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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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 MC LEOD DRIVE, LAS VEGAS, NEVADA 89120
(Address of principal executive offices)
(702) 736-0700
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date:
CLASS OUTSTANDING AS OF JULY 30, 1999
----- -------------------------------
Common Stock, $.01 par value 3,704,415 shares
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<PAGE>
PDS FINANCIAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements PAGE
<S> <C>
Condensed Consolidated Balance Sheets
As of June 30, 1999 (Unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Three Months Ended June 30, 1999
and 1998 (Unaudited) 4
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Six Months Ended June 30, 1999
and 1998 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
2
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,077,000 $ 1,269,000
Restricted cash 4,227,000 3,166,000
Accounts receivable, net 2,907,000 1,335,000
Notes receivable, net 28,251,000 21,878,000
Net investment in leasing operations:
Equipment under operating leases, net 77,497,000 27,751,000
Direct finance leases 12,593,000 9,668,000
Equipment held for sale or lease 7,016,000 10,002,000
Other assets, net 5,335,000 4,560,000
------------ -----------
Total assets $140,903,000 $79,629,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 3,395,000 $ 2,135,000
Deferred funds for pending transactions 38,723,000 13,427,000
Discounted lease rentals 485,000 806,000
Notes payable 65,943,000 36,699,000
Subordinated debentures, net 13,244,000 13,165,000
Other liabilities 8,437,000 2,863,000
------------ -----------
Total liabilities 130,227,000 69,095,000
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares
authorized, 3,704,415 and 3,648,211 shares
issued and outstanding June 30, 1999
and December 31, 1998, respectively 37,000 36,000
Additional paid-in capital 11,421,000 11,268,000
Accumulated other comprehensive income -- (25,000)
Retained earnings (accumulated deficit) (782,000) (745,000)
------------ -----------
Total stockholders' equity 10,676,000 10,534,000
------------ -----------
Total liabilities and stockholders' equity $140,903,000 $79,629,000
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Equipment sales $ 3,408,000 $10,226,000
Revenue from sales type leases 2,416,000 1,267,000
Rental revenue on operating leases 3,409,000 1,644,000
Fee income 276,000 343,000
Finance income 1,003,000 797,000
----------- -----------
Total revenues 10,512,000 14,277,000
Costs and expenses:
Equipment sales 3,265,000 8,966,000
Sales-type leases 2,126,000 1,027,000
Depreciation on operating leases 2,412,000 1,290,000
Selling, general and administrative 969,000 1,258,000
Interest 2,015,000 1,267,000
----------- -----------
Total costs and expenses 10,787,000 13,808,000
Income (loss) before income taxes (275,000) 469,000
Provision (benefit) for income taxes (105,000) 178,000
----------- -----------
Net income (loss) $ (170,000) $ 291,000
=========== ===========
Other comprehensive income, net of tax -- 6,000
----------- -----------
Comprehensive income (loss) $(170,000) $297,000
=========== ===========
Earnings (loss) per share:
Basic $ (0.05) $ 0.08
Diluted $ (0.05) $ 0.08
Weighted average shares outstanding:
Basic 3,675,000 3,605,000
Diluted 3,675,000 3,863,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Equipment sales $ 4,695,000 $16,351,000
Revenue from sales type leases 3,431,000 1,267,000
Rental revenue on operating leases 5,953,000 3,625,000
Fee income 1,349,000 1,368,000
Finance income 1,939,000 1,117,000
----------- -----------
Total revenues 17,367,000 23,728,000
Costs and expenses:
Equipment sales 4,511,000 14,215,000
Sales-type leases 2,850,000 1,027,000
Depreciation on operating leases 4,212,000 2,849,000
Selling, general and administrative 2,060,000 2,350,000
Interest 3,793,000 2,094,000
----------- -----------
Total costs and expenses 17,426,000 22,535,000
Income (loss) before income taxes (59,000) 1,193,000
Provision (benefit) for income taxes (22,000) 453,000
----------- -----------
Net income (loss) $ (37,000) $ 740,000
=========== ===========
Other comprehensive income (loss), net of
tax -- (12,000)
----------- -----------
Comprehensive income (loss) $(37,000) $728,000
=========== ===========
Earnings (loss) per share:
Basic $ (0.01) $ 0.21
Diluted $ (0.01) $ 0.19
Weighted average shares outstanding:
Basic 3,662,000 3,577,000
Diluted 3,662,000 3,820,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (37,000) $ 740,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,212,000 2,848,000
