<PAGE>
===============================================================================
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
[ ] Transition REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
COMMISSION FILE NO. 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 No.)
6171 MCLEOD DRIVE, LAS VEGAS, NEVADA 89120
------------------------------------------
(Address of Principal Executive Offices)
(702) 736-0700
-----------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date:
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF AUGUST 1, 2000
----- --------------------------------
<S> <C>
Common Stock, $.01 par value 3,712,952
</TABLE>
===============================================================================
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 2000 (Unaudited) and December 31, 1999.......................3
Consolidated Statements of Income (Loss) -Three Months Ended
June 30, 2000 and 1999 (Unaudited)..................................................................4
Consolidated Statements of Income (Loss) - Six Months Ended
June 30, 2000 and 1999 (Unaudited)..................................................................5
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2000 and 1999 (Unaudited)..................................................................6
Notes to Consolidated Financial Statements (Unaudited)............................................7-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........10-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................13-14
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................................14
Item 6. Exhibits and Reports on Form 8-K...................................................................14
</TABLE>
2
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------------ ------------------
<S> <C> <C>
(Unaudited)
ASSETS
Cash and cash equivalents $ 1,942,000 $ 2,860,000
Restricted cash -- 2,831,000
Notes, accounts, and leases receivable, net 60,045,000 48,616,000
Equipment under operating leases, net 20,406,000 41,287,000
Equipment held for sale or lease 7,147,000 6,616,000
Refundable income tax deposits 403,000 403,000
Deferred income taxes 748,000 976,000
Other assets, net 4,186,000 4,444,000
------------------ ------------------
$94,877,000 $108,033,000
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable
Equipment vendors $ 501,000 $ 6,363,000
Other 842,000 717,000
Customer deposits 7,446,000 7,141,000
Notes payable 62,320,000 66,549,000
Subordinated debt 11,333,000 13,323,000
Accrued expenses and other 1,920,000 3,836,000
------------------ ------------------
84,362,000 97,929,000
------------------ ------------------
Stockholders' equity
Common stock, $.01 par value, 20,000,000 shares authorized, and
3,710,735 and 3,706,971 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 38,000 37,000
Additional paid-in capital 11,551,000 11,546,000
Accumulated deficit (1,074,000) (1,479,000)
------------------ ------------------
10,515,000 10,104,000
------------------ ------------------
$94,877,000 $108,033,000
================== ==================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
THREE MONTHS ENDED JUNE 30
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------------- ------------------
<S> <C> <C>
REVENUES
Equipment sales $ 575,000 $ 3,408,000
Revenue from sales-type leases 8,393,000 2,416,000
Operating lease rentals 2,706,000 3,409,000
Finance income 2,006,000 1,003,000
Fee income 340,000 276,000
------------------- ------------------
14,020,000 10,512,000
------------------- ------------------
COSTS AND EXPENSES
Equipment sales 845,000 3,265,000
Sales-type leases 6,728,000 2,126,000
Depreciation on leased equipment 2,259,000 2,412,000
Interest 2,256,000 2,015,000
Selling, general and administrative 1,224,000 969,000
Other 349,000 --
------------------- ------------------
13,661,000 10,787,000
------------------- ------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 359,000 (275,000)
INCOME TAXES (BENEFIT) 129,000 (105,000)
------------------- ------------------
NET INCOME (LOSS) $230,000 $(170,000)
=================== ==================
NET INCOME (LOSS) PER SHARE
Basic $0.06 $(0.05)
Diluted $0.06 $(0.05)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 3,711,000 3,675,000
Diluted 3,712,000 3,675,000
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
SIX MONTHS ENDED JUNE 30
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
------------------- ------------------
<S> <C> <C>
REVENUES
Equipment sales $ 3,179,000 $ 4,695,000
Revenue from sales-type leases 18,155,000 3,431,000
Operating lease rentals 6,619,000 5,953,000
Finance income 3,425,000 1,939,000
Fee income 657,000 1,349,000
------------------- ------------------
32,035,000 17,367,000
------------------- ------------------
COSTS AND EXPENSES
Equipment sales 3,576,000 4,511,000
Sales-type leases 15,362,000 2,850,000
Depreciation on leased equipment 5,069,000 4,212,000
Interest 4,442,000 3,793,000
Selling, general and administrative 2,604,000 2,060,000
Other 349,000 --
------------------- ------------------
31,402,000 17,426,000
