UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE NUMBER 0-23928
PDS FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1605970
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6171 MC LEOD DRIVE, LAS VEGAS, NEVADA 89120
(Address of principal executive offices)
(702) 736-0700
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date:
Class Outstanding as of April 30, 1999
----- --------------------------------
Common Stock, $.01 par value 3,648,211 shares
PDS FINANCIAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Condensed Consolidated Balance Sheet (Unaudited)
As of March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statement of Income and Comprehensive
Income for the Three Months Ended March 31, 1999
and 1998 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Report of Independent Accountants 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
2
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 1999 1998
---- ----
(Unaudited)
Cash and cash equivalents $107,000 $1,269,000
Restricted cash 1,000 3,166,000
Accounts receivable, net 3,157,000 1,335,000
Notes receivable, net 22,066,000 21,878,000
Net investment in leasing operations:
Equipment under operating leases, net 29,338,000 27,751,000
Direct finance leases 11,092,000 9,668,000
Equipment held for sale or lease 8,063,000 10,002,000
Deferred income taxes 583,000 583,000
Other assets, net 3,831,000 3,977,000
--------- ---------
Total assets $78,238,000 $79,629,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $1,855,000 $2,135,000
Deferred funds for pending transactions 4,234,000 13,427,000
Discounted lease rentals 632,000 806,000
Notes payable 45,609,000 36,699,000
Subordinated debentures, net 13,204,000 13,165,000
Other liabilities 2,011,000 2,863,000
--------- ---------
Total liabilities 67,545,000 69,095,000
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized,
3,648,211 and 3,648,211 shares issued and outstanding
March 31, 1999 and December 31, 1998, respectively 36,000 36,000
Additional paid-in capital 11,268,000 11,268,000
Accumulated other comprehensive income -- (25,000)
Retained earnings (accumulated deficit) (611,000) (745,000)
-------- --------
Total stockholders' equity 10,693,000 10,534,000
---------- ----------
Total liabilities and stockholders' equity $78,238,000 $79,629,000
----------- -----------
----------- -----------
See accompanying notes to condensed consolidated financial statements.
3
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
---- ----
Revenues:
Equipment sales $1,286,000 $6,124,000
Revenue from sales type leases 1,015,000 --
Rental revenue on operating leases 2,545,000 1,981,000
Fee income 1,074,000 1,025,000
Finance income 936,000 320,000
------- -------
Total revenues 6,856,000 9,450,000
Costs and expenses:
Equipment sales 1,246,000 5,250,000
Sales-type leases 724,000 --
Depreciation on operating leases 1,801,000 1,558,000
Selling, general and administrative 1,090,000 1,091,000
Interest 1,779,000 827,000
--------- -------
Total costs and expenses 6,640,000 8,726,000
Income before income taxes 216,000 724,000
Provision for income taxes 82,000 275,000
------ -------
Net income $134,000 $449,000
-------- --------
-------- --------
Other comprehensive income (loss), net of tax -- (19,000)
-------- --------
Comprehensive income $134,000 $430,000
-------- --------
-------- --------
Earnings per share:
Basic $0.04 $0.13
Diluted $0.04 $0.12
Weighted average shares outstanding:
Basic 3,648,000 3,549,000
Diluted 3,657,000 3,762,000
See accompanying notes to condensed consolidated financial statements.
4
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $134,000 $449,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,801,000 1,558,000
Gain on sale of financial assets (257,000) (1,499,000)
Purchases and originations of notes receivable and direct finance leases (2,487,000) (9,913,000)
Proceeds from:
Sale of notes receivable and direct finance leases -- 4,557,000
Collections of principal on notes receivable and direct finance leases 2,206,000 661,000
Changes in operating assets and liabilities:
Accounts receivable (255,000) (2,462,000)
Other, net 1,000 348,000
----- -------
Net cash provided by (used in) operating activities 1,143,000 (6,301,000)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment for leasing (13,918,000) (1,538,000)
Proceeds from sale of equipment under operating leases -- 4,000
Other, net (100,000) (27,000)
------------ -----------
Net cash used in investing activities (14,018,000) (1,561,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments made from restricted cash 3,165,000 --
Proceeds from notes payable 15,417,000 9,019,000
Proceeds from issuance of discounted lease rentals -- 692,000
Principal payments on notes payable (6,695,000) (2,241,000)
Payments on discounted lease rentals (174,000) (775,000)
Principal payments on subordinated debentures -- (16,000)
Proceeds from exercise of stock options and warrants -- 196,000
---------- ---------
Net cash provided by financing activities 11,713,000 6,875,000
---------- ---------
Net decrease in cash and cash equivalents (1,162,000) (987,000)
Cash and cash equivalents at beginning of period 1,269,000 1,865,000
--------- ---------
Cash and cash equivalents at end of period $107,000 $878,000
--------- ---------
--------- ---------
See accompanying notes to condensed consolidated financial statements.
