<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 0-23928
PDS FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1605970
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6171 MCLEOD DRIVE, LAS VEGAS, NEVADA 89120
(Address of principal executive offices)
(702) 736-0700
(Issuer's telephone number)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date:
<TABLE>
<CAPTION>
Class Outstanding as of October 31, 1998
----- ----------------------------------
<S> <C>
Common Stock, $.01 par value 3,648,211 shares
</TABLE>
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<PAGE>
PDS FINANCIAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page(s)
-------
<S> <C> <C>
Condensed Consolidated Statement of Income (Unaudited)
For the Three Months and Nine Months Ended September 30,
1998 and 1997 2
Condensed Consolidated Balance Sheet
As of September 30, 1998 (Unaudited) and December 31, 1997 3
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5-6
Report of Independent Accountants 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
1
<PAGE>
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- ------------------------------
1998 1997 1998 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Equipment sales $2,517,298 $18,867,933
Revenue from sales-type leases 2,068,034 $13,048,913 3,334,672 $13,048,913
Rental revenue on operating leases 1,349,337 3,277,882 4,974,020 9,090,165
Fee income (loss) (128,914) 819,919 1,238,939 2,328,457
Finance income 948,660 424,834 2,065,724 1,262,024
Other income, net 337 (5,076) 1,061 3,152
---------- ----------- ----------- -----------
Total revenues 6,754,752 17,566,472 30,482,349 25,732,711
---------- ----------- ----------- -----------
COSTS AND EXPENSES
Equipment sales 1,323,190 15,538,415
Sales-type leases 1,845,347 12,457,651 2,872,590 12,457,651
Depreciation on operating leases 880,814 2,506,687 3,729,402 6,797,827
Selling, general and administrative 1,201,884 900,595 3,551,195 2,206,183
Interest 1,434,486 1,246,520 3,528,593 3,312,440
---------- ----------- ----------- -----------
Total costs and expenses 6,685,721 17,111,453 29,220,195 24,774,101
---------- ----------- ----------- -----------
Income before income taxes 69,031 455,019 1,262,154 958,610
Provision for income taxes 27,000 175,000 480,000 366,000
---------- ----------- ----------- -----------
Net income $ 42,031 $ 280,019 $ 782,154 $ 592,610
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Earnings per share:
Basic $ .01 $ .09 $ .22 $ .19
Diluted $ .01 $ .08 $ .21 $ .18
Number of shares used to compute per share amounts:
Basic 3,644,008 3,134,441 3,599,177 3,124,691
Diluted 3,797,806 3,299,189 3,815,037 3,211,414
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 403,042 $ 1,865,468
Restricted cash 2,552,359
Accounts receivable 1,832,287 1,715,154
Notes receivable, net 22,671,068 3,140,964
Net investment in leasing operations:
Equipment under operating leases, net 15,078,653 18,327,490
Direct finance leases 8,716,781 5,976,368
Equipment held for sale or lease 10,180,249 6,289,900
Deferred income taxes 851,000 824,000
Other assets 3,385,632 1,824,488
------------ ------------
Total assets $ 65,671,071 $ 39,963,832
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 3,199,373 $ 2,094,178
Deferred funds for pending transactions 1,406,798 775,159
Discounted lease rentals 3,334,997 5,919,579
Notes payable 32,595,502 21,527,311
Subordinated debt 13,124,911 89,117
Other liabilities 1,425,138 929,142
------------ ------------
Total liabilities 55,086,719 31,334,486
------------ ------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares
authorized, 3,648,211 and 3,523,972 issued
and outstanding in 1998 and 1997, respectively 36,482 35,240
Additional paid-in capital 10,866,665 9,695,056
Retained earnings (accumulated deficit) (318,795) (1,100,950)
------------ ------------
Total stockholders' equity 10,584,352 8,629,346
------------ ------------
Total liabilities and stockholders' equity $ 65,671,071 39,963,832
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 782,154 $ 592,610
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation on operating leases 3,729,402 6,797,827
Gain on sale of financial assets (2,205,285) (1,977,130)
Purchases/originations of notes receivable
and direct finance leases (25,833,343) (16,462,743)
Proceeds from:
Sale of notes receivable and direct finance leases 4,743,462 18,578,609
Collection of notes receivable and direct finance leases 3,321,175 4,641,580
Increase in equipment held for sale or lease (3,890,349) (2,827,781)
Changes in other operating assets and liabilities, net 1,939,491 216,570
------------ ------------
Net cash provided by (used in) operating activities (17,413,293) 9,559,542
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment for leasing (6,294,884) (10,642,672)
Proceeds from sale of leased equipment 3,702,576 145,064
Other, net (186,871) (181,445)
------------ ------------
Net cash used in investing activities (2,779,179) (10,679,053)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from subordinated debt and warrants 13,800,000
Payment of debt issuance costs (1,560,272)
Proceeds from notes payable 22,550,348 5,430,193
Proceeds from discounted lease rentals 692,428 4,686,088
Payments on notes payable (13,957,495) (3,495,486)
Payments on discounted lease rentals (3,047,611) (6,523,519)
Payments on subordinated debentures (38,886) (724,285)
Proceeds from exercise of stock options 291,534 -
------------ ------------
Net cash provided by (used in) financing activities 18,730,046 (627,009)
------------ ------------
Net decrease in cash and cash equivalents (1,462,426) (1,746,520)
Cash and cash equivalents at beginning of period 1,865,468 2,760,200
------------ ------------
Cash and cash equivalents at end of period $ 403,042 $ 1,013,680
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements as of September 30, 1998
and for the three and nine months ended September 30, 1998 and 1997 included in
this Form 10-QSB have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed
or omitted pursuant to such rules and regulations. The condensed consolidated
balance sheet at December 31, 1997 has been derived from the audited financial
statements as of that date and condensed. These condensed consolidated
financial statements should be read in conjunction with the financial
statements and related notes thereto included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997. PricewaterhouseCoopers LLP,
the Company's independent accountants, has performed limited reviews of the
interim financial statements included herein. Their report on such reviews
accompanies this filing.
The condensed consolidated financial statements presented herein as of
September 30, 1998 and for the three and nine months ended September 30, 1998
and 1997 are unaudited, but in the opinion of management, reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows for
the periods presented. The results of operations for any interim period are
not necessarily indicative of results for the full year.
2. BORROWINGS
In May 1998, the Company renewed its agreement with a bank to provide a
$1.0 million working capital line of credit through May 31, 1999. Terms of the
renewed agreement are consistent with the prior agreement.
In May 1998, the Company completed a $13.8 million public debt offering.
