QuickLinks -- Click here to rapidly navigate through this document
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, 2001
Commission File No. 0-23928
PDS GAMING CORPORATION
(exact name of Registrant as specified in its charter) |
Minnesota
(State or other Jurisdiction of
Incorporation or Organization) |
|
41-1605970
(I.R.S. Employer 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:
Class
| | Outstanding as of November 12, 2001
|
|---|
| Common Stock, $.01 par value | | 3,745,872 |
PDS GAMING CORPORATION AND SUBSIDIARIES
INDEX
| |
| | Page
|
|---|
| | | PART I FINANCIAL INFORMATION | | |
Item 1. |
|
Financial Statements: |
|
|
|
|
Consolidated Balance Sheets—September 30, 2001 (Unaudited) and December 31, 2000 |
|
3 |
|
|
Consolidated Statements of Income—Three Months Ended September 30, 2001 and 2000 (Unaudited) |
|
4 |
|
|
Consolidated Statements of Income—Nine Months Ended September 30, 2001 and 2000 (Unaudited) |
|
5 |
|
|
Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2001 and 2000 (Unaudited) |
|
6 |
|
|
Notes to Consolidated Financial Statements (Unaudited) |
|
7-10 |
Item 2. |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
11-14 |
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
|
15 |
|
|
PART II OTHER INFORMATION |
|
|
Item 1. |
|
Legal Proceedings |
|
16 |
Item 6. |
|
Exhibits and Reports on Form 8-K |
|
16 |
2
PDS GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | September 30,
2001
| | December 31,
2000
| |
|---|
| | (Unaudited)
| |
| |
|---|
| ASSETS: | | | | | | | |
Cash and cash equivalents |
|
$ |
1,178,000 |
|
$ |
2,033,000 |
|
| Restricted cash | | | 3,479,000 | | | | |
| Notes, accounts and leases receivable, net of allowances | | | 46,294,000 | | | 52,651,000 | |
| Equipment under operating leases, net | | | 45,522,000 | | | 14,347,000 | |
| Equipment held for sale or lease | | | 5,477,000 | | | 6,961,000 | |
| Other assets, net | | | 9,491,000 | | | 8,309,000 | |
| | |
| |
| |
| | | $ | 111,441,000 | | $ | 84,301,000 | |
| | |
| |
| |
LIABILITIES AND STOCKHOLDERS' EQUITY: |
|
|
|
|
|
|
|
Accounts payable: |
|
|
|
|
|
|
|
| | Equipment vendors | | $ | 1,306,000 | | $ | 400,000 | |
| | Other | | | 1,559,000 | | | 1,018,000 | |
| Customer deposits | | | 4,527,000 | | | 7,816,000 | |
| Accrued expenses and other | | | 3,656,000 | | | 3,847,000 | |
| Notes payable | | | 76,819,000 | | | 48,978,000 | |
| Subordinated debt | | | 11,286,000 | | | 11,400,000 | |
| | |
| |
| |
| | | | 99,153,000 | | | 73,459,000 | |
| | |
| |
| |
Stockholders' equity: |
|
|
|
|
|
|
|
| | Common stock, $.01 par value, 20,000,000 shares authorized, 3,744,649 and 3,714,485 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively | | | 37,000 | | | 37,000 | |
| | Additional paid-in capital | | | 11,624,000 | | | 11,556,000 | |
| | Retained earnings (deficit) | | | 627,000 | | | (751,000 | ) |
| | |
| |
| |
| | | | 12,288,000 | | | 10,842,000 | |
| | |
| |
| |
| | | $ | 111,441,000 | | $ | 84,301,000 | |
| | |
| |
| |
See notes to consolidated financial statements.
