.00
Total Units, (10,000) (3)................................ $12,000,000 $780,000 $11,220,000
</TABLE>

(1) In connection with this Offering, the Company has agreed to sell to Miller &
Schroeder Financial, Inc. (the "Underwriter") a five-year warrant (the
"Underwriter's Warrant") to purchase 50,000 shares of the Company's Common
Stock. The Company has also agreed to pay the Underwriter a 1% management
fee and a 1.5% fee as a nonaccountable expense allowance and to indemnify
the Underwriter against certain liabilities. See "Underwriting."
(2) Before deducting offering expenses (including the 1% management fee and 1.5%
nonaccountable expense allowance payable to the Underwriter) payable by the
Company estimated at $500,000.
(3) The Company has granted to the Underwriter a 45-day option to purchase up to
1,800 additional Units to cover over-allotments. See "Underwriting." If the
option is exercised in full, the total Price to Public, Underwriting
Discount, 1% management fee payable to the Underwriter, 1.5% nonaccountable
expense allowance payable to the Underwriter and Proceeds to Company will be
$13,800,000, $897,000, $138,000, $207,000 and $12,903,000, respectively.

The Units are offered by the Underwriter subject to prior sale, withdrawal,
cancellation or modification of the offer without notice, to delivery to and
acceptance by the Underwriter, and to its right to reject any order in whole or
in part and to certain other conditions. It is expected that delivery of the
Units will be made against payment therefor on or about May 7, 1998, in
Minneapolis, Minnesota.

MILLER & SCHROEDER FINANCIAL, INC.

THE DATE OF THIS PROSPECTUS IS MAY 4, 1998.

<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE UNITS, INCLUDING OVER-
ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES. FOR A
DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING INFORMATION UNDER
"RISK FACTORS." CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 (THE "REFORM ACT"). SEE "FORWARD-LOOKING STATEMENTS" FOR FACTORS
RELATING TO SUCH STATEMENTS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS
PROSPECTUS RELATING TO THE UNITS ASSUMES NO EXERCISE OF THE UNDERWRITER'S
OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." AS USED HEREIN, UNLESS THE CONTEXT
REQUIRES OTHERWISE, THE TERMS THE "COMPANY" OR "PDS" MEAN PDS FINANCIAL
CORPORATION AND PDS'S WHOLLY OWNED SUBSIDIARIES, PDS FINANCIAL
CORPORATION--NEVADA ("PDS NEVADA"), PDS FINANCIAL CORPORATION--MISSISSIPPI
("PDS-MISSISSIPPI"), PDS CASINOS INTERNATIONAL, INC. AND TRANSCANADA 2
CORPORATION.

THE COMPANY

PDS engages in the business of financing and leasing gaming equipment and
supplying reconditioned gaming machines 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. In 1997, the Company established PDS Slot Source, a
reconditioned gaming machine sales and distribution program, to complement its
leasing and financing activities.

In order to offer its SlotLease and PDS Slot Source programs, the Company
must be licensed to own and distribute gaming devices in each jurisdiction in
which it conducts business. As part of the licensing process, each gaming
jurisdiction performs a thorough investigation of each applicant and certain of
its directors, officers, key employees and significant shareholders. The Company
currently is licensed in Nevada, New Jersey, Colorado, Iowa and Minnesota. The
Company also has license applications pending in Mississippi and Indiana. The
Company believes its gaming licenses, as well as its experience in the gaming
industry, provides a significant competitive advantage, enabling the Company to
offer financing packages and services that meet the needs of this industry more
effectively than traditional financing.

The Company believes SlotLease, its operating lease program, has been well
received by casino operators since its introduction in 1996 because it offers
casino operators lower monthly payments and off-balance sheet financing. The
Company retains ownership of the gaming equipment under an operating lease. At
the end of the applicable lease term, the Company offers the customer an option
to purchase the gaming equipment at its then-determined fair market value or to
extend the lease term. Returned gaming machines are inventoried for lease or
resale by the Company through the PDS Slot Source program.

In May 1997, the Company introduced PDS Slot Source, its reconditioned
gaming machine sales and distribution program. The Company believes that the
secondary market for gaming machines is fragmented, underdeveloped and
represents a significant opportunity for growth. The Company obtains used gaming
machines either from its customers at the end of an applicable lease term or in
the marketplace. These gaming machines are refurbished by the Company prior to
resale or are occasionally sold "as is" to a customer. The Company believes its
ability to recondition and distribute used gaming machines enhances the market
value of gaming machines at the end of an operating lease and facilitates
additional financing transactions.

In addition to offering operating leases through its SlotLease program, the
Company also provides financing to its customers in the form of capital leases
or collateralized loans. Such financing transactions are either originated
directly by the Company with the casino operator or are structured jointly with
a gaming equipment manufacturer or distributor. Under both of these types of
transactions substantially all of the benefits and risks of ownership are borne
by the lessee/borrower. Under a capital lease, the

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<PAGE>
customer is required to pay the Company the purchase price of the gaming
equipment either throughout the term of the lease or, if the lease payments are
not sufficient to cover the purchase price of the gaming equipment, the customer
is required to pay the Company a balloon payment at the end of the lease term.
Most of the Company's equipment financing transactions range from $250,000 to
$2.5 million. The Company generally obtains the funds necessary for its capital
lease or note originations by selling all or a portion of its interest in the
payment stream to one or more institutional investors, often simultaneously with
the origination of such financing transactions.

The Company generally targets established medium-sized casino operators that
are opening new casinos or expanding existing casinos, as well as new casino
operators that the Company believes have acceptable credit quality. The Company
is currently focusing its primary efforts on the traditional gaming markets of
Nevada and New Jersey.

The principal executive offices of PDS are located at 6171 McLeod Drive, Las
Vegas, Nevada 89120; its telephone number is (702) 736-0700.

THE OFFERING

<TABLE>
<S> <C>
Securities Offered................ 12,000 Units at a price of $1,000 per Unit, each Unit
consisting of a 10% Senior Subordinated Note, due July
1, 2004, in the principal amount of $1,000 and fifty
five-year Warrants to purchase fifty shares of the
Company's Common Stock at an exercise price per share of
$12.25. See "Description of Units."

Use of Proceeds................... The net proceeds from the sale of the Units, estimated
to be $10,720,000 ($12,358,000 if the Underwriter's
over-allotment option is exercised in full), will be
used primarily to purchase gaming equipment to be leased
to casino operators. See "Use of Proceeds."

THE NOTES

Interest payments................. Interest on the Notes will be paid quarterly, at the
rate of 10% per annum, on the first day of each January,
April, July and October, beginning on October 1, 1998
(each an "Interest Payment Date"). Interest is payable
until final maturity or prior redemption of the Notes.
See "Description of Units--Notes."

Mandatory redemptions............. Each year, beginning on July 1, 2000, the Trustee shall
select by lot, or other similar method, Notes having an
aggregate principal amount of $1,800,000 ($2,070,000 if
the over-allotment option is exercised in full) for
mandatory redemption. Notes selected for mandatory
redemption shall be redeemed in full at par plus accrued
interest. The Company may surrender to the Trustee Notes
purchased in the open market or Notes redeemed pursuant
to optional redemption to be applied to mandatory
redemptions. On or before July 1, 2004, the Company will
pay to the Trustee cash sufficient to redeem all
remaining outstanding Notes. See "Description of
Units--Notes."

Optional redemptions.............. In addition to mandatory redemptions, some or all of the
Notes may be redeemed at any time, on or after July 1,
1998, at the option of the Company, at par plus accrued
interest plus the applicable premium, if any. Notes
shall be selected for optional redemption by the Trustee
by lot or other similar method. In the
</TABLE>

4
<PAGE>

<TABLE>
<S> <C>
event of an optional redemption of the Notes prior to
July 1, 2001, a 6% premium will be due. The premium will
decline to 4% for optional redemptions on or after July
1, 2001 and prior to July 1, 2002, and will further
decline to 2% for optional redemptions on or after July
1, 2002 and prior to July 1, 2003. No premium is payable
with respect to optional redemptions on or after July 1,
2003. See "Description of Units--Notes."

Subordination..................... The Notes will be unsecured general obligations of the
Company and junior, subordinate and subject in right of
payment to the prior payment of all Senior Debt (as
defined herein), whether outstanding at the closing of
the Offering or created thereafter. The Notes are senior
in right of payment to the Convertible Subordinated
Debentures of the Company and any Subordinated Debt held
by an affiliate of the Company. See "Description of
Units--Notes."

Trustee........................... The Notes will be issued pursuant to an indenture (the
"Indenture") between the Company and US Bank Trust
National Association, St. Paul, Minnesota, as trustee
(the "Trustee").

Covenants......................... The Indenture, among other things, requires the Company
to maintain a minimum net worth of $6,000,000 and
restricts or limits the Company, under certain
circumstances, from paying dividends or repurchasing
capital stock, engaging in transactions with affiliates
and effecting mergers, consolidations or transfers of
substantially all of its assets. See "Description of
Units--Notes."

THE WARRANTS

Exercise price.................... Each Warrant entitles the holder to purchase one share
of Common Stock at an exercise price per share of
$12.25. See "Description of Units--Warrants."

Exercise period................... The Warrants are immediately detachable from the Notes
and are immediately exercisable for registered shares of
Common Stock of the Company upon the closing of this
Offering. The exercise period of the Warrants will
expire on the fifth anniversary of the date of this
Prospectus. See "Description of Units--Warrants."

Redemption right.................. After the first anniversary of the date of this
Prospectus, the Warrants are subject to optional
redemption by the Company, upon 30 days prior notice, at
$.01 per Warrant, provided that the closing price for
the Common Stock for a period of 20 consecutive trading
days prior to such notice is equal to or greater than
$30.62. See "Description of Units--Warrants--
Redemption."

Listing........................... The Warrants have been approved for inclusion on The
Nasdaq National Market, subject to notice of issuance,
under the trading symbol "PDSFW."
</TABLE>

5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA

The following table sets forth summary consolidated financial and operating
data of the Company for the periods indicated. This information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and related notes included elsewhere in this Prospectus:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
INCOME STATEMENT DATA:
Total revenues..................................................................... $ 47,613,259 $ 6,360,494
Total costs and expenses........................................................... 46,094,404 5,876,175
------------- -------------
Income before income taxes......................................................... 1,518,855 484,319
Provision for income taxes......................................................... 577,000 179,000
------------- -------------
Net income......................................................................... $ 941,855 $ 305,319
------------- -------------
------------- -------------
CASH FLOW DATA:
Cash provided by (used in):
Operating activities............................................................. $ 12,810,361 $ 9,327,171
Investing activities............................................................. 3,557,077 (19,663,150)
Financing activites.............................................................. (17,262,170) 12,226,070

OTHER DATA:
Ratio of earnings to fixed charges(1).............................................. 1.35 1.34
EBITDA(2).......................................................................... $ 14,367,562 $ 4,041,720
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
ACTUAL AS ADJUSTED(3)
------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Investment in notes and leasing operations.................................... $ 33,734,722 $ 44,454,722(4)
Total assets.................................................................. 39,963,832 50,683,832(4)
Non-recourse debt............................................................. 10,121,389 10,121,389
10% Senior Subordinated Notes................................................. -- 10,120,000(4)
Other recourse debt........................................................... 17,414,618 17,414,618
Total stockholders' equity.................................................... 8,629,346 9,229,346(4)
</TABLE>

- ------------------------

(1) Ratio of earnings to fixed charges is computed by dividing income before
income taxes before fixed charges by fixed charges. Fixed charges consists
of interest expense and the portion of rental expense considered
representative of interest.

(2) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. EBITDA is presented as additional information because it is
commonly used in the industry, and PDS believes it to be a useful indicator
of a company's ability to meet its debt service requirements. It is not,
however, intended as an alternative measure of operating results or cash
flow from operations (as determined in accordance with generally accepted
accounting principles).

(3) Adjusted to reflect the sale of the 12,000 Units offered hereby and the
application of the Company's estimated net proceeds therefrom.

(4) For accounting purposes, the gross sales price of the Units will be
allocated $11,400,000 to the Notes and $600,000 to stockholders' equity to
reflect the estimated value of the Warrants.

6
<PAGE>
RISK FACTORS

THE UNITS OFFERED BY THIS PROSPECTUS INVOLVE CERTAIN RISKS. THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE
COMPANY. CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE REFORM ACT. SEE "FORWARD-LOOKING
STATEMENTS" FOR FACTORS RELATING TO SUCH STATEMENTS.

STRICT REGULATION BY GAMING AUTHORITIES. Financing gaming equipment and
supplying reconditioned gaming machines to casino operators in the United States
are subject to strict regulation under various state, county and municipal laws.
The Company and its required directors, officers and shareholders have received
the necessary licenses, permits and authorizations required to own and
distribute gaming machines in Nevada, New Jersey, Colorado, Iowa and Minnesota
and have license applications pending in Mississippi and Indiana. Failure of the
Company or any of its key personnel to obtain or maintain the requisite
licenses, permits and authorizations would have a material adverse effect on the
Company. Expansion of the Company's activities may be hindered by delays in
obtaining requisite state licenses. No assurance can be given as to the term for
which the Company's license will be renewed in a particular jurisdiction or as
to what license conditions, if any, may be imposed by such jurisdiction in
connection with any future renewals. The Company cannot predict the effects that
adoption of and changes in gaming laws, rules and regulations might have on its
future operations. See "Business--Government Regulation."

COMPETITION. In recent years, the Company has focused solely on providing
financing to the gaming industry and, since late 1997, supplying reconditioned
gaming machines to casino operators in the United States. In the gaming
equipment financing market, the Company competes primarily with equipment
manufacturers and, to a lesser extent, with leasing companies, commercial banks
and other financial institutions. Certain of the Company's competitors are
significantly larger and have substantially greater resources than the Company.
With respect to the sales of reconditioned gaming machines, the Company competes
primarily against equipment manufacturers and smaller distributors. It is
possible that new competitors may engage in gaming equipment financing or the
distribution of reconditioned gaming machines, some of which may have licenses
to own or sell gaming equipment and have greater financial resources than the
Company. Significant competition encountered by the Company may have a material
adverse effect on the Company. There can be no assurance that the Company will
be able to compete successfully against current and future competitors. See
"Business--Competition."

DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES. The Company believes that
its ability to increase revenues, cash flow and profitability will depend, in
part, upon continued market acceptance of the Company's products and services,
particularly SlotLease and PDS Slot Source. There can be no assurance that the
market acceptance of the Company's products and services will continue. Changes
in market conditions in the gaming industry and in the financial condition of
casino operators, such as consolidation within the industry or other factors,
could limit or diminish market acceptance of these products and services.
Historically, the Company has experienced significant nonrecurring revenues in
connection with its financings and sales of gaming equipment to casino
operators. The Company has attracted new customers to replace these nonrecurring
revenues. Insufficient market acceptance of the Company's products and services
could have a material adverse effect on the Company's business, financial
condition and results of operations.

CONTINUED AVAILABILITY OF ADEQUATE FINANCING. The amount and number of
financing transactions that can be originated by the Company are directly
dependent upon and limited by its ability to fund such transactions, either
through the sale of such transactions to institutional investors or through the
Company's working capital, lines of credit or other financing sources. In
addition, the Company desires to expand its lines of credit to allow it to hold
a greater volume of transactions, particularly leases, in its portfolio. There
is no assurance that the Company's present funding sources will be willing to
purchase future transactions, expand existing lines of credit or continue to
provide the Company with a source of funds. Further, there can be no assurance
that the Company would be able to locate new funding sources,

7
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if needed. As a result, funding for the Company's transactions may not be
available on acceptable terms or on a timely basis, if at all. The inability of
the Company to obtain suitable and timely funding for its transactions could
have a material adverse effect on the Company's operations.

ABILITY TO RECOVER INVESTMENT IN EQUIPMENT. The gaming equipment leased
under operating leases by the Company and the inventory of reconditioned gaming
machines represents a substantial portion of the Company's capital. Under the
operating leases offered through the SlotLease program, the Company retains
title to the gaming equipment and assumes the risk of not recovering its entire
investment in the gaming equipment through either re-leasing or selling the
gaming equipment. At the inception of each operating lease, the Company
estimates the residual value of the leased equipment, which is the estimated
market value of the equipment at the end of the initial lease term. The actual
residual value realized may differ from the estimated residual value, resulting
in a gain or loss when the leased equipment is sold or re-leased at the end of
the lease term. The inability to re-lease or sell the gaming equipment on
favorable terms could have a material adverse effect on the Company.

The Company also engages in the purchase, reconditioning and resale of used
gaming machines. There can be no assurances that the Company will be able to
recover its cost for such gaming machines, and the failure to do so could have a
material adverse effect on the Company.

RISKS RELATING TO PDS SLOT SOURCE. The PDS Slot Source program, which the
Company established in 1997, has a limited operating history and is subject to
various risks, including the inability to find adequate sources of used gaming
machines, the inability to obtain or delays in obtaining parts necessary to
refurbish used gaming machines, competitors' control over the supply of certain
parts and changes in market conditions relating to refurbished gaming machines,
the occurrence of any of which could have a material adverse effect on the
Company.

RISKS RELATING TO FINANCING TRANSACTIONS. The Company has funded selected
gaming equipment transactions entirely with its own working capital or with
borrowed funds rather than immediately selling the transactions to institutional
investors. In certain situations, the Company retains a portion of the
transactions it originates. This approach requires substantial capital and
places the Company at risk for its investment in the transactions, which may
subject the Company to greater loss in the event of a default by the lessee or
borrower, or an inability to sell the transactions to institutional investors
after a period of temporary investment by the Company. In connection with its
financing transactions, the Company's level of risk depends primarily on the
creditworthiness of the lessee or borrower and the underlying collateral.

In addition, the Company has provided, and may provide in the future,
financing to Indian tribes. Indian tribes in the United States generally enjoy
sovereign immunity from lawsuits, similar to that of the United States
government. Although the Company generally obtains a waiver of sovereign
immunity, there can be no assurance that a tribe will not assert sovereign
immunity, even if such right has been waived. The law regarding sovereign
immunity is unsettled. If any Indian tribe defaults and successfully asserts its
right of sovereign immunity, the Company's ability to recover its investment and
originate and sell future Indian gaming transactions could be materially
adversely affected.

No assurance can be given that the Company will not incur significant losses
with respect to financing transactions in the future or that such losses will
not have a material adverse effect on the Company's financial condition. See
"Business--Structure of Financing Transactions."

SUBORDINATION; ABSENCE OF SECURITY. The Notes offered hereby are unsecured
and subordinated in right of payment to all Senior Indebtedness of the Company
as defined in the Indenture. Therefore, in the event of a liquidation or
reorganization of the Company, amounts due pursuant to the Notes will be paid
only after all Senior Indebtedness, including interest thereon, has been paid in
full. Accordingly, in such circumstances, sufficient assets may not be available
to pay amounts due on the Notes. As of March 31, 1998, the aggregate principal
amount of Senior Indebtedness outstanding was $24.2 million. The Company may
incur additional Senior Indebtedness. See "Description of Units--Notes."

8
<PAGE>
DEPENDENCE ON CURRENT MANAGEMENT. The Company's success is largely
dependent on the efforts of Johan P. Finley, its founder, President and Chief
Executive Officer. Although the Company maintains $2 million of "key person"
term life insurance and has an employment agreement with Mr. Finley, the loss of
Mr. Finley's services could have a material adverse effect on the Company's
business. See "Management."

LIMITED MARKET FOR UNITS, NOTES AND WARRANTS. Prior to this Offering, there
has been no public market for the Units, the Notes or the Warrants. Although the
Warrants are approved for inclusion on The Nasdaq National Market, subject to
notice of issuance, there can be no assurance that an active public market for
the Warrants will develop or can be sustained. The Units and the Notes will not
be listed on any securities exchange or the Nasdaq system and there can be no
assurance that a market for the Units or the Notes will develop. While the
Underwriter has advised the Company that it intends initially to make a market
in the Notes and Warrants, it has no obligation to do so. Any market that may
develop for such securities is expected to be of a limited nature. As a result,
an investment in the Units may not be suitable for investors who do not wish, or
who are not financially able, to remain as investors for a substantial period of
time. See "Underwriting."

EFFECTIVE FEDERAL AND STATE REGISTRATIONS REQUIRED TO EXERCISE WARRANTS;
POSSIBLE REDEMPTION OF WARRANTS. Purchasers of the Units will be able to
exercise the Warrants only if a registration statement covering the Common Stock
underlying the Warrants is then in effect under the Securities Act of 1933, as
amended (the "Securities Act") or an exemption from registration under the
Securities Act is available, and only if such Common Stock is qualified for sale
or exempt from qualification under applicable securities laws of the states in
which the holders of the Warrants reside. Although the Company will use its best
efforts (i) to maintain the effectiveness of the registration statement covering
the Common Stock underlying the Warrants pursuant to the Securities Act and (ii)
to maintain the registration of such Common Stock under the securities laws of
the states in which the Company initially qualifies the Units for sale in this
Offering, there can be no assurance that the Company will be able to do so. The
Company will not be able to issue shares of Common Stock to those persons
desiring to exercise the Warrants if a registration statement is not kept
effective under the Securities Act or an exemption from registration under the
Securities Act is not available, or if the Common Stock underlying the Warrants
is not qualified or exempt from qualification in the states where the holders of
the Warrants reside. In such a case, a holder of the Warrants might not be able
to exercise the Warrants when such holder desires and, as a result, could be
required to hold the Warrants for a period of time until a registration
statement is effective or an exemption from registration is available or sell
the Warrants. See "Risk Factors--Limited Market for Units, Notes and Warrants"
and "Description of Units--Warrants."