The Company sold 13,800 investment units (the "Units"), each consisting of a
10% Senior Subordinated Note, due July 1, 2004, in the principal amount of
$1,000 (the "Notes") and fifty detachable warrants (the "Warrants") to purchase
fifty shares of the Company's common stock. Interest on the Notes is payable
quarterly, beginning October 1, 1998. Each year beginning July 1, 2000, Notes
having an aggregate balance of $2.1 million will be selected at random for
mandatory redemption. The Warrants have a five year term and an exercise price
of $12.25 per share of common stock. The Units and the Notes will not be
listed on any securities exchange or on the Nasdaq System. The Warrants are
listed on The Nasdaq National Market under the trading symbol "PDSFW." Net
proceeds to the Company of $12.2 million, including proceeds from the over-
allotment, will be used to purchase gaming machines, to expand the Company's
leasing activities and for general corporate purposes.
Also in May 1998, the Company entered into an agreement with a financial
institution to provide the Company a $5.0 million loan. The net proceeds to
the Company of $4.8 million were deposited in a restricted escrow account.
Advances under the loan are collateralized by certain leases, notes and related
equipment, and bear interest at 10.25%.
5
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In August 1998, the Company renewed its working capital line of credit
with a bank and increased the amount of the line to $4.0 million. Terms of the
renewed agreement are consistent with the prior agreement
At September 30, 1998, the Company's revolving credit and working capital
borrowing capability was $40.0 million and advances under these agreements
aggregated $14.9 million.
3. EARNINGS PER SHARE
The Company calculated basic and diluted earnings per share as follows:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income, basic $ 42,031 $ 280,019 $ 782,154 $ 592,610
Interest expense on convertible
Subordinated debentures, net of tax 182 -- 1,531 --
--------- --------- --------- ---------
Net income, diluted $ 42,213 $ 280,019 $ 783,685 $ 592,610
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding:
Basic (actual shares outstanding) 3,644,008 3,134,441 3,599,177 3,124,691
Effect of dilutive options 144,480 164,748 183,607 86,723
Effect of dilutive warrants 3,470 22,044
Effect of convertible subordinated
Debentures 5,848 -- 10,209 --
--------- --------- --------- ---------
Diluted 3,797,806 3,299,189 3,815,037 3,211,414
--------- --------- --------- ---------
--------- --------- --------- ---------
Per share amounts:
Basic $ .01 $ .09 $ .22 $ .19
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted $ .01 $ .08 $ .21 $ .18
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130).
SFAS 130 establishes new rules for the reporting of comprehensive income and
its components; however, the adoption of SFAS 130 had no impact on the
Company's net income or stockholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's investments in equity securities to be
included as a component of other comprehensive income.
During the three months ended September 30, 1998 and 1997, total
comprehensive income amounted to $29,129 and $279,928 respectively. During
the nine months ended September 30, 1998 and 1997, total comprehensive income
amounted to $781,435 and $635,595 respectively. Accumulated other
comprehensive loss at September 30, 1998 and December 31, 1997 was $38,210
and $37,491, respectively.
6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of PDS Financial Corporation:
We have reviewed the accompanying condensed consolidated balance sheet
of PDS Financial Corporation and subsidiaries as of September 30, 1998, and
the related condensed consolidated statements of income for the three and
nine months ended September 30, 1998 and 1997, and the condensed consolidated
statements of cash flows for the nine months ended September 30, 1998 and
1997. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the accompanying condensed consolidated financial
statements for them to be in conformity with generally accepted accounting
principles.
We have audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PDS Financial Corporation and
subsidiaries as of December 31, 1997, and the related consolidated statements
of income, stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated March 20, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
financial statements is fairly stated, in all material respects, in relation
to the consolidated financial statement from which it has been derived.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
October 28, 1998
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is engaged in the business of financing and leasing gaming
equipment and supplying reconditioned gaming devices to casino operators.
The gaming equipment financed by the Company consists mainly of slot
machines, video gaming machines and other gaming devices. In addition, the
Company finances furniture, fixtures and other gaming related equipment,
including gaming tables and chairs, restaurant and hotel furniture, vehicles,
security and surveillance equipment, computers and other office equipment.
SlotLease is the Company's 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, Indiana, Iowa and Minnesota to provide this
financing alternative. In 1997, the Company established PDS Slot Source, a
reconditioned gaming device sales and distribution division, to complement
its leasing and financing activities and to generate equipment sales to
casino operators.
The Company's strategy is to increase its portfolio of assets under
lease and reconditioned gaming device sales, and thereby increase revenues
and cash flows. In addition to its leasing activities, the Company also
originates note transactions, which it generally sells to institutional
investors. In some of its transactions, the Company holds the leases or
notes for a period of time after origination, or retains a partial ownership
interest in the leases or notes. The Company believes its ability to
recondition and distribute used gaming devices enhances the gaming devices'
values at the end of an operating lease and facilitates additional financing
transactions.
The Company's quarterly operating results, including net income, have
historically fluctuated due to the timing of completion of large financing
transactions, as well as the timing of recognition of the resulting fee
income upon subsequent sale. These transactions can be in the negotiation and
documentation stage for several months, and recognition of the resulting fee
income by the Company may fluctuate greatly from quarter to quarter. Thus,
the results of any quarter are not necessarily indicative of the results
which may be expected for any other period. The Company believes that the
development of its lease portfolio and reconditioned gaming device division
will lead to increased recurring revenues, which will tend to lessen the
fluctuations of its operating results.
ACCOUNTING FOR COMPANY ACTIVITIES
The accounting treatment for the Company's financing activities varies
depending upon the underlying structure of the transaction. The majority of
the Company's equipment financing transactions are structured as either notes
receivable or direct finance leases in which substantially all benefits and
risks of ownership are borne by the borrower or lessee. Direct finance
leases are afforded accounting treatment similar to that for notes
receivable. The Company structures some of its gaming equipment financings as
operating leases, under which the Company retains substantially
8
<PAGE>
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.
The Company's revenue generating activities can be categorized as
follows: (i) equipment sales; (ii) rental revenue on operating leases;
(iii) revenue from sales-type leases; (iv) fee income, resulting principally
from the sale of lease or note receivable transactions; and (v) finance
income, resulting from financing transactions in which the direct finance
lease or note receivable is retained by the Company.
The types of income are further described below:
EQUIPMENT SALES. In mid-1997, the Company established a reconditioned
gaming device sales and distribution division, PDS Slot Source. Used gaming
devices are obtained by the Company either from its customers at the end of
an applicable lease term, or in the marketplace. The cost of this equipment
is recorded in the consolidated balance sheet as equipment held for sale or
lease. At the time of sale, the Company records revenue equal to the selling
price of the related asset. Upon selling reconditioned gaming devices, the
Company removes the underlying asset from its consolidated balance sheet and
records the cost, including reconditioning cost, as cost of revenues.
Equipment sales also includes the sale of equipment which may occur during
the term of an operating lease.