3
PDS GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
| | 2001
| | 2000
|
|---|
| REVENUES: | | | | | | |
| | Equipment sales and sales-type leases | | $ | 3,696,000 | | $ | 6,206,000 |
| | Finance income | | | 1,591,000 | | | 1,925,000 |
| | Operating lease rentals | | | 4,468,000 | | | 1,984,000 |
| | Fee income | | | 2,335,000 | | | 1,137,000 |
| | Casino | | | 428,000 | | | |
| | |
| |
|
| | | | 12,518,000 | | | 11,252,000 |
| | |
| |
|
| COSTS AND EXPENSES: | | | | | | |
| | Equipment sales and sales-type leases | | | 3,312,000 | | | 5,822,000 |
| | Interest | | | 3,114,000 | | | 1,994,000 |
| | Depreciation on leased equipment | | | 2,731,000 | | | 1,773,000 |
| | Casino | | | 386,000 | | | |
| | Selling, general and administrative | | | 2,303,000 | | | 1,360,000 |
| | Collection and asset impairment provisions | | | 28,000 | | | 30,000 |
| | |
| |
|
| | | | 11,874,000 | | | 10,979,000 |
| | |
| |
|
Income before income taxes |
|
|
644,000 |
|
|
273,000 |
| Income taxes | | | 258,000 | | | 96,000 |
| | |
| |
|
Net income |
|
$ |
386,000 |
|
$ |
177,000 |
| | |
| |
|
Net income per share: |
|
|
|
|
|
|
| | Basic and diluted | | $ | 0.10 | | $ | 0.05 |
| | |
| |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
| | Basic | | | 3,736,000 | | | 3,713,000 |
| | |
| |
|
| | Diluted | | | 3,954,000 | | | 3,745,000 |
| | |
| |
|
See notes to consolidated financial statements.
4
PDS GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
| | 2001
| | 2000
|
|---|
| REVENUES: | | | | | | |
| | Equipment sales and sales-type leases | | $ | 12,298,000 | | $ | 27,540,000 |
| | Finance income | | | 9,003,000 | | | 5,350,000 |
| | Operating lease rentals | | | 8,529,000 | | | 8,603,000 |
| | Fee income | | | 4,720,000 | | | 1,794,000 |
| | Casino | | | 1,216,000 | | | |
| | |
| |
|
| | | | 35,766,000 | | | 43,287,000 |
| | |
| |
|
| COSTS AND EXPENSES: | | | | | | |
| | Equipment sales and sales-type leases | | | 11,588,000 | | | 24,760,000 |
| | Interest | | | 7,439,000 | | | 6,436,000 |
| | Depreciation on leased equipment | | | 5,836,000 | | | 6,842,000 |
| | Casino | | | 1,068,000 | | | |
| | Selling, general and administrative | | | 6,130,000 | | | 4,253,000 |
| | Collection and asset impairment provisions | | | 1,408,000 | | | 90,000 |
| | |
| |
|
| | | | 33,469,000 | | | 42,381,000 |
| | |
| |
|
Income before income taxes |
|
|
2,297,000 |
|
|
906,000 |
| Income taxes | | | 919,000 | | | 324,000 |
| | |
| |
|
Net income |
|
$ |
1,378,000 |
|
$ |
582,000 |
| | |
| |
|
Net income per share: |
|
|
|
|
|
|
| | Basic | | $ | 0.37 | | $ | 0.16 |
| | |
| |
|
| | Diluted | | $ | 0.36 | | $ | 0.16 |
| | |
| |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
| | Basic | | | 3,725,000 | | | 3,711,000 |
| | |
| |
|
| | Diluted | | | 3,860,000 | | | 3,723,000 |
| | |
| |
|
See notes to consolidated financial statements.
5
PDS GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
| | 2001
| | 2000
| |
|---|
| OPERATING ACTIVITIES: | | | | | | | |
| | Net cash provided by operating activities | | $ | 7,987,000 | | $ | 9,786,000 | |
| | |
| |
| |
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
| | Purchase of equipment for leasing | | | (16,979,000 | ) | | (152,000 | ) |
| | Proceeds from sale of equipment under operating leases | | | 2,929,000 | | | 2,326,000 | |
| | |
| |
| |
| |
Net cash provided by (used in) investing activities |
|
|
(14,050,000 |
) |
|
2,174,000 |
|
| | |
| |
| |
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
| | Proceeds from borrowings | | | 27,151,000 | | | 9,386,000 | |
| | Reduction in restricted cash | | | 1,671,000 | | | 2,831,000 | |
| | Repayment of subordinated debt | | | (2,210,000 | ) | | | |
| | Repayment of borrowings | | | (21,472,000 | ) | | (24,876,000 | ) |
| | Proceeds from issuance of common stock | | | 68,000 | | | 10,000 | |
| | |
| |
| |
| |
Net cash provided by (used in) financing activities |
|
|
5,208,000 |
|
|
(12,649,000 |
) |
| | |
| |
| |
CHANGE IN CASH AND CASH EQUIVALENTS: |
|
|
|
|
|
|
|
| | Net decrease in cash and cash equivalents | | | (855,000 | ) | | (689,000 | ) |
| | Cash and cash equivalents at beginning of period | | | 2,033,000 | | | 2,860,000 | |
| | |
| |
| |
| |
Cash and cash equivalents at end of period |
|
$ |
1,178,000 |
|
$ |
2,171,000 |
|
| | |
| |
| |
See notes to consolidated financial statements.