After the first anniversary of the date of this Prospectus, the Warrants are
subject to redemption at any time by the Company at a price of $.01 per Warrant
on 30 days prior written notice if the closing price of the Common Stock is
equal to or greater than $30.62 for each of the 20 consecutive trading days
prior to such notice. If the Warrants are redeemed, holders of such Warrants
will lose their right to exercise the Warrants, except during such 30-day
period. Redemption of the Warrants could force the holders to exercise the
Warrants at a time when it may be disadvantageous for the holders to do so or to
sell the Warrants at the then current market price or accept the redemption
price, which will be substantially less than the market value of the Warrants at
the time of redemption. See "Description of Units--Warrants."

POTENTIAL FLUCTUATIONS IN RESULTS. The Company's quarterly results 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 of a transaction, which can occur several months after the
date such transaction was originated by the Company. These transactions can be
in the negotiation and documentation stage for several months, and recognition
of the resulting fee income by the Company is difficult to predict and may
fluctuate greatly from quarter to quarter. Thus, the results of any quarter are
not necessarily indicative of the results that may be expected for any other
interim period. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

9
<PAGE>
CONTROL BY CURRENT MANAGEMENT. Johan P. Finley, the Company's founder,
President, and Chief Executive Officer, owns approximately 31% of the Company's
outstanding Common Stock. In addition, Mr. Finley's wife and child own an
aggregate of approximately 10% of the Company's outstanding Common Stock. Thus,
Mr. Finley effectively controls the election of all members of the Company's
Board of Directors and determines all corporate actions. Such ownership may
discourage acquisition of large blocks of the Company's securities and may
depress the price of the Common Stock and have an anti-takeover effect. See
"Principal Stockholders" and "Description of Securities--Common Stock."

ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK. The Company's Amended and
Restated Articles of Incorporation provide that no investor may become a holder
of 5% or more of the Company's stock without first agreeing to consent to a
background investigation, provide a financial statement and respond to questions
from gaming regulators. In addition, investors holding less than 5% of the
Company's stock may be subject to the same requirements by regulatory agencies
which license the Company. Such ownership limitations may discourage acquisition
of large blocks of the Company's equity securities, may depress the price of the
Company's Common Stock and have an anti-takeover effect.

The Company's Amended and Restated Articles of Incorporation authorize its
Board of Directors to issue preferred stock and establish the rights and
preferences of such shares without stockholder approval. The voting rights of
the preferred stock may be greater than the voting rights of the Common Stock in
certain circumstances, and thus the issuance of preferred stock may diminish the
voting power of holders of the Common Stock and make it more difficult for a
third party to acquire the Company. See "Description of Securities."

The Company's directors are subject to investigation and review by gaming
regulators in jurisdictions in which the Company is licensed or has applied for
a license. Such investigation and review of the Company's directors may have an
anti-takeover effect. See "Business--Government Regulation."

As a Minnesota corporation, the Company is subject to certain
"anti-takeover" provisions of the Minnesota Business Corporation Act. These
provisions and the power to issue additional stock and to establish separate
classes or series of stock may, in certain circumstances, deter or discourage
takeover attempts and other changes in control of the Company not approved by
the Board. See "Description of Securities--Certain Provisions Having
Anti-Takeover Effects."

FORWARD-LOOKING STATEMENTS

Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and "Business" and elsewhere in this Prospectus
constitute "forward-looking statements" within the meaning of the Reform Act.
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
or unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: 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 program; 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 risks relating to the PDS Slot Source program; the risk
of default with respect to the Company's financing transactions; the
subordination of the Notes; the Company's dependence on key employees; potential
fluctuations in the Company's quarterly results; general economic and business
conditions; and other factors referenced in this Prospectus. See "Risk Factors."

10
<PAGE>
USE OF PROCEEDS

The net proceeds from the sale of the Units offered by the Company hereby,
after deduction of the selling and estimated offering expenses, are estimated to
be $10,720,000 ($12,358,000 if the Underwriter's over-allotment option is
exercised in full). The Company intends to use the net proceeds to purchase
gaming machines from gaming equipment manufacturers to be leased to casino
operators and the remaining proceeds for general corporate purposes.

Depending upon the nature and timing of the purchase described above and
other leasing transactions, some of the proceeds may be used to temporarily
reduce amounts owed by the Company under three of its revolving credit
facilities with banks. Borrowings under all of these revolving credit facilities
bear interest at a rate equal to the prime rate plus 1%. Borrowings outstanding
under the first revolving credit facility are due upon the earlier of demand by
the bank or August 15, 1998. Borrowings outstanding under the second and third
revolving credit facilities are due on May 1, 1998 and April 9, 2000,
respectively. Borrowings under the first revolving credit facilities were used
for working capital, borrowings under the second credit facility were used to
purchase gaming equipment held for sale or lease and borrowings under the third
revolving credit facility were used to purchase gaming equipment for lease to
casino operators. If the Company uses some or all of the net proceeds to
temporarily reduce amounts owed under the three credit facilities, the Company
will subsequently borrow from such facilities to purchase the gaming machines
described above. See "Forward-Looking Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."

PRICE RANGE OF COMMON STOCK

The Company's Common Stock trades on the Nasdaq National Market under the
symbol "PDSF." The following table sets forth the high and the low sale prices
of the Company's Common Stock as reported by the Nasdaq National Market for each
of the quarters in the two year period ended December 31, 1997.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1996
First Quarter.............................................................. $ 3.000 $ 1.375
Second Quarter............................................................. 2.875 1.875
Third Quarter.............................................................. 2.625 1.875
Fourth Quarter............................................................. 2.500 1.750

1997
First Quarter.............................................................. 3.375 1.750
Second Quarter............................................................. 5.000 2.625
Third Quarter.............................................................. 6.375 3.875
Fourth Quarter............................................................. 8.500 6.000

1998
First Quarter.............................................................. 7.938 5.438
</TABLE>

As of December 31, 1997, there were approximately 60 stockholders of record
of the Company's Common Stock.

DISTRIBUTIONS AND DIVIDEND POLICY

The Board of Directors presently expects to retain all earnings for
operating purposes and does not expect to pay dividends on the Common Stock for
the foreseeable future. In addition, the Indenture prohibits the payment of
dividends for so long as any of the Notes are outstanding, and the Company's
revolving credit agreements place restrictions on the Company's ability to pay
dividends or make other distributions on its Common Stock. The payment by the
Company of dividends, if any, on its Common Stock in the future is subject to
the discretion of the Board of Directors and will depend on the Company's
earnings, financial condition, capital requirements and other relevant factors.

11
<PAGE>
CAPITALIZATION

The following table sets forth the debt and capitalization of the Company as
of December 31, 1997 and as adjusted to give effect to the sale of the 12,000
Units offered by the Company hereby and the application of the estimated net
proceeds of such sale. See "Use of Proceeds."

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------
AS
ACTUAL ADJUSTED(1)(2)
------------- ----------------
<S> <C> <C>
Non-recourse indebtedness....................................................... $ 10,121,389 $ 10,121,389
Other recourse debt............................................................. 17,325,501 17,325,501
Convertible subordinated debentures............................................. 89,117 89,117
10% Senior Subordinated Notes(3)................................................ -- 10,120,000
------------- ----------------
Total debt.................................................................... 27,536,007 37,656,007
------------- ----------------
Preferred Stock, 2,000,000 shares authorized;
no shares issued and outstanding.............................................. -- --
Common Stock, $.01 par value, 20,000,000 shares authorized;
3,523,972 shares issued and outstanding(2).................................... 35,240 35,240
Additional paid-in capital(3)................................................... 9,695,056 10,295,056
Retained earnings (accumulated deficit)......................................... (1,100,950) (1,100,950)
------------- ----------------
Total stockholders' equity.................................................... 8,629,346 9,229,346
------------- ----------------
Total capitalization.......................................................... $ 36,165,353 $ 46,885,353
------------- ----------------
------------- ----------------
</TABLE>

- ------------------------

(1) Adjusted to reflect the sale of the 12,000 Units offered by the Company
hereby and the anticipated application of the net proceeds.

(2) Does not include (i) 552,454 shares of Common Stock issuable upon exercise
of outstanding stock options, (ii) up to 21,000 shares of Common Stock
issuable upon conversion of the Convertible Subordinated Debentures, (iii)
168,200 shares issuable upon the exercise of outstanding warrants, (iv)
600,000 shares issuable upon the exercise of the Warrants that are a part of
the 12,000 Units offered hereby, or (v) 50,000 shares issuable to the
Underwriter upon exercise of the Underwriter's Warrant issued in connection
with this offering. See "Management--Stock Option Plan," "Description of
Securities--Convertible Subordinated Debentures" and "Underwriting."

(3) For accounting purposes, the gross sales price of the Units will be
allocated $11,400,000 to the Notes and $600,000 to stockholders' equity to
reflect the estimated value of the Warrants.

12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Equipment Sales.................................................................. $ 17,481,986
Revenue from sales-type leases................................................... 14,480,372
Rental revenue on operating leases............................................... 11,405,648 $ 2,938,477
Fee income....................................................................... 2,669,798 2,486,366
Finance income................................................................... 1,575,455 798,324
Other............................................................................ 137,327
------------- -------------
Total revenues................................................................. 47,613,259 6,360,494
------------- -------------
Costs and expenses:
Equipment sales.................................................................. 15,225,203
Sales-type leases................................................................ 13,654,086
Depreciation on operating leases................................................. 8,588,611 2,203,476
Selling, general and administrative.............................................. 4,126,232 2,318,774
Interest......................................................................... 4,260,096 1,353,925
Other............................................................................ 240,176
------------- -------------
Total costs and expenses....................................................... 46,094,404 5,876,175
------------- -------------
Income before income taxes......................................................... 1,518,855 484,319
Provision for income taxes......................................................... 577,000 179,000
------------- -------------
Net income..................................................................... $ 941,855 $ 305,319
------------- -------------
------------- -------------

Earnings per share(1):
Basic............................................................................ $ .30 $ .10
Diluted.......................................................................... $ .28 $ .10
Number of shares used to compute per share data(1):
Basic............................................................................ 3,183,536 3,119,816
Diluted.......................................................................... 3,619,837 3,126,848

BALANCE SHEET DATA:
Investment in notes and leasing operations......................................... $ 33,734,722 $ 30,698,481
Total assets....................................................................... 39,963,832 40,561,727
Non-recourse debt.................................................................. 10,121,389 17,917,461
Other recourse debt................................................................ 17,414,618 7,723,756
Total stockholders' equity......................................................... 8,629,346 5,737,325
</TABLE>

- ------------------------

(1) See Note 1 of Notes to Consolidated Financial Statements for the method used
to determine the number of shares used to compute per share amounts.

13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE REFORM ACT. SEE "FORWARD-LOOKING STATEMENTS" FOR
FACTORS RELATING TO SUCH STATEMENTS.

GENERAL

The Company engages in the business of financing and leasing gaming
equipment and supplying reconditioned gaming machines 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 machine sales and distribution program, to
complement its leasing and financing activities.

The Company's strategy is to increase both its portfolio of assets under
lease and its reconditioned gaming machine sales and thereby increase revenues
and cash flow. In addition to its leasing activities, the Company also
originates note transactions, which it generally sells to institutional
investors. In some of its transactions, the Company holds the leases or notes
for a period of time after origination or retains a partial ownership interest
in the leases or notes. The Company believes its ability to recondition and
distribute used gaming machines enhances the market value of gaming machines 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 that may be
expected for any other period. The Company believes that the development of its
lease portfolio will lead to increased recurring rental revenues, which will
tend to lessen the fluctuations of its operating results.

RECENT OPERATING RESULTS

Revenues for the three months ended March 31, 1998 were $9.5 million,
compared with $3.6 million for the three months ended March 31, 1997. Net income
for the three months ended March 31, 1998 was $449,000, or 12 cents per diluted
share, compared with net income of $154,000, or 5 cents per diluted share for
the three months ended March 31, 1997. Equipment sales, including both equipment
which had been under leases and used gaming devices which the Company purchased
in the marketplace and reconditioned prior to sale were $6.1 million for the
three months ended March 31, 1998. The Company did not sell equipment during the
three months ended March 31, 1997. Gross financing originations for the three
months ended March 31, 1998 decreased to $11.6 million from $35.7 million during
the three months ended March 31, 1997.

14
<PAGE>
SUMMARY CONSOLIDATED OPERATING RESULTS DATA
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues......................................................... $ 9,450,045 $ 3,560,598
Depreciation..................................................... 1,558,266 1,819,581
Income before income taxes....................................... 723,769 249,241
Net income....................................................... 448,769 154,241

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>

ACCOUNTING FOR COMPANY ACTIVITIES

The accounting treatment for the Company's financing activities varies
depending upon the underlying structure of the transaction. The majority of the
Company's equipment transactions are structured as either notes receivable or
direct finance leases in which substantially all benefits and risks of ownership
are borne by the borrower or lessee. In accordance with the Statement of
Financial Accounting Standards (SFAS) No. 13, 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. 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) REVENUE FROM SALES-TYPE LEASES; (iii) RENTAL REVENUE
ON OPERATING LEASE ACTIVITY; (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 machine sales and distribution program, PDS Slot Source. Used gaming
machines 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 machines, the Company
removes the underlying asset from its consolidated balance sheet. Equipment
sales also includes the sale of equipment which may occur during the term of an
operating lease.

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

15
<PAGE>
recognized at the inception of the lease in the consolidated income statement as
the difference between income 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. Upon selling a sales-type lease to a third party, the Company removes
the underlying asset from its consolidated balance sheet.

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.

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 FOR YEARS ENDED DECEMBER 31, 1997 AND 1996

Revenues totaled $47.6 million in 1997, a significant increase from $6.4
million in 1996. The increase in revenues is primarily attributable to equipment
sales, sales-type leases of new gaming equipment as well as the Company's
expanded lease portfolio. Revenues have also benefited from the Company becoming
licensed to own gaming equipment in Nevada and other jurisdictions in 1997.
Gross originations of financing transactions in 1997 totaled $84.4 million
compared to $73.8 million in 1996, an increase of 14%.

EQUIPMENT SALES totaled $17.5 million in 1997. The Company did not sell
equipment in 1996. The Company has obtained its gaming equipment distributor
licenses in Nevada, New Jersey, Colorado, Iowa and Minnesota and, in 1997,
established its reconditioned gaming machine sales and distribution program, PDS
Slot Source. The 1997 equipment sales include both equipment which had been
under operating leases, and used gaming machines which the Company purchased in
the marketplace and reconditioned prior to sale. The cost of equipment sold was
$15.2 million.

REVENUE FROM SALES-TYPE LEASES was $14.5 million in 1997, resulting from the
Company's first sales-type leases of new gaming equipment. Consistent with the
growth of the distribution business described above, the Company intends to
continue to offer this type of lease. The Company did not originate sales-type
leases during 1996. The related cost of these sales-type leases was $13.7
million in 1997.

16
<PAGE>
RENTAL REVENUE ON OPERATING LEASES increased significantly, consistent with
the Company's strategy. The Company's average operating lease portfolio grew
substantially to $27.7 million during 1997, compared to $9.1 million during
1996. Rental revenue on operating leases increased to $11.4 million during 1997
from $2.9 million during 1996. Related depreciation also increased to $8.6
million from $2.2 million. These leases are expected to generate revenues
throughout their lease terms, which range from 24 months to 48 months and are
typically 36 months.

FEE INCOME was $2.7 million related to the sale of transactions with a basis
of $74.5 million during 1997, compared to fee income of $2.5 million on the sale
of transactions with a basis of $52.9 million during 1996.

FINANCE INCOME increased to $1.6 million in 1997 from $0.8 million in 1996.
The increase primarily reflects the larger portfolio of notes receivable held by
the Company in 1997.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in 1997 increased to $4.1
million from $2.3 million in 1996, primarily attributable to higher payroll and
occupancy costs associated with the expansion of the sales activities and the
formation of the reconditioned gaming machine program in Las Vegas, Nevada in
1997.

INTEREST EXPENSE increased to $4.3 million from $1.4 million due to higher
levels of borrowing directly related to the larger investment in equipment for
leasing beginning in the second half of 1996.

OTHER EXPENSE in 1997 primarily reflects the loss on the sale of certain
marketable securities.

INCOME BEFORE INCOME TAXES increased $1.0 million to $1.5 million for 1997,
compared with $0.5 million for 1996. The improvement in 1997 reflects the profit
contributions from equipment sales, sales-type leases and operating lease
activities, partially offset by higher related costs and expenses, as described
above.

INCOME TAXES The Company's effective income tax rate in 1997 was
approximately 38%, compared to approximately 37% in 1996. Both effective rates
are higher than the federal statutory 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 flows generated primarily from the operating activities described above
and various forms of recourse and non-recourse 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 $1.9 million at December 31,
1997, a decrease of $0.9 million from December 31, 1996. During 1997, cash flow
provided by operating activities totaled $12.8 million, an increase of $3.5
million from 1996. The higher level of cash provided by operating activities in
1997, when compared with 1996, primarily results from the Company's expanded
leasing activities. The cash provided by investing activities in 1997 primarily
reflects $14.7 million in proceeds from the sale of leased equipment, partially
offset by $11.0 million of new investment in equipment for leasing. The majority
of the proceeds from the sale of equipment under operating leases were used to
pay related borrowings, primarily discounted lease rentals. The higher level of
proceeds from, and payments on, notes payable in 1997 reflect the utilization of
the Company's new revolving credit and working capital facilities. The greater
magnitude of operating and financing activities in 1997 reflects the higher
level of originations and larger lease portfolio, as discussed above.

17
<PAGE>
At December 31, 1997 total borrowings were $27.5 million, up from $25.6
million at December 31, 1996. The majority of the proceeds from borrowings were
invested in equipment in the Company's leasing operations. The Company's
recourse debt to equity ratio was 2.0:1 at December 31, 1997 compared with 1.3:1
at December 31, 1996. The following summarizes the significant borrowing
activities of the Company.

DEBT FINANCING

DISCOUNTED LEASE RENTALS. Subsequent to origination of certain leases, the
Company discounts the remaining leases 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 consolidated
balance sheet as discounted lease rentals. The discounted lease rentals are
generally non-recourse 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 to $5.9 million as of
December 31, 1997 from $18.0 million as of December 31, 1996. The net decrease
of $12.1 million is primarily the result of principal payments of $18.3 million,
partially offset by cash proceeds from discounting of $4.7 million and non-cash
borrowings of $1.5 million.

NOTES PAYABLE. Total notes payable increased to $21.5 million as of
December 31, 1997 from $5.8 million as of December 31, 1996 in part as a result
of advances under new revolving borrowing agreements, described in the
accompanying Notes to Consolidated Financial Statements. The net increase of
approximately $15.7 million is primarily the result of additional net non-cash
borrowings of $19.1 million, cash proceeds of $10.5 million, partially offset by
payments of $13.9 million. The non-cash borrowings are described in Note 2 of
Notes to Consolidated Financial Statements.

CAPITAL RESOURCES

At December 31, 1997, the Company's revolving borrowing capability is $34.0
million compared with $26.0 million at December 31, 1996. Advances under these
agreements aggregated $8.4 million at December 31, 1997.

The Company's current financial resources, including estimated cash flows
from operations, the revolving credit and working capital facilities, and the
proceeds from the sale of Units in this offering are expected to be sufficient
to fund the Company's anticipated working capital needs. In addition to the
borrowing activities described above, the Company has developed a network of
financial institutions to which it sells financial transactions on a regular
basis. The Company is, from time to time, dependent upon the need to liquidate
or externally finance transactions originated and held in its investment
portfolio. The Company continues to explore other possible sources of capital,
however, there is no assurance that additional debt financing if required, can
be obtained or will be available on terms acceptable to the Company.

Inflation has not been a significant factor in the Company's operations.

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.

18
<PAGE>
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
timely converted, 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.

RECENT ACCOUNTING DEVELOPMENTS:

In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, a new standard for reporting and displaying comprehensive income. This
new standard will be adopted in the first quarter of 1998. The Company does not
expect the adoption of this new standard to have a material affect on its
financial position or results of operations.

In June 1997, the FASB issued SFAS No. 131, a new standard for reporting
segment information in financial statements. The new standard will be effective
for the Company's annual financial statements in 1998. Management of the Company
is currently evaluating this standard and has not yet determined its impact on
the Company's disclosures.

The Company capitalizes certain costs of computer software developed or
obtained for internal use. The amounts capitalized are not significant and the
Company's policy for the capitalization of these costs is consistent with the
guidelines included in the American Institute of Certified Public Accountants'
recent Statement of Position for accounting for costs of computer software
developed or obtained for internal use.

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BUSINESS

CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE REFORM ACT. SEE "FORWARD-LOOKING STATEMENTS" FOR
FACTORS RELATING TO SUCH STATEMENTS.

BACKGROUND

The Company was founded in 1988 as a leasing company, specializing in
vehicle and general equipment leasing transactions. The Company began providing
equipment financing for new Indian gaming facilities in the Upper Midwest in
early 1991. Since 1994, all of the Company's gross originations have resulted
from transactions in the gaming industry. In 1996, the Company established a
sales office in Las Vegas, Nevada, which became the Company's principle
executive office in 1997.

The Company generally targets established medium-sized casino operators that
are opening new gaming facilities or expanding existing gaming facilities, as
well as new casino operators that the Company believes have acceptable credit
quality or credit enhancements provided by equipment manufacturers. Most of the
Company's equipment financing transactions range from $250,000 to $2.5 million.
The Company is currently focusing its primary efforts on the traditional gaming
markets of Nevada and New Jersey.