RENTAL REVENUE ON OPERATING LEASES. Operating leases are defined as
those leases in which substantially all the benefits and risks of ownership
of the leased asset are retained by the Company. Revenue from operating
leases consists of monthly rentals and is reflected in the consolidated
income statement evenly over the life of the lease as rental revenue on
operating leases. The cost of the related equipment is depreciated on a
straight-line basis over the lease term to the Company's estimate of residual
value. This depreciation is reflected on the consolidated income statement
as depreciation on operating leases. For operating leases, the cost of
equipment, less accumulated depreciation, is recorded in the consolidated
balance sheet as equipment under operating leases, net.
REVENUE FROM SALES-TYPE LEASES. Beginning in the third quarter of 1997,
the Company structured certain of its gaming equipment transactions as
sales-type leases. Sales-type leases, like direct finance leases, transfer
substantially all the benefits and risks of ownership of the leased asset to
the lessee. Unlike direct finance leases, sales-type leases also include
dealer profit resulting from the Company leasing equipment which was
purchased at a discount that is not available to the lessee. This dealer
profit is recognized at the inception of the lease as the difference between
revenue from sales-type leases and sales-type lease cost. Revenue from
sales-type leases is the present value of the future minimum lease payments.
Sales-type lease cost is the Company's equipment cost, net of any discounts,
less the present value of its unguaranteed residual value. Upon selling a
sales-type lease to a third party, the Company removes the underlying asset
from its consolidated balance sheet.
FEE INCOME. The Company funds much of the direct finance lease and note
transactions it originates through a sale of such transactions (i.e., the
sale of all of the Company's right, title and interest in the future payment
stream from the related leases or notes). A sale may occur simultaneously
with the origination or several months thereafter. At the time of sale, the
Company records fee income equal to the difference between the selling price
and the carrying value of the related financial asset. The calculation of
fee income reflects many factors, including the credit
9
<PAGE>
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
Three Months Ended September 30, 1998 and 1997
Revenues for the third quarter of 1998 totaled $6.8 million, a decrease
of $10.8 million from $17.6 million in the third quarter last year. The
decrease in revenues is primarily attributable to a decrease in transactions
classified as sales-type leases. Gross originations of financing
transactions for the three months ended September 30, 1998 decreased to
$11.5 million compared to $18.7 million for the same period in 1997. The
originations in the third quarter of 1997 included $13.0 million of
sales-type leases involving third party equipment (not equipment supplied by
PDS Slot Source).
Equipment sales totaled $2.5 million in the third quarter of 1998. The
Company did not sell equipment in the third quarter of 1997. The Company has
obtained its gaming equipment distributor licenses in Nevada, New Jersey,
Colorado, Indiana, Iowa and Minnesota and in mid-1997 established its
reconditioned gaming device sales and distribution division, PDS Slot Source.
The 1998 equipment sales include both equipment which had been under
operating leases, and used gaming devices which the Company purchased in the
marketplace and reconditioned prior to sale. The cost of equipment sold was
$1.3 million
Revenue from sales-type leases was $2.1 million during the third quarter
of 1998 compared with $13.0 million in the third quarter of 1997. The higher
revenue in the 1997 quarter results primarily from the delivery of equipment
to a new casino, which was opening at that time. PDS Slot Source marketed
the equipment leased in the third quarter of 1998; while an unrelated gaming
equipment manufacturer supplied the equipment leased in the third quarter of
1997. The related cost of these sales-type leases was $1.8 million and
$12.5 million in 1998 and 1997, respectively.
The Company's average operating lease portfolio was $14.6 million during
the third quarter of 1998 as compared to $32.5 million one year earlier. The
decrease in the average portfolio resulted from the sale (primarily in the
fourth quarter of 1997) of certain of the equipment which had been under
operating leases. Rental revenue on operating leases decreased to
$1.3 million from $3.3 million. Related depreciation also decreased to
$.9 million from $2.5 million. These leases are expected to generate revenues
throughout their lease terms, which range from 24 to 48 months and are
typically 36 months.
10
<PAGE>
Fee income was a loss of $129,000 resulting from a prepayment premium,
which the Company incurred and paid during the third quarter of 1998. The
Company's strategy is to increase its portfolio of income-producing assets,
rather than earning fees by selling transactions. Nonetheless, market
conditions delayed the Company from selling certain transactions during the
third quarter of 1998. The Company generated fee income of $820,000 related
to the sale of transactions with a basis of $25.6 million in the three months
ended September 30, 1997.
Finance income increased $524,000 to $949,000 for the three months ended
September 30, 1998, compared to $425,000 during the three months ended
September 30, 1997. Consistent with the Company's strategy, the increase
primarily reflects a larger portfolio of notes receivable and direct finance
leases held by the Company during the third quarter of 1998 as compared to
the third quarter of 1997.
Selling, general and administrative expenses increased to $1.2 million
for the three months ended September 30, 1998, compared to $.9 million in the
same period of 1997. The increase in the 1998 period is primarily
attributable to higher payroll and occupancy costs associated with the
expansion of sales activities and the formation of the reconditioned gaming
device division in Las Vegas, Nevada.
Interest expense increased $188,000 primarily because of the higher
levels of borrowings related to the larger portfolio of notes receivable,
direct finance leases and inventory held by the Company during the third
quarter of 1998 as compared to the third quarter of 1997.
Income before income taxes decreased to $69,000 in the third quarter of
1998, compared with $455,000 in the same period last year. The lower third
quarter 1998 income before income taxes primarily reflects the lower profit
contribution from fee income, as described above.
The effective income tax rate was 39.1% in the three months ended
September 30, 1998, compared with 38.5% in the three months ended September 30,
1997. In both periods, the effective rate was higher than the federal
statutory tax rate of 34%, due primarily to state income taxes.
Nine Months Ended September 30, 1998 and 1997
Revenues for the nine months ended September 30, 1998 totaled
$30.5 million, an increase of $4.8 million from $25.7 million in the first
nine months of last year. The increase in revenues is primarily attributable
to higher equipment sales, partially offset by lower rental revenues. Gross
originations of financing transactions for the nine months ended September
30, 1998 were $43.7 million compared to $72.6 million for the same period in
1997.
Equipment sales totaled $18.9 million in the first nine months of 1998.
The Company did not sell equipment in the first nine months of 1997. The 1998
equipment sales include both equipment which had been under operating leases,
and used gaming devices which the Company purchased in the marketplace and
reconditioned prior to sale. The cost of equipment sold was $15.5 million
Revenue from sales-type leases was $3.3 million during the first nine
months of 1998 compared with $13.0 million in the first nine months of 1997.
The higher revenue in the 1997
11
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period results primarily from the delivery of equipment to a new casino,
which was opening at that time. PDS Slot Source marketed the equipment leased
in the 1998 period; while an unrelated gaming equipment manufacturer supplied
the equipment leased in the 1997 period. The related cost of these
sales-type leases was $2.9 million and $12.5 million in 1998 and 1997,
respectively.