6
PDS GAMING 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 Gaming Corporation (formerly "PDS Financial Corporation," and the "Company"), and the related notes, included within the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (the "2000 Form 10-K"), previously filed with the Securities and Exchange Commission.
The balance sheet at December 31, 2000 was derived from the audited financial statements included in the Company's 2000 Form 10-K.
2. NOTES PAYABLE
Notes payable consist of the following:
| | September 30,
2001
| | December 31,
2000
| |
|---|
| Lines of credit with a maximum aggregate balance of $12,150,000 bearing interest at rates from 8.00% to 10.50%, secured by related investment in leases and equipment held for sale or lease: | | | | | | | |
| | Recourse | | $ | 5,117,000 | | $ | 12,919,000 | |
| | Non-recourse | | | | | | 4,616,000 | |
| Equipment notes bearing interest at rates from 7.13% to 15.69%, secured by related investments in leases: | | | | | | | |
| | Recourse | | | 21,835,000 | | | 16,403,000 | |
| | Non-recourse | | | 36,197,000 | | | 15,952,000 | |
| Other recourse notes payable bearing interest at rates from 9.00% to 10.50%, secured by related investments in leases | | | 14,318,000 | | | | |
| | |
| |
| |
| | | | 77,467,000 | | | 49,890,000 | |
| Unamortized loan discounts | | | (648,000 | ) | | (912,000 | ) |
| | |
| |
| |
| | | $ | 76,819,000 | | $ | 48,978,000 | |
| | |
| |
| |
7
3. EARNINGS PER SHARE
The Company calculated basic and diluted earnings per share as follows:
| | Three months ended
September 30
| | Nine months ended
September 30
|
|---|
| | 2001
| | 2000
| | 2001
| | 2000
|
|---|
| Net income | | $ | 386,000 | | $ | 177,000 | | $ | 1,378,000 | | $ | 582,000 |
| | |
| |
| |
| |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
| | Basic | | | 3,736,000 | | | 3,713,000 | | | 3,725,000 | | | 3,711,000 |
| | Effect of dilutive options | | | 218,000 | | | 32,000 | | | 135,000 | | | 12,000 |
| | |
| |
| |
| |
|
| | Diluted | | | 3,954,000 | | | 3,745,000 | | | 3,860,000 | | | 3,723,000 |
| | |
| |
| |
| |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
| | Basic | | $ | 0.10 | | $ | 0.05 | | $ | 0.37 | | $ | 0.16 |
| | Effect of dilutive options | | | | | | | | | (0.01 | ) | | |
| | |
| |
| |
| |
|
| | Diluted | | $ | 0.10 | | $ | 0.05 | | $ | 0.36 | | $ | 0.16 |
| | |
| |
| |
| |
|
Certain common stock warrants and common stock options were not included in the computation of diluted earnings per share for the periods ended September 30, 2001 and 2000 because the weighted average exercise prices of the warrants and options was greater than average market prices of the common stock.
4. SEGMENT INFORMATION
The Company conducts business through the operations of its Finance and Lease ("Finance") and Casino Slot Exchange ("CSE") segments. The Table Games and Casino Operations divisions do not yet meet the criteria requiring recognition as operating segments under Statement of Financial Accounting Standards No. 131,Disclosures about Segments of an Enterprise and Related Information. Other than selling, general and administrative costs specifically identifiable to the Finance and CSE segments, other employees of the Company provide certain legal, accounting and compliance, personnel and other administrative support services on behalf of the Finance and CSE segments. The costs associated with these activities ("SG&A") are not separately allocated to each business segment. The accounting policies of each business segment are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in the Company's 2000 Form 10-K. The Company evaluates the performance of its operating segments based on earnings before income taxes. Financial performance
8
measurements for the Finance and CSE segments are set forth below with SG&A for the three months and nine months ended September 30, 2001 and 2000.