GAMING INDUSTRY

The casino industry in the United States, and the gaming industry in
general, have experienced substantial growth in recent years. Prior to 1979,
high stakes gaming activities were limited to Nevada. In 1979, casino gaming was
legalized in New Jersey. Between 1979 and 1988, gaming activities by various
Indian tribes developed, leading to the federal enactment of the Indian Gaming
Regulatory Act of 1988. The growth of Indian gaming served as a catalyst for
certain jurisdictions to consider non-Indian casino gaming because of its
potential as a source of government revenue. Since 1989, various forms of casino
gaming have been legalized in Colorado, Illinois, Indiana, Iowa, Louisiana,
Michigan, Mississippi, Missouri and South Dakota. In addition, gaming facilities
operate on cruise ships sailing out of California, Florida, Georgia, Hawaii and
Puerto Rico. Several other states have approved or are considering approval of
some form of casino gaming. No assurance can be given as to whether any
additional states will adopt legislation permitting casino gaming in the future
or the nature, timing and extent of casino development in any state.

According to data compiled from gaming commission reports, in 1996 there
were approximately 372,000 total slot machines installed in the United States,
compared with approximately 237,000 total slot machines installed in the United
States in 1993 and approximately 156,000 total slot machines installed in the
United States in 1990. According to data compiled from gaming commission
reports, in 1996 there were approximately 86,000 slot machines shipped in the
United States, compared with approximately 69,000 slot machines shipped in the
United States in 1993 and approximately 16,000 slot machines shipped in the
United States in 1990, which represents machines shipped to replace older
machines or new installations of machines.

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COMPANY STRATEGY

The Company believes that the gaming industry in general has entered into a
gaming equipment replacement cycle, which provides increased opportunities for
the Company's products and services. The Company believes its ability to offer
casino operators gaming devices under operating lease structures provides a
competitive advantage over financial institutions who do not possess gaming
licenses. The Company's strategy is to increase both its portfolio of assets
under lease and its reconditioned gaming machine sales, and thereby increase its
revenues and cash flow. Recently the Company has increased its focus on the
Nevada and New Jersey gaming markets, and the Company intends to further expand
its presence in those markets.

Because it is licensed to own and distribute gaming machines in key states,
the Company believes it is able to offer a wider variety of gaming equipment
financing structures, such as operating leases, which are especially important
for small to medium-sized casino operators that may be subject to financing
covenants that restrict indebtedness. While gaming equipment manufacturers and
distributors may offer financing to casino operators, this financing may not be
on the most favorable terms to casino operators, and the manufacturers and
distributors generally do not offer sufficient financing for other necessary
furniture, fixtures and equipment. The Company believes its experience in and
knowledge of the gaming industry, as well as its licenses, allow it to offer
financing packages and services that meet the needs of the gaming industry in a
more effective manner than traditional financing and leasing sources and
equipment manufacturers and distributors.

THE SLOTLEASE PROGRAM

The Company believes SlotLease, its operating lease program, has been well
received by casino operators since its introduction in 1996 because it offers
casino operators lower monthly payments and off-balance sheet financing. The
Company believes that the SlotLease program promotes its strategic objective of
increasing recurring revenues. The Company retains ownership of the gaming
equipment under operating lease, and at the end of the applicable lease term the
Company offers the casino operator an option to purchase the gaming equipment at
its then determined fair market value or extend the lease term. The Company
receives rental income under a non-cancelable lease, which ranges from 24 to 48
months and typically has a term of 36 months. The casino operator incurs rental
expense and avoids reflecting an asset and related liability on its balance
sheet. Returned gaming machines are inventoried for lease or resale by the
Company through the PDS Slot Source program.

PDS SLOT SOURCE

In May 1997, the Company introduced PDS Slot Source, its reconditioned
gaming machine sales and distribution program. The Company believes that the
secondary market for gaming machines is fragmented, underdeveloped and
represents a significant opportunity for growth. The Company obtains used gaming
machines either from its customers at the end of an applicable lease term or in
the market from distributors, brokers or operators. These gaming machines are
refurbished by the Company prior to resale or occasionally are sold "as is" to a
customer. The Company believes its ability to recondition and distribute used
gaming machines enhances the market value of gaming machines at the end of an
operating lease and facilitates additional financing transactions.

STRUCTURE OF EQUIPMENT FINANCING TRANSACTIONS

In addition to offering operating leases through its SlotLease program, the
Company also provides financing in the form of capital leases or collateralized
loans. Such financing transactions are either originated directly by the Company
with the casino operator or are structured jointly with the gaming equipment
manufacturer or distributor. Both of these types of transactions transfer
substantially all of the benefits and risks of ownership to the lessee/borrower.
Under a capital lease, the lessee is required to pay

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the Company the purchase price of the gaming equipment either throughout the
term of the lease or, if the lease payments are not sufficient to cover the
purchase price of the gaming equipment, the lessee is required to pay the
Company a balloon payment at the end of the lease term. Most of the Company's
equipment financing transactions range from $500,000 to $2.5 million. The
Company generally obtains the funds necessary for its capital lease or
collateralized loan originations by selling all or a portion of its interest in
the payment stream to one or more institutional investors, often simultaneously
with its origination of financing transactions. The sale price of a financing
transaction is based upon the discounted present value of the payment stream.
The Company's ability to locate investors to purchase its financing transactions
depends on many factors, including the credit quality of the borrowers or
lessees, the type of underlying equipment, credit enhancements, if any, and the
terms under which the transaction was both originated and sold. See "Risk
Factors--Dependence on Availability of Funding."

MARKETING

The Company's marketing strategy has been to develop working relationships
with casino operators and owners, key equipment manufacturers and distributors,
as well as relationships with investment banking firms and other sources of
financing. Management believes that the cultivation of such ongoing
relationships creates financing opportunities for the Company. While the Company
is negotiating further informal and formal commitments from other casino
operators and owners, equipment manufacturers, distributors and financial
institutions, there can be no assurance that any further agreements can be
reached or that manufacturers, distributors, or any other vendor will refer
their transactional business to the Company.

The Company's customers are primarily medium sized casinos operating mainly
in the traditional gaming markets of Nevada and New Jersey. Many of the
Company's customers have a presence in more than one geographic market. In all
of its markets, the Company generally targets established medium-sized casino
operators that are opening new gaming facilities or are expanding or
retrofitting existing facilities, as well as new casino operators that the
Company believes have acceptable credit quality or credit enhancements provided
by equipment manufacturers.

The Company advertises its products and services by participating in the
World Gaming Conference & Expo, which is held every fall in Las Vegas, Nevada.
The Company also advertises in trade magazines and occasionally sends direct
mail advertisements to medium sized casino operators.

COMPETITION

The finance industry is highly competitive. In the gaming equipment
financing market, the Company competes primarily with equipment manufacturers
and to a lesser extent with leasing companies, commercial banks and other
financial institutions. Certain of the Company's competitors are significantly
larger and have substantially greater resources than the Company. The Company
sometimes jointly markets its financing services with gaming equipment
manufacturers who may be competitors of the Company. The Company believes its
ability to offer casino operators gaming devices under operating lease
structures provides a competitive advantage over financial institutions who do
not possess gaming licenses.

The Company competes on the basis of offering flexibility in structuring
leases and other financial transactions, commitment to prompt attention to
customer needs, creative solutions to non-traditional financing requests, and
immediate reactions to changes in the financial marketplace. In addition to
financing gaming equipment, the Company finances substantially all other types
of furniture, fixture and equipment used in a casino operation.

With respect to the sales of reconditioned gaming machines, the Company
competes primarily against equipment manufacturers and smaller distributors. It
is possible that new competitors may engage in gaming equipment financing or the
distribution of reconditioned gaming machines, some of which may have licenses
to own or sell gaming equipment and have greater financial resources than the
Company.

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PRINCIPAL CUSTOMERS

Historically, the Company has experienced significant nonrecurring revenues
in connection with the completion of large gaming equipment financing
transactions. Revenues from the Company's five principal customers were 37%,
18%, 11%, 2% and 7% of total revenues during 1997 and 20%, 0%, 16%, 20% and 14%
of total revenues during 1996. The Company does not expect revenues from certain
of these customers to represent a significant percentage of its total revenues
in 1998. Due to the nature of its large gaming equipment financing transactions,
the Company believes that a significant percentage of its total revenues may be
derived from one or several of its customers in 1998.

GOVERNMENT REGULATION

Gaming is a highly regulated industry. The Company's gaming equipment
financing activities are subject to federal and state regulation and oversight.
In order to offer its SlotLease and PDS Slot Source programs, the Company must
be licensed to own and distribute gaming devices in each jurisdiction where it
conducts business. As part of the licensing process, each gaming jurisdiction
performs a thorough investigation of each applicant, its directors and certain
of its officers, key employees and significant shareholders. The Company
currently is licensed as a gaming equipment distributor under Nevada, New
Jersey, Colorado, Iowa and Minnesota gaming laws. The Company has gaming license
applications pending in Mississippi and Indiana, which were filed in 1997.
Expansion of the Company's activities may be hindered by delays in obtaining
requisite state licenses or other approvals.

No investor may become a holder of 5% or more of the Company's stock without
first agreeing to consent to a background investigation, provide a financial
statement and respond to questions from gaming regulators. See "Description of
Securities--General." In addition, investors holding less than 5% of the
Company's stock may be subject to the same requirements by regulatory agencies
which license the Company.

Gaming on Indian land is further regulated by tribal governments. Changes in
federal, state or tribal laws or regulations may limit or otherwise materially
affect the types of gaming that may be conducted on Indian land. In addition,
numerous lawsuits nationwide seek to limit or expand Indian gaming activities.
The outcome of such litigation cannot be predicted.

The following references to material statutes and regulations affecting the
Company are brief summaries thereof and do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations. Any
change in applicable law or regulation may have a material effect on the
business of the Company.

NEVADA. The ownership, operation, sale and distribution of gaming devices
in Nevada is subject to the Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, the "Nevada Act") and various local
regulations. Generally, gaming activities (including the sale and lease of
gaming devices) may not be conducted in Nevada unless licenses are obtained from
the Nevada Gaming Commission (the "Nevada Commission") and appropriate county
and city licensing agencies. The Nevada Commission, the Nevada State Gaming
Control Board (the "Nevada Board") and the various county and city licensing
agencies are collectively referred to herein as the "Nevada Gaming Authorities."

The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state

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and local revenues through taxation and licensing fees. Change in such laws,
regulations and procedures could have an adverse effect on the Company's
operations.

PDS Nevada, a Nevada corporation and wholly owned subsidiary of the Company,
is required to be licensed as a distributor by the Nevada Gaming Authorities.
The gaming license requires the periodic payment of fees and taxes and is not
transferable. The Company is registered by the Nevada Commission as a publicly
traded corporation ("Registered Corporation") and as such, it is required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information which the Nevada Commission may
require. No person may become a stockholder of, or receive any percentage of
profits from, the Company or PDS Nevada without first obtaining licenses and
approvals from the Nevada Gaming Authorities. The Company and PDS Nevada have
obtained from the Nevada Gaming Authorities the various registrations,
approvals, permits and licenses required to engage in gaming activities in
Nevada.

The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire, or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes. "Gaming
facilities" has been interpreted by the Nevada Gaming Authorities to include the
acquisition or financing of gaming devices in Nevada. The Company has applied
for approval by the Nevada Commission of this Offering and received such
approval on April 28, 1998. Furthermore, any such approval does not constitute a
finding, recommendation, or approval by the Nevada Commission or the Nevada
Board as to the accuracy or adequacy of the prospectus or the investment merits
of the securities offered. Any representation to the contrary is unlawful.

The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or PDS
Nevada in order to determine whether such individual is suitable or should be
licensed as a business associate of a gaming licensee. Officers, directors and
certain key employees of PDS Nevada must file applications with the Nevada
Gaming Authorities and may be required to be licensed or found suitable by the
Nevada Gaming Authorities. Officers, directors, and key employees of the Company
who are actively and directly involved in gaming activities of PDS Nevada may be
required to be licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application for licensing for any cause
which they deem reasonable. A finding of suitability is comparable to licensing,
and both require submission of detailed personal and financial information
followed by a thorough investigation. The applicant for licensing or a finding
of suitability must pay all the costs of the investigation incurred by the
Nevada Gaming Authorities. Changes in licensed positions must be reported to the
Nevada Gaming Authorities, and in addition to their authority to deny an
application for a finding of suitability or licensure, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in corporate position.

If the Nevada Gaming Authorities were to find an officer, director, or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or PDS Nevada, the company involved would have to
sever all relationships with such person. In addition, the Nevada Commission may
require the Company or PDS Nevada to terminate the employment of any person who
refuses to file appropriate applications. Determinations of suitability or of
questions pertaining to licensing are not subject to judicial review in Nevada.

The Company and PDS Nevada are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financial transactions by PDS Nevada
must be reported to, or approved by, the Nevada Commission.

If it were determined that the Nevada Act was violated by PDS Nevada, the
gaming licenses it holds could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, PDS Nevada, the Company, and the persons involved could be subject to
substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada

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<PAGE>
Commission. Limitation, conditioning or suspension of any gaming license could
(and revocation of any gaming license would) materially adversely affect the
Company's gaming operations.

Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.

The Nevada Act requires any person who acquires more than five percent of
the Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires beneficial owners of more than 10 percent of
the Company's voting securities to apply to the Nevada Commission for a finding
of suitability within 30 days after the chairman of the Nevada Board mails the
written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more than
10 percent, but not more than 15 percent, of the Company's voting securities may
apply to the Nevada Commission for a waiver of such finding of suitability if
such institutional investor holds the voting securities for investment purposes
only. An institutional investor shall not be deemed to hold voting securities
for investment purposes unless the voting securities were acquired and are held
in the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies, or operations of the Company,
or any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation, partnership or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of the
investigation incurred by the Nevada Gaming Authorities.

Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board, may be found unsuitable. A record owner may
also be found unsuitable if the record owner fails to identify the beneficial
owner within 30 days of a request by the Nevada Commission or Chairman of the
Nevada Board. Any stockholder found unsuitable and who holds, directly or
indirectly, any beneficial ownership of the common stock of a Registered
Corporation beyond such period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or PDS
Nevada, the Company (i) pays that person any dividend or interest upon voting
securities of the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person,
(iii) pays remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his voting securities for cash at fair market value.

The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated, and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such

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<PAGE>
unsuitable person in connection with such securities; (iii) pays the unsuitable
person remuneration in any form; or (iv) makes any payment to the unsuitable
person by way of principal, redemption, conversion, exchange, liquidation or
similar transaction.

The Company is required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Nevada Commission has not imposed such a requirement on the Company.

Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he obtains control, may not occur without the prior approval
of the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission under a variety
of stringent standards prior to assuming control of such Registered Corporation.
The Nevada Commission may also require controlling stockholders, officers,
directors and other persons having a material relationship or involvement with
the entity proposing to acquire control, to be investigated and licensed as part
of the approval process relating to the transaction.

The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
Board of Directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purposes of acquiring control of the
Registered Corporation.

License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly, or annually. Nevada licensees that
hold a license as an operator of a slot route, or a manufacturer's or
distributor's license, also pay certain fees and taxes to the State of Nevada.

Any person who is licensed, required to be licensed, registered, required to
be registered or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease at the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. A Licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the State of

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Nevada or its ability to collect gaming taxes and fees, or employs a person in
the foreign operation who has been denied a license or finding of suitability in
Nevada on the ground of personal unsuitability.

NEW JERSEY. The Company and certain of its owners, officer, directors and
employees are currently required to be licensed under the New Jersey Casino
Control Act (the "New Jersey Act") as a gaming-related casino service industry
qualified to sell its products to casinos in New Jersey. The sale and
distribution of gaming equipment to casinos in New Jersey is also subject to the
New Jersey Act and the regulations promulgated thereunder by the New Jersey
Casino Control Commission (the "NJCCC"). The NJCCC has broad discretion in
promulgating and interpreting regulations under the New Jersey Act. Amendments
and supplements to the New Jersey Act, if any, may be of material nature, and
accordingly may adversely affect the ability of the Company or its employees to
obtain any required licenses, permits, and approvals from the NJCCC, or any
renewals thereof.

The current regulations govern licensing requirements, standards for
qualification, persons required to be qualified, disqualification criteria,
competition, investigation of supplementary information, duration of licenses,
record keeping, causes for suspension, standards for renewals or revocation of
licenses, equal employment opportunity requirements, fees and exemptions. In
deciding to grant a license, the NJCCC may consider, among other things, the
financial stability, integrity, responsibility, good character, reputation for
honesty, business ability and experience of the Company and its directors,
officers, management, and supervisory personnel, principal employees and
stockholders as well as the adequacy of the financial resources of the Company.

Pursuant to the New Jersey Act, NJCCC regulations and precedent, no entity
may hold a gaming-related casino service industry license unless each owner of
the entity who directly or indirectly holds any beneficial interest or ownership
in excess of 5% of the entity, each director of the entity (except that a
director who, in the opinion of the NJCCC is not significantly involved in or
connected with the management or ownership of the entity shall not be required
to qualify), each officer of the entity who is significantly involved in or has
authority over the conduct of business directly related to gaming activity and
each officer whom the NJCCC may consider appropriate, the management employee
supervising the regional or local office which employs the sales representative
who will deal with the casino licensees, each employee who acts as a sales
representative of who regularly engages in the solicitation of business from
casino licensees, and any person whom the NJCCC may consider appropriate for
approval or qualification, obtains and maintains qualification approval from the
NJCCC.

The NJCCC may require all financial backers, investors, mortgagees,
bondholders and holders of notes or other evidence of indebtedness, either in
effect or proposed, which bears any relation to the gaming devices being
distributed in New Jersey, publicly traded securities of an entity which holds a
casino license or is an entity qualifier, subsidiary or holding company of a
casino licensee (all of the above are collectively the "Regulated Company") to
qualify as financial sources.

An institutional investor ("Institutional Investors") is defined by the New
Jersey Act as any retirement fund administered by a public agency for the
exclusive benefit of federal, state, or local public employees; investment
company registered under the Investment Company Act of 1940; collective
investment trust organized by banks under Part Nine of the Rules of the
Comptroller of the Currency; closed end investment trust; chartered or licensed
life insurance company or property and casualty insurance company; banking or
other chartered or licensed lending institution; investment advisor registered
under the Investment Advisers Act of 1940; and such other persons as the NJCCC
may determine for reasons consistent with the policies of the New Jersey Act.

An Institutional Investor shall be granted a waiver by the NJCCC from
financial source or other qualification requirements applicable to a holder of
publicly-traded securities, in the absence of a prima facie showing by the New
Jersey Division of Gaming Enforcement that there is any cause to believe that
the Institutional Investor may be found unqualified, on the basis of the NJCCC
findings that: (a) its holdings were purchased for investment purposes only and,
upon request by the NJCCC, it files a certified

27
<PAGE>
statement to the effect that it has no intention of influencing or affecting the
affairs of the issuer, the licensee or its holding or intermediary companies;
provided, however, that the Institutional Investor will be permitted to vote on
matters put to the vote of the outstanding security holders; and (b) if (i) the
securities are debt securities of a licensee or a licensee's holding or
intermediary companies or other subsidiary company of the licensee's holding or
intermediary companies which is related in any way to the financing of the
licensee and represent either (x) 20% or less of the total outstanding debt of
the company, or (y) 50% or less of any issue of outstanding debt of the company,
(ii) the securities are under 10% of the equity securities of a licensee or a
licensee's holding or intermediary companies, or (iii) if the securities so held
exceed such percentages, upon a showing of good cause. The NJCCC may grant a
waiver of qualification to an Institutional Investor holding a higher percentage
of such securities upon a showing of good cause and if the conditions specified
above are met.

Generally, the NJCCC requires each institutional holder seeking waiver of
qualification to execute a certification to the effect that (i) the holder has
reviewed the definition of Institutional Investor under the New Jersey Act and
believes that it meets the definition of Institutional Investor; (ii) the
securities are those of a publicly traded corporation; (iii) the holder
purchased the securities for investment purposes only and holds them in the
ordinary course of business; (iv) the holder has no involvement in the business
activities of, and no intention of influencing or affecting the affairs of the
issuer, the licensee, or any affiliate; and (v) if the holder subsequently
determines to influence or affect the affairs of the issuer, the licensee of any
affiliate, it shall provide not less than 30 days' prior notice of such intent
and shall file with the NJCCC an application for qualification before taking any
such action. If an Institutional Investor changes its investment intent, or if
the NJCCC finds reasonable cause to believe that it may be found unqualified,
the Institutional Investor may take no action with respect to the security
holdings, other than to divest itself such holdings.

The New Jersey Act imposes certain restrictions upon the issuance,
ownership, and transfer of securities of a Regulated Company and defines the
term "security" to include instruments which evidence a direct or indirect
beneficial ownership or creditor interest in a Regulated Company including but
not limited to, mortgages, debentures, security agreements, notes and warrants.

If the NJCCC finds that a holder of such securities is not qualified under
the New Jersey Act, if has the right to take any remedial action it may deem
appropriate, including the right to force divestiture by such disqualified
holder of such securities. In the event that certain disqualified holders fail
to divest themselves of such securities, the NJCCC has the power to revoke or
suspend the casino service industry license of the Regulated Company which
issued the securities. If a holder is found unqualified, it is unlawful for the
holder (i) to exercise, directly or through any trustee or nominee, any right
conferred by such securities, or (ii) to receive any dividends or interest upon
any such securities or any renumeration in any form, from the licensee for
service rendered or otherwise.

If, as a result of transfer of publicly-traded securities of a Regulated
Company or a financial entity of a Regulated Company, any person is required to
qualify under the New Jersey Act, that person is required to file an application
for licensure or qualification within 30 days after the NJCCC determines that
qualification is required or declines to waive qualification.

