<PAGE>
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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
[ ] Transition REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 NOVEMBER 10, 2000
----- -----------------------------------
<S> <C>
Common Stock, $.01 par value 3,714,485
</TABLE>
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<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 2000 (Unaudited) and December 31, 1999..................3
Consolidated Statements of Income (Loss) -Three Months Ended
September 30, 2000 and 1999 (Unaudited).............................................................4
Consolidated Statements of Income (Loss) - Nine Months Ended
September 30, 2000 and 1999 (Unaudited).............................................................5
Consolidated Statements of Cash Flows - Nine Months Ended
September 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
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................................14
</TABLE>
2
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,171,000 $ 2,860,000
Restricted cash 2,831,000
Notes, accounts, and leases receivable, net 59,518,000 48,616,000
Equipment under operating leases, net 17,019,000 41,287,000
Equipment held for sale or lease 7,100,000 6,616,000
Refundable income tax deposits 403,000 403,000
Deferred income taxes 663,000 976,000
Other assets, net 4,907,000 4,444,000
----------------- -----------------
$ 91,781,000 $ 108,033,000
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable:
Equipment vendors $ 3,789,000 $ 6,363,000
Other 697,000 717,000
Customer deposits 7,452,000 7,141,000
Notes payable 55,331,000 66,549,000
Subordinated debt 11,367,000 13,323,000
Accrued expenses and other 2,448,000 3,836,000
----------------- -----------------
81,084,000 97,929,000
----------------- -----------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized,
and 3,714,485 and 3,706,971 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 37,000 37,000
Additional paid-in capital 11,556,000 11,546,000
Accumulated deficit (896,000) (1,479,000)
----------------- -----------------
10,697,000 10,104,000
----------------- -----------------
$ 91,781,000 $ 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 SEPTEMBER 30
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
REVENUES
Revenue from sales-type leases $ 3,534,000 $ 668,000
Equipment sales 2,672,000 1,031,000
Operating lease rentals 1,984,000 5,601,000
Finance income 1,925,000 1,163,000
Fee income 1,137,000 1,303,000
--------------- ---------------
11,252,000 9,766,000
--------------- ---------------
COSTS AND EXPENSES
Sales-type leases 3,067,000 549,000
Equipment sales 2,755,000 1,249,000
Depreciation on leased equipment 1,773,000 4,001,000
Interest 1,994,000 2,803,000
Selling, general and administrative 1,380,000 1,583,000
Other 10,000 250,000
--------------- ---------------
10,979,000 10,435,000
--------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 273,000 (669,000)
INCOME TAXES (BENEFIT) 96,000 (255,000)
--------------- ---------------
NET INCOME (LOSS) $ 177,000 $ (414,000)
=============== ===============
NET INCOME (LOSS) PER SHARE
Basic and diluted $0.05 ($0.11)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 3,713,000 3,705,000
Diluted 3,745,000 3,705,000
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---------------- -----------------
<S> <C> <C>
REVENUES
Revenue from sales-type leases $ 21,689,000 $ 4,099,000
Equipment sales 5,851,000 5,726,000
Operating lease rentals 8,603,000 11,554,000
Finance income 5,350,000 3,103,000
Fee income 1,794,000 2,652,000
---------------- -----------------
43,287,000 27,134,000
---------------- -----------------
COSTS AND EXPENSES
Sales-type leases 18,429,000 3,399,000
Equipment sales 6,331,000 5,760,000
Depreciation on leased equipment 6,842,000 8,213,000
Interest 6,436,000 6,597,000
Selling, general and administrative 3,984,000 3,578,000
Other 359,000 315,000
---------------- -----------------
42,381,000 27,862,000
---------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 906,000 (728,000)
INCOME TAXES (BENEFIT) 324,000 (277,000)
---------------- -----------------
NET INCOME (LOSS) $ 582,000 $ (451,000)
================ =================
NET INCOME (LOSS) PER SHARE
Basic and diluted $0.16 ($0.12)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 3,711,000 3,676,000
Diluted 3,723,000 3,676,000