------------------- ------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 633,000 (59,000)
INCOME TAXES (BENEFIT) 228,000 (22,000)
------------------- ------------------
NET INCOME (LOSS) $ 405,000 $ (37,000)
=================== ==================
NET INCOME (LOSS) PER SHARE
Basic $0.11 $(0.01)
Diluted $0.11 $(0.01)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 3,710,000 3,662,000
Diluted 3,713,000 3,662,000
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 1,894,000 $ 3,902,000
---------------- ---------------
INVESTING ACTIVITIES
Purchase of equipment for leasing (67,000) (29,663,000)
Proceeds from sale of equipment under operating leases 1,645,000
Other, net (272,000)
---------------- ---------------
Net cash provided by (used in) investing activities 1,578,000 (29,935,000)
---------------- ---------------
FINANCING ACTIVITIES
Proceeds from borrowings 8,896,000 36,953,000
Repayment of borrowings (14,053,000) (12,420,000)
Repayment of subordinated debt (2,070,000)
Reduction in restricted cash 2,831,000 3,165,000
Proceeds from issuance of common stock 6,000
Proceeds from exercise of stock options and warrants 143,000
---------------- ---------------
Net cash provided by (used in) financing activities (4,390,000) 27,841,000
---------------- ---------------
CHANGE IN CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents (918,000) 1,808,000
Cash and cash equivalents at beginning of period 2,860,000 1,269,000
---------------- ---------------
Cash and cash equivalents at end of period $1,942,000 $ 3,077,000
================ ===============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and disclosures required by generally
accepted accounting principles for annual financial statements. In the
opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation
have been included. The results of operations for any interim period
are not necessarily indicative of results for the full year. For
further information, please refer to the consolidated financial
statements of PDS Financial Corporation (the "Company"), and the
related notes, included within the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999 (the "1999 Form 10-K"),
previously filed with the Securities and Exchange Commission.
The balance sheet at December 31, 1999 was derived from the
audited financial statements included in the Company's 1999 Form 10-K.
2. NOTES PAYABLE
Recourse and non-recourse obligations consist of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Lines of credit with a maximum aggregate commitment of
$46,000,000 bearing interest at rates from 7.3% to 11.9%,
secured by related investment in leases and equipment
held for sale or lease $22,243,000 $26,351,000
Equipment notes bearing interest at rates from 8.0% to 15%,
secured by related investment in leases:
Recourse 16,712,000 18,472,000
Non-recourse 24,474,000 23,244,000
---------------- ----------------
63,429,000 68,067,000
Unamortized loan discounts (1,109,000) (1,518,000)
---------------- ----------------
$62,320,000 $66,549,000
================ ================
</TABLE>
7
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. EARNINGS PER SHARE
The Company calculated basic and diluted earnings per share as
follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
----- ----- ---- ----
<S> <C> <C> <C> <C>
Net income (loss), basic and diluted $ 230,000 $ (170,000) $ 405,000 $ (37,000)
========== =========== ========== ==========
Weighted average shares outstanding
Basic 3,711,000 3,675,000 3,710,000 3,662,000
Effect of diluted options 1,000 3,000
---------- ---------- ---------- ----------
Diluted 3,712,000 3,675,000 3,713,000 3,662,000
========== ========== ========== ==========
Net income (loss) per share:
Basic $ 0.06 $ (0.05) $ 0.11 $ (0.01)
Diluted $ 0.06 $ (0.05) $ 0.11 $ (0.01)
</TABLE>
Common stock warrants and certain common stock options were
not included in the computation of diluted earnings per share for the
quarter ended June 30, 2000, because the exercise price was greater
than average market price of the common stock.
4. SEGMENT INFORMATION
The Company conducts business with external customers through
the operations of its PDS Slot Source ("Slot Source") and PDS Finance
("Finance") segments. In addition, employees of the Company provide
certain legal, accounting and compliance, personnel and other
administrative support services on behalf of Slot Source and Finance.
Specifically identifiable costs are allocated to Slot Source and
Finance. The selling, general and administrative costs (SG & A)
associated with these activities, are not separately allocated to each
business unit.
The accounting policies of each business unit are the same as
those described in Note 1 of Notes to Consolidated Financial Statements
included in the Company's 1999 Form 10-K. The Company evaluates the
performance of its operating segments based on earnings before income
taxes. On January 1, 2000, the Company began allocating interest and
other specifically identifiable expenses to the Slot Source and Finance
segments based on their identifiable assets. Amounts for 1999 have been
reclassified to conform with this presentation. Financial performance
measurements for Slot Source, Finance, and SG & A are set forth below.