New Jersey gaming-related casino service industry licenses are granted for a
period of two or four years, depending on the length of time a company has been
licensed, and are renewable. The NJCCC may impose such conditions upon licensing
as it deems appropriate. Licenses are also subject to suspension, revocation or
refusal for sufficient cause, including the violation of any law. In addition,
licensees are also subject to monetary penalties for violations of the New
Jersey Act or the regulations of the NJCCC.

MISSISSIPPI. The ownership, operation, sale and distribution of gaming
devices are subject to extensive state and local regulation, but primarily the
licensing and regulatory control of the Mississippi Gaming Commission and the
regulatory control of the Mississippi State Tax Commission (the "Mississippi
Gaming Authorities").

28
<PAGE>
The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gambling in Mississippi, was enacted on June 29, 1990. Although
not identical, the Mississippi Act is similar to the Nevada Gaming Control Act.
The Mississippi Gaming Commission has adopted regulations which are also similar
in many respects to the Nevada gaming regulations.

The laws, regulations and supervisory procedures of the Mississippi Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimal
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Mississippi Gaming Authorities; (iv) the prevention of cheating
and fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. The regulations are subject to amendment
and interpretation by the Mississippi Gaming Commission. Changes in such laws,
regulations and procedures could have an adverse affect on the Company's
operations.

PDS-Mississippi is required to be licensed as a distributor by the
Mississippi Gaming Authorities. PDS-Mississippi is an applicant for a
distributor license. As an applicant, PDS-Mississippi has been conducting
business in Mississippi prior to licensure in Mississippi through a licensed
Mississippi supplier with the permission of the Executive Director of the
Mississippi Gaming Commission. There can be no assurance that the Mississippi
Gaming Commission will allow this arrangement to continue during pendancy of
this application. Distributor licenses are nontransferable and are initially
issued for a two year period and must be periodically renewed thereafter. The
license requires the periodic payment of fees and taxes and is not transferable.
The Company is an applicant for registration with the Mississippi Gaming
Commission as a publicly traded holding corporation ("Registered Corporation")
and as such, it will be required periodically to submit detailed financial and
operating reports to the Mississippi Gaming Commission and furnish any other
information which the Mississippi Gaming Commission may require.
PDS-Mississippi, as applicant for a distributor license, and the Company, as an
applicant as a registered corporation, are subject to the licensing and
regulatory control of the Mississippi Gaming Authorities. If after licensure and
registration, PDS-Mississippi and the Company do not continue to satisfy the
requirements of the Mississippi Gaming Authorities, PDS-Mississippi could no
longer conduct business in Mississippi. Furthermore, if PDS-Mississippi fails to
obtain licensure and the Company fails to obtain registration, PDS-Mississippi
could no longer do business in Mississippi.

Certain officers and employees of the Company and officers, directors and
certain employees of PDS-Mississippi must be found suitable by the Mississippi
Gaming Commission. The Company believes it has applied for all necessary
findings of suitability with respect to such persons associated with the Company
or PDS-Mississippi, although the Mississippi Gaming Commission, in its
discretion may require additional persons to file applications for finding of
suitability. In addition, any persons having a material relationship or
involvement with the Company may be required to be found suitable for licensure,
in which case those persons must pay the costs and fees associated with such
investigation. The Mississippi Gaming Commission may deny an application for
licensure or finding of suitability for any cause that it deems reasonable.

In the event that PDS-Mississippi and the Company are licensed in
Mississippi as a distributor and a Registered Corporation, respectively,
substantially all loans, leases, sales of securities and similar financial
transactions by PDS-Mississippi must be reported to or approved by the
Mississippi Gaming Commission. The Company may not make an issuance or a public
offering of its securities without the prior approval of the Mississippi Gaming
Commission if any part of the proceeds of the offering is to be used to finance
the construction, acquisition or operation of gaming facilities in Mississippi
or to retire or extend obligations incurred for one or more such purposes.
"Gaming facilities" has been interpreted by the Mississippi Gaming Commission to
include the acquisition or financing of gaming devices in Mississippi.

29
<PAGE>
If the Mississippi Gaming Commission decides that PDS-Mississippi violated a
gaming law or regulation, the Mississippi Gaming Commission could limit,
condition, suspend or revoke the license of PDS-Mississippi. In addition,
PDS-Mississippi, the Company and the persons involved could be subject to
substantial fines for each separate violation, limitation, conditioning,
suspension or revocation of any distributor license would materially adversely
affect the Company's and the PDS-Mississippi's operations.

At any time, the Mississippi Gaming Commission has the power to investigate
and require the finding of suitability of any record or beneficial owner of the
Company's shares of Common Stock. Mississippi law requires any person who
acquires more than 5% of a Registered Corporation's common stock to report the
acquisition to the Mississippi Gaming Commission, and such person may be
required to be found suitable. Also, any person who becomes a beneficial owner
of more than 10% of a Registered Corporation's common stock, as reported to the
Commission, must apply for a finding of suitability by the Mississippi Gaming
Commission and must pay the costs and fees the Mississippi Gaming Commission
incurs conducting the investigation. The Mississippi Gaming Commission has
generally exercised its discretion to require a finding of suitability of any
beneficial owner of more than 5% of a public company's common stock. If a
stockholder who must be found suitable is a corporation, partnership, or trust,
it must submit detailed business and financial information including a list of
beneficial owners. The Mississippi Gaming Commission has adopted a policy with
respect to certain institutional investors which may permit such investors to
purchase and hold up to 10% of a public company's common stock without a
suitability finding. Such institutional investors may be required to file
certain information with the Mississippi Gaming Commission under the policy and
the Mississippi Gaming Commission retains discretion to require finding of
suitability at any time. To date, all stockholders of the Company required to be
suitable by the Mississippi Gaming Commission have been found suitable.

Any person who fails or refuses to apply for a finding of suitability or
license within 30 days after being ordered to do so by the Mississippi Gaming
Commission may be found unsuitable. Management believes that compliance by the
Company with the licensing procedures and regulatory requirements of the
Mississippi Gaming Commission will not affect the marketability of its
securities. Any person found unsuitable and who holds, directly or indirectly,
any beneficial ownership of the securities of the Company beyond such time as
the Mississippi Gaming Commission prescribes, may be guilty of a misdemeanor.
The Company is subject to disciplinary action if, after receiving notice that a
person is unsuitable to be a stockholder or to have any other relationship with
the Company or its Mississippi Gaming Subsidiaries, the Company: (i) pays the
unsuitable person any dividend or other distribution upon the voting securities
of the Company; (ii) recognizes the exercises, directly or indirectly, of any
voting rights conferred by securities held by the unsuitable person; (iii) pays
the unsuitable person any renumeration in any form for services rendered or
otherwise, except in certain and specific circumstances; or (iv) fails to pursue
all lawful efforts to require the unsuitable person to divest himself of the
securities, including, if necessary, the immediate purchase of the securities
for cash at a fair market value.

The Company may be required to disclose to the Mississippi Gaming
Commission, upon request, the identities of the security holders including
holders of debt securities of the Company. In addition, the Mississippi Gaming
Commission under the Mississippi Act may, in its discretion, require holders of
debt securities of registered corporations to file applications, investigate
such holders, and require such holders to be found suitable to own such debt
securities. Although the Mississippi Gaming Commission does not require the
individual holders of obligations such as notes to be investigated and found
suitable, the Mississippi Gaming Commission retains the discretion to do so for
any reason, including but not limited to a default or where the holder of the
debt instrument exercises a material influence over the gaming operations of the
entity in question. Any holder of debt securities required to apply for a
finding of suitability must pay all investigative fees and costs of the
Mississippi Gaming Commission in connection with such an investigation. If the
Mississippi Gaming Commission determines that a person is unsuitable to own such
a security, then it is unlawful for the unsuitable person: (i) to receive any
dividend or interest whatsoever from the Company; (ii) to exercise any voting
right conferred by such securities or interest; or (iii) to receive any
renumeration in any form from the Company.

30
<PAGE>
The Mississippi Gaming Commission has the power to require that the
Company's securities bear legend to the general effect that such securities are
subject to the Mississippi Act and the regulations of the Mississippi Gaming
Commission. The Mississippi Gaming Commission has applied power, through the
power to regulate licensees, to impose additional restrictions on the holders of
the Company's securities at any time. The Company has applied for a waiver from
the legend requirement in connection with the licensing of PDS-Mississippi.

OTHER JURISDICTIONS. The Company currently is also licensed to operate as a
distributor of gaming equipment in Colorado, Iowa and Minnesota and has a
license application pending in Indiana. Although the regulations in these
jurisdictions are not identical, their material attributes are substantially
similar, as described below.

The manufacture, sale and distribution of gaming devices and the ownership
and operation of gaming facilities in each jurisdiction are subject to various
state, county and/or municipal laws, regulations and ordinances, which are
administered by the relevant regulatory agency or agencies in that jurisdiction
(the "Gaming Regulators"). These laws, regulations and ordinances primarily
concern the responsibility, financial stability and character of gaming
equipment owners, distributors, sellers and operators, as well as persons
financially interested or involved in gaming or liquor operations.

In many jurisdictions, selling or distributing gaming equipment may not be
conducted unless proper licenses are obtained. An application for a license may
be denied for any cause which the Gaming Regulators deem reasonable. In order to
ensure the integrity of manufacturers and suppliers of gaming supplies, most
jurisdictions have the authority to conduct background investigations of a
company, its key personnel, significant stockholders, and others. The Gaming
Regulators may at any time revoke, suspend, condition, limit or restrict a
license for any cause deemed reasonable by the Gaming Regulators. Fines for
violation of gaming laws or regulations may be levied against the holder of a
license and persons involved. The Company and its key personnel have obtained
all licenses necessary for the conduct of the Company's business in the
jurisdictions in which it sells, distributes and finances gaming equipment.
Suspension or revocation of such licenses could have a material adverse effect
on the Company's operations.

LITIGATION

The Company is not a party to any significant pending legal proceedings.

EMPLOYEES

As of December 31, 1997, the Company employed 27 persons, including 6 in
direct sales and marketing, 7 in warehousing/refurbishing and 14 in general and
administrative functions. All of these persons are full-time employees. The
Company is highly dependent upon the services of Johan P. Finley, the Company's
founder, President and Chief Executive Officer, and the loss of his services
could have a material adverse effect on the Company. The Company maintains $2.0
million of "key person" term life insurance on Mr. Finley. The Company has an
employment agreement with Mr. Finley, as well as employment agreements with
Peter D. Cleary, the Company's Chief Financial Officer, Robert M. Mann, the
Company's Executive Vice President, and Lona M.B. Finley, the Company's
Treasurer. See "Management."

FACILITIES

The Company's corporate offices and warehouse are located in approximately
30,000 square feet of leased space in Las Vegas, Nevada. The Company pays
average monthly base rent of $18,000 pursuant to a lease expiring on January 31,
2005. The Company has additional offices located in approximately 6,000 square
feet of leased space in Eden Prairie, Minnesota. The Company pays average
monthly base rent of $8,000, net of sublease payments, pursuant to a lease
expiring on January 14, 2000. The Company considers the facilities as adequate
and suitable for the purposes they serve.

31
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are:

<TABLE>
<CAPTION>
NAME AGE TITLE
- ---------------------------------------- --- ---------------------------------------------
<S> <C> <C>
Johan P. Finley(2)...................... 36 President, Chief Executive Officer and
Chairman of the Board
Peter D. Cleary(3)...................... 40 Vice President, Chief Financial Officer and
Secretary
Robert M. Mann.......................... 47 Executive Vice President
Lona M.B. Finley(3)..................... 33 Treasurer
Charles R. Patterson(2)................. 55 Director
Joel M. Koonce (1)(2)................... 59 Director
James L. Morrell(1)(3).................. 44 Director
David R. Mylrea......................... 40 Director
</TABLE>

- ------------------------

(1) Member of the Audit Committee

(2) Member of the Compensation Committee

(3) Member of the Compliance Committee

JOHAN P. FINLEY is the founder of the Company and has been its President,
Chief Executive Officer and Chairman of the Board of Directors of the Company
since its inception in February 1988. In addition, Mr. Finley was the President
and Chief Executive Officer of RCM Inc. and Home Products, Inc. from 1991 to
1994. Mr. Finley is the spouse of Lona M.B. Finley.

PETER D. CLEARY has been Secretary of the Company since January 1998, Vice
President and Chief Financial Officer of the Company since September 1995 and
has been a Director of the Company since January 1996. From 1980 to 1995, Mr.
Cleary served in various positions with Coopers & Lybrand L.L.P., most recently
as Audit Manager. Coopers & Lybrand L.L.P. provides accounting services to the
Company.

ROBERT M. MANN has been the Executive Vice President of the Company since
March 1995. He is responsible for managing the credit review and administration,
credit and operations and marketing functions of the Company, as well as
developing and maintaining banking relationships and alternative financing
sources for the Company's activities. Mr. Mann began his career in equipment
financing and leasing in 1974. Prior to joining PDS, Mr. Mann was Senior Vice
President of the Capital Finance Division of ITT Commercial Finance, where his
responsibilities included the development of securitization product and
financing programs for the gaming industry, as well as the oversight of a $1.5
billion portfolio. During his 15 years with ITT, Mr. Mann also served in a
variety of capacities including Manager-Portfolio Control and Senior
Analyst-Portfolio Control.

LONA M.B. FINLEY has been the Treasurer of the Company since December 1993.
Prior to becoming Treasurer, Ms. Finley served in various other positions, most
recently as Controller with the Company since 1988. Her current duties also
include human resource and personnel functions. Ms. Finley is the spouse of
Johan P. Finley.

CHARLES R. PATTERSON has served as President of The Walman Optical Co., a
Minnesota manufacturer and distributor of eyeglasses, accessories and ophthalmic
examination equipment since 1992. He has served in various capacities with
Walman Optical since 1971. Mr. Patterson is a member of the Board of Directors
of F.B. Optical Manufacturing, Inc., a Minnesota optical company, and also
serves as a member of the Regional Board of the Optical Laboratory Association
of the United States. Mr. Patterson has been a member of the Company's Board of
Directors since March 1994.

32
<PAGE>
JOEL M. KOONCE has served as Chief Financial and Administrative Officer of
CENEX, Inc., a distributor of petroleum and agronomy products and other farm
supplies located in St. Paul, Minnesota, since December 1986. Prior to joining
CENEX, Mr. Koonce served in various management positions with Land O'Lakes, most
recently as Vice President of Administration and Planning for Agricultural
Services. Mr. Koonce served in various management positions for General Mills
from 1965 to 1981. He is Chairman of the Board of Directors of the St. Paul Bank
for Cooperatives and has been a member of the Company's Board of Directors since
April 1994.

JAMES L. MORRELL is an independent business consultant. From 1986 to 1995,
Mr. Morrell was employed by Dain Bosworth Incorporated, where he held a number
of management positions, most recently Managing Director, Corporate Finance. Mr.
Morrell has been a member of the Company's Board of Directors since March 1996.

DAVID R. MYLREA is an independent business consultant. From July 1994 to
November 1997, Mr. Mylrea was General Counsel and Secretary of the Company. Mr.
Mylrea has been engaged in the practice of law in Minneapolis, Minnesota since
1984. He was a partner of the law firm of Parsinen, Bowman and Levy, P.A. from
1989 to 1993. Mr. Mylrea is a director of Edwards Sales Corporation. Mr. Mylrea
has been a member of the Company's Board of Directors since January 1994.

Directors of the Company are elected to serve until their successors are
duly elected and qualified. Each non-employee Board member receives an annual
cash retainer of $2,500 and a fee of $1,000 for each Board meeting attended.
Upon election to the Board of Directors, each non-employee director is
automatically granted a non-qualified option to purchase 10,000 shares of the
Company's Common Stock at its fair market value on the date of grant. These
options have a term of ten years and become exercisable as to 2,500 shares on
the date of each Annual Meeting of Stockholders at which the director is
re-elected or is serving an unexpired term. Messrs. Patterson and Koonce each
received 10,000 such options in March 1994 and April 1994, respectively, which
have an exercise price of $5.00 per share. Mr. Morrell received 10,000 such
options in March 1996 with an exercise price of $2.50 per share. Beginning May
14, 1998, the Company intends to grant a nonqualified stock option to purchase
5,000 shares of the Company's Common Stock at its fair market value on the date
of grant to each non-employee director on an annual basis. These options will
have a term of 10 years and will become exercisable as to 1,000 shares on the
date of each annual meeting of the Company's stockholders at which the director
is re-elected or is serving an unexpired term. The Company reimburses officers
and directors for their authorized expenses.

33
<PAGE>
EXECUTIVE COMPENSATION

The following table sets forth the annual compensation for the fiscal years
ending December 31, 1997, 1996 and 1995 for the Chief Executive Officer, the
Executive Vice President, the Chief Financial Officer and the Chief Operating
Officer of the Company:

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- -------------------------------------------------- ---------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Johan P. Finley .................................. 1997 $ 210,000 $ 500 -- $ 153,104(1)
President and Chief Executive Officer 1996 159,135 35,145 -- 44,154(1)
1995 154,500 -- 13,934(1)

Robert M. Mann ................................... 1997 $ 137,207 $ 21,006 -- $ 9,550(2)
Executive Vice President 1996 127,764 20,508 -- 7,677(2)
1995 98,800 9,360 54,000 33,740(2)

Peter D. Cleary .................................. 1997 $ 100,000 $ 15,500 -- $ 3,534(3)
Chief Financial Officer 1996 85,744 14,206 -- --
1995(3) 24,792 -- 54,000 --

David R. Mylrea .................................. 1997 $ 103,184 $ 51,137 -- $ 58,473(4)
Chief Operating Officer and Secretary(4) 1996 110,210 16,893 -- 19,460(4)
1995 107,000 9,360 7,500 10,020(4)
</TABLE>

- ------------------------

(1) Consists of Company contributions to a 401(k) profit sharing plan in the
amount of $4,750, $4,500 and $4,620 in 1997, 1996 and 1995, respectively, an
automobile allowance of $1,984 in 1997, $12,000 in 1996 and $9,314 in 1995,
fees in the amount of $70,000 and $27,654 paid for personally guaranteeing
bank lines of credit in 1997 and 1996, respectively, personal use of a
Company automobile and reimbursement for moving and temporary living
expenses in the amount of $76,370 in 1997.

(2) Consists of Company contributions to a 401(k) profit sharing plan in the
amount of $4,750 and $2,877 in 1997 and 1996, an annual automobile allowance
of $4,800, $4,800 and $3,800 in 1997, 1996 and 1995, respectively, and
reimbursement for moving and temporary living expenses in the amount of
$29,940 in 1995.

(3) Mr. Cleary joined the Company in September 1995. Consists of Company
contributions to a 401(k) profit sharing plan in the amount of $2,267 in
1997 and reimbursement for moving and temporary living expenses in the
amount of $1,267 in 1997.

(4) Mr. Mylrea terminated his employment with the Company in November 1997.
Consists of Company contributions to a 401(k) profit sharing plan in the
amount of $3,748, $4,060 and $4,620 in 1997, 1996 and 1995, respectively, an
annual automobile allowance of $4,725, $5,400 and $5,400 in 1997, 1996 and
1995, respectively, severance pay in the amount of $50,000 in 1997 and a
transaction-related fee in the amount of $10,000 in 1996.

In September 1993, the Company entered into a five-year employment agreement
with Johan P. Finley as President and Chief Executive Officer. The Company
expects to renew this agreement prior to September 1998. Mr. Finley is entitled
to an annual bonus during the term of his agreement of up to 7% of the Company's
pre-tax income. The agreement provides that Mr. Finley is entitled to a payment
in the amount of two times his base salary in effect upon a termination of his
employment by the Company, change in control of the Company, or a sale of the
majority of the Company's assets. The agreement will automatically renew for
additional one-year periods at the expiration of the term, provided that either
Mr. Finley or the Company may prevent the renewal by written notice at least 30
days prior to the expiration of the term.

In February 1995, the Company entered into a five-year employment agreement
with Robert M. Mann to serve as Executive Vice President. In accordance with an
income-based formula, Mr. Mann is eligible to

34
<PAGE>
earn a bonus of up to 16% of his base salary. Under his employment agreement,
Mr. Mann may receive an annual discretionary bonus of up to 15% of his base
salary.

In September 1995, the Company entered into an employment agreement with
Peter D. Cleary to serve as Chief Financial Officer and Vice President. This
contract automatically renewed for an another year in September 1997. In
accordance with an income-based formula, Mr. Cleary is eligible to earn an
annual bonus of up to 32.5% of his base salary. Under his employment agreement,
Mr. Cleary may receive an annual discretionary bonus of up to 15% of his base
salary.

In January 1994, the Company entered into a five-year employment agreement
with David R. Mylrea to serve as Chief Operating Officer, General Counsel and
Secretary. In accordance with an income-based formula, Mr. Mylrea was eligible
to earn a bonus of up to 55% of his base salary. Under his employment agreement,
Mr. Mylrea could receive an annual discretionary bonus of up to 15% of his base
salary. Mr. Mylrea terminated his employment with the Company in November 1997.

In March 1994, the Company entered into a three-year employment agreement
with Lona M.B. Finley. This contract automatically renewed for an additional
year. In accordance with an income-based formula, Ms. Finley is eligible to earn
a bonus of up to 55% of her base salary. Under her employment agreement, she may
receive an annual discretionary bonus of up to 15% of her base salary. The
agreement provides that Ms. Finley is entitled to a payment in the amount of two
times her base salary then in effect upon a termination of her employment by the
Company, a change in control of the Company or a sale of a majority of the
Company's assets.