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 9,786,000 $ 5,198,000
--------------- ---------------
INVESTING ACTIVITIES
Purchase of equipment for leasing (152,000) (55,669,000)
Proceeds from sale of equipment under operating leases 2,326,000 1,920,000
Other, net (72,000)
--------------- ---------------
Net cash provided by (used in) investing activities 2,174,000 (53,821,000)
--------------- ---------------
FINANCING ACTIVITIES
Proceeds from borrowings 9,386,000 65,658,000
Repayment of borrowings (24,876,000) (20,319,000)
Reduction in restricted cash 2,831,000 3,166,000
Proceeds from exercise of stock options and warrants 10,000 159,000
--------------- ---------------
Net cash provided by (used in) financing activities (12,649,000) 48,664,000
--------------- ---------------
CHANGE IN CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents (689,000) 41,000
Cash and cash equivalents at beginning of period 2,860,000 1,269,000
--------------- ---------------
Cash and cash equivalents at end of period $ 2,171,000 $ 1,310,000
=============== ===============
</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
Notes payable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ----------------
<S> <C> <C>
Lines of credit with a maximum aggregate commitment of
$36,000,000 bearing interest at rates from 7.3% to 11.9%,
secured by related investment in leases and equipment held
for sale or lease $ 18,821,000 $ 26,351,000
Equipment notes bearing interest at rates from 8.0% to
15%, secured by related investment in leases:
With recourse 15,226,000 18,472,000
Non-recourse 22,268,000 23,244,000
--------------- ----------------
56,315,000 68,067,000
Unamortized loan discounts (984,000) (1,518,000)
--------------- ----------------
$ 55,331,000 $ 66,549,000
=============== ================
</TABLE>
3. CONTINGENCY
During the current quarter, a significant customer failed to make its
regularly scheduled monthly payments to the Company causing an event of
default under the terms of the Master Lease Agreements ("Agreements"). At the
inception of these Agreements, the Company had required the customer to make
significant deposits. The Company has begun negotiations to restructure the
Agreements. The current outstanding principal balance due the Company under
these Agreements is approximately $38.9 million, which collateralizes
borrowings of the Company totaling approximately $32.0 million. Of the $32.0
million, $2.2 million is with recourse to the Company, while approximately
$29.8 million is non-recourse to the Company. With recourse financing, in the
event of a default by a lessee, the lender has recourse against the lessee,
the equipment serving as collateral and the Company. Under non-recourse
financing, in the event of default by a lessee, the lender generally only has
recourse against the lessee, and the equipment serving as collateral, but not
against the Company.
7
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. CONTINGENCY (CONTINUED)
The Company reviews its loan and lease portfolio quarterly for probable
losses. Such review includes consideration of the following factors: the
financial condition of the customer, the nature of the leased equipment, the
ability of the Company to remarket the equipment and the availability of
deposits made at the inception of a lease or note. The Company currently
believes that adequate allowances have been provided for any probable losses.
4. 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,
---------------------------------- ----------------------------------
2000 1999 2000 1999
-------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $ 177,000 $ (414,000) $ 582,000 $ (451,000)
============== ================ =============== ================
Weighted average shares outstanding
Basic 3,713,000 3,705,000 3,711,000 3,676,000
Effect of dilutive options 32,000 12,000
-------------- ---------------- --------------- ----------------
Diluted 3,745,000 3,705,000 3,723,000 3,676,000
============== ================ =============== ================
Net income (loss) per share
Basic and diluted $ 0.05 $ (0.11) $ 0.16 $ (0.12)
</TABLE>
Common stock warrants and certain common stock options were not
included in the computation of diluted earnings per share for the periods
ended September 30, 1999, because the exercise price was greater than average
market price of the common stock.