| | Three months ended
September 30,
| |
|---|
| | 2001
| | 2000
| |
|---|
| Revenues: | | | | | | | |
| | Finance | | $ | 9,068,000 | | $ | 8,023,000 | |
| | CSE | | | 3,020,000 | | | 3,229,000 | |
| | Other | | | 430,000 | | | | |
| | |
| |
| |
| | | $ | 12,518,000 | | $ | 11,252,000 | |
| | |
| |
| |
| Income (loss) before income taxes: | | | | | | | |
| | Finance | | $ | 2,770,000 | | $ | 1,405,000 | |
| | CSE | | | (436,000 | ) | | (279,000 | ) |
| | SG&A | | | (1,690,000 | ) | | (853,000 | ) |
| | |
| |
| |
| | | $ | 644,000 | | $ | 273,000 | |
| | |
| |
| |
| | Nine months ended
September 30,
| |
|---|
| | 2001
| | 2000
| |
|---|
| Revenues: | | | | | | | |
| | Finance | | $ | 26,305,000 | | $ | 36,813,000 | |
| | CSE | | | 8,196,000 | | | 6,474,000 | |
| | Other | | | 1,265,000 | | | | |
| | |
| |
| |
| | | $ | 35,766,000 | | $ | 43,287,000 | |
| | |
| |
| |
| Income (loss) before income taxes: | | | | | | | |
| | Finance | | $ | 8,476,000 | | $ | 5,316,000 | |
| | CSE | | | (1,544,000 | ) | | (906,000 | ) |
| | SG&A | | | (4,635,000 | ) | | (3,504,000 | ) |
| | |
| |
| |
| | | $ | 2,297,000 | | $ | 906,000 | |
| | |
| |
| |
| Identifiable assets: | | | | | | | |
| | Finance | | $ | 97,976,000 | | $ | 78,404,000 | |
| | CSE | | | 6,359,000 | | | 7,931,000 | |
| | Other | | | 7,106,000 | | | 5,446,000 | |
| | |
| |
| |
| | | $ | 111,441,000 | | $ | 91,781,000 | |
| | |
| |
| |
5. CONTINGENCIES
In November 2000, a significant customer, the Resort at Summerlin, LLP, and The Resort at Summerlin, Inc., dba Regent Las Vegas, The Resort at Summerlin ("Regent") filed for protection under Chapter 11 of the U.S. Bankruptcy Code. On September 25, 2001, the U.S. Bankruptcy Court approved the sale of the Regent's assets to Hot Spur Resorts, LLC for $80 million with an expected closing date in November 2001. On October 1, 2001, the customer stopped making monthly payments under its lease obligations (the "Leases") to the Company.
9
On October 12, 2001, the Regent's senior mortgage lenders ("Plaintiffs"), in the name of the Regent, brought suit against the Company, et al., in United States Bankruptcy Court, District of Nevada. The complaint primarily challenges the classification of the Leases between operating and capital leases. The Plaintiffs seek, among other things, a determination that the Leases constitute "financing" transactions and not "true" leases.
The majority of the Leases were originally structured as, and intended by the parties to be, operating leases to the Regent with terms ranging from 12 to 48 months and fair market value purchase options. The monthly rental payments due in accordance with the original terms are approximately $1.4 million. In January 2001, a Stipulation for Adequate Protection and Order was approved by the Court for monthly payments of approximately $949,000.
The Company intends to vigorously defend against these claims. The outcome and resultant effect on the Company, if any, of this pending litigation cannot be determined at this time. Management currently believes, however, that the ultimate outcome of these matters will not have a material adverse impact on the Company's future financial position.
September 11, 2001 Terrorist Attacks
On September 11, 2001, the United States was subjected to extensive terrorist attacks likely to have far-reaching effects on economic activity in the country for an indeterminate period. The near and long-term impact on the Nevada economy and the Company's business cannot be predicted at this time.
10
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 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. The Company believes it is currently the only independent leasing company licensed in the states of Nevada, New Jersey, Colorado, Illinois, Iowa, Indiana, Minnesota, Mississippi, 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 financing and leasing activities and to generate equipment sales. 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™ platform. During 2000, the Company formed its Table Games Division. In early 2001, the Company received a non-restricted gaming license to operate The Gambler casino in Reno, Nevada and formed its Casino Operations division.
