UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
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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.) |
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6171 McLeod Drive, Las Vegas, Nevada 89120 (Address of Principal Executive Offices) |
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(702) 736-0700 (Issuer's Telephone Number, Including Area Code) |
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Indicate by check mark whether the Registrant (1) has 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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
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 May 2, 2003 |
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|---|---|---|
| Common Stock, $.01 par value | 3,803,737 |
PDS GAMING CORPORATION AND SUBSIDIARIES
INDEX
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Page |
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| PART I FINANCIAL INFORMATION | ||||
Item 1. |
Financial Statements: |
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Consolidated Balance Sheets—March 31, 2003 (Unaudited) and December 31, 2002 |
3 |
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Consolidated Statements of Income (Loss)—Three Months Ended March 31, 2003 and 2002 (Unaudited) |
4 |
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Consolidated Statements of Cash Flows—Three Months Ended March 31, 2003 and 2002 (Unaudited) |
5 |
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Notes to Consolidated Financial Statements (Unaudited) |
6-8 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
9-13 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
13 |
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Item 4. |
Controls and Procedures |
13-14 |
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PART II OTHER INFORMATION |
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Item 1. |
Legal Proceedings |
14-15 |
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Item 6. |
Exhibits and Reports on Form 8-K |
15 |
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2
PDS GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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March 31, 2003 |
December 31, 2002 |
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(Unaudited) |
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| ASSETS: | ||||||||
| Cash and cash equivalents | $ | 1,659,000 | $ | 115,000 | ||||
| Restricted cash | 2,398,000 | 1,377,000 | ||||||
| Notes, accounts and leases receivable, net of allowances | 40,476,000 | 41,203,000 | ||||||
| Equipment under operating leases, net | 51,008,000 | 42,487,000 | ||||||
| Equipment held for sale or lease | 2,997,000 | 3,350,000 | ||||||
| Other assets, net | 8,980,000 | 9,306,000 | ||||||
| $ | 107,518,000 | $ | 97,838,000 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY: | ||||||||
| Equipment vendors payable | $ | 19,301,000 | $ | 14,385,000 | ||||
| Accounts payable | 815,000 | 233,000 | ||||||
| Customer deposits | 3,982,000 | 3,440,000 | ||||||
| Notes payable | 63,228,000 | 59,977,000 | ||||||
| Subordinated debt | 8,808,000 | 9,054,000 | ||||||
| Accrued expenses and other | 2,972,000 | 2,599,000 | ||||||
| 99,106,000 | 89,688,000 | |||||||
| Stockholders' equity: | ||||||||
| Common stock, $.01 par value, 20,000,000 shares authorized, 3,801,939 and 3,799,978 shares issued and outstanding | 38,000 | 38,000 | ||||||
| Additional paid-in capital | 11,814,000 | 11,812,000 | ||||||
| Retained earnings (deficit) | (3,440,000 | ) | (3,700,000 | ) | ||||
| 8,412,000 | 8,150,000 | |||||||
| $ | 107,518,000 | $ | 97,838,000 | |||||
See notes to consolidated financial statements.