5. SEGMENT INFORMATION
The Company conducts business with external customers through the
operations of Casino Slot Exchange (formerly known as "Slot Source") and
Finance and Lease ("Finance") segments. During the quarter ended September 30,
2000, the Company changed the name of Slot Source to Casino Slot Exchange, the
marketing and distribution website acquired during the quarter. In addition,
employees of the Company provide certain legal, accounting and compliance,
personnel and other administrative support services on behalf of Casino Slot
Exchange and Finance. Specifically identifiable costs are allocated to Casino
Slot Exchange and Finance. The selling, general and administrative costs
(SG&A) associated with these activities, are not separately allocated to each
business unit.
During the third quarter of 2000, the Company formed its third
operating unit, the Table Games division. The activities of the Table Games
division have not been material to date and are included in SG&A. Beginning
January 1, 2001 the Company intends to begin reporting the Table Games
division as a third business segment.
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,
8
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. SEGMENT INFORMATION (CONTINUED)
the Company began allocating interest and other specifically identifiable
expenses, excluding SG&A, to the Casino Slot Exchange and Finance segments based
on their identifiable assets. Amounts for 1999 have been reclassified to conform
with this presentation. Financial performance measurements for Casino Slot
Exchange, Finance, and SG&A are set forth below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
Revenues
Casino Slot Exchange $ 3,229,000 $ 1,699,000
Finance 8,023,000 8,067,000
-------------------- --------------------
$ 11,252,000 $ 9,766,000
==================== ====================
Income (loss) before income taxes
Casino Slot Exchange $ (279,000) $ (550,000)
Finance 1,405,000 839,000
SG&A (853,000) (958,000)
-------------------- --------------------
$ 273,000 $ (669,000)
==================== ====================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
Revenues
Casino Slot Exchange $ 6,474,000 $ 9,824,000
Finance 36,813,000 17,310,000
-------------------- --------------------
$ 43,287,000 $ 27,134,000
==================== ====================
Income (loss) before income taxes
Casino Slot Exchange $ (906,000) $ (511,000)
Finance 5,316,000 2,568,000
SG&A (3,504,000) (2,785,000)
-------------------- --------------------
$ 906,000 $ (728,000)
==================== ====================
Identifiable assets
Casino Slot Exchange $ 7,931,000 $ 8,946,000
Finance 78,404,000 107,936,000
SG&A 5,446,000 4,012,000
-------------------- --------------------
$ 91,781,000 $ 120,894,000
==================== ====================
</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 and other products to
casino operators. The gaming equipment financed by the Company consists
primarily of slot machines, video gaming machines, digital table games 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 and Washington to provide this financing alternative. The
Company also reconditions, sells and distributes used and other gaming devices
and products through Casino Slot Exchange to complement its leasing and
financing activities and to generate equipment sales to casino operators. The
Company's strategy is to increase its recurring revenues and cash flows through
these operating divisions and by acquiring and operating casinos. 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. During 1999, the Company expanded its focus
beyond providing reconditioned slot and video gaming devices to include new
types of table games on its proprietary DCS(TM) platform. During the third
quarter of 2000, the Company formed its Table Games division. Through its Table
Games division, the Company's strategy is to place games utilizing the DCS(TM)
technology with its casino customers in order to generate recurring monthly
revenues and cash flows.
The Company's quarterly operating results, including net income, have
historically fluctuated due to the timing of completion of large financing
transactions, and the recognition of fee income from subsequent sales. These
types of transactions can be in the negotiation and documentation stage for
several months, and recognition of the resulting fee income by the Company may
fluctuate greatly from quarter to quarter. Thus, the results of any quarter are
not necessarily indicative of the results that may be expected for any other
period.
The Company'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 or used gaming devices sold by the Company's
Casino Slot Exchange 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 SEPTEMBER 30, 2000 AND 1999
Revenues for the third quarter of 2000 totaled $11.3 million, a 15%
increase compared to $9.8 million in the year earlier quarter. The increase in
revenues is primarily attributable to increased sales of equipment and revenue
from sales-type leases offset by a decrease in operating lease rentals. Gross
originations of financing transactions were $8.1 million and $3.5 million for
the three months ended September 30, 2000 and 1999, respectively.