5
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements as of March 31, 1999 and for the
three months ended March 31, 1999 and 1998 included in this Form 10-Q have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such rules and
regulations. The consolidated balance sheet at December 31, 1998 has been
derived from the audited financial statements as of that date and condensed.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and related notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1998.
PricewaterhouseCoopers LLP, the Company's independent accountants, have
performed a limited review of the interim financial statements included herein.
Their report on such review accompanies this filing.
The condensed consolidated financial statements presented herein are unaudited,
but in the opinion of management, reflect all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position,
results of operations and cash flows for the periods presented. The results of
operations for any interim period are not necessarily indicative of results for
the full year.
2. BORROWINGS
The Company borrows funds in order to finance the origination or purchase of
certain leases and notes receivable, and for the purchase of equipment held
for sale or lease. Such borrowings are generally collateralized by the cash
flow stream of the lease or note receivable funded, and the related
equipment. Certain of the borrowings have recourse to the Company.
Notes payable consists of the following:
March 31, December 31,
Recourse: 1999 1998
---- ----
Notes payable to banks, due either on demand or
in 1999 through 2000, interest at the prime rate (7.2%
at December 31, 1998) plus 1% collateralized by certain
equipment under operating leases, equipment
held for sale or lease and accounts receivable $2,650,000 $3,701,000
Notes payable to financial institutions, due in 1999
through 2002, interest at 7.1% to 12.0%, collateralized by
certain notes receivable, equipment under operating leases
and direct finance leases 28,354,000 16,919,000
Notes payable to manufacturers/distributors due in 1999
through 2001, interest at 8.8% to 14.0% collateralized by
certain notes receivable, equipment under operating leases
and direct finance leases 9,775,000 11,486,000
Other 32,000 36,000
---------- -----------
Total recourse 40,811,000 32,142,000
---------- ----------
6
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Non-recourse:
Notes payable to financial institutions, due in 1999
through 2002, interest at 8.7% to 11.0%, collateralized
by certain notes receivable and equipment under operating
and direct finance leases 3,286,000 3,059,000
Notes payable to manufacturers/distributors due in
1999 through 2001, interest at 8.0% to 10.0%,
collateralized by certain equipment under operating
leases and direct finance leases 2,882,000 2,872,000
Other -- --
----------- ------------
Total non-recourse 6,168,000 5,931,000
--------- ---------
Less unamortized discounts (1,370,000) (1,374,000)
---------- ----------
$45,609,000 $36,699,000
----------- -----------
----------- -----------
The Company has revolving credit and working capital facilities aggregating
$50.0 million at March 31, 1999. Advances under these agreements with banks and
financial institutions were approximately $14.5 million at March 31, 1999, which
are included in the recourse debt balances in the above table.
3. EARNINGS PER SHARE
The Company calculated basic and diluted earnings per share as follows:
Three Months Ended March 31:
1999 1998
---- ----
Net income, basic $134,000 $449,000
Interest expense on convertible
subordinated debentures, net of tax -- 1,000
-------- --------
Net income, diluted $134,000 $450,000
-------- --------
-------- --------
Weighted average shares outstanding:
Basic (weighted average shares outstanding) 3,648,000 3,549,000
Effect of dilutive options 9,000 174,000
Effect of dilutive warrants -- 20,000
Effect of convertible subordinated
debentures -- 19,000
--------- ---------
Diluted 3,657,000 3,762,000
--------- ---------
--------- ---------
Per share amounts:
Basic $0.04 $0.13
Diluted $0.04 $0.12
Options to purchase 719,000 shares of common stock, and warrants to purchase
968,000 shares of common stock were not included in the computation of
diluted earnings per share for the quarter ended March 31, 1999, because the
exercise price was greater than the average market price of the common stock.