The Company's average operating lease portfolio was $15.4 million during
the first nine months of 1998 as compared to $30.4 million one year earlier.
The decrease in the average portfolio resulted from the sale (primarily in
the fourth quarter of 1997) of certain of the equipment which had been under
operating leases. Rental revenue on operating leases decreased to $5.0 million
from $9.1 million. Related depreciation also decreased to $3.7 million
from $6.8 million. These leases are expected to generate revenues throughout
their lease terms, which range from 24 to 48 months and are typically 36
months.
Fee income decreased $1.1 million to $1.2 million related to the sale of
transactions with a basis of $17.6 million in the nine months ended
September 30, 1998, compared to fee income of $2.3 million on the sale of
transactions with a basis of $61.1 million in the nine months ended
September 30, 1997. The lower level of fee income is primarily attributable
to the Company's strategy to retain income-producing assets, coupled with
market conditions in the 1998 period, as discussed above.
Finance income increased $800,000 to $2.1 million for the nine months
ended September 30, 1998 when compared to $1.3 million during the nine months
ended September 30, 1997. Consistent with the Company's strategy, the
increase primarily reflects a larger portfolio of notes receivable and direct
finance leases held by the Company during the first nine months of 1998 as
compared to the first nine months of 1997.
Selling, general and administrative expenses increased to $3.6 million
for the nine months ended September 30, 1998, compared to $2.2 million in the
same period of 1997. The increase in the 1998 period is primarily
attributable to higher payroll and occupancy costs associated with the
expansion of the sales activities and the formation of the reconditioned
gaming device division in Las Vegas, Nevada.
Interest expense increased $216,000 primarily because of the higher
levels of borrowings related to the larger portfolio of notes receivable,
direct finance leases and inventory held by the Company during the first nine
months of 1998 as compared to the first nine months of 1997.
Income before income taxes increased $303,000 to $1,262,000 in the first
nine months of 1998, compared with $959,000 in the same period last year. The
improvement in 1998 primarily reflects the profit contributions from
equipment sales and higher level of finance income, partially offset by lower
fee income and higher related costs and expenses, as described above.
The effective income tax rate was approximately 38% in the nine months
ended September 30, 1998 and 1997. In both periods, the effective rate was
higher than the federal statutory tax rate of 34%, due primarily to state
income taxes.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The funds necessary to support the Company's activities have been
provided by cash flow generated primarily from the operating activities
described above, and various forms of recourse and nonrecourse borrowings.
The Company's strategy to increase its leasing activities and reconditioned
gaming device sales involves a higher level of investment in equipment under
operating leases and equipment held for sale or lease, financed through
discounted lease rentals and notes payable. The Company expects its lease
portfolio to generate recurring cash flow from operations throughout the
lease term.
The Company's cash and cash equivalents were $403,000 at September 30,
1998, a decrease of $1.5 million from December 31, 1997. During the first
nine months of 1998, cash used in operating activities totaled $17.4 million,
compared with cash provided by operations of $9.6 million in the first nine
months of 1997. The higher level of cash used in the 1998 period primarily
reflects the Company's higher level of investment in notes receivable and
equipment held for sale or lease related to the Company's reconditioned
gaming device division. As discussed above, market conditions delayed the
Company from selling certain transactions during the third quarter of 1998.
The cash used in investing activities primarily reflects the investment in
equipment for leasing. The lower level of investment in equipment for leasing
in the 1998 period results from the Company's decision to deploy certain of
its resources in the reconditioned gaming device division during 1998. The
$18.7 million of net cash provided by financing activities in the first nine
months of 1998 was driven by the subordinated debt transaction, as discussed
in the Notes to Condensed Consolidated Financial Statements, and other
borrowings.
At September 30, 1998 total borrowings were $49.1 million, up from
$27.5 million at December 31, 1997. The majority of the proceeds from the
borrowings were invested in notes receivable, equipment under operating lease
and equipment held for sale or lease. The Company's recourse debt to equity
ratio was 4.0:1 at September 30, 1998 compared with 2.0:1 at December 31,
1997. The increase at September 30, 1998 was primarily the result of the
$13.8 million subordinated debt transaction completed in May 1998. The
following summarizes the significant borrowing activities of the Company in
addition to the subordinated debt transaction, which is discussed in the
Notes to Condensed Consolidated Financial Statements.
DISCOUNTED LEASE RENTALS. Subsequent to origination of certain leases,
the Company discounts the remaining lease payments with various financial
institutions in return for a cash payment based on the present value of such
payments. Proceeds from discounting are recorded in the Company's condensed
consolidated balance sheet as discounted lease rentals. The discounted lease
rentals are generally nonrecourse to the Company. As lessees make payments,
rental revenue on operating leases is recorded by the Company with an
offsetting charge to interest expense and a reduction in the discounted lease
rentals utilizing the interest method. Total discounted lease rentals
decreased from $5.9 million as of December 31, 1997 to $3.3 million as of
September 30, 1998. The net decrease of $2.6 million is primarily the result
of cash proceeds from discounting of $.7 million, more than offset by
principal payments of $3.0 million.
NOTES PAYABLE. Total notes payable increased from $21.5 million as of
December 31, 1997 to $32.6 million as of September 30, 1998. The net increase
of $11.1 million is primarily the result of additional cash proceeds of
$22.6 million, net noncash borrowings of $2.5 million, partially offset by
payments of $14.0 million.
13
<PAGE>
CAPITAL RESOURCES
At September 30, 1998, the Company's revolving credit and working
capital borrowing capability is $40.0 million. Advances under these
agreements aggregated $14.9 million at September 30, 1998.
The Company's current financial resources, including the proceeds from
its May 1998 subordinated debt offering, estimated cash flows from operations
and the revolving credit facilities are expected to be sufficient to fund the
Company's anticipated working capital needs. In addition to the borrowing
activities summarized above, the Company has developed a network of financial
institutions to which it sells transactions on a regular basis. The Company
is, from time to time, dependent upon the need to liquidate or externally
finance transactions originated and held in its investment portfolio.
Inflation has not been a significant factor in the Company's operations.
YEAR 2000 ISSUE
The Company is currently evaluating the potential impact of the situation
referred to as the "Year 2000 Issue." The Year 2000 Issue concerns the
inability of computer software programs to properly recognize and process date
sensitive information relating to the Year 2000. The Company has begun
evaluating its major automated systems to determine if they are Year 2000
compliant and has contacted the suppliers of certain of those systems to inquire
about Year 2000 compliance. The Company believes that its major automated
systems are Year 2000 compliant.
The Company has also made inquiries of and is contacting certain suppliers
with respect to Year 2000 issues. Even assuming that all material third parties
confirm that they are or expect to be Year 2000 compliant by December 31, 1999,
it is not possible to state with certainty that such parties will be so
compliant. It is impossible to fully assess the potential consequences in the
event service interruptions from suppliers occur or in the event that there are
disruptions in such infrastructure areas as utilities, communications,
transportation, banking and government.