Each employment agreement is subject to earlier termination for cause or
upon disability or death. In the case of disability, the Company has agreed to
continue salary payments for a six-month term. Mr. Finley has agreed not to
compete with the Company following termination of employment for a period of one
year, and Messrs. Mylrea, Mann and Cleary are subject to two-year non-compete
provisions.

The Company has a 401(k) profit-sharing plan for its employees and may adopt
additional bonus, pension, profit-sharing, retirement, or similar plans in the
future.

STOCK OPTION PLAN

The Company's 1993 Stock Option Plan, as amended, (the "Option Plan")
reserves 1,100,000 shares of Common Stock for issuance pursuant to options
("Options") granted or to be granted to certain key employees, officers,
directors and consultants of the Company. The Company will increase the shares
of Common Stock reserved for issuance under the Option Plan to 1,350,000 shares
of Common Stock if a majority of the Company's shareholders approve the increase
at the Company's annual meeting on May 14, 1998. Options granted under the
Option Plan may be either Options that qualify as "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986
("Incentive Options"), or those that do not qualify as "incentive stock options"
("Non-Statutory Options"). The Option Plan is administered by the Board of
Directors and the compensation committee (the "Committee"), which determines the
persons who are to receive Options, the terms and the number of shares subject
to each Option and whether the Option is an Incentive Option or a Non-Statutory
Option.

As of the date of this Prospectus, options to purchase 526,772 shares of
Common Stock are outstanding, with exercise prices ranging from $1.50 per share
to $9.88 per share, to 40 employees, 275,363 of which are currently exercisable.
In addition, pursuant to the Option Plan, newly elected non-employee directors
of the Company each receive an automatic grant of a Non-Statutory Option to
purchase 10,000 shares on the date they first become a director. See "Directors
and Executive Officers" above.

Incentive Options may not be granted at a purchase price less than the fair
market value of the Common Stock on the date of the grant (or, for an option
granted to a person holding more than 10% of the Company's voting stock, at less
than 110% of fair market value) and Non-Statutory Options may not be granted at
a purchase price less than 85% of fair market value. Aside from the maximum
number of shares

35
<PAGE>
of Common Stock reserved under the Option Plan, there is no minimum or maximum
number of shares that may be subject to Options. However, the aggregate fair
market value of the stock subject to Incentive Options granted to any Optionee
that are exercisable for the first time by an Optionee during any calendar year
may not exceed $100,000. Incentive Options generally expire when the Optionee is
no longer an employee of the Company.

Options may not be transferred other than by will or the laws of descent and
distribution, and during the lifetime of an Optionee may be exercised only by
the Optionee. The term of each Option, which is fixed by the Committee at the
time of grant, may not exceed 10 years from the date the Option is granted
(except that an Incentive Option granted to a person holding more than 10% of
the Company's voting stock may be exercisable only for 5 years). Options may be
made exercisable in whole or in installments, as determined by the Committee. In
addition, the Committee may grant a bonus to an Optionee upon the grant or
exercise of a Non-Statutory Option. In the event of a proposed merger or
consolidation of the Company (an "Event"), unless appropriate arrangements have
been made to issue (a) substitute options to optionees, or (b) stock having an
aggregate value equal to the excess of the fair market value of the optioned
shares at such time over the aggregate stock option exercise price, then
optionees shall be entitled to receive, in connection with such Event, an amount
of cash per optioned share equal to the aggregate consideration per share
received by shareholders over the option exercise price.

No Options were granted to officers of the Company in 1997.

The following table sets forth the number and dollar value of all exercises
of options in 1997 and the number and aggregate dollar value of all unexercised
options held by the named executive officers as of the end of 1997. The value of
each unexercised, in-the-money option was determined by multiplying (i) the
difference between (a) the market price of a share of Common Stock as of the end
of 1997 ($6.75), and (b) the exercise price of the option, by (ii) the number of
shares subject to the option.

<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT TO VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE- MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997
SHARES ACQUIRED VALUE ---------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
- ------------------------- --------------- ------------ ----------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Johan P. Finley.......... -- -- -- -- -- --
Robert M. Mann........... -- -- 24,000 30,000 $ 55,480 $ 52,500
Peter D. Cleary.......... -- -- 24,000 30,000 $ 105,480 $ 127,500
David R. Mylrea.......... 152,955 $ 1,214,080 -- -- -- --
</TABLE>

INDEMNIFICATION AND LIMITATION ON LIABILITY OF DIRECTORS

The Company's Amended and Restated Articles of Incorporation limit the
liability of its directors to the fullest extent permitted by the Minnesota
Business Corporation Act. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of fiduciary duty as
directors, except for liability for (a) any breach of the duty of loyalty to the
Company or its stockholders, (b) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of the law, (c) dividends
or other distributions of corporate assets that are in contravention of certain
statutory or contractual restrictions, (d) violations of certain Minnesota
securities laws, or (e) any transaction from which the director derives an
improper personal benefit. Liability under federal securities law is not limited
by the Amended and Restated Articles. Section 302A.521 of the Minnesota Business
Corporation Act provides that a Minnesota business corporation shall indemnify
any director, officer, employee or agent of the corporation made or threatened
to be made a party to a proceeding, by reason of the former or present official
capacity (as defined therein) of the person, against judgments, penalties,
fines, settlements and reasonable expenses incurred by the person in connection
with the proceeding if certain statutory standards are met. "Proceeding" means a
threatened, pending or completed civil, criminal, administrative, arbitration or
investigative proceeding, including one by or in the right of the Company.
Article VII of the

36
<PAGE>
Company's Amended and Restated By-Laws provides that the Company shall indemnify
persons to the fullest extent permissible by the Minnesota Business Corporation
Act. Section 302A.521 contains detailed terms regarding such right of
indemnification and reference is made thereto for a complete statement of such
indemnification rights. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers, and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission (the "Commission") such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.

37
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Company's outstanding Common Stock as of December
31, 1997 by (i) each person known by the Company to beneficially hold five
percent (5%) or more of the outstanding Common Stock, (ii) each director of the
Company, (iii) each executive officer of the Company, and (iv) all executive
officers and directors as a group. Except as otherwise noted, the Company
believes that all of the persons and groups shown below, based on information
furnished by such owners, have sole voting and investment power with respect to
the shares indicated.

<TABLE>
<CAPTION>
SHARES OWNED
-------------------
<S> <C> <C>
PERCENT
OF
NAME NUMBER(4) CLASS
- ---------------------------------------------------------------- ---------- -------
Johan P. Finley(1)(2)........................................... 1,086,486 31%

Peter D. Cleary(1).............................................. 24,600 *

Robert M. Mann(1)............................................... 34,000 *

Lona M.B. Finley(1)(3).......................................... 377,577 10%

Charles R. Patterson ........................................... 11,000 *
801 12th Avenue North
Minneapolis, MN 55411

Joel M. Koonce ................................................. 13,500 *
5500 Cenex Drive
Inver Grove Heights, MN 55077

David R. Mylrea ................................................ 1,093 *
8824 Windsor Terrace
Brooklyn Park, MN 55077

James L. Morrell ............................................... 7,500 *
1323 Waterford Road
Woodbury, MN 55125

All officers and directors as a group (8 persons)............... 1,555,754 41.8%
</TABLE>

- ------------------------

* Less than 1%

(1) The address of each such person is 6171 McLeod Drive, Las Vegas, Nevada
89120.

(2) Includes 11,200 held as co-trustee for minor child also claimed by spouse as
co-trustee. Mr. Finley disclaims beneficial ownership of the shares held by
Lona M.B. Finley, his spouse. Mr. Finley has indicated his intent to
purchase 50 Investment Units in this offering.

(3) Includes 5,000 shares held by Ms. Finley as custodian for her son and 11,200
shares held as co-trustee for minor child also claimed by spouse as
co-trustee. Ms. Finley disclaims beneficial ownership of the shares held by
Johan P. Finley, her spouse.

(4) Includes shares of Common Stock issuable to the following persons upon
exercise of options that are currently exercisable or that will become
exercisable within 60 days of the date of this Prospectus: Peter D. Cleary,
24,000 shares; Robert M. Mann, 34,000 shares; Lona M.B. Finley, 116,591
shares; Charles R. Patterson, 10,000 shares; Joel M. Koonce, 10,000 shares;
James L. Morrell, 7,500 shares; all executive officers and directors as a
group, 202,091 shares.

38
<PAGE>
CERTAIN TRANSACTIONS

Johan P. Finley, the Company's President, Chief Executive Officer,
controlling stockholder and Chairman of the Board, received a fee in the amount
of $70,000 and $27,654 in exchange for giving a personal guarantee of amounts
loaned to the Company under its bank lines of credit in 1997 and 1996,
respectively.

David R. Mylrea, a director of the Company, entered into an agreement to
provide certain legal services to the Company during 1998. The Company expects
to pay total fees of approximately $120,000 in 1998 to Mr. Mylrea pursuant to
this agreement. This agreement will terminate in the event Mr. Mylrea accepts
full-time employment elsewhere.

DESCRIPTION OF UNITS

Each Unit offered hereby consists of a 10% Senior Subordinated Note, due
July 1, 2004, in the principal amount of $1,000 and fifty detachable Warrants to
purchase fifty shares of Common Stock of the Company.

NOTES

GENERAL. The Notes will be issued under an Indenture (the "Indenture")
dated as of May 4, 1998 between the Company and the Trustee. A copy of the form
of the Indenture is filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following statements are summaries of certain
provisions of the Indenture and are subject to and qualified in their entirety
by reference to all of the provisions of the Indenture, including the
definitions therein of certain terms not defined herein.

The Notes offered by the Company under the Indenture will be limited to
$13,800,000 aggregate principal amount (assuming exercise of the Underwriter's
over-allotment option). The Notes will mature July 1, 2004, unless redeemed
earlier. Interest on the Notes will accrue at a rate of 10% per annum. Interest
is payable quarterly on the first day of each January, April, July and October
(each an "Interest Payment Date"), beginning on October 1, 1998 to the person in
whose name the Note is registered at the close of business on the Regular Record
Date, which is the first day of the calendar month preceding each Interest
Payment Date.

Principal, premium, if any, and interest on the Notes will be payable by
wire transfer, check or draft drawn upon the Trustee mailed on each payment date
to the holders thereof as such appear on the Note register as of the close of
business on the first day of the calendar month preceding such payment date at
the addresses of the holders as they appear on the Note register.

The Notes will be issued only in registered form, without a coupon, in
denominations of $1,000 each and any integral multiple of $1,000. The Notes are
exchangeable and transferable and transfers will be registered without charge
thereof, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. Holders may
transfer the Notes by surrendering them for transfer at the office of the
Trustee.

The Company intends to furnish annual reports to the holders of the Notes.

SUBORDINATION. When issued, the Notes will be junior, subordinate and
subject to right of payment to the prior payment of all the Company's Senior
Debt, but will be senior in right of payment to any Subordinated Debt and to any
debt (other than the Notes) held by an affiliate of the Company or a subsidiary
of the Company, whether outstanding at the closing of this offering or created
thereafter.

As of March 31, 1998, there was $24.2 million of Senior Debt outstanding.

MANDATORY REDEMPTIONS. The Notes are subject to mandatory redemptions. Each
year beginning on July 1, 2000 and through July 1, 2004, the Trustee shall
select, by lot or other similar method, Notes having

39
<PAGE>

an aggregate principal amount of $1,800,000 ($2,070,000 if the over-allotment
option is exercised in full) for mandatory redemption. Notes selected for
mandatory redemption shall be redeemed in full at par plus accrued interest.
Notes purchased in the open market or redeemed pursuant to optional redemption
by the Company may be used, at the Company's option, at the principal amount
thereof, to reduce the amount of any subsequent mandatory redemption payment. On
or before July 1, 2004, the Company will pay to the Trustee cash sufficient to
redeem all outstanding Notes.

OPTIONAL REDEMPTIONS. The Notes will be subject to redemption at the option
of the Company, in whole or in part, from time to time, commencing on July 1,
1998, at the Redemption Prices established for the Notes, together in each case
with interest accrued to the date fixed for redemption (subject to the right of
a holder on the Regular Record Date for an interest payment to receive such
interest). The Redemption Prices for the Notes (expressed as a percentage of the
principal amount) shall be as follows for Notes redeemed in the 12-month periods
beginning on the July 1 of each of the following years:

<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
1998.............................................................................. 106%
1999.............................................................................. 106%
2000.............................................................................. 106%
2001.............................................................................. 104%
2002.............................................................................. 102%
2003 and thereafter............................................................... 100%
</TABLE>

The Company may elect to redeem less than all of the Notes. If the Company
elects to redeem less than all of the Notes, the Trustee will select which Notes
to redeem by lot or any similar method which is deemed fair and appropriate.

DEFINITIONS

"Consolidated Tangible Net Worth" means, with respect to any Person at any
date of determination, the Consolidated stockholders' equity represented by the
shares of such Person's capitalized stock (other than Disqualified Stock)
outstanding at such date, as determined on a Consolidated basis in accordance
with generally accepted accounting principals ("GAAP") less any portion of such
stockholders' equity attributable to intangible assets as determined in
accordance with GAAP.

"Material Subsidiary" means any Subsidiary which represents 10% or more of
the Company's Consolidated gross revenues or Consolidated total assets.

"Restricted Payment" means the purchase, redemption or other acquisition or
retirement for value of any capital stock of the Company or any Subsidiary. If a
Restricted Payment is made in other than cash, the value of any such payment
shall be determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Company Resolution to be filed with the
Trustee. For purposes of this definition, "Restricted Payment" shall not include
(a) payments made in the form of the Company's common stock, (b) mandatory
repurchase obligations by the Company with respect to shares issued by any
employee stock ownership plan of the Company, or (c) purchases of common stock
of a Wholly Owned Subsidiary of the Company.

"Senior Debt" means (i) the principal of any and all Consolidated Debt of
the Company (other than the Notes and Subordinated Debt) incurred in connection
with the borrowing of money from or to banks, trust companies, insurance
companies and other financial institutions, including all Consolidated Debt to
such institutions and seller-financed acquisitions to the extent it is secured
by real estate and/or assets of the Company or any Subsidiary, evidenced by
bonds, debentures, mortgages, notes or other securities or other instruments,
incurred or assumed by the Company or any Subsidiary before, at or after the
date of execution of this Indenture, (ii) the principal of all renewals,
extensions and refundings thereof; provided

40
<PAGE>

that any Consolidated Debt shall not be Senior Debt if the instrument creating
or evidencing any such Consolidated Debt or pursuant to which such Consolidated
Debt is outstanding, provides that such Consolidated Debt, or such renewal,
extension or refunding thereof, is junior or is not superior in right of payment
to the Notes and (iii) interest on Senior Debt, including all interest accruing
after commencement of any case, proceeding or other action relating to the
bankruptcy, insolvency or reorganization of the Company. Senior Debt shall
continue to be Senior Debt notwithstanding that such Senior Debt is
subordinated, avoided or disallowed under the Federal Bankruptcy Code or other
applicable law.

"Subordinated Debt" means any and all Consolidated Debt of the Company or
any Subsidiary created, incurred, assumed or guaranteed by the Company or any
Subsidiary before, at or after the date of execution of this Indenture which, by
the terms of the instrument (or any supplemental instrument) creating or
evidencing such Consolidated Debt or pursuant to which such Consolidated Debt is
outstanding it is provided that such Consolidated Debt, or any renewal,
extension, or refunding thereof, is expressly subordinate and junior in right of
payment to the Notes (whether or not subordinated to any other Consolidated Debt
of the Company). "Subordinated Debt" shall include any Consolidated Debt of the
Company to Affiliates of the Company or any Subsidiary (after giving effect to
any intercompany eliminations).

MODIFICATION OF THE INDENTURE. With the consent of the holders of not less
than a majority of the aggregate principal amount of the Notes then outstanding,
the Trustee and the Company may execute a supplemental Indenture to add
provisions to, or change in any manner or eliminate any provisions of, the
Indenture or modify in any manner the rights of the holders of the Notes,
provided that, without the consent of the holder of each outstanding Note so
affected, no such supplemental Indenture and no such amendment will: (i) change
the maturity date of the principal or interest rate payable on any Note, or
reduce the principal amount thereof or the rate of interest thereon or any
premium payable upon the redemption thereof; (ii) reduce the percentage of the
holders of the Notes whose consent is required for the authorization of any such
supplemental Indenture; (iii) modify any provisions of Section 513, 902 or 1012
of the Indenture, except to increase any such percentage or to provide that
certain other provisions of the Indenture cannot be waived or modified without
the consent of the holder of each outstanding Note; or (iv) modify any provision
of the Indenture relating to the subordination of the Notes in a manner adverse
to the holders of the Notes.

RESTRICTIVE COVENANTS

LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
shall not and shall not permit its Subsidiaries to make any Restricted Payments
(as defined above under "Definitions") (i) if at the time of such action an
Event of Default shall have occurred and be continuing, after giving effect to
such Restricted Payment; or (ii) if, immediately after giving effect to such
Restricted Payment, the aggregate of all Restricted Payments declared or made
from the date of the Indenture, through and including the date of such
Restricted Payment (the "Base Period") exceeds the sum of 25% of Consolidated
Net Income (or in the event Consolidated Net Income is a deficit, minus 100% of
such deficit) during the Base Period.

LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Indenture will provide that
the Company shall not, and shall not permit, cause or suffer any Subsidiary of
the Company to, conduct any business or enter into any transaction or series of
transactions with or for the benefit of any Affiliate or Subsidiary of the
Company or any holder of 5% or more of any class of Capital Stock of the Company
(each an "Affiliate Transaction"), except (i) in good faith and on terms that
are, in the aggregate, no less favorable to the Company or such Subsidiary, as
the case may be, than those that could have been obtained in a comparable
transaction on an arms-length basis from a Person not an Affiliate of the
Company or such Subsidiary or (ii) transactions between the Company and any of
its wholly owned Subsidiaries or between any wholly owned Subsidiaries of the
Company.

41
<PAGE>
NET WORTH. The Indenture provides that the Company will at all times during
the term of the Notes keep and maintain a Consolidated Tangible Net Worth of at
least $6,000,000 plus 15% of positive Consolidated Net Income earned after
January 1, 1998.

CONSOLIDATION, MERGER, TRANSFER OR LEASE. The Company will not consolidate
with, or merge with or into, or transfer all or substantially all of its assets
in one transaction or a series of related transactions, to another Person unless
(i) the successor corporation is a corporation organized and existing under the
laws of the United States or any state thereof or the District of Columbia, (ii)
the successor corporation (if other than the Company) assumes all of the
obligations of the Company under the Notes and Indenture, and (iii) immediately
after giving effect to such transaction (a) no Default or Event of Default shall
have occurred and be continuing, and (b) the net worth of the successor
corporation is not less than that of the Company immediately prior to such
merger, consolidation or transfer.

EVENTS OF DEFAULT. The Indenture defines the following acts, among them, to
be events of default: (a) default in the payment of any installment of interest
upon any of the Notes as and when the same shall become due and payable, and
continuance of such default for a period of 15 days; or (b) default in the
payment of the principal of any of the Notes as and when the same shall become
due and payable; or (c) failure on the part of the Company duly to observe or
perform any other of the conditions or covenants on its part and continuance of
such failure for 15 or 30 days, as the case may be; or (d) with certain limited
exceptions, a default under any bond, debenture, note or other evidence of
Indebtedness in excess of $500,000 of the Company now or hereafter outstanding
shall happened and continue and the holders of such indebtedness shall have the
right to accelerate the maturity of such indebtedness; or (e) a decree or order
by a court of competent jurisdiction shall have been entered, either (i)
adjudging the Company or any Material Subsidiary a bankrupt or insolvent, or
(ii) approving a petition seeking reorganization of the Company or any Material
Subsidiary under the Bankruptcy Act or any other similar applicable federal or
state law, or (iii) appointing a receiver or liquidator or trustee or assignee
in bankruptcy or insolvency of the Company or any Material Subsidiary or a
receiver of all or any substantial portion of the property, or (iv) directing
the winding up or liquidation of its affairs, and any such decree or order shall
have continued in force undischarged or unstayed for a period of 60 days; (f)
the Company or any Material Subsidiary shall institute proceedings to be
adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy
petition against it, or shall file a petition or answer or consent seeking
reorganization under the Bankruptcy Act or any other similar applicable federal
or state law, or shall consent to the filing of any such petition; or shall
consent to the appointment of a receiver or liquidator or trustee or assignee in
bankruptcy or insolvency of it or of all or substantially all of its property,
or shall make a general assignment for the benefit of creditors, or shall admit
in writing its inability to pay its debts generally as they become due, or
corporate action shall be taken by the Company or any Material Subsidiary in
furtherance of any of the aforesaid purposes or (g) the rendering of a final
judgment or judgments (not subject to appeal) for the payment of money against
the Company or any Subsidiary not fully insured against in an aggregate amount
in excess of $500,000 by a court or courts of competent jurisdiction, which
judgment or judgments remain unsatisfied for a period of 30 days after the right
to appeal all such judgments has expired or otherwise terminated.

In each and every such case, so long as such Event of Default shall not have
been remedied, unless the principal of all the Notes shall not have already
become due and payable, either the Trustee or the holders of not less than
twenty-five percent (25%), in aggregate principal amount of the Notes then
outstanding, by notice in writing to the Company (and to the Trustee if given by
the Noteholders) may declare the principal of all the Notes then outstanding to
be due and payable immediately; and, upon any such declaration, the same shall
become and be immediately due and payable.

GOVERNING LAW. The Indenture and each Note shall be deemed to be a contract
made under the laws of the State of Minnesota and for all purposes shall be
governed and construed in accordance with the laws of the State of Minnesota.