The weighted average exercise price for these options and warrants was $5.40
and $11.27, respectively, as of March 31, 1999. These options and warrants
expire at various dates through 2008.
7
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of PDS Financial Corporation:
We have reviewed the accompanying condensed consolidated balance
sheet of PDS Financial Corporation and subsidiaries as of March 31, 1999, and
the related condensed consolidated statements of income and comprehensive
income and cash flows for the three-month periods ended March 31, 1999 and
1998. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the accompanying condensed consolidated financial
statements for them to be in conformity with generally accepted accounting
principles.
We have audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PDS Financial Corporation and
subsidiaries as of December 31, 1998, and the related consolidated statements
of income and comprehensive income, stockholders' equity and cash flows for
the year then ended (not presented herein); and in our report dated February
23, 1999, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated financial statements is fairly stated, in all material
respects, in relation to the consolidated financial statement from which it
has been derived.
PricewaterhouseCoopers LLP
Las Vegas, Nevada
April 28, 1999
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is engaged in the business of financing and leasing
gaming equipment and supplying reconditioned gaming devices to casino
operators. The gaming equipment financed by the Company consists mainly of
slot machines, video gaming machines and other gaming devices. In addition,
the Company finances furniture, fixtures and other gaming related equipment,
including gaming tables and chairs, restaurant and hotel furniture, vehicles,
security and surveillance equipment, computers and other office equipment. In
1996, the Company introduced SlotLease, a specialized operating lease program
for slot machines and other electronic gaming devices. The Company believes
it is currently the only independent leasing company licensed in the states
of Nevada , New Jersey, Colorado, Iowa, Indiana and Minnesota to provide this
financing alternative. In 1997, the Company established PDS Slot Source, a
reconditioned gaming device sales and distribution division, to complement
its leasing and financing activities and to generate equipment sales to
casino operators.
The Company's strategy is to increase its portfolio of assets under
lease, resulting in increased recurring revenues and cash flows. In addition
to its leasing activities, the Company also originates note transactions,
which it generally sells to institutional investors. In some of its
transactions, the Company holds the leases or notes for a period of time
after origination, or retains a partial ownership interest in the leases or
notes. The Company believes its ability to recondition and distribute used
gaming devices enhances the gaming devices' values at the end of an operating
lease and facilitates additional financing transactions.
The Company's quarterly operating results, including net income,
have historically fluctuated due to the timing of completion of large
financing transactions, as well as the timing of recognition of the resulting
fee income upon subsequent sale. These transactions can be in the negotiation
and documentation stage for several months, and recognition of the resulting
fee income by the Company may fluctuate greatly from quarter to quarter.
Thus, the results of any quarter are not necessarily indicative of the
results which may be expected for any other period.
ACCOUNTING FOR COMPANY ACTIVITIES
The accounting treatment for the Company's financing activities varies
depending upon the underlying structure of the transaction. The majority of the
Company's equipment financing transactions are structured as either notes
receivable or direct finance leases in which substantially all benefits and
risks of ownership are borne by the borrower or lessee. Direct finance leases
are afforded accounting treatment similar to that for notes receivable. The
Company structures some of its gaming equipment financings as operating leases,
under which the Company retains substantially all of the benefits and risks of
ownership. However, certain of its gaming equipment transactions are structured
as direct finance and sales-type leases. Consistent with the Company's strategy
to increase its leasing activities, the 1998 and 1999 originations involve a
greater mix of operating leases, which generate revenues throughout the lease
term, as opposed to notes or direct finance leases, which generate revenues
primarily upon sale.
The Company's revenue generating activities can be categorized as
follows: (i) equipment sales; (ii) revenue from Sales-type leases; (iii) rental
revenue on operating leases; (iv) fee income, resulting principally from the
sale of lease or note receivable transactions; and (v) finance income, resulting
from financing transactions in which the direct finance lease or note receivable
is retained by the Company.