Gain on sale of financial assets (257,000) (2,205,000)
Purchases and originations of notes receivable and direct finance leases (12,602,000) (12,114,000)
Proceeds from:
Sale of notes receivable and direct finance leases 1,558,000 4,743,000
Collections of principal on notes receivable and direct finance leases 4,123,000 1,806,000
Changes in operating assets and liabilities:
Accounts receivable (1,573,000) (3,547,000)
Increase in Customer deposit liabilities 5,884,000 233,000
Other, net 887,000 3,951,000
Equipment held for sale or lease 1,707,000 (9,372,000)
------------ ------------
Net cash provided by (used in) operating activities 3,902,000 (12,917,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment for leasing (29,663,000) (3,173,000)
Proceeds from sale of equipment under operating leases -- 3,697,000
Other, net (272,000) (65,000)
------------ ------------
Net cash provided by (used in) investing activities (29,935,000) 459,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments made from restricted cash 3,165,000 --
Proceeds from notes payable 36,953,000 11,700,000
Proceeds from issuance of discounted lease rentals -- 692,000
Principal payments on notes payable (12,099,000) (10,537,000)
Payments on discounted lease rentals (321,000) (2,359,000)
Proceeds from issuance of subordinated debt and warrants -- 13,800,000
Payment of debt issue costs -- (1,550,000)
Principal payments on subordinated debentures -- (29,000)
Proceeds from exercise of stock options and warrants 143,000 263,000
------------ ------------
Net cash provided by financing activities 27,841,000 11,980,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,808,000 (478,000)
Cash and cash equivalents at beginning of period 1,269,000 1,865,000
------------ ------------
Cash and cash equivalents at end of period $ 3,077,000 $ 1,387,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements as of June 30, 1999 and for the
three and six month periods ended June 30, 1999 and 1998 included in this Form
10-Q 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 consolidated balance sheet at
December 31, 1998 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, 1998.
The condensed consolidated financial statements presented herein 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
The Company borrows funds in order to finance the origination or purchase of
certain leases and notes receivable, and for the purchase of equipment held for
sale or lease. Such borrowings are generally collateralized by the cash flow
stream of the lease or note receivable funded, and the related equipment.
Certain of the borrowings have recourse to the Company.
Notes payable consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ----------
<S> <C> <C>
Notes payable to banks, due either on demand or
in 1999 through 2003, fixed interest rates between 8.75% to 12.9% or
variable rates based on the prime rate plus 10% (8% at June 30,1999)
collateralized by certain equipment under operating leases, equipment
held for sale or lease and accounts receivable $10,317,000 $3,701,000
Notes payable to financial institutions, due in 1999 through 2002, interest at
7.1% to 12.0%, collateralized by certain notes receivable, equipment under
operating leases and direct finance leases 21,726,000 16,919,000
Notes payable to manufacturers/distributors due in 1999 through 2001, interest
at 8.8% to 14.0% collateralized by certain notes receivable, equipment under
operating leases and direct finance leases 8,754,000 11,486,000
Other 32,000 36,000
----------- ----------
Total recourse 40,829,000 32,142,000
----------- ----------
</TABLE>
7
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Non-recourse:
Notes payable to banks and financial institutions, due in 1999 through 2003,
interest at 8.7% to 12.5%, collateralized by certain notes receivable and
equipment under operating and direct finance leases 25,200,000 3,059,000
Notes payable to manufacturers/distributors due in 1999 through 2001, interest
at 8.0% to 10.0%, collateralized by certain equipment under operating
leases and direct finance leases 1,646,000 2,872,000
Other -- --
----------- -----------
Total non-recourse 26,846,000 5,931,000
----------- -----------
Less unamortized discounts (1,732,000) (1,374,000)
----------- -----------
$65,943,000 $36,699,000
=========== ===========
</TABLE>
The Company has available revolving credit and working capital facilities
aggregating approximately $70 million at June 30, 1999. Advances under these
agreements with banks and financial institutions were approximately $22.8
million at June 30, 1999, which are included in the recourse debt balances in
the above table.