Revenues from equipment sales and sales-type leases totaled $6.2
million in the third quarter of 2000, compared to $1.7 million in the year
earlier period. Such revenues include sales of both equipment, which had been
under operating leases, and used gaming devices, which the Company reconditioned
through its Casino Slot Exchange division. Revenue from sales and sales-type
leases of Casino Slot Exchange reconditioned and used gaming devices totaled
$3.2 million in the current quarter, compared to $1.7 million in the prior year
period. The cost of such sales totaled $3.0 million in the current period
compared to $1.8 million in the year earlier quarter. The increase in Casino
Slot Exchange revenues is due
10
<PAGE>
to increased shipments of gaming devices in the quarter ended September 30, 2000
compared to the prior year quarter. Casino Slot Exchange shipped 1,954 units in
the current quarter compared to 1,280 in the prior year period.
The Company's average operating lease portfolio was $18.4 million
during the third quarter of 2000 as compared to $72.4 million for the prior year
quarter. The decrease in equipment under operating lease is primarily due to the
reclassification of certain leases at year end 1999 from operating leases to
leveraged leases and the sale of equipment previously under operating lease
during or at the end of the lease term. Rental revenue on operating leases
decreased to $2.0 million in the current quarter, compared to $5.6 million in
the year earlier quarter. Related depreciation decreased to $1.8 million in the
current quarter, compared to $4.0 million in the year earlier quarter.
Finance income totaled $1.9 million for the three months ended
September 30, 2000, compared to $1.2 million for the third quarter of 1999. The
increase of $0.7 million primarily results from the larger average portfolio of
notes receivable, leveraged leases and direct finance leases held by the Company
during the quarter compared to the third quarter of 1999.
Fee income totaled $1.1 million for the three months ended September
30, 2000, compared to $1.3 million for the third quarter of 1999.
Interest expense totaled $2.0 million in the three months ended
September 30, 2000, compared to $2.8 million for the year earlier period. This
decrease is primarily due to lower levels of outstanding borrowings.
Selling, general and administrative expenses totaled $1.4 million and
$1.6 million for the three months ended September 30, 2000 and 1999,
respectively. The decrease of $0.2 million primarily resulted from increases in
initial direct costs capitalized as part of the related leases and notes
receivable.
Other expense decreased $0.2 million for the three months ended
September 30, 2000, primarily due to increasing the provision for uncollectible
receivables by $0.2 million in the third quarter of 1999.
The estimated effective income tax rate was 35% and 38% for the three
months ended September 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 an increase in the portion of the Company's business in the state of
Nevada.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues for the nine months ended September 30, 2000 totaled $43.3
million, a 60% increase from $27.1 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. Gross originations
of financing transactions for the nine months ended September 30, 2000 totaled
$19.4 million compared to $57.1 million for the year earlier period. The
decrease is primarily due to record levels of originations during the nine
months ended September 30, 1999, compared to the same period in 2000.
Revenues from equipment sales and sales-type leases totaled $27.5
million in the nine months ended September 30, 2000, compared to $9.8 million in
the year earlier period. Sales of equipment previously under operating lease
totaled $21.0 million in the current year period, and the cost of those sales
totaled $18.2 million. No such sale of equipment under operating lease occurred
in the prior year period. Revenue from equipment sales and sales-type leases of
Casino Slot Exchange reconditioned and used gaming devices totaled $6.5 million
during the nine months ended September 30, 2000, compared to $9.8 million in the
year earlier period. The cost of such sales totaled $6.0 million in the current
period, compared to $9.2 million in the year earlier period.
11
<PAGE>
The Company's average operating lease portfolio was $27.6 million
during the nine months ended September 30, 2000 as compared to $48.4 million for
the year earlier period. The decrease is due to the sale of equipment previously
under operating leases during or at the end of the lease term and the
reclassification of certain leases from operating leases to leveraged leases.
Rental revenue on operating leases decreased to $8.6 million for the nine months
ended September 30, 2000, compared to $11.6 million in the year earlier period.