To date, the Company has not incurred material costs associated with the
Year 2000 Issue. The Company believes that any future costs associated with,
and the potential impact of, the Year 2000 Issue will not be material. Based
upon its assessments to date, the Company believes it will not experience any
material disruption in its operations as a result of Year 2000 problems in
internal financial systems, reconditioning activities and other process
control systems, or in its interface with major customers and suppliers.
However, if major suppliers, including those providing inventory, banking,
electricity and communications services, experience difficulties resulting in
disruption of critical supplies or services to the Company, a shutdown of the
Company's operations could occur for the duration of the disruption. The
Company has not yet developed a contingency plan to provide for continuity of
normal business operations in the event problem scenarios, such as those
described above, arise. The Company will assess the need to develop such a
plan based upon the results of feedback from its major suppliers. Assuming
no major disruption in service from critical third party providers, the
Company believes that it will be able to manage the Year 2000 transition
without any material effect on the Company's results of operations or
financial position. There can be no assurance, however, that unexpected
difficulties will not arise and, if so, that the Company will be able to
timely develop and implement a contingency plan.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein, which are not historical facts, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements may be
identified by the use of terminology such as, "believe," "may," "will,"
"expect," "anticipate," "intend," "designed," "estimate," "should," or
"continue" or the negatives thereof or other variations thereon or comparable
terminology. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, without limitation strict
regulation by gaming authorities, competition the Company faces or may face
in the future, uncertainty of market acceptance of the
14
<PAGE>
SlotLease program and PDS Slot Source, the ability of the Company to continue
to obtain adequate financing, the ability of the Company to recover its
investment in gaming equipment leased under operating leases as well as its
investment in used gaming machines purchased for refurbishment and resale to
customers, the risk of default with respect to the Company's financing
transactions, the Company's dependence on key employees, potential
fluctuations in the Company's quarterly results, general economic and
business conditions, and other risk factors detailed from time to time in the
Company's reports filed with the Securities and Exchange Commission.
15
<PAGE>
PART II- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are included with this quarterly report on
Form 10-QSB as required by Item 601 of Regulation S-B.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.1 Loan Agreement, dated August 5, 1998
between U.S. Bank, as Lender and
the Registrant as Borrower
15 Letter Regarding Unaudited Interim
Financial Information
27 Financial Data Schedule
</TABLE>
b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the quarter ended September 30, 1998 or during the period from
September 30, 1998 to the date of this Quarterly Report on
Form 10-QSB.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PDS FINANCIAL CORPORATION
Dated: November 13, 1998 By:/s/ Peter D. Cleary
Chief Financial Officer
(a duly authorized officer)
16
<PAGE>
<TABLE>
<CAPTION>
LOAN AGREEMENT
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$4,000,000 08-5-98 849-26 55908 365 6608780924 40329 VB
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicablity of this document to any particular loan or item.
Borrower: PDS FINANCIAL CORPORATION; ET. AL. Lender: U.S. Bank
6171 McLeod Drive Commercial Services Group
Las Vegas, NV 89120 2300 W. Sahara, Suite 200
Las Vegas, NV 89102
THIS LOAN AGREEMENT between PDS FINANCIAL CORPORATION and PDS FINANCIAL
CORPORATION - NEVADA (referred to in this Agreement individually and
collectively as "Borrower") and U.S. BANK (referred to in this Agreement as
"Lender") is made and executed on the following terms and conditions.
Borrower has received prior commercial loans from Lender or has applied to
Lender for a commercial loan or loans and other financial accommodations,
including those which may be described on any exhibit or schedule attached to
this Agreement. All such loans and financial accommodations, together with
all future loans and financial accommodations from Lender to Borrower, are
referred to in this Agreement individually as the "Loan" and collectively as
the "Loans." Borrower understands and agrees that: (a) in granting,
renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement;
(b) the granting, renewing, or extending of any Loan by Lender at all times
shall be subject to Lender's sole judgment and discretion; and (c) all such
Loans shall be and shall remain subject to the following terms and conditions
of this Agreement.
TERM. This Agreement shall be effective as of August 15, 1997, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
ACCOUNT. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to Borrower
(or to a third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means a disbursement of Loan funds under this
Agreement.
BORROWER. The word "Borrower" means individually and collectively PDS
FINANCIAL CORPORATION and PDS FINANCIAL CORPORATION - NEVADA and all other
persons and entities signing Borrowers' Note.
BORROWING BASE. The words "Borrowing Base" mean (as determined by Lender
from time to time) the lesser of (a) $4,000,000.00; or (b) the sum of
(i) 65.000% of the aggregate amount of Eligible Accounts, plus (ii) 65.000%
of the aggregate amount of Eligible Inventory. In determining the amount of
the Borrowing
<PAGE>
Base, only Eligible Accounts and Eligible Inventory of PDS FINANCIAL
CORPORATION - NEVADA shall be included.
BUSINESS DAY. The words "Business Day" mean a day on which commercial banks
are open for business in the State of Nevada.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
COLLATERAL. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise. The
word "Collateral" includes without limitation all collateral described below
in the section titled "COLLATERAL."
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable to
Lender. The net amount of any Eligible Account against which Borrower may
borrow shall exclude all returns, discounts, credits, and offsets of any
nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts
do not include:
(a) Accounts with respect to which the Account Debtor is an officer, an
employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders,
officers, or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a resident
of the United States, except to the extent such Accounts are supported
by insurance, bonds or other assurances satisfactory to Lender.
(e) Accounts with respect to which Borrower is or may become liable to
the Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account
Debtor.
(h) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account Debtor
to be unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief under
any provision of any state or federal bankruptcy, insolvency, or debtor-
in-relief acts; or who has had appointed a trustee, custodian, or
receiver for the assets of such
<PAGE>
Account Debtor; or who has made an assignment for the benefit of
creditors or has become insolvent or fails generally to pay its debts
(including its payrolls) as such debts become due.
(j) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 90 DAYS from the
invoice date. The entire balance of any Account of any single Account
debtor will be ineligible whenever the portion of the Account which has
not been paid within 90 DAYS from the invoice date is in excess of
10.000% of the total amount outstanding on the Account.
(l) That portion of the Accounts of any single Account Debtor which
exceeds 10.000% of all of Borrower's Accounts.
(m) Datings; Progress Billings; Cash Sales; Service Charges.
ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time, all
of Borrower's Inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further
processing.
(c) Work in progress.
(d) Raw Materials; Inventory outside Las Vegas, NV, held over 24
months.
ERISA. the word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or
hereafter existing, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated; whether Borrower may be liable
individually or jointly with others; whether borrower may be obligated as a
guarantor, surety, or otherwise; whether recovery upon such Indebtedness may
be or hereafter may become barred by any statute of limitations; and whether
such Indebtedness may be or hereafter may become otherwise unenforceable.