8
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
2000 1999
---------------- -----------------
<S> <C> <C>
Revenues
Slot Source $ 790,000 $ 5,824,000
Finance 13,230,000 4,688,000
SG & A - -
---------------- -----------------
$14,020,000 $ 10,512,000
================ =================
Income (loss) before income taxes
Slot Source $ (732,000) $ 76,000
Finance 2,315,000 618,000
SG & A (1,224,000) (969,000)
---------------- -----------------
$ 359,000 $ (275,000)
================ =================
Identifiable Assets
Slot Source $ 8,766,000 $ 8,282,000
Finance 82,077,000 126,286,000
SG & A 4,034,000 6,335,000
---------------- -----------------
$94,877,000 $140,903,000
================ =================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
----------------- ------------------
<S> <C> <C>
Revenues
Slot Source $ 3,245,000 $ 4,695,000
Finance 28,790,000 12,672,000
SG & A - -
----------------- ------------------
$32,035,000 $ 17,367,000
================= ==================
Income (loss) before income taxes
Slot Source $ (674,000) $ 39,000
Finance 3,911,000 1,962,000
SG & A (2,604,000) (2,060,000)
----------------- ------------------
$ 633,000 $ (59,000)
================= ==================
Identifiable assets
Slot Source $ 8,766,000 $ 8,282,000
Finance 82,077,000 126,286,000
SG & A 4,034,000 6,335,000
----------------- ------------------
$94,877,000 $140,903,000
================= ==================
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 primarily 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.
The Company has a specialized operating lease program (SlotLease) for slot
machines and other electronic gaming devices. The Company believes that it is
one of only two independent leasing companies licensed in Nevada, and that it
is currently the only independent leasing company licensed in the states of
New Jersey, Colorado, Illinois, Iowa, Indiana, Mississippi, Minnesota, New
Mexico, California and Washington to provide this financing alternative. The
Company also reconditions, sells and distributes gaming devices through PDS
Slot Source 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. 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. In the last three years, the Company has
significantly increased the amount of leases and collateralized equipment
loans ("financing transactions") held in its own portfolio.
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's operating results are subject to quarterly
fluctuations resulting from a variety of factors, including, but not limited
to, (i) variations in the mix of financing transactions between operating
leases, direct finance leases, and notes receivable, (ii) changes in the
gaming industry which effect the demand for reconditioned gaming devices sold
by the Company's Slot Source division, and, (iii) economic conditions, in
which a detrimental change can cause customers to delay new investments and
increase the Company's bad debt exposure, and reduce the level of fee income
obtained through the sale of leases or financing transactions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Gross originations of financing transactions were $3.3 million and
$55.3 million for the three months ended June 30, 2000 and 1999,
respectively. The decrease in originations is due primarily to the Company
having recorded the highest level of originations in its history during the
quarter ended June 30, 1999.
Revenues for the second quarter of 2000 totaled $14.0 million, a 33%
increase compared to $10.5 million in the year earlier quarter. The increase
in revenues is primarily attributable to sales-type lease revenue associated
with the early termination of an operating lease and financing of such
equipment as a sales-type lease.
Revenues from equipment sales and sales-type leases totaled $9.0
million in the second quarter of 2000, a 55% increase from $5.8 million for the
comparable quarter in 1999. Approximately $8.0 million of
10
<PAGE>
the current quarter revenue is primarily due to financing as a sales-type
lease, certain equipment formally under an operating lease. Such revenues
also include sales of both equipment, which had been under operating leases,
and used gaming devices, which the Company reconditioned in its Slot Source
division. Revenue from sales and sale-type leases of Slot Source
reconditioned gaming devices totaled $0.8 million in the current quarter
compared to $5.8 million in the prior year period. The cost of such sales
totaled $0.8 million in the current period, compared to $5.4 million in the
year earlier quarter. The decrease in Slot Source revenues is due to reduced
shipments of gaming devices in the quarter ended June 30, 2000 compared to
prior year quarter. Slot Source shipped 472 units in the current quarter
compared to 1,540 in the prior year period.
The Company's average operating lease portfolio was $27.3 million
during the second quarter of 2000, a 38% decrease as compared to $44.3
million for the prior year quarter. The decline in equipment under operating
lease reflects equipment sold to original lessees at lease termination and
the early termination of certain operating leases and sales of the underlying
equipment to the original lessee under sales-type leases. Rental revenue on
operating leases decreased to $2.7 million in the current quarter, compared
to $3.4 million in the year earlier quarter. Related depreciation decreased
to $2.3 million in the current quarter, compared to $2.4 million in the year
earlier quarter.