42
<PAGE>
THE TRUSTEE. The obligations of the Trustee are only those set out in the
Indenture. Upon the occurrence and during the continuance of any Event of
Default, the Trustee is required to apply only the degree of care and skill in
fulfilling its obligations as a prudent person would exercise or use in the
circumstances in the conduct of such person's own affairs. The Trustee must not
conduct its duties under the Indenture in any way that would be a negligent act,
or a negligent failure to act, or willful misconduct. The Trustee is not liable
for any error in judgment made in good faith and the Trustee will not be liable
with respect to any action taken or omitted to be taken by it in good faith in
accordance with the direction of the holders of a majority in aggregate
principal amount of the Notes at the time outstanding, relating to the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or of exercising any trust or power conferred upon the Trustee, under
the Indenture.

WARRANTS

GENERAL. Each Unit consists of a $1,000 10% Senior Subordinated Note Due
July 1, 2004, together with fifty Warrants to purchase fifty shares of Common
Stock. The Note and Warrants are immediately detachable. Up to an aggregate of
690,000 Warrants (including 90,000 that may be issued pursuant to the
Underwriters over-allotment option) may be issued pursuant to a Warrant
Agreement (the "Warrant Agreement") dated as of May 4, 1998 between the Company
and Norwest Bank Minnesota, N.A., Minneapolis, Minnesota as warrant agent (the
"Warrant Agent"). A copy of the form of the Warrant Agreement is filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following statements are summaries of certain provisions of the Warrant
Agreement and are subject to, and qualified in, their entirety by reference to
all of the provisions of the Warrant Agreement.

Each Warrant entitles the holder thereof to purchase one share of Common
Stock of the Company, par value $.01 per share (the "Warrant Shares"), at an
exercise price per share equal to $12.25. The Warrants expire at 5:00 p.m.,
Minneapolis time, on the fifth anniversary of the date of this Prospectus (the
"Expiration Date"). Certificates for the Warrants are in registered form only,
and each certificate is exchangeable for similar certificates of different
denominations at the office of the Warrant Agent.

EXERCISE. The Warrants are immediately detachable from the Notes and the
Warrants are immediately exercisable upon the closing of this Offering. The
exercise period of the Warrants will expire on the fifth anniversary of the date
of this Prospectus. The Company has agreed to use its best efforts, at all times
the Warrants are exercisable, to maintain effective a registration statement
relating to the Warrant Shares.

Warrants may be surrendered for exercise at any time after they become
exercisable on or prior to the Expiration Date (or earlier Redemption Date) by
submitting to the Warrant Agent a Warrant certificate signed by the
Warrantholder indicating such Warrantholder's election to exercise all or a
portion of the Warrants evidenced by such certificate. Surrendered Warrant
certificates must be accompanied by payment of the aggregate exercise price of
the Warrants to be exercised, which payment may be made in the form of cash or
by certified check payable to the order of the Company.

REDEMPTION. The Warrants are redeemable by the Company, in whole or in
part, at $.01 per Warrant at any time on or after the first anniversary of the
effective date of this Prospectus, following a period of 20 consecutive trading
days where the per share closing sale price of the Common Stock as reported by
The Nasdaq National Market is equal to or greater than $30.62 and provided an
effective registration statement relating to the Warrant Shares is available to
the Warrantholders. Notice of redemption will be given by the Company to the
Warrant Agent at least 30 days prior to the date scheduled for such redemption
(the "Redemption Date") and by the Warrant Agent to the holders of the Warrants
not less than 30 days prior to and including the Redemption Date. Notices to
holders of Warrants will be sent to their respective addresses appearing on the
books of the Warrant Agent. Each registered holder of a Warrant will continue to
have the right to exercise such Warrant until the close of business on the
Redemption Date, and the Warrants will continue to be subject to adjustment
until such exercise or redemption.

43
<PAGE>
ANTIDILUTION. The exercise price and the number of Warrant Shares
purchasable upon the exercise of each Warrant are subject to adjustment to
protect Warrantholders against dilution upon the occurrence of certain events,
including the issuance of a stock dividends, stock splits, reclassification of
any combination of the Common Stock, or the merger, consolidation or disposition
of substantially all of the assets of the Company. No adjustment in the exercise
price of the Warrants and the number of Warrant Shares purchasable upon the
exercise of each Warrant will be required until cumulative adjustments reach
$.01 per share. No fractional shares will be issued upon exercise of Warrants,
but the Company will pay an amount in cash equal to the same fraction of the
fair market value of a Warrant Share.

Warrantholders are not entitled, in their capacity as Warrantholders, to
receive dividends or to consent or receive notice as stockholders in respect of
any meeting of stockholders for the election of directors of the Company or any
other matter, or to vote at any such meeting, or to exercise any rights
whatsoever as stockholders of the Company.

44
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

Under presently existing provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations promulgated thereunder, applicable
judicial decisions and administrative rulings, all of which are subject to
change, which changes may be retroactive, the federal income tax consequences
described below may arise in connection with this offering of Units. Due to the
complexity of the Code, the following merely states general tax principles and
likely tax consequences to the extent presently determinable and such statements
may not be authoritative in individual cases or where special rules or elections
may apply. The discussion of original issue discount is based in part on final
Treasury Regulations promulgated under the Code (the "OID Regulations").
Investors should consult their own tax advisors concerning this Offering.
Investors should also consult their own tax advisors as to the tax treatment
arising from the application of foreign, state and local tax laws and
regulations.

NOTES

GENERAL. As a general rule, interest paid or accrued on the Notes, as well
as market discount and original issue discount, if any, will be treated as
ordinary income to the holders thereof. A holder of Notes using the accrual
method of accounting for federal income tax purposes is required to include
interest paid or accrued thereon in ordinary income as such interest accrues,
while a holder using the cash receipts and disbursements method of accounting
for federal income tax purposes must include such interest in ordinary income
when payments are received (or made available for receipt) by such holder.
Generally, principal payments on the Notes will be treated as return of capital
to the extent of a holder's basis therein. However, the character of the income
and the timing of its recognition are both subject to the original issue
discount and market discount rules, as described below.

ORIGINAL ISSUE DISCOUNT. The Notes will be deemed to be issued with
"original issue discount" within the meaning of Section 1273(a)(1) of the Code
if, as expected, the "stated redemption price at maturity" exceeds the "issue
price" of the Notes. The original issue discount with respect to the Notes will
be considered to be zero if it is less than 0.25% of the Notes' stated
redemption price at maturity multiplied by the number of complete years from the
date of issue of the Notes to their maturity date.

The "stated redemption price at maturity" of the Notes will be equal to the
principal amount thereof ($1,000). Although under certain circumstances the
Notes are subject to redemption by the Company for an amount in excess of their
principal amount, the Company believes that based on the OID Regulations, this
excess need not be considered when determining the Notes' stated redemption
price at maturity. Noteholders should consult with their own advisors regarding
the subject of the mandatory redemption feature of the Notes.

In general, the "issue price" of a Note is determined by allocating the
"issue price" of a Unit to the Note and Warrants comprising such Unit on the
basis of the proportion which the fair market value of each such element of a
Unit bears to the fair market value of both elements of a Unit. The "issue
price" of a Unit is the initial offering price to the public at which a
substantial amount of Units are first sold. The OID Regulations also provide
that the Company may make a reasonable allocation of the "issue price" of a Unit
to the Note and Warrants, and such allocation is generally binding on all
Unitholders. The Company's allocation of the $1,000 Unit price is $950 to the
Note, representing its "issue price" and the remaining $50 to the Warrants to
purchase 50 shares ($1.00 per Warrant). The Company's allocation of the issue
price of the Units is binding on all holders of Units unless a holder explicitly
discloses that such holder's allocation of the "issue price" of the Unit is
different from the Company's allocation. Such disclosure must be made on a form
prescribed by the Internal Revenue Service and attached to such holder's timely
filed federal income tax return for the holder's taxable year that includes the
acquisition date of the Unit.

A holder of a debt instrument issued with original issue discount must
generally include the original issue discount in ordinary gross income for
federal income tax purposes as it accrues in advance of the receipt of any cash
attributable to such income. The amount of original issue discount required to
be

45
<PAGE>
included in a Noteholder's ordinary gross income for federal income tax purposes
in any taxable year will accrue on a daily basis under a constant-yield method
that takes into account the compounding of interest. One effect of this method
is that a relatively smaller portion of the original issue discount is included
in income in the earlier years and a relatively large portion in later years.

A subsequent purchaser of a Note will also be required to include in such
purchaser's ordinary gross income for federal income tax purposes the original
issue discount, if any, accruing with respect to such Note unless the price
equals or exceeds the Note's principal amount. If the price paid by such a
purchaser of a Note exceeds the sum of the Note's issue price plus the aggregate
amount of original issue discount accrued with respect thereto, but does not
equal or exceed the principal amount of the Note, the amount of original issue
discount to be accrued will be reduced in accordance with the formula set forth
in Section 1272(a)(7)(B) of the Code.

In addition to reporting interest paid on the Notes, the Company will report
annually to the Internal Revenue Service and holders of record of the Notes
information with respect to the original issue discount accruing thereon.

It is possible that the Notes, which are expected to be issued with original
issue discount, may be affected by the "applicable high yield discount
obligation" provisions of the Code. If the rules of Section 163(e)(5) of the
Code otherwise apply and the yield of the Notes is at least five percentage
points above the "applicable Federal rate," then the Company would not be able
to deduct any original issue discount accruing with respect thereto until such
interest is actually paid. In addition, if Section 163(e)(5) of the Code
otherwise applies and the yield of the Notes is more than six percentage points
above the "applicable Federal rate," then a portion of such interest
corresponding to the yield in excess of six percentage points above the
applicable Federal rate would not be deductible by the Company at any time. The
applicability of these "applicable high yield discount obligation" provisions of
the Code to the Notes depends upon the Notes' yield to maturity, which would be
affected by the determination of the "issue price" of the Notes, as discussed
above, and whether the Notes have "significant original issue discount" within
the meaning of the Code. Furthermore, if Section 163(e)(5) of the Code applies
to the Notes, and the yield on the Notes exceeds the applicable Federal rate by
more than six percentage points, then a corporate holder would be entitled to
treat the portion of the interest that is not deductible by the Company as a
dividend, which may then qualify for the dividends received deduction provided
for by the Code. In such event, a corporate holder of Notes should consult with
their own tax advisors as to the applicability of the dividends received
deduction.

MARKET DISCOUNT. The Notes, whether or not issued with original issue
discount, will be subject to the "market discount rules" of Section 1276 of the
Code. In general, these rules provide that if the holder of a Note purchases a
Note at a market discount (that is, a discount from its original issue price
plus any accrued original issue discount, as described above) and thereafter
recognizes gain upon a disposition or redemption, the lesser of such gain or the
accrued market discount will be taxed as ordinary interest income. Generally,
the accrued market discount will be the total market discount on a Note
multiplied by a fraction, the numerator of which is the number of days the
holder held the Note and the denominator of which is the number of days from the
date the holder acquired the Note until its maturity date. The holder may elect,
however, to determine accrued market discount under the constant-yield method.

Limitations imposed by the Code that are intended to match deductions with
the taxation of income may defer deductions for interest on indebtedness
incurred or continued, or short-sale expenses incurred, to purchase or carry a
Note with accrued market discount. A holder of a Note may elect to include
market discount in gross income as it accrues, and a holder making such an
election is exempt from this rule. This election to include market discount in
income currently, once made, applies to all market discount obligations acquired
on or after the first taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service. The adjusted basis
of a Note subject to such election

46
<PAGE>
will be increased to reflect market discount included in gross income, thereby
reducing any gain or increasing any loss on a sale or taxable disposition.

PREMIUM. In general, if a holder of a Note purchased such Note at a
premium, that is, an amount in excess of the amount payable upon the maturity
thereof, such excess will be treated as "amortizable bond premium." In such
case, a holder may elect, under Section 171 of the Code, to deduct the
amortizable bond premium as it accrues under a constant-yield method that is
similar to the method used for the accrual of original issue discount. The
holder's tax basis in the Note then decreases by the amount of the amortizable
bond premium deducted. An election under Section 171 of the Code is available
only if a Note is held as a capital asset. Noteholders should consult with their
own tax advisors regarding special rules that apply for determining the amount
of, and method for amortizing, bond premium with respect to Notes that may be
redeemed prior to maturity.

SALE OF THE NOTES. If a Note is sold, the seller will recognize gain or
loss equal to the difference between the amount realized from the sale and the
seller's adjusted basis in the Note. Such adjusted basis generally will equal
the cost of the Note to the seller, increased by any original issue discount
included in the seller's ordinary gross income with respect to the Note and
reduced by any principal payments on the Note previously received by the seller
and by any amortizable bond premium deducted by the seller. Except as discussed
with respect to market discount or to the extent cash received is attributable
to accrued interest, any gain or loss recognized upon a sale, exchange,
retirement or other disposition of a Note will be capital gain if the Note is
held as a capital asset. Any such capital gain would be taxed at long-term rates
if the Note is held for more than 18 months, at mid-term rates if held more than
12 but not more than 18 months and at short-term rates if held for not more than
12 months.

If, however, the Internal Revenue Service were to determine that the Company
intended on the date of issue of the Notes to redeem all or any portion of the
Notes prior to their stated maturity, within the meaning of Section
1271(a)(2)(A) of the Code, any gain realized upon a sale, exchange, retirement
or other disposition of the Notes would be considered ordinary income to the
extent it does not exceed the unrecognized portion of the original issue
discount, if any, with respect to the Notes. It is uncertain how this rule will
be applied to the Notes since the provisions regarding mandatory and optional
redemption may be considered evidence of an intention at the time the Notes were
issued to call them before the stated maturity thereof.

WITHHOLDING TAXES AND REPORTING REQUIREMENTS. Interest payments, original
issue discount and cash proceeds of a sale, exchange or redemption of the Notes
will be reported to the extent required by the Code to the holders thereof and
the Internal Revenue Service. Such amounts will ordinarily not be subject to
withholding of United States federal income tax. However, a backup withholding
tax at a rate of 31% may be required by reason of the events specified by
Section 3406 of the Code and regulations promulgated thereunder, which include
failure of a holder to supply the Company or its agent with such holder's
taxpayer identification number. Such withholding may also apply to a holder who
is otherwise exempt from such withholding, such as a foreign corporation, if
such person fails to document properly its status as an exempt recipient.
Foreign persons should consult with their own tax advisors as to the United
States withholding tax, if any, applicable to their particular circumstances.

WARRANTS

SALE OF WARRANTS. As described above, the basis for federal income tax
purposes of the Warrants included in a Unit is determined by allocating the
"issue price" of a Unit to the Note and Warrant comprising such Unit on the
basis of the proportion which the fair market value of each such element of a
Unit bears to the fair market value of both elements of a Unit. Upon a sale of
Warrants, a holder thereof will recognize long-term or short-term capital gain
or loss, assuming such a holder is not a dealer in Warrants and assuming the
Common Stock of the Company is, or would be when acquired, a capital asset in
the hands of the holder. The amount of gain or loss will be the difference
between the amount realized

47
<PAGE>
and the tax basis, as adjusted, of the Warrants sold. The redemption of a
Warrant may also be considered a sale or exchange so that any gain or loss
recognized as a result thereof may also be a capital gain or loss. Any loss
realized by a holder of a Warrant due to the failure to exercise prior to the
expiration date will be treated as a capital loss. Any such capital gain would
be taxed at long-term rates if the Warrant is held for more than 18 months, at
mid-term rates if held more than 12 but not more than 18 months and at
short-term rates if held for not more than 12 months.

EXERCISE OF WARRANTS. Generally, a holder of Warrants will not recognize
any gain or loss on the purchase of Common Stock of the Company for cash upon
exercise of the Warrants. The tax basis of the Common Stock of the Company
received will be equal to the tax basis, as adjusted, in the Warrants so
exercised, plus the cash exercise price. The holding period of the Common Stock
of the Company received upon exercise of a Warrant for cash will not include the
period during which the Warrant was held; it shall commence only upon the
exercise date of the Warrant.

Section 305 of the Code and the applicable Treasury Regulations provide that
in certain circumstances a change in the exercise price for the Warrants will be
treated as a deemed distribution of an increased interest in the assets or
earnings and profits of the Company, which in turn will produce ordinary
dividend income for a holder of Warrants. The amount of such deemed dividend
will be equal to the fair market value of any additional shares of Common Stock
and cash in lieu of fractional shares received as a result of the change in the
exercise price of the Warrants. In certain other circumstances, Section 305 of
the Code and the applicable Treasury Regulations provide that the absence of
appropriate adjustments in the conversion price for the Warrants will produce
dividend income for the holders of the Company's Common Stock.

LAPSE. Upon the lapse of a Warrant, a holder will recognize a capital loss
equal to such holder's adjusted tax basis in the Warrant.

OTHER TAX CONSEQUENCES. No advice has been received by the Company as to
local, income, franchise, personal property or other taxation in any state or
locality or as to the tax effect of ownership of Notes or Warrants in any state
or locality. Unitholders are advised to consult their own tax advisors with
respect to any state or local income, franchise, personal property or other tax
consequences arising out of their ownership of Notes or Warrants.

THE DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
UNITHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF UNITS, NOTES OR WARRANTS, INCLUDING THE
TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.

DESCRIPTION OF SECURITIES

GENERAL

The authorized capital stock of the Company consists of 22,000,000 shares,
divided into 20,000,000 shares of Common Stock, $.01 par value per share, and
2,000,000 shares of preferred stock, $.01 par value per share.

The Board of Directors has the authority, without approval of the Company's
stockholders, to authorize the issuance of shares of preferred stock of the
Company from time to time in one or more series. Each series shall have a
distinctive designation or title and the number of shares as shall be fixed by
the Board of Directors prior to the issuance of any shares. Each series of
preferred stock shall have voting

48
<PAGE>
powers, full or limited, or no voting powers and such preferences and relative,
participating, optional, or other special rights and qualifications,
limitations, or restrictions thereof, as adopted by the Board of Directors prior
to the issuance of any shares. The Board of Directors is also authorized to
increase or decrease (but not below the number of shares then outstanding) the
number of shares of any series of preferred stock subsequent to the issuance of
shares of that series. The Company has no present plan to establish any such
class or series.

The Company's Amended and Restated Articles of Incorporation provide that no
person or entity may become the beneficial owner of 5% or more of the Company's
shares unless such person or entity agrees to provide personal background and
financial information to gaming authorities, consent to a background
investigation, and respond to questions from gaming authorities. The Company may
redeem, at fair market value, shares held by any person or entity whose status
as a stockholder, in the opinion of the Board of Directors of the Company,
jeopardizes the approval, continued existence, or renewal by any gaming
authority, including the Nevada Gaming Authorities, state gaming regulators, the
Bureau of Indian Affairs or the National Indian Gaming Commission, of any
contract or lease with a casino, casino management firm, or casino owner, or on
or related to casino property, or any other tribal, federal, or state license or
franchise held or to be acquired by the Company. These restrictions will be
contained in a legend on each certificate issued evidencing shares of Common
Stock.

COMMON STOCK

As of the date hereof, there are 3,593,830 shares of Common Stock
outstanding. All outstanding shares of Common Stock are fully paid and
nonassessable. The holders of Common Stock are entitled to one vote for each
share held of record on all matters voted upon by stockholders and may not
cumulate votes for the election of directors. Thus, the owners of a majority of
the shares of Common Stock outstanding may elect all of the directors, if they
choose to do so, and the owners of the balance of such shares would not be able
to elect any directors. Johan P. Finley, the Company's founder, President and
Chief Executive Officer, owns approximately 31% of the Company's outstanding
Common Stock and effectively controls the election of all the directors and
thereby controls the Company's affairs.

Each share of outstanding Common Stock is entitled to participate equally in
any distribution of net assets made to the stockholders in liquidation of the
Company and is entitled to participate equally in dividends as and when declared
by the Board of Directors. There are no redemption, sinking fund, conversion, or
preemptive rights with respect to the shares of Common Stock. The absence of
preemptive rights could result in a dilution of the interest of existing
stockholders should additional shares of Common Stock be issued.

CONVERTIBLE SUBORDINATED DEBENTURES

The Company issued unsecured Convertible Subordinated Debentures (the
"Debentures") in 1993, which became convertible into Common Stock of the Company
at a price of $4.25 per share. From September 1997 through March 31, 1998,
$1,059,000 of the principal balance of the Debentures has been converted into
249,212 shares of Common Stock of the Company. As of March 31, 1998,
approximately $34,000 of the principal balance of the Debentures remains
outstanding and is due on September 30, 1998. The shares of Common Stock
issuable upon conversion of the Debentures have not been registered with the
Commission, however, such shares will be eligible for resale in the public
market in accordance with Rule 144 of the Securities Act at any time subsequent
to conversion.

CERTAIN PROVISIONS HAVING ANTI-TAKEOVER EFFECTS

The Company is governed by the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act, which may deny stockholders the
receipt of a premium on their Common Stock and which may also have a depressive
effect on the market price of the Company's Common Stock. In

49
<PAGE>
general, Section 302A.671 provides that the shares of a corporation acquired in
a "control share acquisition" have no voting rights unless voting rights are
approved in a prescribed manner. A "control share acquisition" is an
acquisition, directly or indirectly, of beneficial ownership of shares that
would, when added to all other shares beneficially owned by the acquiring
person, entitle the acquiring person to have voting power of 20% or more in the
election of directors. In general, Section 302A.673 prohibits a public Minnesota
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of four years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. "Business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. An "interested stockholder" is a person who is the
beneficial owner, directly or indirectly, of 10% or more of the corporation's
voting stock or who is an affiliate or associate of the corporation and at any
time within four years prior to the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the corporation's voting stock.