The types of income are further described below:
EQUIPMENT SALES. In mid-1997, the Company established a reconditioned
gaming device sales and distribution division, PDS Slot Source. Used gaming
devices are obtained by the Company either from its customers at the end of an
applicable lease term, or in the marketplace. The cost of this equipment is
recorded in the consolidated balance sheet as equipment held for sale or lease.
At the time of sale, the Company records revenue equal to the selling price of
the related asset. Upon selling reconditioned gaming devices, the Company
removes the underlying asset from its consolidated balance sheet and records the
cost, including reconditioning cost, as cost of revenues. Equipment sales also
includes the sale of equipment which may occur during the term of an operating
lease.
9
REVENUE FROM SALES-TYPE LEASES. Sales-type leases, like direct finance
leases, transfer substantially all the benefits and risks of ownership of the
leased asset to the lessee. Unlike direct finance leases, sales-type leases also
include either a dealer profit resulting from the Company leasing equipment
which was purchased at a discount that is not available to the lessee, or a
manufacturing profit resulting from the reconditioning process performed on used
gaming devices. This dealer profit or manufacturing profit is recognized at the
inception of the lease in the consolidated income statement as the difference
between revenue from sales-type leases and sales-type lease cost. Revenue from
sales-type leases is the present value of the future minimum lease payments.
Sales-type lease cost is the Company's equipment cost, net of any discounts.
Upon selling a sales-type lease to a third party, the Company removes the
underlying asset from its consolidated balance sheet.
RENTAL REVENUE ON OPERATING LEASES. Operating leases are defined as those
leases in which substantially all the benefits and risks of ownership of the
leased asset are retained by the Company. Revenue from operating leases consists
of monthly rentals and is reflected in the consolidated income statement evenly
over the life of the lease as rental revenue on operating leases. The cost of
the related equipment is depreciated on a straight-line basis over the lease
term to the Company's estimate of residual value. This depreciation is reflected
on the consolidated income statement as depreciation on operating leases. For
operating leases, the cost of equipment, less accumulated depreciation, is
recorded in the consolidated balance sheet as equipment under operating leases,
net.
FEE INCOME. The Company funds much of the direct finance lease and note
transactions it originates through a sale of such transactions (i.e., the
sale of all of the Company's right, title and interest in the future payment
stream from the related leases or notes). A sale may occur simultaneously
with the origination or several months thereafter. At the time of sale, the
Company records fee income equal to the difference between the selling price
and the carrying value of the related financial asset. The calculation of fee
income reflects many factors, including the credit quality of the borrowers
or lessees, the type of underlying equipment, credit enhancements, if any and
ultimately, the terms under which the transaction was both originated and
sold. Fee income also includes commissions and advisory fees for arranging
financing between unrelated parties. Upon the sale of a lease or note, the
Company removes the underlying asset from its consolidated balance sheet.
FINANCE INCOME. For the period during which the Company holds a note
receivable or direct finance lease, finance income is recognized over the
term of the underlying lease or note in a manner which produces a constant
percentage rate of return on the asset carrying cost. For those direct
finance leases held by the Company, the present value of the future minimum
lease payments are recorded in the consolidated balance sheet as direct
finance leases.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
Revenues for the first quarter of 1999 totaled $6.9 million, a 27%
decrease from $9.5 million in the year earlier quarter. The decrease in revenues
is primarily attributable to lower sales of equipment formerly out on operating
leases offset by higher rental revenue, fee income and finance income. Gross
originations of financing transactions for the three months ended March 31, 1999
totaled $8.6 million compared to $11.6 million for the year earlier quarter.
Revenues from equipment sales and sales-type leases totaled $2.3
million in the first quarter of 1999, a 62% decrease from $6.1 million in the
year earlier quarter. Such revenues include sales of both equipment which had
been under operating leases, and used gaming devices which the Company
reconditioned in its Slot Source division. Sales of equipment which has been
under operating lease totaled $3.2 million in the year earlier quarter, and the
cost of those sales totaled $2.6 million. No such sale of equipment under
operating lease occurred in the current quarter. Revenue from sales and
sale-type leases of Slot Source reconditioned gaming devices totaled $2.3
million in the current quarter, compared to $2.9 million in the year earlier
quarter. The cost of such sales totaled $2.0 million in the current quarter,
compared to $2.6 million in the year earlier quarter.