Finance income totaled $2.0 million for the three months ended June
30, 2000 compared to $1.0 million for the second quarter of 1999. The
increase primarily reflects the larger average portfolio of notes receivable,
leveraged leases and direct finance leases held by the Company during the
quarter compared the second quarter of 1999.
Fee income totaled $0.3 million for both three-month periods ended
June 30, 2000 and 1999, respectively.
Interest expense totaled $2.3 million in the three months ended June
30, 2000, compared to $2.0 million for the comparable period in 1999. This
increase primarily reflects the higher levels of average outstanding
borrowings that were utilized to fund the increased investment in the
Company's leasing portfolio. The average outstanding borrowings were $64.0
million and $54.0 million for the quarter ending June 30, 2000 and 1999,
respectively.
Selling, general and administrative expenses totaled $1.2 million
and $1.0 million for the three months ended June 30, 2000 and 1999,
respectively. The increase of $0.2 million primarily reflects the decrease in
initial direct costs capitalized as part of the related lease and note
receivable as a result of the lower total originations.
Other expense increased $0.3 million for the three months ended
June 30, 2000 primarily due to prepayment discounts on an unsecured note
receivable. No such transaction took place in the previous year period.
The estimated effective income tax rate was 36% and 38% for the
three months ended June 30, 2000 and 1999, respectively. In both periods, the
effective rate was higher than the federal statutory tax rate of 34%, due
primarily to state income taxes. The decrease in the effective income tax
rate reflects a larger portion of the Company's business occurring in the
state of Nevada.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Gross originations of financing transactions for the six months
ended June 30, 2000 totaled $11.3 million compared to $63.9 million for the
year earlier period. The decrease results from the factors described above.
Revenues for the six months ended June 30, 2000 totaled $32.0
million, an 84% increase from $17.4 million in the year earlier period. The
increase in revenues is primarily attributable to sales-type lease revenue
associated with the early termination of certain equipment under operating
leases and financing of such equipment as sales-type leases.
11
<PAGE>
Revenues from equipment sales and sales-type leases totaled $21.3
million in the six months ended June 30, 2000, a 163% increase from $8.1
million in the year earlier period. Revenue from sales-type leases totaled
$18.2 million in the current year compared to $3.4 million in the year
earlier period. Sales-type lease revenue includes both sales of Slot Source
reconditioned gaming devices as well as revenue from the sale and financing
of equipment previously under operating lease. Revenue from the sale and
financing activities totaled $16.7 million in the six months ended June 30,
2000 compared to $1.5 million in year earlier period. Sales of equipment that
has been under operating lease totaled $1.4 million in the current year
period, and the cost of those sales totaled $1.3 million. No such sale of
equipment under operating lease occurred in the previous year period. Revenue
from sales and sale-type leases of Slot Source reconditioned gaming devices
totaled $3.2 million during the six months ended June 30, 2000, compared to
$8.1 million in the year earlier period. The cost of such sales totaled $3.1
million in the current period, compared to $7.4 million in the year earlier
period.
The Company's average operating lease portfolio was $32.2 million
during the six months ended June 30, 2000, an 11% decrease as compared to
$36.3 million for the year earlier period. The decrease in the average
portfolio results from a decrease in the volume of originations during 2000.
Rental revenue on operating leases increased to $6.6 million for the six
months ended June 30, 2000, compared to $6.0 million in the year earlier
period. Related depreciation increased to $5.1 million for the six months
ended June 30, 2000, compared to $4.2 million in the year earlier period.
These leases are expected to generate revenues throughout their lease terms,
which range from 24 to 48 months, with a majority being 36 months.
Finance income totaled $3.4 million for the six months ended June
30, 2000, compared to $1.9 million in the year earlier period. The increase
primarily reflects a larger average portfolio of notes receivable and direct
finance leases held by the Company during the first six months of 2000
compared to the same period of 1999. The average portfolio of notes and
direct finance leases held by the Company in the current year was $50.7
million compared to $33.8 million for the year earlier period.
Fee income totaled $0.7 million for the six months ended June 30,
2000, compared to $1.3 million in the year earlier period. The decrease is a
result of the lower total originations during the current year period
compared to the year earlier period.
Interest expense totaled $4.4 million for the six months ended June
30, 2000, compared to $3.8 million in the year earlier period. This increase
was primarily due to higher levels of outstanding borrowings that were
utilized to fund the increased investment in direct finance leases and notes
receivable.