TRANSFER AGENT, WARRANT AGENT AND REGISTRAR

The transfer agent, warrant agent and registrar for the Company's Common
Stock is Norwest Bank Minnesota, N.A., Minneapolis, Minnesota.

UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement, Miller & Schroeder Financial, Inc. (the "Underwriter") has agreed to
purchase from the Company and the Company has agreed to sell to the Underwriter,
the 12,000 Units offered hereby at the Price to Public, less the Underwriting
Discount shown on the cover page of this Prospectus. The Company has agreed to
pay the Underwriter a nonaccountable expense allowance and a management fee in
the amount of 1.5% and 1% respectively, of the gross proceeds of the Offering
including any proceeds resulting from the exercise of the over-allotment option.

The Underwriting Agreement provides that the Underwriter will be obligated
to purchase, subject to the terms and conditions set forth therein, all of the
Units being sold pursuant to the Underwriting Agreement (other than the Units
covered by the over-allotment option) if any of the Units being sold pursuant to
the Underwriting Agreement are purchased.

The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Underwriter and their officers, directors and controlling
persons against civil liabilities in connection with this Offering, including
certain liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted pursuant to such
indemnification provisions, the Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.

The Underwriter proposes to offer the Units to the public at the Price to
Public set forth on the cover page of this Prospectus and to certain selected
dealers at such price less a concession of $37.50 per Unit. After the initial
public offering, the Price to Public and concessions to dealers may be changed
by the Underwriter. The Underwriter does not intend to confirm sales to any
account over which it has discretionary authority.

The Company has granted to the Underwriter an option, exercisable by the
Underwriter within 45 days after the date of this Prospectus, to purchase up to
an additional 1,800 Units at the Price to Public, less the Underwriting Discount
shown on the cover page of this Prospectus. This option may be exercised in
whole or in part, but only for the purpose of covering any over-allotments in
the sale of the 12,000 Units offered hereby.

50
<PAGE>

In connection with this Offering, the Company has agreed to issue and sell
to the Underwriter, for nominal consideration, warrants (the "Underwriter's
Warrants") to purchase 50,000 shares of Common Stock of the Company at $12.25
per share. The Underwriter's Warrants contain anti-dilution provisions providing
for appropriate adjustments on the occurrence of certain events. The
Underwriter's Warrants also provides certain demand and participatory rights to
require registration under the Securities Act of the shares underlying the
Underwriter's Warrants. The Underwriter's Warrants will be exercisable
commencing two years from the date of this Prospectus and for a period of three
years thereafter. The Underwriter's Warrants will be restricted from sale,
transfer, assignment or hypothecation except to officers or successors of the
Underwriter. Any profits realized by the Underwriter upon the sale of the
Underwriter's Warrant or the securities issuable upon exercise thereof may be
deemed to constitute additional underwriting compensation.

In order to facilitate the offering of the Units, the Underwriter may engage
in transactions that stabilize, maintain or otherwise affect the price of the
Units. Specifically, the Underwriter may over-allot the Units in connection with
the offering, creating a short position in the Units for its own account. In
addition, to cover over-allotments or to stabilize the price of the Units, the
Underwriter may bid for, and purchase, Units in the open market. The Underwriter
may also reclaim selling concessions allowed to a dealer for distributing Units
in the offering, if the Underwriter repurchases previously distributed Units in
transactions to cover its short positions, in stabilization transactions or
otherwise. Finally, the Underwriter may bid for, and purchase, Units in market
making transactions and impose penalty bids. These activities may stabilize or
maintain the market price of the Units above the market level that may otherwise
prevail. The Underwriter is not required to engage in these activities and may
end any of these activities at any time. Any such activities will be undertaken
in accordance with Regulation M under the Exchange Act, if at all.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. Neither the Company nor the
Underwriter make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above might have on the
price of the Units. In addition, neither the Company nor the Underwriter make
any representations that the Underwriter will engage in such transactions or
that such transactions, once commenced, will not be discontinued without notice.

Prior to the Offering, there has been no public market for the Units, Notes
or Warrants. The Company has applied to list the Warrants on The Nasdaq National
Market. The Company does not intend to list the Units or the Notes on any
securities exchange or include them for quotation on the Nasdaq system. The
Underwriter has advised the Company that it intends initially to make a market
in the Units, Notes and Warrants, but the Underwriter is not obligated to do so
and may discontinue market making at any time without notice.

The foregoing is a summary of the material provisions of the Underwriting
Agreement and the Underwriter's Warrants. Copies of such documents have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.

James L. Morrell, a member of the Board of Directors of the Company since
March 1996, has also been a member of the nine person board of directors of MI
Acquisition Corp. since August 1997. The Underwriter is a wholly owned
subsidiary of Miller & Schroeder Inc., which is a wholly owned subsidiary of MI
Acquisition Corp. Mr. Morrell does not serve on the board of directors of either
Miller & Schroeder Inc. or the Underwriter and does not serve on any committees
of the Underwriter.

From time to time the Company has engaged the Underwriter and Miller &
Schroeder Investments Corporation, a wholly owned subsidiary of Miller &
Schroeder, Inc. to arrange loans and other financing transactions for the
Company. Currently, Miller & Schroeder Investments Corporation is in the process
of arranging for the Company, on a best efforts basis, a $5 million secured
credit facility. With respect to such efforts, the Company has agreed to pay
Miller & Schroeder Investments Corporation a placement agent

51
<PAGE>
fee equal to 3% of the size of the credit facility arranged. The Company may
engage the Underwriter or Miller & Schroeder Investments Corporation to arrange
other loans or financings in the future.

VALIDITY OF NOTES AND WARRANTS

The validity of the Notes and Warrants offered hereby will be passed upon
for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal
matters for the Underwriter will be passed upon by Fredrikson & Byron, P.A.,
Minneapolis, Minnesota.

EXPERTS

The financial statements of the Company as of December 31, 1997 and 1996,
and for the years then ended, included herein and in the Registration Statement,
have been audited by Coopers & Lybrand L.L.P., independent accountants, whose
report thereon appears elsewhere herein and in the Registration Statement. All
such financial statements are included in reliance upon the authority of such
firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Reports, proxy statements and other information
filed by the Company with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, DC 20549, and at the Commission's regional offices at
Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois
60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material may be obtained at prescribed rates from the Commission's Public
Reference Section at 450 Fifth Street, N.W., Washington, DC 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other materials that are filed through the Commission's
Electronic Data Gathering, Analysis and Retrieval system. This Web site can be
accessed at http://www.sec.gov. In addition, material filed by the Company can
be inspected at the offices of the National Association of Securities Dealers,
Inc., at 1735 K Street, N.W., Washington, D.C. 20006.

The Company intends to furnish annual reports to holders of the Units
containing audited financial statements reported on by an independent certified
public accounting firm.

This Prospectus does not contain all of the information set forth in the
Registration Statement of which this Prospectus is a part and which the Company
has filed with the Commission. For further information with respect to the
Company and the securities offered hereby, reference is made to such
Registration Statement and the exhibits thereto. Statements made in this
Prospectus as to the contents of any contract, agreement or other documents
referred to are necessarily summaries of such documents and are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved. The Registration
Statement and exhibits may be inspected without charge and copied at prescribed
rates at the public reference facilities maintained by the Commission at the
address set forth above.

52
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------

<S> <C>
Report of Independent Accountants.......................................................................... F-2

Consolidated Balance Sheet................................................................................. F-3

Consolidated Income Statement.............................................................................. F-4

Consolidated Statement of Stockholders' Equity............................................................. F-5

Consolidated Statement of Cash Flows....................................................................... F-6

Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of PDS Financial Corporation:

We have audited the accompanying consolidated balance sheet of PDS Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PDS Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.

/s/ Coopers & Lybrand L.L.P.

Minneapolis, Minnesota
March 20, 1998

F-2
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 1,865,468 $ 2,760,200
Accounts receivable, net........................................................... 1,715,154 4,904,861
Notes receivable, net.............................................................. 3,140,964 6,392,194
Net investment in leasing operations:
Equipment under operating leases, net............................................ 18,327,490 20,560,731
Direct finance leases............................................................ 5,976,368 2,121,162
Equipment held for sale or lease................................................. 6,289,900 69,216
Investment in purchased residuals................................................ 1,555,178
Deferred income taxes.............................................................. 824,000 1,032,000
Other assets, net.................................................................. 1,824,488 1,166,185
------------- -------------
Total assets................................................................... $ 39,963,832 $ 40,561,727
------------- -------------
------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable and accrued expenses.............................................. $ 2,094,178 $ 1,465,950
Deferred funds for pending transactions............................................ 775,159 4,975,987
Discounted lease rentals........................................................... 5,919,579 17,986,776
Notes payable...................................................................... 21,527,311 5,791,956
Convertible subordinated debentures................................................ 89,117 1,862,485
Other liabilities.................................................................. 929,142 2,741,248
------------- -------------
Total liabilities.............................................................. 31,334,486 34,824,402
------------- -------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, 3,523,972 and
3,119,816 shares issued and outstanding in 1997 and 1996, respectively......... 35,240 31,198
Additional paid-in capital....................................................... 9,695,056 7,748,932
Retained earnings (accumulated deficit).......................................... (1,100,950) (2,042,805)
------------- -------------
Total stockholders' equity......................................................... 8,629,346 5,737,325
------------- -------------
Total liabilities and stockholders' equity......................................... $ 39,963,832 $ 40,561,727
------------- -------------
------------- -------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-3
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENT

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
REVENUES
Equipment sales.................................................................... $ 17,481,986
Revenue from sales-type leases..................................................... 14,480,372
Rental revenue on operating leases................................................. 11,405,648 $ 2,938,477
Fee income......................................................................... 2,669,798 2,486,366
Finance income..................................................................... 1,575,455 798,324
Other.............................................................................. 137,327
------------- ------------
Total revenues................................................................... 47,613,259 6,360,494
------------- ------------
COSTS AND EXPENSES
Equipment sales.................................................................... 15,225,203
Sales-type leases.................................................................. 13,654,086
Depreciation on operating leases................................................... 8,588,611 2,203,476
Selling, general and administrative................................................ 4,126,232 2,318,774
Interest........................................................................... 4,260,096 1,353,925
Other.............................................................................. 240,176
------------- ------------
Total costs and expenses......................................................... 46,094,404 5,876,175
------------- ------------
Income before income taxes........................................................... 1,518,855 484,319
Provision for income taxes........................................................... 577,000 179,000
------------- ------------
Net income........................................................................... $ 941,855 $ 305,319
------------- ------------
------------- ------------
Earnings per share:
Basic.............................................................................. $ .30 $ .10
Diluted............................................................................ $ .28 $ .10
Weighted average shares outstanding:
Basic.............................................................................. 3,183,536 3,119,816
Diluted............................................................................ 3,619,837 3,126,848
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-4
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON STOCK PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
---------- -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1995....................... 3,119,816 $ 31,198 $ 7,952,161 $ (2,348,124) $ 5,635,235
Fair market value adjustments..................... (203,229) (203,229)
Net income........................................ 305,319 305,319
---------- ------- ------------ ------------- ------------
BALANCES, DECEMBER 31, 1996....................... 3,119,816 $ 31,198 $ 7,748,932 $ (2,042,805) $ 5,737,325
Issuance of stock upon conversion of subordinated
debentures...................................... 240,220 2,402 1,018,438 1,020,840
Issuance of stock upon exercise of stock options,
including tax benefit of $296,614............... 163,936 1,640 761,948 763,588
Fair market value adjustments..................... 165,738 165,738
Net income........................................ 941,855 941,855
---------- ------- ------------ ------------- ------------
BALANCES, DECEMBER 31, 1997....................... 3,523,972 $ 35,240 $ 9,695,056 $ (1,100,950) $ 8,629,346
---------- ------- ------------ ------------- ------------
---------- ------- ------------ ------------- ------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-5
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 941,855 $ 305,319
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization on operating leases............................. 8,588,611 2,203,476
Provision for uncollectible receivables....................................... 628,000 170,000
Deferred income taxes......................................................... 447,000 179,000
Purchases of notes receivable................................................. (1,133,903) (12,817,613)
Purchases of direct finance leases............................................ (36,104,562)
Proceeds from:
Sale of notes receivable.................................................... 8,906,504 14,746,862
Sale of direct finance leases............................................... 33,764,746 424,957
Collection on notes receivable.............................................. 3,276,334 1,699,381
Collection of principal on direct finance leases............................ 2,625,174 1,024,256
Gain on sale of financial assets.............................................. (4,214,376) (1,206,724)
Changes in operating assets and liabilities:
Accounts receivable......................................................... (1,734,423) (508,263)
Equipment held for sale or lease............................................ (2,712,376)
Income taxes receivable..................................................... 1,041,000
Accounts payable and accrued expenses....................................... 677,864 (143,122)
Other liabilities........................................................... (1,463,010) 2,664,629
Other, net.................................................................... 316,923 (455,987)
-------------- --------------
Net cash provided by operating activities................................. 12,810,361 9,327,171
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment for leasing.............................................. (11,040,800) (21,123,740)
Proceeds from sale of equipment under operating leases.......................... 14,717,389 1,529,835
Other........................................................................... (119,512) (69,245)
-------------- --------------
Net cash provided by (used in) investing activities....................... 3,557,077 (19,663,150)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable..................................................... 10,511,260 470,000
Proceeds from discounted lease rentals.......................................... 4,699,634 18,085,906
Principal payments on notes payable............................................. (13,866,948) (3,088,822)
Payments on discounted lease rentals............................................ (18,320,564) (2,331,371)
Principal payments on subordinated debentures................................... (752,526) (909,643)
Proceeds from exercise of stock options......................................... 466,974
-------------- --------------
Net cash provided by (used in) financing activities....................... (17,262,170) 12,226,070
-------------- --------------
Net increase (decrease) in cash and cash equivalents.............................. (894,732) 1,890,091
Cash and cash equivalents at beginning of year.................................... 2,760,200 870,109
-------------- --------------
Cash and cash equivalents at end of year.......................................... $ 1,865,468 $ 2,760,200
-------------- --------------
-------------- --------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-6
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BUSINESS DESCRIPTION:

PDS Financial Corporation (the Company) engages in the leasing and financing
of gaming equipment and supplying reconditioned gaming devices to casino
operators. In 1996, the Company introduced SlotLease, a specialized operating
lease program for slot machines and other electronic gaming devices. In 1997,
the Company established PDS Slot Source, its reconditioned gaming device sales
and distribution division, to compliment its leasing and financing activities.

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of PDS Financial
Corporation and its wholly-owned subsidiaries. All significant intercompany
balances and transactions between PDS Financial Corporation and its wholly-owned
subsidiaries have been eliminated in consolidation.

USE OF ESTIMATES:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management's estimates relate to
residual values, deferred income tax valuations and allowances for uncollectible
receivables.

CASH AND CASH EQUIVALENTS:

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of investments in money market accounts. The Company has
cash in checking and savings accounts at various banks. The accounts are insured
by the Federal Deposit Insurance Corporation up to $100,000. At December 31,
1997 and 1996, the Company's uninsured checking and savings account balances
totaled approximately $1.4 million and $2.6 million, respectively.

LEASE ACCOUNTING:

Statement of Financial Accounting Standards (SFAS) No. 13, "Accounting for
Leases", requires that the Company account for its leases by the operating,
direct finance or sales-type method. Operating leases are defined as those
leases in which substantially all of the benefits and risks of ownership of the
leased asset remain with the Company. Direct finance and sales-type leases are
defined as those leases which transfer substantially all of the benefits and
risks of ownership of the asset to the lessee. Sales-type leases also include
dealer profit. After the inception of a lease, the Company may engage in
discounting or selling of lease payments to reduce or recover its cash
investment in the asset. The methods of accounting for leases and the financial
reporting effects of subsequent transactions are described below.

OPERATING LEASES. Lease revenue consists of monthly rentals and is
reflected in the Consolidated Income Statement as "Rental revenue on operating
leases". The cost of equipment is recorded as "Net investment in leasing
operations--equipment under operating leases" in the Consolidated Balance Sheet
and is depreciated on a straight-line basis over the lease term to the Company's
estimate of residual value. Revenue and depreciation are recorded evenly over
the life of the lease.

F-7
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DIRECT FINANCE AND SALES-TYPE LEASES. Profit recognition under these two
accounting methods is similar, except that the sales-type classification also
gives rise to dealer profit. This results when the Company leases equipment
purchased at a discount that is not available to the lessee. Under the
sales-type method, dealer profit is recognized at lease inception as the
difference between "Revenue from sales-type leases" and "Sales-type lease"
costs. "Revenue from sales-type leases" consists of the present value of future
minimum lease payments. "Sales-type lease" costs consists of the equipment
carrying value, less the present value of its unguaranteed residual value, if
any. For direct finance leases, the present value of both the future minimum
lease payments and residual values, if any, are recorded in the Consolidated
Balance Sheet as "Net investment in leasing operations--direct finance leases."
Interest income from these leases is recognized as a constant percentage return
on asset carrying values and is reflected in the Consolidated Income Statement
as "Finance income."

EQUIPMENT HELD FOR SALE OR LEASE:

Equipment held for sale or lease, which consists primarily of gaming
devices, is valued at the lower of specific unit cost or net realizable value.

INITIAL DIRECT COSTS:

Initial direct costs related to direct finance and operating leases and
notes receivable are capitalized and recorded in the Consolidated Balance Sheet
as part of the related asset and are amortized over the term of the agreement
using the effective interest method.

RESIDUALS:

Residuals values, representing the estimated value of the asset at the
expiration of the lease, are recorded on a net present value basis in the
consolidated financial statements at the inception of each direct finance lease
originated by the Company. Investments in purchased residual interests are
recorded at cost and are separately presented in the Company's Consolidated
Balance Sheet. The Company periodically reviews residuals for possible
impairment to ensure that they are appropriately valued.

PROPERTY AND EQUIPMENT:

Property and equipment, which consists primarily of furniture, equipment and
leasehold improvements, is stated at cost. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of
three to seven years. Expenditures for maintenance and repairs which do not
improve or extend the life of the respective assets are expensed as incurred.
Gains and losses on asset disposals are included in operations.

DEBT ISSUANCE COSTS:

All direct costs incurred in obtaining interest-bearing debt are capitalized
and included in the Consolidated Balance Sheet as part of "Other assets, net",
and are amortized over the term of the underlying financing agreement using the
interest method.

F-8
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
LICENSING COSTS:

Costs related to obtaining licenses in various states, necessary to own,
possess and distribute gaming devices and associated equipment, are capitalized
and included in "Other assets, net" in the Consolidated Balance Sheet and are
amortized over three years on a straight-line basis.

INVESTMENTS IN EQUITY SECURITIES:

Investments in equity securities are classified as available for sale and
are carried at fair value, with the unrealized gains and losses reported in
stockholders' equity until realized. These fair values are determined using
quoted market prices.

INCOME TAXES:

The Company utilizes the asset and liability method of accounting for income
taxes, under which deferred taxes are determined from the differences in the
financial reporting and tax bases of assets and liabilities using enacted tax
rates applicable to the period in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the period and the change during the period in deferred tax
assets and liabilities.

EQUIPMENT SALES:

Revenue is recognized when title to the equipment is transferred to the
customer. This occurs generally upon a customers' exercise of their purchase
option for equipment under operating leases and upon shipment of reconditioned
gaming devices to customers.

FEE INCOME:

Fee income includes gross profit from the sale to third parties of the
Company's interest in notes receivable and direct finance leases. Upon sale, the
Company records fee income equal to the difference between the sale price and
the carrying value of the related asset. Fee income also includes commissions
earned for arranging financing between unrelated parties.

STOCK-BASED COMPENSATION:

The Company utilizes the intrinsic value method for its stock option plan.

EARNINGS PER SHARE:

Effective with year-end 1997, the Company adopted SFAS No. 128, "Earnings
Per Share," and has retroactively presented basic and diluted earnings per
share. A dilutive effect on earnings results from the assumed exercise of stock
options and warrants and the full conversion of the convertible subordinated
debentures into common shares and elimination of the related interest
requirements, net of income taxes.

F-9
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company calculated basic and diluted earnings per share as follows for
the years ended December 31.

<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Net income, basic.................................................. $ 941,855 $ 305,319
Interest expense on convertible subordinated debentures, net of
tax.............................................................. 85,776
------------ ----------
Net income, diluted................................................ $ 1,027,631 $ 305,319
------------ ----------
------------ ----------
Weighted average shares outstanding:
Basic (actual shares outstanding).............................. 3,183,536 3,119,816
Effect of dilutive options..................................... 136,990 7,032
Effect of convertible subordinated debentures.................. 299,311
------------ ----------
Diluted.......................................................... 3,619,837 3,126,848
------------ ----------
------------ ----------
Per share amounts:
Basic.......................................................... $ .30 $ .10
Diluted........................................................ $ .28 $ .10
</TABLE>

Options and warrants to purchase 337,200 and 671,364 shares of common stock
at a weighted average price of $5.60 and $4.03 for the years ended December 31,
1997 and 1996, respectively, were not included in the computation of diluted
earnings per share because the exercise price was greater than the average
market price of the common stock. These options and warrants expire at various
dates through 2007. Convertible subordinated debentures (convertible into
573,898 shares of common stock and $176,711 of related interest expense, net of
tax) were not included in the 1996 computation of diluted earnings per share
because the effect would have been antidilutive.