The Company's strategy is to increase recurring revenues and cash flows through its operating divisions and by acquiring and operating casinos. In addition to its leasing activities, the Company also originates financing transactions and receives notes which it occasionally sells to third parties for fee income. 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 access to lower cost financing and equipment, industry knowledge and presence in multiple jurisdictions provide advantages in identifying casino ownership opportunities.
Results of Operations
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.
Factors that cause significant quarterly fluctuations in the Company's operating results include, but are 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 affect the demand for reconditioned 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.
Three months ended September 30, 2001 and 2000
Revenues in the third quarter of 2001 totaled $12.5 million compared to $11.3 million in the year-earlier quarter. The increase in revenues is primarily attributable to an increase in operating lease rentals and fee income, partially offset by a decrease in equipment sales and sales-type lease revenue. Gross originations of financing transactions were $4.0 million in the third quarter of 2001, compared with $8.1 million in the year-earlier quarter.
11
Revenues from equipment sales and sales-type leases totaled $3.7 million in the third quarter of 2001, a 40% decrease as compared to $6.2 million in the year-earlier quarter. Such revenues include sales of both equipment under operating leases for cash or financed through the Finance and Lease division and used gaming devices reconditioned by the Company's Casino Slot Exchange division, and are further described by division as follows:
Finance and Lease Division
Revenues from sale of equipment previously under operating lease and sold for cash or financed through the Finance and Lease division totaled $678,000 in the current year quarter compared to $3.0 million in the comparable quarter. This decrease of $2.3 million is due to fewer maturities of operating leases for the quarter ended September 30, 2001 compared to the prior-year quarter. Gross margins related to these sales were 31% and 39% for September 30, 2001 and 2000, respectively.
Casino Slot Exchange
Revenues from equipment sales and sales-type leases through Casino Slot Exchange totaled $3.0 million for the quarter ended September 30, 2001, compared to $3.2 million for the prior year quarter. The decrease is due to fewer shipments of gaming devices. Shipments of gaming devices totaled 1,497 compared to 1,954 for the quarters ended September 30, 2001 and 2000, respectively. Gross margins related to these sales were 3% and (1%), respectively.
Finance income decreased to $1.6 million in the third quarter of 2001 compared to $1.9 million in the year-earlier quarter. The decrease reflects the reclassification of certain leases from leveraged leases to operating leases during the period ended September 30, 2001.
The Company's average operating lease portfolio was $37.7 million during the third quarter of 2001, a 102% increase from $18.7 million during the year-earlier quarter. The increase in the average operating lease portfolio reflects the reclassification of certain leases from leveraged leases to operating leases during the third quarter 2001. Rental revenues from operating leases increased to $4.5 million in the third quarter of 2001 compared to $2.0 million in the year-earlier quarter. Related depreciation was $2.7 million and $1.8 million for the quarters ended September 30, 2001 and 2000, respectively. Depreciation on operating leases as a percentage of rental revenues decreased from 89% in the prior-year quarter to 61% in the third quarter of 2001. This decrease is due to our normal recurring review of the portfolio that resulted in acceleration of depreciation on certain leases in the prior-year quarter.
Fee income increased to $2.3 million from $1.1 million in the prior-year quarter. The fee earned this quarter was comprised of a fee for financial advisory services from a significant customer versus the prior year consisting mainly of fees generated from the sale of direct finance leases.
Gaming revenues of $428,000 and gaming costs of $386,000 in the third quarter of 2001 represent the operations of The Gambler casino in Reno, Nevada. This casino was acquired in a purchase transaction during the fourth quarter 2000, and therefore is not reflected in operations for the prior year.
Interest expense increased to $3.1 million in the third quarter of 2001 compared to $2.0 million in the year-earlier quarter. The increase in interest expense is due to the higher levels of outstanding borrowings.
Selling, general and administrative expenses totaled $2.3 million in the third quarter of 2001 and $1.4 million in the year-earlier quarter. The increase of $900,000 primarily reflects increased payroll and costs related to the Table Games Division which was created during the third quarter of 2000, increased payroll and costs related to the broadening of the management team during the current year,
12
legal fees associated with a customer currently in bankruptcy and increased depreciation and amortization related to gaming operations and licensing.