<PAGE>
INVENTORY. The word "Inventory" means all of Borrower's raw materials, work
in process, finished goods, merchandise, parts and supplies, of every kind
and description, and goods held for sale or lease or furnished under
contracts of service in which Borrower now has or hereafter acquires any
right, whether held by Borrower or others, and all documents of title,
warehouse receipts, bills of lading, and all other documents of every type
covering all or any part of the foregoing. Inventory includes Inventory
temporarily out of Borrower's custody or possession and all returns on
Accounts.
LENDER. The word "Lender" means U.S. BANK, its successors and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
LIQUID ASSETS. The words "Liquid Assets" means Borrower's cash on hand plus
Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however, evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being contested
in good faith; (c) liens of materialmen, mechanics, warehousemen, or
carriers, or other like liens arising in the ordinary course of business and
securing obligations which are not yet delinquent; (d) purchase money liens
or purchase money security interests upon or in any property acquired or
held by Borrower in the ordinary course of business to secure Indebtedness
outstanding on the date of this Agreement or permitted to be incurred under
the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens
and security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those liens and
security interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of Borrower's
assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
<PAGE>
SUBORDINATED DEBT. The words "Subordinated Debt" mean Indebtedness and
liabilities of Borrower which have been subordinated by written agreement to
Indebtedness owned by Borrower to Lender in form and substance acceptable to
Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but
including leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits. Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows:
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject to
the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered by
Borrower to Lender.
(b) Lender shall have received such opinions of counsel , supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall be
in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall have
been executed by each Guarantor, delivered to Lender, and be in full
force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, Inventory, books, records,
and operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and Borrower
shall have delivered to Lender the compliance certificate called for in
the paragraph below titled "Compliance Certificate."
MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested
either orally or in writing by authorized persons. Lender may, but need
not, require that all oral requests be confirmed in writing. Each Advance
shall be conclusively deemed to have been made at the request of and for the
benefit of Borrower (a) when credited to any deposit account of Borrower
maintained with Lender or (b) when advanced in accordance with the
instructions of an authorized person. Lender, at its option, may set a
cutoff time, after which all requests for Advances will be treated as having
been requested on the next succeeding Business Day.
MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of
the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay to
Lender an amount equal to the difference between the outstanding principal
balance of
<PAGE>
the Advances and the Borrowing Base. On the Expiration Date, Borrower
shall pay to Lender in full the aggregate unpaid principal amount of all
Advances then outstanding and all accrued unpaid Interest, together with
all other applicable fees, costs and charges, if any, not yet paid.
LOAN ACCOUNT. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and conclusively
binding on Borrower unless Borrower notifies Lender to the contrary within
thirty (30) days after Borrower's receipt of any such statement which
Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower (and
others, if required) shall grant to Lender Security Interests in such property
and assets as Lender may require (the "Collateral"), including without
limitation Borrower's present and future Accounts, general Intangibles, and
Inventory. Lender's Security Interests in the Collateral shall be continuing
liens and shall include the proceeds and products of the Collateral, including
without limitation the proceeds of any insurance. With respect to the
Collateral, Borrower agrees and represents and warrants to Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to Lender any and all of the
documents evidencing or constituting the Collateral and Borrower will
note Lender's interest upon any and all chattel paper if not delivered to
Lender for possession by Lender. Contemporaneous with the execution of
this Agreement, Borrower will execute one or more financing statements
and any similar statements as may be required by applicable law, and
will file such financing statements and all such similar statements in
the appropriate location or locations. Borrower hereby appoints Lender as
its irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue any Security Interest. Lender may at
any time, and without further authorization from Borrower, file a carbon,
photograph, facsimile, or other reproduction of any financing statement for
use as a financing statement. Borrower will reimburse Lender for all
expenses for the perfection, termination, and the continuation of the
perfection of Lender's security interest in the Collateral. Borrower
promptly will notify Lender of any change in Borrower's name including any
change to the assumed business names of Borrower. Borrower also promptly
will notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify Lender in
writing prior to any change in address or location of Borrower's principal
governance office or should Borrower merge or consolidate with any other
entity.
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the
Accounts, Borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning Eligible
Accounts and Account balances and agings. With respect to the Inventory,
Borrower agrees to keep and maintain such records as Lender may require,
including without limitation information concerning Eligible Inventory and
records itemizing and describing the kind, type, quality, and quantity of
Inventory, Borrower's Inventory costs and selling prices, and the daily
withdrawals and additions to inventory. The following is an accurate and
complete list of all locations at which Borrower keeps or maintains business
records concerning Borrower's Accounts and Inventory: Las Vegas, NV.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender schedules of
Accounts and Inventory and Eligible Accounts and Eligible Inventory, in form
and substance satisfactory to the Lender. Thereafter Borrower shall execute
and deliver to Lender such supplemental schedules of Eligible Accounts and
Eligible Inventory and such other matters and information relating to the
Accounts and Inventory as Lender may request. Supplemental schedules shall
be delivered according to the following schedule: Accounts Payable aging
and Accounts Receivable
<PAGE>
aging, within 20 days after the end of each month and formatted 90 days
from invoice date; monthly Borrower's Certificate, supported by Sales
Journal for additions to Accounts Receivable and for non-cash reductions
on Borrower's Certificate, and supported by Collection Report for
reductions to Accounts Receivable; annual complete debtor name and address
listing; monthly detailed listing of eligible Inventory, using last-cost
to calculate unit price for borrowing purposes. In addition, Borrower
agrees to undergo no less than one collateral audit annually, to be
performed by Lender's internal staff or Lender-approved external
examiners. Direct verifications will be required. Borrower agrees to pay
all Lender's expenses incurred in connection with each collateral audit.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Account; (b) All Account Information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and
(c) Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and to
confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Inventory; (b) All Inventory values listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; (c) The value of
the Inventory will be determined on a consistent accounting basis; (d)
Except as agreed to the contrary by Lender in writing, all Eligible
Inventory is now and at all times hereafter will be in Borrower's physical
possession and shall not be held by others on consignment, sale on approval,
or sale or return; (e) Except as reflected in the Inventory schedules
delivered to Lender, all Eligible Inventory is now and at all times
hereafter will be of good and merchantable quality, free from defects; (f)
Eligible Inventory is not now and will not at any time hereafter be stored
with a bailee, warehouseman, or similar party without Lender's prior written
consent, and, in such event, Borrower will concurrently at the time of
bailment cause any such bailee, warehouseman, or similar party to issue and
deliver to Lender, in form acceptable to Lender, warehouse receipts in
Lender's name evidencing the storage of Inventory; and (g) Lender, its
assigns, or agents shall have the right at any time and at Borrower's
expense to inspect and examine the Inventory and to check and test the same
as to quality, quantity, value, and condition.