3
PDS GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
THREE MONTHS ENDED MARCH 31,
(Unaudited)
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2003 |
2002 |
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| REVENUES: | ||||||||
| Equipment sales and sales-type leases | $ | 1,905,000 | $ | 4,953,000 | ||||
| Operating lease rentals | 5,405,000 | 2,511,000 | ||||||
| Finance income | 986,000 | 1,288,000 | ||||||
| Fee income | 976,000 | 340,000 | ||||||
| Casino | 163,000 | 341,000 | ||||||
| 9,435,000 | 9,433,000 | |||||||
| COSTS AND EXPENSES: | ||||||||
| Equipment sales and sales-type leases | 1,521,000 | 4,208,000 | ||||||
| Depreciation on operating leases | 3,775,000 | 1,673,000 | ||||||
| Interest | 2,233,000 | 1,894,000 | ||||||
| Casino | 311,000 | 708,000 | ||||||
| Selling, general and administrative | 997,000 | 1,578,000 | ||||||
| Depreciation and amortization on other property | 192,000 | 202,000 | ||||||
| 9,029,000 | 10,263,000 | |||||||
| Income (loss) from continuing operations before income taxes | 406,000 | (830,000 | ) | |||||
| Income taxes (benefit) | 146,000 | (349,000 | ) | |||||
| Income (loss) from continuing operations | 260,000 | (481,000 | ) | |||||
| Loss from discontinued operations, net of income tax benefit | (1,392,000 | ) | ||||||
| Net income (loss) | $ | 260,000 | $ | (1,873,000 | ) | |||
| Net income (loss) per share: | ||||||||
| Continuing operations—basic and diluted | $ | 0.07 | $ | (0.13 | ) | |||
| Discontinued operations | (0.37 | ) | ||||||
| Net income (loss)—basic and diluted | $ | 0.07 | $ | (0.50 | ) | |||
Weighted average shares outstanding: |
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| Basic | 3,802,000 | 3,783,000 | ||||||
| Diluted | 3,802,000 | 3,783,000 | ||||||
See notes to consolidated financial statements.
4
PDS GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
(Unaudited)
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2003 |
2002 |
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| OPERATING ACTIVITIES: | ||||||||
| Net cash provided by continuing operating activities | $ | 12,282,000 | $ | 8,256,000 | ||||
| Net cash used in discontinued operating activities | (688,000 | ) | ||||||
| Net cash provided by operating activities | 12,282,000 | 7,568,000 | ||||||
| INVESTING ACTIVITIES: | ||||||||
| Purchase of equipment for leasing | (12,675,000 | ) | (687,000 | ) | ||||
| Purchase of fixed assets | (50,000 | ) | (1,045,000 | ) | ||||
| Proceeds from sale of equipment under operating leases | 269,000 | |||||||
| Net cash used in investing activities | (12,725,000 | ) | (1,463,000 | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
| Proceeds from borrowings | 13,366,000 | 13,210,000 | ||||||
| Repayment of borrowings | (10,361,000 | ) | (11,092,000 | ) | ||||
| Increase in restricted cash | (1,021,000 | ) | (5,854,000 | ) | ||||
| Proceeds from issuance of common stock | 3,000 | 94,000 | ||||||
| Net cash provided by (used in) financing activities | 1,987,000 | (3,642,000 | ) | |||||
| CHANGE IN CASH AND CASH EQUIVALENTS: | ||||||||
| Net increase in cash and cash equivalents | 1,544,000 | 2,463,000 | ||||||
| Cash and cash equivalents at beginning of period | 115,000 | 4,086,000 | ||||||
| Cash and cash equivalents at end of period | $ | 1,659,000 | $ | 6,549,000 | ||||
See notes to consolidated financial statements.
5
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 (including 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 (the "Company"), and the related notes, included within the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (the "2002 Form 10-K"), previously filed with the Securities and Exchange Commission.
The balance sheet at December 31, 2002 was derived from the audited financial statements included in the Company's 2002 Form 10-K.
2. STOCK PLANS
The Company has established the 1993 Stock Option Plan and the 2002 Stock Option Plan. The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for the stock option plans. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123 ("SFAS No. 148"), therefore, no compensation expense was recognized for the Company's stock option plans. Had compensation expense for the Company's stock option plans been determined based on the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS No. 148, the Company's net income (loss) and earnings (loss) per share would have approximated the pro forma amounts indicated below:
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Three Months Ended |
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March 31, 2003 |
March 31, 2002 |
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| Reported net income (loss) | $ | 260,000 | $ | (1,873,000 | ) | ||
| Reported earnings (loss) per share—basic and diluted | 0.07 | (0.50 | ) | ||||
| Adjustment to compensation expense for stock-based awards, net of tax | 114,000 | 114,000 | |||||
| Pro forma net income (loss) | 146,000 | (1,987,000 | ) | ||||
| Pro forma earnings (loss) per share—basic and diluted | 0.04 | (0.53 | ) | ||||
The weighted-average fair value of each stock option included in the preceding pro forma amounts was estimated using the Black-Scholes option-pricing model and is amortized over the vesting period of the underlying options.