The estimated effective income tax rate increased to 40% in the third quarter of 2001 compared to 35% in the year-earlier quarter. The effective rate was higher than the federal statutory tax rate of 34% due primarily to state income taxes and permanent tax differences. The increase in the effective tax rate reflects an increase in the portion of the Company's business outside the state of Nevada.
Nine months ended September 30, 2001 and 2000
Revenues in the nine months ended September 30, 2001 totaled $35.8 million compared to $43.3 million in the year-earlier period. The decrease in revenues of $7.5 million is primarily attributable to a decrease in sales-type lease revenue associated with the early termination of certain equipment under operating leases and financing of such equipment as sales-type leases. This decrease was partially offset by an increase in finance income, fee income and gaming revenue.
Revenues from equipment sales and sales-type leases totaled $12.3 million in the nine months ended September 30, 2001 from $27.5 million in the year-earlier period, and are further described by division as follows:
Finance and Lease Division
Revenues from the sale of equipment previously under operating lease and sold for cash or financed through this division totaled $4.1 million in the current year compared to $21.0 million in the prior-year period. The decrease reflects fewer maturities of operating leases for the nine months ended September 30, 2001 compared to the same period last year. Gross margins related to these sales were 9.1% and 14.8%, respectively.
Casino Slot Exchange
Equipment sales and sales-type lease revenues totaled $8.2 million for the nine months ended September 30, 2001, compared to $6.5 million in the prior year period. This increase reflects the increase in gaming device shipments. Gaming devices shipped totaled 4,855, a 49% increase compared to 3,259 in the comparable period last year. Gross margin related to these sales totaled 4% and (2%) for the nine-month periods ended September 30, 2001 and 2000, respectively.
Finance income totaled $9.0 million for the nine months ended September 30, 2001 compared to $5.4 million in the year-earlier period. The increase primarily reflects the acceleration of collateralized residual profits related to defaulted leases of $3.5 million.
Rental revenues from operating leases decreased to $8.5 million in the nine months ended September 30, 2001 compared to $8.6 million in the year-earlier period. This decrease reflects the lower average operating lease portfolio of $26.2 million during the nine months ended September 30, 2001 compared to $27.0 million in the year-earlier period. Related depreciation was $5.8 million and $6.8 million for the nine months ended September 30, 2001 and 2000, respectively. Depreciation on operating leases as a percentage of rental revenue decreased from 79% in the prior-year period compared to 68% in the nine months ended September 30, 2001. This decrease is due to our normal recurring portfolio review that resulted in acceleration of depreciation on certain leases in the prior year.
Fee income totaled $4.7 million in the nine months ended September 30, 2001 compared to $1.8 million in the year-earlier period. The increase of $2.9 million is due to an increase in financial advisory services and an increase in originations in the current year compared to the prior year. Originations totaled $42 million and $19.4 million, respectively.
13
Gaming revenues of $1.2 million and gaming costs of $1.1 million in the nine months ended September 30, 2001 represent the operations of The Gambler casino in Reno, Nevada. This casino was acquired in a purchase transaction during the fourth quarter 2000, and therefore is not reflected in operations for the prior year.
Interest expense totaled $7.4 million in the nine months ended September 30, 2001 compared to $6.4 million in the year-earlier period. The increase in interest expense is due to the higher levels of outstanding borrowings.
Selling, general and administrative expenses totaled $6.1 million in the nine months ended September 30, 2001 compared to $4.3 million in the year-earlier period. The increase primarily reflects increased payroll and related costs related to broadening the Company's management team and the Table Games division, which was created during the third quarter of 2000, expenses related to the Company's exchange offering of its subordinated debt, legal fees associated with a customer currently in bankruptcy and depreciation and amortization related to gaming operations and licensing which were incurred in the nine months ended September 30, 2001.
The estimated effective income tax rate was 40% in the nine months ended September 30, 2001 and 36% in the year-earlier period. The increase and the reason the effective rate was higher than the federal statutory tax rate of 34% was due primarily to state income taxes and permanent tax differences.
Liquidity and Capital Resources
The Company's activities are principally funded by proceeds from sales-type, direct finance and operating leases, equipment sales, fee income and proceeds from various forms of non-recourse and recourse debt. Management believes the Company's ability to generate cash from operations is sufficient to fund operations.