MULTIPLE BORROWERS. This Agreement has been executed by multiple obligors who
are referred to herein individually, collectively and interchangeably as
"Borrower." Unless specifically stated to the contrary, the word "Borrower" as
used in this Agreement, including without limitation all representations,
warranties and covenants, shall include all Borrowers. Borrower understands and
agrees that, with or without notice to Borrower, Lender may with respect to any
other Borrower (a) make one or more additional secured or unsecured loans or
otherwise extend additional credit; (b) alter, compromise, renew, extend,
accelerate, or otherwise change one or more times the time for payment or other
terms any indebtedness, including increases and decreases of the rate of
interest on the indebtedness; (c) exchange, enforce, waive, subordinate, fail or
decide not to perfect, and release any security, with or without the
substitution of new collateral; (d) release, substitute, agree not to sue, or
deal with any one or more of Borrower's sureties, endorsers, or other guarantors
on any terms or in any manner Lender may choose; (e) determine how, when and
what application of payments and credits shall be made on any indebtedness;
(f) apply such security and direct the order or manner of sale thereof,
including without limitation, any nonjudicial sale permitted by the terms of the
controlling security agreement or deed of trust, as Lender in its discretion may
determine; (g) sell, transfer, assign, or grant participations in all or any
part of the indebtedness; (h) exercise or refrain from exercising any rights
against Borrower or others, or otherwise act or refrain from acting; (i) settle
or compromise any indebtedness; and (j) subordinate the payment of all or any
part of any indebtedness of Borrower to Lender to the payment of any liabilities
which may be due Lender or others .
REPRESENTATIONS AND WARRANTIES. The reference to "Borrower" in this
"REPRESENTATIONS AND WARRANTIES" section of this Agreement means PDS FINANCIAL
CORPORATION only and does not apply to any other co-borrower. Borrower
represents and warrants to Lender, as of the
<PAGE>
date of this Agreement, as of the date of each disbursement of Loan proceeds,
as of the date of any renewal, extension or modification of any Loan, and at
all times any indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Minnesota and
is validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its businesses
or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not conflict
with, result in a violation of, or constitute a default under (a) any
provision of its articles of incorporation or organization, or bylaws, or
any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's
legal name, and Borrower has not used, or filed a financing statement under,
any other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or
other applicable state or Federal laws, rules, or regulations adopted
pursuant to any of the foregoing. Except as disclosed to and acknowledged
by Lender in writing, Borrower represents and warrants that: (a) During the
period of Borrower's ownership of the properties, there has been no use,
generation, manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on, under, about
or from any of the properties. (b) Borrower has no knowledge of, or reason
to believe that there has been (i) any use, generation, manufacture,
storage, treatment, disposal, release, or threatened release of any
hazardous waste or substance on, under, about or from the properties by any
prior owners or occupants of any of the properties, or (ii) any actual or
threatened litigation or claims of any kind by any person relating to such
matters. (c) Neither Borrower nor any tenant, contractor, agent or other
authorized user of any of the properties shall use, generate, manufacture,
store, treat, dispose of, or release any hazardous waste or substance on,
under, about or from any of the properties; and any such activity shall be
conducted in compliance with all applicable federal, state and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender and
its agents to enter upon the properties to make such inspections and tests
as Lender may deem appropriate to determine compliance of the properties
with this section of the Agreement. Any inspections or tests made by Lender
shall be at Borrower's expense and for Lender's purposes only and shall not
be construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person.
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Page 9
The representations and warranties contained herein are based on
Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and waives
any future claims against Lender for indemnity or contribution in the
event Borrower becomes liable for cleanup or other costs under any such
laws, and (b) agrees to indemnify and hold harmless Lender against any and
all claims, losses, liabilities, damages, penalties, and expenses which
lender may directly or indirectly sustain or suffer resulting from a
breach of this section of the Agreement or as a consequence of any use,
generation, manufacture, storage, disposal, release or threatened release
occurring prior to Borrower's ownership or interest in the properties,
whether or not the same was or should have been known to Borrower. The
provisions of this section of the Agreement, including the obligation to
indemnify, shall survive the payment of the Indebtedness and the
termination or expiration of this Agreement and shall not be affected by
Lender's acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which may
materially adversely affect Borrower's financial condition or properties,
other than litigation, claims, or other events, if any, that have been
disclosed to and acknowledged by Lender in writing.
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Page 10
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith in
the ordinary course of business and for which adequate reserves have been
provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or affecting
any of the Collateral directly or indirectly securing repayment of
Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place of
business, is located at 6442 City West Parkway, Suite 300, Minneapolis, MN
55344. Unless Borrower has designated otherwise in writing this location is
also the office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which such
information is dated or certified; and none of such information is or will
be incomplete by omitting to state any material fact necessary to make such
information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. The reference to "Borrower" in this "AFFIRMATIVE
COVENANTS" section of this Agreement means PDS FINANCIAL CORPORATION only and
does not apply to any other co-borrower. Borrower covenants and agrees with
Lender that, while this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor.
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Page 11
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis, and
permit Lender to examine and audit Borrower's books and records at all
reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year, Borrower's balance sheet and income statement for the year ended,
prepared by Borrower, and, as soon as available, but in no event later than
fifty (50) days after the end of each fiscal quarter, Borrower's balance
sheet and profit and loss statement for the period ended, prepared and
certified as correct to the best knowledge and belief by Borrower's chief
financial officer or other officer or person acceptable to Lender. All
financial reports required to be provided under this Agreement shall be
prepared in accordance with generally accepted accounting principles,
applied on a consistent basis, and certified by Borrower as being true and
correct.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
list of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports with
respect to Borrower's financial condition and business operations as Lender
may request rom time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 7.00 to 1.00.
CASH FLOW REQUIREMENTS. Maintain Cash Flow at not less than the
following level: A RATIO OF 1.25 TO 1.00. THIS IS THE RATIO OF NET
INCOME PLUS DEPRECIATION AND AMORTIZATION PLUS INTEREST EXPENSE, DIVIDED
BY INTEREST PLUS DIVIDENDS.
The following provisions shall apply for purposes of determining compliance
with the foregoing financial covenants and ratios: DEBT WILL EXCLUDE
NONRECOURSE DEBT AND SUBORDINATED DEBT. Except as provided above, all
computations made to determine compliance with the requirements contained in
this paragraph shall be made in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Borrower
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest for the Loans, Borrower
will provide Lender with such loss payable or other endorsements as Lender
may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will have
an independent appraiser satisfactory to Lender determine, as applicable,
the actual cash value or replacement cost of any Collateral. The cost of
such appraisal shall be paid by Borrower.
<PAGE>
Page 12
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if unpaid,
might become a lien or charge upon any of Borrowers properties, income, or
profits. Provided however, Borrower will not be required to pay and
discharge any such assessment, tax, charge, levy, lien or claim so long as
(a) the legality of the same shall be contested in good faith by appropriate
proceedings, and (b) Borrower shall have established on its books adequate
reserves with respect to such contested assessment, tax, charge, levy, lien,
or claim in accordance with generally accepted accounting practices.