Related depreciation decreased to $6.8 million for the nine months ended
September 30, 2000, compared to $8.2 million in the year earlier period.
Finance income totaled $5.4 million for the nine months ended September
30, 2000, compared to $3.1 million in the year earlier period. The increase
primarily results from a larger average portfolio of notes receivable and direct
finance leases held by the Company during the first nine 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 $47.6 million compared to
$38.1 million for the year earlier period.
Fee income totaled $1.8 million for the nine months ended September 30,
2000, compared to $2.7 million in the year earlier period. The decrease is
primarily due to the lower level of originations during the current year period
compared to the year earlier period.
Interest expense totaled $6.4 million for the nine months ended
September 30, 2000, compared to $6.6 million in the year earlier period. This
decrease was primarily due to lower levels of outstanding borrowings.
Selling, general and administrative expenses totaled $4.0 million for
the nine months ended September 30, 2000, compared to $3.6 million in the year
earlier period. This increase primarily results from the decrease in initial
direct costs capitalized as part of the related lease and note receivables as a
result of the lower total originations.
The estimated effective income tax rate was 36% and 38%, respectively,
in the nine months ended September 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 sales-type leases and various forms of non-recourse
and with recourse borrowings. 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 $2.2
million at September 30, 2000, compared to $2.9 million at December 31, 1999.
During the nine months ended September 30, 2000, net cash provided by operating
activities totaled $9.8 million, compared to $5.2 million for the nine months
ended September 30, 1999. The higher level of cash provided by operating
activities in 2000 primarily resulted from collections on notes receivable and
direct financing leases and proceeds from the sales of direct financing leases
partially offset by the origination of direct financing leases. The $2.2 million
in net cash provided by investing activities in 2000 primarily reflects the
proceeds from the sale of certain equipment under operating leases. The net cash
used in financing activities of $12.6 million in 2000 was primarily attributable
to principal payments on debt, including payments on subordinated debt totaling
$2.1 million, partially offset by borrowings used principally to fund financing
transactions. The 1999 cash flows included higher proceeds from borrowings
related to the higher origination levels.
At September 30, 2000, total borrowings under notes and lines of credit
were $55.3 million, compared to $66.5 million at December 31, 1999. At September
30, 2000, the Company's revolving credit and working capital facilities
aggregated approximately $61.0 million at interest rates ranging from 7.3% to
11.9%. Advances under these agreements aggregated approximately $44.2 million at
September 30, 2000.
12
<PAGE>
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. Management
believes that any future significant acquisition of casinos or other expansion
of the Company's products line will be financed primarily with collateralized
borrowings. The Company continues to explore these and other possible sources of
capital as it explores expansion opportunities; 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, historically, changes in
interest rates have not had a direct impact on the Company's earnings. The
Company does not currently believe this risk is material and therefore does not
manage the interest risk with derivative financial instruments.
The Company's portfolio of fixed rate receivables and borrowings
fluctuates in value based on changes in market rates of interest. However, the
Company does not believe that the changes in the fair values are likely to be
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.
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 Casino Slot
Exchange, the ability of the Company to continue to obtain adequate financing,
the ability of the Company to recover its investment in gaming equipment leased
under operating leases as well as its investment in used gaming machines
purchased for refurbishment and resale to customers, the risk of default with
respect to the Company's financing transactions, the Company's dependence on key
employees, potential fluctuations in the Company's quarterly results, general
economic and business conditions, and other risk factors detailed from time to
time in the Company's reports filed with the Securities and Exchange Commission.
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<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-Q as required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- ------------
<S> <C>
10.27 Purchase Agreement by and among the Registrant,
PDS Financial Corporation and C.J. Classics, Inc.
dated June 12, 2000
27 Financial Data Schedule for the period ended
September 30, 2000
</TABLE>
b) Reports on Form 8-K. There were no reports on Form 8-K during the
quarter ended September 30, 2000 or during the period from
September 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: November 13, 2000 BY: /s/ MARTHA VLCEK
-----------------------------------
Chief Financial Officer
(a duly authorized officer)
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