3. EARNINGS PER SHARE
The Company calculated basic and diluted earnings (loss) per share as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss), basic $ (170,000) $ 291,000 $ (37,000) $ 740,000
Interest expense on convertible
subordinated debentures, net of tax -- 1,000 -- 1,000
---------- ---------- ---------- ----------
Net income (loss), diluted $ (170,000) $292,000 $(37,000) $741,000
========== ========== ========== ==========
Weighted average shares outstanding:
Basic (weighted average shares outstanding) 3,675,000 3,605,000 3,662,000 3,577,000
Effect of dilutive options -- 210,000 -- 195,000
Effect of dilutive warrants -- 41,000 -- 36,000
Effect of convertible subordinated
debentures -- 7,000 -- 12,000
---------- ---------- ---------- ----------
Diluted 3,675,000 3,863,000 3,662,000 3,820,000
========== ========== ========== ==========
Per share amounts:
Basic $(0.05) $0.08 $(0.01) $0.21
Diluted $(0.05) $0.08 $(0.01) $0.19
</TABLE>
Options to purchase 366,000 shares of common stock, which were in the money were
not included in the computation of diluted earnings per share for the quarter
ended June 30, 1999, because they would have been anti-dilutive. The weighted
average exercise price for these options was $3.30, as of June 30, 1999. These
options expire at various dates through 2008.
8
<PAGE>
4. NOTES RECEIVABLE
During the three months ended June 30, 1999, two customers with
outstanding notes receivable balances totaling approximately $12 million,
failed to make their regularly scheduled monthly payments to the Company
causing an event of default under the terms of the respective notes. The
notes receivable are generally collateralized by gaming equipment. The
Company is currently in negotiation with the obligors and guarantors of
these notes to cure these defaults and restructure the terms of these
notes. Although there can be no asssurance, the Company currently believes
that the revised terms will not result in a charge under the Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan."
Certain of these notes receivable are used to collateralize borrowings from
certain banks, financial institutions and distributors, and such
borrowings total $7.7 million. An event of default under the notes
receivable from a customer allows these lenders to require either
substitution of collateral or repayment of the obligation. The Company is
continuing to discuss its options with these lenders.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is engaged in the business of financing and leasing gaming
equipment and supplying reconditioned gaming devices to casino operators. The
gaming equipment financed by the Company consists mainly of slot machines, video
gaming machines and other gaming devices. In addition, the Company finances
furniture, fixtures and other gaming related equipment, including gaming tables
and chairs, restaurant and hotel furniture, vehicles, security and surveillance
equipment, computers and other office equipment. In 1996, the Company introduced
SlotLease, a specialized operating lease program for slot machines and other
electronic gaming devices. The Company believes it is currently the only
independent leasing company licensed in the states of Nevada , New Jersey,
Colorado, Iowa, Indiana 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,
resulting in increased recurring 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.
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 all of the benefits and risks of
ownership. However, certain of its gaming equipment transactions are structured
as direct finance and sales-type leases. Consistent with the Company's strategy
to increase its leasing activities, the 1998 and 1999 originations involve a
greater mix of operating leases, which generate revenues throughout the lease
term, as opposed to notes or direct finance leases, which generate revenues
primarily upon sale.
The Company's revenue generating activities can be categorized as
follows: (i) equipment sales; (ii) revenue from sales-type leases; (iii)
rental revenue on operating 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.
10
<PAGE>
REVENUE FROM 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 either a dealer profit resulting from the Company leasing equipment
which was purchased at a discount that is not available to the lessee, or a
manufacturing profit resulting from the reconditioning process performed on used
gaming devices. This dealer profit or manufacturing profit is recognized at the
inception of the lease in the consolidated income statement 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.
Upon selling a sales-type lease to a third party, the Company removes the
underlying asset from its consolidated balance sheet.
RENTAL REVENUE ON OPERATING LEASES. Operating leases are defined as those
leases in which substantially all the benefits and risks of ownership of the
leased asset are retained by the Company. Revenue from operating leases consists
of monthly rentals and is reflected in the consolidated income statement evenly
over the life of the lease as rental revenue on operating leases. The cost of
the related equipment is depreciated on a straight-line basis over the lease
term to the Company's estimate of residual value. This depreciation is reflected
on the consolidated income statement as depreciation on operating leases. For
operating leases, the cost of equipment, less accumulated depreciation, is
recorded in the consolidated balance sheet as equipment under operating leases,
net.
FEE INCOME. The Company funds much of the direct finance lease and note
transactions it originates through a sale of such transactions (i.e., the sale
of all of the Company's right, title and interest in the future payment stream
from the related leases or notes). A sale may occur simultaneously with the
origination or several months thereafter. At the time of sale, the Company
records fee income equal to the difference between the selling price and the
carrying value of the related financial asset. The calculation of fee income
reflects many factors, including the credit quality of the borrowers or lessees,
the type of underlying equipment, credit enhancements, if any and ultimately,
the terms under which the transaction was both originated and sold. Fee income
also includes commissions and advisory fees for arranging financing between
unrelated parties. Upon the sale of a lease or note, the Company removes the
underlying asset from its consolidated balance sheet.