Borrower, upon demand of Lender, will furnish to Lender evidence of payment
of the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at any
time a written statement of any assessments, taxes, charges, levies, liens
and claims against Borrower's properties, income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely manner,
and promptly notify Lender if Borrower learns of the occurrence of any event
which constitutes an Event of Default under this Agreement or under any of
the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable federal,
state and municipal laws, ordinances, rules and regulations respecting its
properties, charters, businesses and operations, including without
limitation, compliance with the Americans With Disabilities Act and with all
minimum funding standards and other requirements of ERISA and other laws
applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and records.
If Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software programs
for the generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit Lender
free access to such records at all reasonable times and to provide Lender
with copies of any records it may request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds with
a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities, shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice, summons,
lien,
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Page 13
citation, directive, letter or other communication from any governmental
agency or instrumentality concerning any intentional or unintentional
action or omission on Borrower's part in connection with any environmental
activity whether or not there is damage to the environment and/or other
natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all
Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. The reference to "Borrower" in this "NEGATIVE COVENANTS"
section of this Agreement means PDS FINANCIAL CORPORATION only and does not
apply to any other co-borrower. Borrower covenants and agrees with Lender that
while this Agreement is in effect, Borrower shall not, without the prior written
consent of Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal and
state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other enterprise
or entity, or (c) incur any obligation as surely or guarantor other than in
the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt;
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Page 14
(c) there occurs a material adverse change in Borrower's financial condition,
in the financial condition of any Guarantor, or in the value of any Collateral
securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to
limit, modify or revoke such Guarantor's guaranty of the Loan or any other
loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the indebtedness against
any and all such accounts, and, at Lender's option, to administratively freeze
all such accounts to allow Lender to protect Lender's charge and setoff rights
provided on this paragraph.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition contained
in this Agreement or in any of the Related Documents, or failure of Borrower
to comply with or to perform any other term, obligation, covenant or
condition contained in any other agreement between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective obligations
under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at any
time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and
for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness of any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness.
EVENTS AFFECTING CO-BORROWERS. Any of the preceding events occurs with
respect to any co-borrower of any of the Indebtedness or any co-borrower
dies or becomes incompetent, or revokes or disputes the validity of, or
liability under, any of the Indebtedness.
<PAGE>
Page 15
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of
the Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option, all
Indebtedness immediately will become due and payable, all without notice of any
kind to Borrower, except that in the case of an Event of Default of the type
described in the "Insolvency" subsection above, such acceleration shall be
automatic and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of Lender's
rights and remedies shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude pursuit
of any other remedy, and an election to make expenditures or to take action to
perform an obligation of Borrower or of any Grantor shall not affect Lender's
right to declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the party
or parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Nevada. If there is a lawsuit, Borrower agrees upon
Lender's request to submit to the jurisdiction of the courts of Clark
County, the State of Nevada (initial here _PDC/____). Subject to the
provisions on arbitration, this Agreement shall be governed by and construed
in accordance with the laws of the State of Nevada.
ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE,
ARISING FROM THIS AGREEMENT OR OTHERWISE, INCLUDING WITHOUT LIMITATION
CONTRACT AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE
AMERICAN ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to
take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Agreement shall preclude any
party from seeking equitable relief from a court of competent jurisdiction.
The statute of limitations, estoppel, waiver, laches, and similar doctrines
which would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
these purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration provision.
<PAGE>
Page 16
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for ALL obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and unconditionally
agrees that either Lender or such purchaser may enforce Borrower's
obligation under the Loans irrespective of the failure or insolvency of any
holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Borrower, notice to any Borrower will constitute notice to all Borrowers.
For notice purposes, Borrower will keep Lender informed at all times of
Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable to any person or circumstance,
such finding shall not render that provision invalid or unenforceable as to
any other persons or circumstances. If feasible, any such offending
provision shall be deemed to be modified to be within the limits of
enforceability or validity; however, if the offending provision cannot be so
modified, it shall be stricken and all other provisions of this Agreement in
all other respects shall remain valid and enforceable.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
<PAGE>
Page 17
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
<PAGE>
Page 18
EACH BORROWER ACKNOWLEDGES HAVING READ ALL OF THE PROVISIONS OF THIS LOAN
AGREEMENT, AND EACH BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
AS OF AUGUST 5, 1998.
BORROWER:
PDS FINANCIAL CORPORATION
By: /s/ Johan P. Finley
----------------------------------
Johan P. Finley, President/C.E.O.
PDS FINANCIAL CORPORATION - NEVADA, Co-Borrower
By: /s/ Johan P. Finley
----------------------------------
Johan P. Finley, President/C.E.O.
LENDER:
U.S. BANK
By:
----------------------------------
Authorized Officer
<PAGE>
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 10549
RE: PDS Financial Corporation
Registration Statement on Form S-8 (Registration No. 33-85966)
We are aware that our report dated October 28, 1998 on our reviews of interim
financial information of PDS Financial Corporation for the periods ended
September 30, 1998 and 1997, and included in the Company's quarterly report on
Form 10-QSB for the quarter ended September 30, 1998, is incorporated by
reference in this registration statement. Pursuant to Rule 436 (c) under the
Securities Act of 1933, this report should not be considered a part of the
registration statement prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
November 13, 1998
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT AS OF AND FOR THE QUARTER ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,955,401
<SECURITIES> 0
<RECEIVABLES> 48,298,789
<ALLOWANCES> 0
<INVENTORY> 10,180,249
<CURRENT-ASSETS> 0<F1>
<PP&E> 4,236,632<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 65,671,071
<CURRENT-LIABILITIES> 6,031,309
<BONDS> 49,055,410<F3>
0
0
<COMMON> 36,482
<OTHER-SE> 10,547,870
<TOTAL-LIABILITY-AND-EQUITY> 65,671,071
<SALES> 18,867,933
<TOTAL-REVENUES> 30,482,349
<CGS> 15,538,415
<TOTAL-COSTS> 29,220,195
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F4>
<INCOME-PRETAX> 1,262,154
<INCOME-TAX> 480,000
<INCOME-CONTINUING> 782,154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 782,154
<EPS-PRIMARY> .22
<EPS-DILUTED> .21
<FN>
<F1>THE COMPANY DOES NOT PREPARE A CLASSIFIED BALANCE SHEET
<F2>INCLUDES DEFERRED INCOME TAX ASSET OF $851,000
<F3>INCLUDES NONRECOURSE OBLIGATIONS OF $6,812,273
<F4>AMOUNT, $3,528,593, IS INCLUDED IN TAG 30 "TOTAL COSTS"
</FN>
</TABLE>