Cash and cash equivalents totaled approximately $1.2 million at September 30, 2001 and $2.0 million at December 31, 2000. During the nine months ended September 30, 2001, cash provided by operating activities totaled $8.0 million compared to $9.8 million in the year-earlier period. The lower level of cash provided by operating activities during the first nine months of 2001 is due to lower levels of sales of direct financing leases. The $1.3 million accounts payable to equipment vendors at September 30, 2001 was paid in October 2001, financed primarily with non-recourse debt. Cash used in investing activities totaled $14.0 million in the nine months ended September 30, 2001 compared to cash provided by investing activities of $2.2 million in the year-earlier period. The increased cash used was due primarily to increased purchases of equipment for leasing. The net cash provided by financing activities of $5.2 million in the nine months ended September 30, 2001 primarily reflects new borrowings in excess of repayments on debt.
At September 30, 2001, total borrowings were $88.1 million, compared to $60.4 million at December 31, 2000. At September 30, 2001, the Company's revolving credit and working capital facilities aggregated approximately $12.2 million at interest rates ranging from 8.0% to 10.5%. Advances under these agreements aggregated approximately $5.1 million at September 30, 2001. On June 26, 2001, the Company issued $2,205,000 aggregate principal amount of 12% Senior Subordinated Notes due 2007 in exchange for a like principal amount of 10% Senior Subordinated Notes due 2004 in connection with the closing of an exchange offer. The Company's current financial resources, including 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.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Substantially all of the Company's borrowings are under fixed interest rates, and maturities are matched with the cash flows of leased assets and notes receivables. A changing interest rate environment will not significantly impact the Company's margins since the effects of higher or lower borrowing costs would be reflected in the rates for newly originated leases or collateralized loans. Therefore, consistent with the Company's strategy and intention to hold most of its originations to maturity, the Company does not have a significant exposure to interest rate changes.
Currency Risk
The Company does not have any exposure to foreign currency risk because all of its sales to customers in foreign countries are transacted in United States dollars.
Forward-Looking Statements
Certain statements contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of terminology such as "believe," "may," "will," "expect," "anticipate," "intend," "designed," "estimate," "should" or "continue" or the negatives thereof or other variations thereon or comparable terminology. Such forward-looking statements involve known or unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: strict regulation and changes in regulations imposed by gaming authorities; the limitation, conditioning, suspension or revocation of gaming licenses and entitlements held by the Company; competition the Company faces or may face in the future; uncertainty of market acceptance of the Company's Table Games Division, operating lease program or Casino Slot Exchange; a decline in the public acceptance of gaming; unfavorable public referendums or legislation, particularly as they relate to gaming; the ability of the Company to continue to obtain adequate financing on acceptable terms; 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; inability to expand through acquisition of existing casinos, limited operating history with the Company's table games division and casino operations; the risk of default by the Company's customers with respect to its financing transactions; the Company's dependence on key employees; potential fluctuations in the Company's quarterly results; general economic and business conditions; and other factors detailed from time to time in the Company's reports filed with the Securities and Exchange Commission.
15
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 5 to the accompanying unaudited consolidated financial statements.
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.
Exhibit Number
| | Description
|
|---|
| 10.1 | | Loan and Security Agreement dated July 26, 2001 between Sun West Bank, as lender, and PDS Gaming Corporation-Nevada, as borrower |
| 10.2 | | Loan Agreement dated August 6, 2001 between Bremer Business Finance Corporation, as lender, and PDS Gaming Corporation, PDS Gaming Corporation-Nevada, PDS Financial Corporation-Mississippi and PDS Gaming Corporation-Colorado, collectively, as borrower |
- b)
- Reports on Form 8-K. There were no reports on Form 8-K during the quarter ended September 30, 2001 or during the period from September 30, 2001 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 GAMING CORPORATION |
Dated: November 13, 2001 |
|
By: |
|
/s/ MARTHA VLCEK
Chief Financial Officer and Treasurer
(a duly authorized officer) |
16
QuickLinks
PDS GAMING CORPORATION AND SUBSIDIARIES INDEXPDS GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETSPDS GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED SEPTEMBER 30, (Unaudited)PDS GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME NINE MONTHS ENDED SEPTEMBER 30, (Unaudited)PDS GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, (Unaudited)PDS GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)SIGNATURE