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3. NOTES PAYABLE
Notes payable consist of the following:
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March 31, 2003 |
December 31, 2002 |
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| Recourse lines of credit with a maximum aggregate balance of $15,740,000 bearing interest at rates from 5.25% to 10.50%, secured by related investment in leases, equipment held for sale or lease and other assets | $ | 10,823,000 | $ | 12,853,000 | ||||
| Equipment notes bearing interest at rates from 0% to 15.08%, secured by related investment in leases: | ||||||||
| Recourse | 20,995,000 | 21,838,000 | ||||||
| Non-recourse | 31,955,000 | 25,726,000 | ||||||
| 63,773,000 | 60,417,000 | |||||||
| Unamortized loan discounts | (545,000 | ) | (440,000 | ) | ||||
| $ | 63,228,000 | $ | 59,977,000 | |||||
4. DISCONTINUED OPERATIONS
During the first quarter 2002, the Company discontinued operations of its Table Games Division, with the exception of servicing games currently under lease and selling or leasing games in inventory, and certain components of its Casino Slot Exchange Division. Accordingly, the Company recorded these activities as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Results from discontinued operations, net of income tax benefit, were as follows for the three months ended March 31, 2002:
| Loss on discontinued operations: | |||||
| Loss on disposal | $ | (993,000 | ) | ||
| Operating loss | (399,000 | ) | |||
| $ | (1,392,000 | ) | |||
| Loss per share: | |||||
| Loss on disposal | $ | (0.26 | ) | ||
| Operating loss | (0.11 | ) | |||
| $ | (0.37 | ) | |||
5. CONTINGENCIES AND COMMITMENTS
Litigation. In May 2002, the Company received notification that Tekbilt, Inc. ("Claimant") had submitted a Demand for Arbitration to the American Arbitration Association alleging breach of a Distributor Agreement (the "Agreement") with Claimant in connection with the Company's discontinued operations. In the notification, Claimant alleged that such breach has caused Claimant to
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sustain substantial damages. The monetary damages sought by claimant are unspecified. The Company timely filed its Answering Statement and has asserted a Counterclaim against Claimant. The Company seeks the dismissal of Claimant's claims in their entirety, an award of monetary damages and reimbursement of all costs and expenses incurred by the Company as a result of the case, including attorneys fees. Neither party has specified its alleged damages. The case is in a preliminary stage, and the hearing before the American Arbitration Association panel is expected to occur in 2003. Although unable to predict the outcome of this matter, management believes the claim to be without merit and will vigorously pursue all legal defenses available to it. Management, further, does not believe that the outcome of such arbitration is likely to have a material adverse effect on the Company. Accordingly, no accounting recognition has been provided for losses, if any.
On February 24, 2003, the Company announced that it had entered into a letter of intent (the "Letter of Intent") with respect to a proposal submitted by a management group consisting of Johan P. Finley, the Company's Chairman and Chief Executive Officer, Lona M.B. Finley, the Company's Executive Vice President, Secretary and Chief Administrative Officer, and Peter D. Cleary, the Company's President, Chief Operating Officer and Treasurer (collectively, the "Management Group"), to acquire all of the approximately 69% of the outstanding shares of the Company's common stock not already owned by the Management Group (the "Proposed Transaction").