The Company's average operating lease portfolio was $28.4 million
during the first quarter of 1999, as 62% increase as compared to $17.6 million
for the year earlier quarter. The increase in the average portfolio results from
an increase in the volume of originations during 1998 and the first quarter of
1999. Rental revenue on operating leases increased to $2.5 million in the
current quarter, compared to $2.0 million in the year earlier quarter. Related
depreciation increased to $1.8 million in the current quarter, compared to $1.6
million in the year earlier quarter. These leases are expected to generate
revenues throughout their lease terms, which range from 24 to 48 months and are
typically 36 months.
10
Fee income totaled $1,074,000 in the current quarter, compared to
$1,024,000 in the year earlier quarter. The current quarter fee income was
composed of both fees for financial advisory service and gains form the sale of
financial transactions, compared to the year earlier quarter which consisted
primarily from gains of financial transactions.
Finance income totaled $936,000 in the current quarter, compared to
$320,000 in the year earlier quarter. This increase primarily reflects the
larger portfolio of notes receivable and direct finance leases held by the
Company during the quarter as compared to the year earlier quarter.
Selling, general and administrative expenses totaled $1.1 million in
both the current year quarter and in the year earlier quarter. Higher payroll
and related costs in the current quarter were offset by lower travel, consulting
and other administrative costs, compared to the year earlier quarter.
Interest expense totaled $1.8 million in the current quarter, compared
to $800,000 in the year earlier quarter. This increase was due to higher levels
of outstanding borrowings which were utilized to fund the increased investment
in the leasing operations, increased inventory of gaming devices held for sale,
and to fund the originations of notes receivable.
The effective income tax rate was 38% in the three months ended March
31, 1999 and 1998. In both periods, the effective rate was higher than the
federal statutory tax rate of 34%, due primarily to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's strategy to increase its financing activities and its
reconditioned gaming device sales, involves a higher level of investment in
notes receivable, equipment under operating leases and equipment held for sale
or lease, financed through discounted lease rentals and notes payable. The funds
necessary to support the Company's activities have been provided by cash flow
generated primarily from the operating activities described above, and various
forms of recourse and nonrecourse borrowings. The Company expects its lease
portfolio to generate recurring cash flow throughout the lease term.
The Company's cash and cash equivalents totaled $107,000 at March 31,
1999, a decrease of $1.2 million from December 31, 1998. The decrease resulted
from the timing of payments to vendors which occurred in advance of the proceeds
from borrowings from various lenders. During the first quarter of 1999, cash
provided in operating activities totaled $1.1 million, an increase of $7.4
million from the first quarter of 1998. The higher level of cash provided in the
1999 quarter primarily reflects lower originations of notes receivable and
direct financing leases, offset by lower proceeds from sales of notes receivable
and direct financing leases. The cash used in investing activities in the 1999
quarter primarily reflects $13.9 million of investment in equipment for leasing.
The $11.7 million of net cash provided by financing activities in the first
quarter of 1999 was primarily the result of borrowings and cash transferred from
restricted to non-restricted accounts, which was used principally to fund the
purchases of equipment for leasing.
At March 31, 1999 total borrowings were $45.6 million, compared to
$36.7 million at December 31, 1998. The majority of the proceeds from the
borrowings were invested in the Company's leasing operations.
At March 31, 1999, the Company's revolving credit and working capital
facilities aggregated approximately $50.0 million. Advances under these
agreements aggregated approximately $14.5 million at March 31, 1999.