Selling, general and administrative expenses totaled $2.6 million
for the six months ended June 30, 2000 compared to $2.1 million in the year
earlier period. This increase primarily reflects the decrease in initial
direct costs capitalized as part of the related lease and note receivable as
a result of the lower total originations
The estimated effective income tax rate was 36% and 37%,
respectively, in the six months ended June 30, 2000 and 1999. In both
periods, the effective rate was higher than the federal statutory tax rate of
34%, due primarily to state income taxes. The decrease in the effective
income tax rate reflects a larger portion of the Company's business occurring
in the state of Nevada.
LIQUIDITY AND CAPITAL RESOURCES
The Company's activities are principally funded by proceeds from
rents, fees, sales of equipment or sale-type leases and various forms of
non-recourse debt and recourse bank debt. Management believes the Company's
ability to generate cash from operations is sufficient to fund operations, as
shown in the accompanying Consolidated Statements of Cash Flows.
The Company's unrestricted cash and cash equivalents totaled $1.9
million at June 30, 2000, compared to $2.9 million at December 31, 1999. During
the six months ended June 30, 2000, cash
12
<PAGE>
provided by operating activities totaled $1.9 million, compared to $3.9
million for the six months ended June 30, 1999. The lower level of cash
provided by operating activities during the six months ended June 30, 2000
primarily reflects significant payments of accounts payable and other accrued
liabilities partially offset by proceeds from the sales of notes and direct
financing leases. Cash provided by investing activities totaled $1.6 million
in the six months ended June 30, 2000, compared to cash used by investing
activities of $29.9 million in the comparable period in 1999. The increase
reflects the current year sale of equipment previously under operating
leases. No such transaction occurred in the prior year's comparable period.
Additionally, as described above, the high level of originations in the 1999
period resulted in the $29.7 million investment in equipment for leasing. The
$4.4 million used in financing activities in the six months ended June 30,
2000 was primarily attributable to a principal payment on subordinated debt
for $2.1 million and principal payments on other debt, partially offset by
borrowings used principally to fund financing transactions. The 1999 period
reflected higher proceeds from borrowings related to the higher origination
levels.
The Company's lease portfolio declined $9.0 million from December
31, 1999 during the six months ended June 30, 2000. This decline is primarily
due to sale of leased assets and depreciation exceeding leases originated for
the Company's portfolio in the current period.
At June 30, 2000, total borrowings were $62.3 million, compared to
$66.6 million at December 31, 1999. At June 30, 2000, the Company's revolving
credit and working capital facilities aggregated approximately $61 million at
interest rates ranging from 7.3% to 11.9%. Advances under these agreements
aggregated approximately $50.0 million at June 30, 2000. 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. The Company is, from
time to time, dependent upon the need to liquidate or externally finance
transactions originated and held in its investment portfolio. The Company
continues to explore other possible sources of capital; however, there is no
assurance that additional capital, if required, can be obtained or will be
available on terms acceptable to the Company.
Inflation has not had a significant impact on the Company's operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE FACTORS ABOUT MARKET RISK
INTEREST RATE RISK
The Company generally provides financing (both leases and loans) to
customers at fixed rates of interest (either with stated interest rates or
implicit rates). 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
security 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 the Company's transactions are conducted and accounts are
denominated in United States dollars and as such the Company does not
currently have exposure to foreign currency risk.
13
<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.
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 12, 2000 for
the purposes of (1) electing members of the Board of Directors of the Company,
and (2) ratifying the appointment of Piercy, Bowler, Taylor and Kern as the
independent accountants of the Company for the fiscal year ending December 31,
2000.
There were 3,711,710 shares of Common Stock entitled to vote at the
meeting and a total of 3,212,570 shares (86.6%) were represented at the
meeting. The shareholder voting was as follows:
1. Election of Directors:
<TABLE>
<CAPTION>
Withhold
For Against Authority
----- ------- -----------
<S> <C> <C> <C>
Johan P. Finley 3,152,684 1,000 58,880
Peter D. Cleary 3,153,570 1,000 58,000
Joel M. Koonce 3,153,370 1,000 58,200
James L. Morrell 3,153,570 1,000 58,000
Lona M.B. Finley 3,154,870 1,000 56,700
</TABLE>
2. To ratify the appointment of Piercy, Bowler, Taylor and Kern as the
independent accountants of the Company for the fiscal year ending
December 31, 2000:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
3,197,545 5,425 9,600
</TABLE>
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-K.
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- ------------
<S> <C>
27 Financial Data Schedule for the
period ended June 30, 2000
</TABLE>
14
<PAGE>
b) Reports on Form 8-K. There were no reports on Form 8-K during the
quarter ended June 30,2000 or during the period from June 30, 2000
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 3 , 2000 BY: /s/ PETER D. CLEARY
------------------------
Interim Chief Financial Officer
(a duly authorized officer)
15