FINANCE INCOME. For the period during which the Company holds a note
receivable or direct finance lease, finance income is recognized over the term
of the underlying lease or note in a manner which produces a constant percentage
rate of return on the asset carrying cost. For those direct finance leases held
by the Company, the present value of the future minimum lease payments are
recorded in the consolidated balance sheet as direct finance leases.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 and 1998
Revenues for the second quarter of 1999 totaled $10.5 million, a 27%
decrease from $14.3 million in the year earlier quarter. The decrease in
revenues is primarily attributable to lower sales of equipment formerly out on
operating leases and lower fee income offset by higher rental revenue and
finance income. Gross originations of financing transactions for the three
months ended June 30, 1999 totaled $55.3 million compared to $20.6 million for
the year earlier quarter.
Revenues from equipment sales and sales-type leases totaled $5.8 million in
the second quarter of 1999, a 50% decrease from $11.5 million in the year
earlier quarter. Such revenues include sales of both equipment which had been
under operating leases, and used gaming devices which the Company reconditioned
in its Slot Source division. Sales of equipment which has been under operating
lease totaled $3.7 million in the year earlier quarter, and the cost of those
sales totaled $3.5 million. No such sale of equipment under operating lease
occurred in the current quarter. Revenue from sales and sale-type leases of Slot
Source reconditioned gaming devices totaled $5.8 million in the current quarter,
compared to $7.8 million in the year earlier quarter. The cost of such sales
totaled $5.4 million in the current quarter, compared to $6.5 million in the
year earlier quarter.
The Company's average operating lease portfolio was $44.3 million
during the second quarter of 1999, a 200% increase as compared to $14.0
million for the year earlier quarter. The increase in the average portfolio
results from an increase in the volume of originations during 1998 and the
first six months of 1999. Rental revenue on operating leases increased to
$3.4 million in the current quarter, compared to $1.6 million in the year
earlier quarter. Related depreciation increased to $2.4 million in the
current quarter, compared to $1.3 million in the year earlier quarter. These
leases are expected to generate revenues throughout their lease terms, which
range from 24 to 48 months and are typically 36 months.
11
<PAGE>
Fee income totaled $276,000 in the current quarter, compared to $343,000
in the year earlier quarter. The current quarter fee income was composed of
fees for financial advisory services, compared to the year earlier quarter
which primarily consisted of gains from the sale of financial transactions.
Finance income totaled $1,003,000 in the current quarter, compared to
$797,000 in the year earlier quarter. This increase primarily reflects the
larger portfolio of notes receivable and direct finance leases held by the
Company during the current quarter as compared to the year earlier quarter.
Selling, general and administrative expenses totaled $969,000 in the
current quarter, compared to $1.3 million in the prior year quarter. This
decrease reflects the increase in costs capitalized in the Company's lease
orginiation department, which resulted from the significant increase in
originations in the current quarter as compared to the year earlier quarter.
Interest expense totaled $2.0 million in the current quarter, compared to
$1.3 million in the year earlier quarter. This increase was due to higher levels
of outstanding borrowings which were utilized to fund the increased investment
in the leasing operations and to fund the originations of notes receivable.
The effective income tax rate was 38% in the three months ended June 30,
1999 and 1998. In both periods, the effective rate was higher than the federal
statutory tax rate of 34%, due primarily to state income taxes.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1999 and 1998
Revenues for the six months ended June 30, 1999 totaled $17.4 million, a
27% decrease from $23.7 million in the year earlier period. The decrease in
revenues is primarily attributable to lower sales of equipment formerly out on
operating leases offset by higher rental revenues and finance income. Gross
originations of financing transactions for the six months ended June 30, 1999
totaled $63.9 million compared to $32.2 million for the year earlier period.
Revenues from equipment sales and sales-type leases totaled $8.1 million
in the six months ended June 30, 1999, a 54% decrease from $17.6 million in
the year earlier period. Sales of equipment which has been under operating
lease totaled $6.9 million in the year earlier period, and the cost of those
sales totaled $6.1 million. No such sale of equipment under operating lease
occurred in the current period. Revenue from sales and sale-type leases of
Slot Source reconditioned gaming devices totaled $8.1 million during the six
months ended June 30, 1999, compared to $10.7 million in the year earlier
period. The cost of such sales totaled $7.4 million in the current period,
compared to $9.1 million in the year earlier quarter.