In April 1999 the Company entered into two revolving line of credit
facilities with banks, totaling $6.0 million, which will be utilized to fund the
origination of notes receivable and lease transactions. The Company's current
financial resources, including the estimated cash flows from operations and the
revolving credit facilities are expected to be sufficient to fund the Company's
anticipated working capital needs. In addition to the borrowing activities
summarized above, the Company has developed a network of financial institutions
to which it sells transactions on a regular basis. The Company is, from time to
time, dependent upon the need to liquidate or externally finance transactions
originated and held in its investment portfolio. In the future the Company may
seek to raise capital to fund its growth strategy through debt or financings,
however we cannot predict when such an event will occur, nor if such capital
would be available at favorable terms, if at all.
Inflation has not been a significant factor in the Company's
operations.
11
YEAR 2000 ISSUE
The Company is continuing to evaluate the potential impact of the
situation referred to as the "Year 2000 Issue." The Year 2000 Issue concerns the
inability of computer software programs to properly recognize and process date
sensitive information beyond December 31, 1999. The Company has evaluated its
major automated systems to determine if they are Year 2000 compliant and has
contacted the suppliers of certain of those systems to inquire about Year 2000
compliance. Although the Company believed its existing accounting system was
Year 2000 compliant, the company purchased and began installing a new management
information system in January 1999. The new system has been certified as Year
2000 compliant by the software provider. The total cost of the new system is
approximately $100,000 and is expected to be fully operational by June 1, 1999.
The Company also has electronic interfaces with certain of its
suppliers. The Company has made inquiries and received assurances from such
suppliers with respect to Year 2000 issues.
The Company has also made inquiries of and is contacting certain
suppliers with respect to Year 2000 issues. Even assuming that all material
third parties confirm that they are or expect to be Year 2000 compliant by
December 31, 1999, it is not possible to state with certainty that such parties
will be so compliant. It is impossible to fully assess the potential
consequences in the event service interruptions from suppliers occur or in the
event that there are disruptions in such infrastructure areas as utilities,
communications, transportation, banking and government.
To date, the Company has not incurred material costs associated with
the Year 2000 Issue. The Company believes that any future costs associated with,
and the potential impact of, the Year 2000 Issue will not be material. Based
upon its assessments to date, the Company believes it will not experience any
material disruption in its operations as a result of Year 2000 problems in
internal financial systems, reconditioning activities and to the process control
systems, or in its interface with major customers and suppliers. However, if
major suppliers, including those providing inventory, banking, electricity and
communications services, experience difficulties resulting in disruption of
critical supplies or services to the Company, a shutdown of the Company's
operations could occur for the duration of the disruption. The Company has begun
to develop a contingency plan to provide for continuity of normal business
operations in the event problem scenarios, such as those described above, arise,
however that plan is not yet complete. Assuming no major disruption in service
from critical third party providers, the Company believes that it will be able
to manage the Year 2000 transition without any material effect on the Company's
results of operations or financial position. There can be no assurance, however,
that unexpected difficulties will not arise and, if so, that the Company will be
able to timely develop and implement a contingency plan.
ITEM 3. QUANTITATIVE AND QUALITATIVE FACTORS ABOUT MARKET RISK
Interest Rate Risk
The Company generally provides financing (both leases and traditional
loans) to customers at fixed rates of interest (either with stated interest
rates or implicit rates). The Company either sells such securities to
investors, or holds such transactions in its portfolio. For larger
transactions retained in the portfolio, the Company obtains fixed rate
commitments from financing sources such as banks and financial institutions
prior to providing such financing to customers, which substantially reduces
the interest rate risk during the origination process. For smaller
transactions, the Company may originate the transaction using internally
available funds, and shortly after origination use the 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 our transactions are conducted and accounts are denominated in
United States Dollars and as such we do not currently have exposure to
foreign currency risk.
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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.
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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-X.
Exhibit
Number Description
------- -----------
10.19 Employment Agreement between the Registrant and
Joe S. Rolston, IV
15 Letter Regarding Unaudited Interim Financial
Information
27 Financial Data Schedule
b) Reports on Form 8-K. There were no reports on Form 8-K filed
during the quarter ended March 31, 1999 or during the period
from March 31, 1999 to the date of this Quarterly Report on
Form 10-Q.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PDS FINANCIAL CORPORATION
Dated: May 13, 1999 By:/s/ Steven M. Des Champs
-----------------------------
Chief Financial Officer
(a duly authorized officer)
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