F-10
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:

BALANCE SHEET INFORMATION:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable............................................. $ 2,030,154 $ 4,904,861
Allowance for uncollectible amounts............................. (315,000)
------------ ------------
$ 1,715,154 $ 4,904,861
------------ ------------
------------ ------------
Other assets, net:
Property and equipment, net..................................... $ 778,508 $ 153,076
Prepaid expense................................................. 274,427 402,639
Debt issuance costs, net........................................ 265,976 43,148
Licensing costs, net............................................ 132,691 110,407
Investments and other........................................... 372,886 456,915
------------ ------------
$ 1,824,488 $ 1,166,185
------------ ------------
------------ ------------
Accounts payable and accrued expenses:
Trade payables.................................................. $ 1,107,160 $ 481,788
Accrued interest payable........................................ 285,572 687,490
Other accrued expenses.......................................... 701,446 296,672
------------ ------------
$ 2,094,178 $ 1,465,950
------------ ------------
------------ ------------
Other liabilities:
Lessee deposits................................................. $ 753,870 $ 2,657,298
Other........................................................... 175,272 83,950
------------ ------------
$ 929,142 $ 2,741,248
------------ ------------
------------ ------------
</TABLE>

F-11
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION: (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION:

<TABLE>
<CAPTION>
1997 1996
------------ --------------
<S> <C> <C>
Cash paid during the year for:
Interest...................................................... $ 4,393,601 $ 902,298
Income taxes, net of refunds received......................... 24,149 (1,097,819)

Noncash activities:
Transaction closed but not funded at year-end:
Deferred funds for pending transactions..................... 775,159 4,975,987
Increase in accounts receivable from sale of direct finance
lease....................................................... 4,113,500
Increase in notes payable for purchase of equipment for
leasing..................................................... 7,636,125 4,126,916
Increase in notes payable for purchase of notes receivable.... 12,196,978
Operating leases converted to direct finance leases upon
exercise of purchase options................................ 2,675,530
Exchange of notes receivable and purchased residuals for
equipment for leasing and the assumption of discounted lease
rentals..................................................... 5,744,504
Exchange of notes receivable, direct finance leases and
related discounted lease rentals for inventory for sale or
lease....................................................... 5,332,008
Conversion of subordinated debentures into common stock....... 1,020,840
Origination of direct finance lease or notes receivable for
sale of equipment and residuals............................. 3,095,523
</TABLE>

F-12
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. NOTES RECEIVABLE:

Notes receivable consists of the following:

<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Notes receivable, due in varying monthly installments, stated
and effective interest at rates from 8.0% to 13.2%, through
September 2002, collateralized by casino-related equipment and
furnishings and/or lease agreements between the borrower and a
customer of the borrower...................................... $ 4,423,964 $ 12,521,382
Other........................................................... -- 272,725
Unamortized discount............................................ -- (14,421)
------------ -------------
4,423,964 12,779,686
Impairment allowance............................................ (1,000,000) (6,331,000)
------------ -------------
3,423,964 6,448,686
Unamortized origination fees.................................... -- 16,508
Allowance for uncollectible amounts............................. (283,000) (73,000)
------------ -------------
$ 3,140,964 $ 6,392,194
------------ -------------
------------ -------------
</TABLE>

Included in the notes receivable balances above are certain loans, for which
an impairment allowance for the full amount of the loans has been recognized.
Changes in the allowance for uncollectible receivables, including the impairment
allowance, are as follows:

<TABLE>
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
Balance, beginning of year...................................... $ 6,404,000 $ 6,454,000
-------------- ------------
Charge-offs..................................................... (5,500,000) (237,000)
Recoveries...................................................... 66,000 17,000
-------------- ------------
Net charge-offs................................................. (5,434,000) (220,000)
Provision for uncollectible receivables......................... 313,000 170,000
-------------- ------------
Balance, end of year............................................ $ 1,283,000 $ 6,404,000
-------------- ------------
-------------- ------------
</TABLE>

The estimated fair value of notes receivable approximates their carrying
value. The fair value is estimated using discounted cash flow analysis with
interest rates currently being offered by the Company for notes with similar
terms and credit risk.

F-13
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. NOTES RECEIVABLE: (CONTINUED)
Scheduled principal maturities for notes receivable based upon the terms
noted above are as follows at December 31, 1997:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- --------------------------------------------------------------------------------
<S> <C>
1998.......................................................................... 1,967,995
1999.......................................................................... 1,232,457
2000.......................................................................... 88,020
2001.......................................................................... 18,658
2002.......................................................................... 116,834
------------
$ 3,423,964
------------
------------
</TABLE>

4. NET INVESTMENT IN LEASING OPERATIONS:

Equipment under operating leases consists principally of gaming equipment
the Company leases for periods ranging from 24 to 48 months at which time the
lessee generally has the right to purchase the property at fair value. The
Company may discount the lease rentals with a financial institution. The
components of net investment in equipment under operating leases are as follows:

<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Operating leased assets........................................ $ 23,773,809 $ 22,382,688
Less accumulated depreciation.................................. (5,446,319) (1,821,957)
------------- -------------
$ 18,327,490 $ 20,560,731
------------- -------------
------------- -------------
</TABLE>

The components of net investment in direct finance leases are as follows:

<TABLE>
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
Minimum lease payments receivable:
To be received by the Company................................. $ 7,432,065 $ 1,730,692
To be received by a financial institution..................... 17,435 752,294
Unearned income............................................... (1,458,132) (346,824)
Allowance for uncollectible receivables....................... (15,000) (15,000)
-------------- ------------
$ 5,976,368 $ 2,121,162
-------------- ------------
-------------- ------------
</TABLE>

F-14
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. NET INVESTMENT IN LEASING OPERATIONS: (CONTINUED)
At December 31, 1997, future minimum lease payments to be received by the
Company on nondiscounted operating and direct finance leases are as follows:

<TABLE>
<CAPTION>
DIRECT
OPERATING FINANCE
YEAR ENDING DECEMBER 31 LEASES LEASES
- ----------------------------------------------------------------- ------------- ------------
<S> <C> <C>
1998........................................................... $ 3,759,570 $ 1,878,807
1999........................................................... 4,182,898 1,972,880
2000........................................................... 2,867,448 1,928,795
2001........................................................... 1,217,302 1,651,583
------------- ------------
$ 12,027,218 $ 7,432,065
------------- ------------
------------- ------------
</TABLE>

See Note 5 for a summary of operating lease payments that have been
discounted with financial institutions.

5. DISCOUNTED LEASE RENTALS:

The Company utilizes certain of its lease rental receivables and underlying
assets as collateral to borrow from financial institutions at fixed rates on a
nonrecourse basis. In the event of a default by a lessee, the financial
institution has a first lien on the underlying leased asset, with no further
recourse against the Company. As lessees make payments, "Finance income" and
"Rental revenue on operating leases" are recorded along with the recognition of
interest expense on discounted lease rentals. Discounted lease rentals are
reduced by the interest method.

Future minimum lease payments and interest expense on leases that have been
discounted as of December 31, 1997 are as follows:

<TABLE>
<CAPTION>
MINIMUM LEASE RENTALS TO BE
RECEIVED BY FINANCIAL INSTITUTIONS
-------------------------------------------------
DIRECT DISCOUNTED FUTURE
FINANCE OPERATING LEASE INTEREST
YEAR ENDING DECEMBER 31 LEASES LEASES RENTALS EXPENSE
- ------------------------------------------ --------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
1998.................................... $ 17,435 $ 3,606,887 $ 3,216,812 $ 407,510
1999.................................... -- 2,606,443 2,480,269 126,174
2000.................................... -- 226,554 222,498 4,056
--------- ------------ ------------ ----------
$ 17,435 $ 6,439,884 $ 5,919,579 $ 537,740
--------- ------------ ------------ ----------
--------- ------------ ------------ ----------
</TABLE>

Interest expense on discounted lease rentals was $1,975,825 and $634,847 in
1997 and 1996, respectively. At December 31, 1997, effective interest rates on
discounted lease rentals ranged from 8% to 10%.

F-15
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. BORROWINGS:

NOTES PAYABLE:

Notes payable consists of the following:

<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Recourse:
Notes payable to banks, due on demand and in 1998 and 1999,
interest at the prime rate (8.5% at December 31, 1997) plus 1%,
collateralized by certain equipment under operating leases,
equipment held for sale or lease and accounts receivable....... $ 3,489,083
Notes payable to financial institutions, due in 1998 through
2001, interest at 8.8% to 9.1%, collateralized by certain notes
receivable, equipment under operating leases and direct finance
leases......................................................... 4,866,070 $ 1,698,222
Notes payable to manufacturers/distributors due in 1998 through
2001, interest at 8.0% to 10.0% collateralized by certain notes
receivable, equipment under operating leases and direct finance
leases......................................................... 9,012,318 4,050,593
Other............................................................ 202,284
------------- ------------
Total recourse................................................... 17,569,755 5,748,815

Nonrecourse:
Notes payable to manufacturers/distributors due in 1998 through
2001, interest at 8.0% to 10.0%, collateralized by certain
equipment under operating leases and direct finance leases..... 4,088,487
Other............................................................ 148,904 53,245
------------- ------------
Total nonrecourse................................................ 4,237,391 53,245
Less unamortized discount........................................ (279,835) (10,104)
------------- ------------
$ 21,527,311 $ 5,791,956
------------- ------------
------------- ------------
</TABLE>

The Company's established revolving credit and working capital facilities
aggregate $34.0 million. Advances under these agreements with banks and
financial institutions were approximately $8.4 million at December 31, 1997, as
indicated in the table above. The agreements contain covenants which restrict
the payment of dividends and require, among other things, the Company to
maintain a minimum net worth and certain debt to net worth and cash flow ratios,
as defined. Borrowings under a $1.0 million working capital loan are guaranteed
by the principal stockholder of the Company.

CONVERTIBLE SUBORDINATED DEBENTURES:

In 1993, the Company issued unsecured Convertible Subordinated Debentures
(the Debentures) which are subordinate to other borrowings of the Company of
which $89,117 remains outstanding at December 31, 1997. At December 31, 1997,
principal and interest at 11.5% is due in three remaining equal quarterly
installments of $31,430 through September 30, 1998. At the option of the
holders, the unpaid

F-16
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. BORROWINGS: (CONTINUED)
principal balance of the Debentures may be converted into shares of common stock
of the Company using a per share conversion price of $4.25. During 1997,
$1,020,840 of Debentures were converted into 240,220 shares of common stock.

Principal maturities of notes payable and convertible subordinated
debentures are as follows at December 31, 1997:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- -------------------------------------------------------------------------------
<S> <C>
1998......................................................................... 8,593,086
1999......................................................................... 7,783,081
2000......................................................................... 4,184,378
2001......................................................................... 1,051,251
2002......................................................................... 4,632
-------------
$ 21,616,428
-------------
-------------
</TABLE>

The Company estimates that the fair value of its borrowings approximates the
carrying value.

7. INCOME TAXES:

The following summarizes the deferred income tax status as recognized in the
Company's Consolidated Balance Sheet at December 31:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax asset................................................ $ 958,500 $ 1,832,000
Deferred tax liability............................................ (134,500) (800,000)
------------ ------------
Net deferred tax asset............................................ $ 824,000 $ 1,032,000
------------ ------------
------------ ------------
</TABLE>

The tax effect of the major temporary differences which give rise to
deferred income taxes at December 31 is as follows:

<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforward................................... $ 672,000 $ 1,718,000
Asset valuation allowances........................................ 251,000 77,700
Lease transactions................................................ (125,000) (787,600)
Other, net........................................................ 26,000 23,900
------------ ------------
Net deferred tax asset............................................ $ 824,000 $ 1,032,000
------------ ------------
------------ ------------
</TABLE>

The net operating loss carryforward will be an available deduction from
future taxable income through 2009. Realization of the net operating loss
carryforward is dependent on generating sufficient taxable income prior to
expiration of the loss carryforward. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
asset will be realized and therefore no valuation allowance is deemed necessary.

F-17
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES: (CONTINUED)
The following summarizes the provision for income taxes:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Currently payable..................................................... $ 130,000 $ --
Deferred.............................................................. 447,000 179,000
---------- ----------
Provision for income taxes............................................ $ 577,000 $ 179,000
---------- ----------
---------- ----------
</TABLE>

The difference between the federal statutory tax rate of 34% applied to
income before income taxes and the Company's effective tax rate is:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Income taxes at statutory rate........................................ $ 516,500 $ 164,700
State income taxes, net of federal impact............................. 31,100 10,200
Other, net............................................................ 29,400 4,100
---------- ----------
Provision for income taxes............................................ $ 577,000 $ 179,000
---------- ----------
---------- ----------
</TABLE>

In 1994, the Company entered into a tax indemnification agreement with its
then sole stockholder whereby the Company will indemnify the stockholder for
certain tax liabilities, if any, that may arise with respect to the Company's
operations during the period in which it was an S corporation, prior to 1994.

8. STOCKHOLDERS' EQUITY:

PREFERRED STOCK:

The Company's Articles of Incorporation, as amended, authorize the issuance
of 2,000,000 shares of preferred stock. The rights, preferences and privileges
of the authorized preferred shares (none of which have been issued) may be
established by the Board of Directors without further action by the holders of
the Company's common stock. In 1996, the Board of Directors designated the par
value of the Company's preferred stock at $.01 per share.

STOCK OPTION PLAN:

The Company established the 1993 Stock Option Plan (the Plan) to encourage
stock ownership by employees, officers, directors and other individuals as
determined by the Board of Directors or a committee appointed by the Board of
Directors (the Committee). The Plan provides that options granted thereunder may
be either incentive stock options (ISOs) or nonqualified stock options. At
December 31, 1997, the maximum number of shares of common stock available for
grant under the Plan was 1,100,000. In January 1998, the Board of Directors
passed a resolution to increase the maximum number of shares to 1,350,000,
subject to stockholder approval.

Newly elected nonemployee directors of the Company receive an automatic
grant of nonqualified options to purchase 10,000 shares. Options may have a
maximum term of up to ten years. The exercise price of ISOs granted under the
Plan must be at least equal to the fair value of the common stock on the date of
grant. The exercise price of nonqualified options must be at least equal to 85%
of the fair value of the common stock on the date of grant. If an option
expires, terminates or is canceled, the shares not

F-18
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDERS' EQUITY: (CONTINUED)
purchased thereunder become available for additional option awards under the
Plan. The Plan expires on April 1, 2003.

Option activity is summarized as follows:

<TABLE>
<CAPTION>
PLAN OPTIONS OPTIONS OUTSTANDING
AVAILABLE --------------------------
FOR GRANT ISOS NONQUALIFIED
------------ ------------ ------------
<S> <C> <C> <C>
Balances, December 31, 1995........................ 244,628 76,282 563,819
Increase in available shares....................... 100,000
Granted............................................ (35,000) 15,000 20,000
Canceled........................................... 128,137 (23,409) (104,728)
------------ ------------ ------------
Balances, December 31, 1996........................ 437,765 67,873 479,091
------------ ------------ ------------
Granted............................................ (178,500) 23,500 155,000
Exercised.......................................... (10,555) (152,955)
Canceled........................................... 9,500 (9,500)
------------ ------------ ------------
Balances, December 31, 1997........................ 268,765 71,318 481,136
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Weighted average exercise price per share:
Granted.................................................................... $ 3.66 $ 2.23
Exercised.................................................................. 2.86 --
Canceled................................................................... 3.08 2.46

December 31:
Outstanding................................................................ 3.47 3.22
Exercisable................................................................ 3.23 3.04
</TABLE>

Stock options outstanding at December 31, 1997 had an average remaining
contractual life of 7.5 years. At December 31, 1997, 326,454 options outstanding
had an exercise price of $1.50 to $2.88 with a weighted average exercise price
of $2.57. Of these options, 206,545 were exercisable at December 31, 1997 with a
weighted average exercise price of $2.53. The remaining 226,000 options
outstanding had an exercise price of $3.00 to $7.88 with a weighted average
exercise price of $4.76. Of these options, 71,000 were exercisable at December
31, 1997 with a weighted average exercise price of $5.30.

The exercise prices are equal to the estimated fair value of common stock on
the grant dates. These options are exercisable over vesting periods, typically
five years, through 2002. At December 31, 1997, options to purchase 277,545
shares of common stock are exercisable at prices ranging from $1.50 to $5.75.

F-19
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDERS' EQUITY: (CONTINUED)

Had the Company used the fair value-based method of accounting for the Plan
beginning in 1995 and charged compensation cost against income over the vesting
period based on the fair value of options at the date of grant, net income and
net income per share for 1997 and 1996 would have been adjusted to the following
pro forma amounts:

<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Net income, basic
As reported....................................................... $ 941,855 $ 305,319
Pro forma......................................................... 878,633 269,170

Net income per share, basic
As reported....................................................... $ .30 $ .10
Pro forma......................................................... .28 .09

Net income, diluted
As reported....................................................... $ 1,027,631 305,319
Pro forma......................................................... 964,409 269,170

Net income per share, diluted
As reported....................................................... $ .28 $ .10
Pro forma......................................................... .27 .09
</TABLE>

The pro forma information above only includes stock options granted after
December 31, 1994. Pro forma compensation expense under the fair value-based
method of accounting will generally increase over the next few years as
additional stock option grants are considered.

The weighted-average grant-date fair value of options granted was $2.35 and
$1.46 per option for 1997 and 1996, respectively. The weighted-average
grant-date fair value of options was determined by using the fair value of each
option grant on the date of grant, utilizing the Black-Scholes option-pricing
model and the following key assumptions:

<TABLE>
<S> <C>
Risk-free interest rate............................................ 6.2%
Expected life...................................................... 5 years
Expected volatility................................................ 70%
Expected dividends................................................. 0
</TABLE>

WARRANTS:

In 1994, the Company issued warrants to purchase up to 170,000 shares of its
common stock to the underwriter in connection with the initial public offering
of its common stock and a certain lender in connection with bridge note
financing. At December 31, 1997, warrants to purchase up to 168,200 shares
remain outstanding, are exercisable at an exercise price of $6.00 per share and
expire in 1999.

9. EMPLOYEE MATTERS:

BENEFIT PLAN:

The Company maintains a contributory defined contribution plan which
qualifies under Section 401(k) of the Internal Revenue Code (IRC) and covers
employees who meet certain age and service

F-20
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. EMPLOYEE MATTERS: (CONTINUED)
requirements subject to IRC limits. Employee contributions are limited to 10% of
their compensation. Company contributions are at the discretion of the Board of
Directors up to 5% of the individual employee earnings. The Company's
contributions to the plan in 1997 and 1996 were approximately $27,000 and
$22,000, respectively.

EMPLOYMENT AGREEMENTS:

The Company has entered into employment agreements with its four officers
for periods ranging from one to five years. Three of the agreements contain
noncompete clauses which continue from one to two years following termination of
employment. The agreements, among other things, provide for initial base
salaries, benefits and payment of both discretionary bonuses and bonuses based
on the attainment of specified profit levels. The agreements are automatically
extended for additional one-year periods unless notice of nonextension is given.

10. COMMITMENT:

The Company leases office and warehouse space under terms of various
noncancelable operating leases expiring through 2004. The agreements require the
Company to pay monthly base rent in varying amounts plus its pro rata share of
the operating expenses. A portion of the office space has been subleased under
an agreement expiring in 2000, which requires monthly payments to the Company
over the sublease term aggregating $154,000. Net rent expense was approximately
$305,000 in 1997 and $164,000 in 1996.

Net future minimum lease payments under these leases are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 328,000
1999............................................................................ 320,000
2000............................................................................ 208,000
2001............................................................................ 211,000
2002............................................................................ 237,000
After 2002...................................................................... 495,000
------------
$ 1,799,000
------------
------------
</TABLE>

11. SIGNIFICANT CUSTOMERS:

Significant customer activity as a percent of the Company's total revenues
in 1997 and 1996 is summarized as follows:

<TABLE>
<CAPTION>
PERCENT OF REVENUES
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Customer A..................................................................... 37% 20%
Customer B..................................................................... 18% --
Customer C..................................................................... 11% 16%
Customer D..................................................................... 2% 20%
Customer E..................................................................... 7% 14%
</TABLE>

F-21
<PAGE>
PDS FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. RELATED PARTY TRANSACTIONS:

In 1995, the Company made various loans to a casino industry change cart
manufacturing company. The Company's President, Chief Executive Officer and
principal stockholder held an ownership position in this company and also had
served on its board of directors. In early 1996, a portion of these loans went
into default. In December 1996, the Company charged off the remaining loan
balance of $237,000.

F-22
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY THE UNITS, NOTES OR WARRANTS BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Forward Looking Statements................................................ 10
Use of Proceeds........................................................... 11
Price Range of Common Stock............................................... 11
Distributions and Dividend Policy......................................... 11
Capitalization............................................................ 12
Selected Consolidated Financial Data...................................... 13
Management's Discussion and Analysis of
Financial Condition and Results
of Operations............................................................ 14
Business.................................................................. 20
Management................................................................ 32
Principal Stockholders.................................................... 38
Certain Transactions...................................................... 39
Description of Units...................................................... 39
Certain Federal Income Tax Considerations................................. 45
Description of Securities................................................. 48
Underwriting.............................................................. 50
Validity of Notes and Warrants............................................ 52
Experts................................................................... 52
Additional Information.................................................... 52
Index to Consolidated Financial Statements................................ F-1
</TABLE>

------------------------

12,000 INVESTMENT UNITS

PDS FINANCIAL

CORPORATION

$12,000,000
10% SENIOR SUBORDINATED NOTES
DUE JULY 1, 2004
AND WARRANTS TO PURCHASE
600,000 SHARES OF COMMON STOCK

---------------------

PROSPECTUS

---------------------

MILLER & SCHROEDER FINANCIAL, INC.

[LOGO]

THE DATE OF THIS PROSPECTUS
IS MAY 4, 1998.

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