The Company's average operating lease portfolio was $36.3 million during
the six months ended June 30, 1999, a 130% increase as compared to $15.8 million
for the year earlier period. The increase in the average portfolio results from
an increase in the volume of originations during 1999. Rental revenue on
operating leases increased to $6.0 million for the six months ended June 30,
1999, compared to $3.6 million in the year earlier period. Related depreciation
increased to $4.2 million for the six months ended June 30, 1999, compared to
$2.8 million in the year earlier period. 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 totaled $1.3 million for the six months ended June 30, 1999,
compared to $1.4 million in the year earlier period. The current period fee
income is composed of both fees for financial advisory services and gains from
the sale of financial transactions, compared to the year earlier period which
consisted primarily from gains from the sale of financial transactions.
Finance income totaled $1.9 million for the six months ended June 30, 1999,
compared to $1.1 million in the year earlier period. This increase primarily
reflects the larger portfolio of notes receivable and direct finance leases held
by the Company during the period as compared to the year earlier period.
12
<PAGE>
Selling, general and administrative expenses totaled $2.1 million for
the six months ended June 30, 1999 compared to $2.3 million in the year
earlier period. This decrease reflects the increase in costs capitalized in
the Company's lease orginiation department, which resulted from the
significant increase in originations in the six months ended June 30, 1999 as
compared to the year earlier period.
Interest expense totaled $3.8 million for the six months ended June 30,
1999, compared to $2.1 million in the year earlier period. This increase was due
to higher levels of outstanding borrowings which were utilized to fund the
increased investment in the leasing operations and to fund the originations of
notes receivable.
The effective income tax rate was 38% in the three months ended March 31,
1999 and 1998. In both periods, the effective rate was higher than the federal
statutory tax rate of 34%, due primarily to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's strategy to increase its financing activities and its
reconditioned gaming device sales, involves a higher level of investment in
notes receivable, equipment under operating leases and equipment held for sale
or lease, financed through discounted lease rentals and notes payable. 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 non-recourse borrowings. The Company expects its lease
portfolio to generate recurring cash flow throughout the lease term.
The Company's cash and cash equivalents totaled $3.1 million at June 30,
1999, an increase of $1.8 million from December 31, 1998. During the first
six months of 1999, cash provided in operating activities totaled $3.9
million, an increase of $16.8 million from the first six months of 1998. The
higher level of cash provided in 1999 primarily reflects an increase in
customer deposits and lesser amounts of cash used to acquire inventory. The
cash used in investing activities in 1999 primarily reflects $29.7 million of
investment in equipment for leasing. The $27.8 million of net cash provided
by financing activities in 1999 was primarily the result of borrowings and
cash transferred from restricted to non-restricted accounts, which was used
principally to fund the purchases of equipment for leasing.
At June 30, 1999 total borrowings under notes and lines of credit were
$65.9 million, compared to $36.7 million at December 31, 1998. The majority of
the proceeds from the borrowings were invested in the Company's leasing
operations and were primarily non-recourse to the Company.
At June 30, 1999, the Company's revolving credit and working capital
facilities aggregated approximately $70 million. Advances under these agreements
aggregated approximately $22.8 million at June 30, 1999.
The Company's current financial resources, including the 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. In the future the Company may seek to raise capital
to fund its growth strategy through debt or financings, however we cannot
predict when such an event will occur, nor if such capital would be available
at favorable terms, if at all.
Inflation has not been a significant factor in the Company's operations.
13
<PAGE>
YEAR 2000 ISSUE
The Company is continuing to evaluate 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 beyond December 31, 1999. The Company has evaluated 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.
Although the Company believed its existing accounting system was Year 2000
compliant, the company purchased and began installing a new management
information system in January 1999. The new system has been certified as Year
2000 compliant by the software provider. The total cost of the new system is
approximately $100,000 and is expected to be fully operational during the third
quarter of 1999.
The Company also has electronic interfaces with certain of its suppliers.
The Company has made inquiries and received assurances from such suppliers with
respect to Year 2000 issues.
The Company 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 to the 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 begun
to develop a contingency plan to provide for continuity of normal business
operations in the event problem scenarios, such as those described above, arise,
however that plan is not yet complete. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE FACTORS ABOUT MARKET RISK
Interest Rate Risk
The Company generally provides financing (both leases and traditional
loans) to customers at fixed rates of interest (either with stated interest
rates or implicit rates). The Company either sells such transactions to
investors, or holds such transactions in its portfolio. For larger
transactions retained in the portfolio, the Company obtains fixed rate
commitments from financing sources such as banks and financial institutions
prior to providing such financing to customers, which substantially reduces
the interest rate risk during the origination process. For smaller
transactions, the Company may originate the transaction using internally
available funds, and shortly after origination use the transaction as
collateral for borrowing on one of several lines of credit. Such lines of
credit have floating rates of interest until a specific amount is borrowed
under the facility, at which time the amount borrowed will be assigned a
fixed rate of interest payable over its remaining term. Therefore changes in
interest rates have not historically had a direct impact on the Company's
earnings. The Company does not currently manage this interest rate risk with
derivative financial instruments and does not believe this risk is material.
The Company's existing portfolio of fixed rate receivables and borrowings
will fluctuate in value based on changes in market rates of interest. However
the Company does not believe that the changes in the fair values are material.
Currency Risk
All of our transactions are conducted and accounts are denominated in
United States Dollars and as such we do not currently have exposure to foreign
currency risk.
14
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements contained herein which are not historical facts are
forward-looking statements with respect to events, the occurrence of which
involves risks and uncertainties, including without limitation strict regulation
by gaming authorities, competition the Company faces or may face in the future,
uncertainty of market acceptance of the SlotLease program and PDS Slot Source,
the ability of the Company to continue to obtain adequate financing, the ability
of the Company to recover its investment in gaming equipment leased under
operating leases as well as its investment in used gaming machines purchased for
refurbishment and resale to customers, the risk of default with respect to the
Company's financing transactions, the Company's dependence on key employees,
potential fluctuations in the Company's quarterly results, general economic and
business conditions, and other risk factors detailed from time to time in the
Company's reports filed with the Securities and Exchange Commission.
15
<PAGE>
PART II- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its annual meeting of shareholders on May 14, 1999 for the
purposes of (1) electing members of the Board of Directors of the Company, (2)
approval of the Company's Employee Stock Purchase Plan and (3) ratifying the
appointment of PricewaterhouseCoopers LLP as the independent accountants of the
Company for the fiscal year ending December 31, 1999.
There were 3,648,211 shares of Common Stock entitled to vote at the meeting
and a total of 3,013,613 shares (82.6%) were represented at the meeting . The
shareholder voting was as follows:
<TABLE>
<CAPTION>
1. Election of Directors:
Withhold
FOR AGAINST AUTHORITY
<S> <C> <C> <C>
Johan P. Finley 2,959,413 5700 48,500
Peter D. Cleary 2,959,413 5700 48,500
Joel M. Koonce 2,959,413 5700 48,500
James L. Morrell 2,959,413 5700 48,500
Lona M.B. Finley 2,959,413 5700 48,500
</TABLE>
2. To approve the Company's Stock Purchase Plan:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--------- -------- -------- ---------------
<S> <C> <C> <C>
1,636,206 59,025 13,300 636,796
</TABLE>
3. To ratify the appointment of PricewaterhouseCoopers LLP as the
independent accountants of the Company for the fiscal year ending
December 31, 1999
<TABLE>
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
3,009,233 2,380 2,000
</TABLE>
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are included with this quarterly report
on Form 10-Q as required by Item 601 of Regulation S-X.
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule
b) Reports on Form 8-K. There were no reports on Form 8-K filed
during the quarter ended June 30, 1999 or during the period
from June 30, 1999 to the date of this Quarterly Report on
Form 10-Q.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PDS FINANCIAL CORPORATION
Dated: August 13, 1999 BY: /s/ Steven M. Des Champs
-----------------------------
Chief Financial Officer
(a duly authorized officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3077
<SECURITIES> 0
<RECEIVABLES> 31,158
<ALLOWANCES> 123
<INVENTORY> 7,016
<CURRENT-ASSETS> 10,211
<PP&E> 1,714
<DEPRECIATION> 749
<TOTAL-ASSETS> 140,903
<CURRENT-LIABILITIES> 42,118
<BONDS> 79,187
0
0
<COMMON> 37
<OTHER-SE> 11,421
<TOTAL-LIABILITY-AND-EQUITY> 140,903
<SALES> 8,126
<TOTAL-REVENUES> 17,367
<CGS> 7,361
<TOTAL-COSTS> 17,426
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,793
<INCOME-PRETAX> (59)
<INCOME-TAX> (22)
<INCOME-CONTINUING> (37)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