On March 7, 2003, the Company announced that it had been named as a defendant in a purported class action lawsuit filed by a shareholder in District Court, Clark County, Nevada in connection with the Proposed Transaction. The complaint alleged that members of the Company's Board of Directors violated their fiduciary duties in approving the Letter of Intent with respect to the proposal submitted by the Management Group, and sought to enjoin the Management Group from acquiring the shares. On April 25, 2003, the Company announced the voluntary dismissal of this lawsuit by the plaintiff.
On May 12, 2003, the Company announced that it had been named as a defendant in an additional purported class action lawsuit filed by a shareholder in District Court, Clark County, Nevada in connection with the Proposed Transaction. The complaint alleges that members of the Company's Board of Directors violated their fiduciary duties in approving the Letter of Intent with respect to the proposal submitted by the Management Group, and seeks to enjoin the Management Group from acquiring the shares. The Company believes the allegations are without merit and intends to vigorously defend the lawsuit.
Residual sharing. The Company agreed to share the proceeds from future sales of certain equipment at lease termination, but only to the extent, if any, that such proceeds exceed the Company's original estimate of residual values of the equipment made at the inception of the respective leases. The Company's obligation to assign assets to a residual sharing pool is collateralized by receivables totaling $11.4 million at March 31, 2003. The value of the equipment to be assigned to the sharing pool is calculated based on the present value of the Company's original anticipated residual value in the equipment at lease termination (originally $7.2 million), subject to adjustment as defined. The sharing pool has not been fully identified, and the parties to the residual sharing agreement are continuing to negotiate the make up of the sharing pool.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged in the business of leasing and other financing of gaming equipment and remarketing previously leased 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, California, Colorado, Illinois, Indiana, Iowa, Minnesota, Mississippi, New Mexico and Washington to provide this financing alternative. In early 2001 the Company received a nonrestricted gaming license to operate The Gambler, now known as Rocky's Casino and Sports Bar ("Rocky's"), in Reno, Nevada.
STRATEGY
The Company's strategy is to increase recurring revenues and cash flows through originations of leases. In addition to its leasing activities, the Company also originates note transactions which it generally sells to third parties. 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 remarket 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.
The Company's operating results are also subject to quarterly fluctuations resulting from a variety of other 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 affect the demand for reconditioned gaming devices sold by the Company at lease termination, 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.
ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect reported amounts and disclosures, some of which may require revision in future periods. The most significant estimates are those involving residual values, collectibility of notes, accounts and leases receivable and valuation of equipment held for sale or lease.
The following is a summary of what management believes are the critical accounting policies related to the Company. The application of these policies, in some cases, requires the Company's management to make subjective judgments regarding the effect of matters that are inherently uncertain. See Note 1, "Summary of Significant Accounting Policies," to the Company's Consolidated Financial Statements included within the Company's Annual Report on Form 10-K for the fiscal year ended
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December 31, 2002, previously filed with the Securities and Exchange Commission, for a more detailed discussion of the Company's accounting policies.
Revenue and Cost Recognition. The Company records revenue, primarily, in accordance with SFAS No. 13, Accounting for Leases, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, along with other related guidance under generally accepted accounting principles and other regulatory guidance related to revenue recognition.
The Company's leasing activities include operating, direct finance and sales-type leases. For all types of leases, the determination of profit considers the estimated value of equipment at lease termination, referred to as the residual value. The issues specific to operating, direct finance and sales-type leases are as follows:
After the inception of a lease, the Company may discount or sell notes and future lease payments to reduce or recover its investment in the asset. Initial direct costs related to leases and notes receivable are capitalized as part of the related asset and amortized over the term of the agreement using the interest method, except for operating leases, for which the straight-line method is used.
Equipment held for sale or lease, consisting primarily of gaming devices, is valued at the lower of average unit cost or net realizable value. Revenue is recognized when title transfers to the customer upon shipment of used gaming devices or upon the exercise of a purchase option under an operating lease.
Reserves For Losses. An allowance for losses is maintained at levels determined by the Company's management to adequately provide for collection losses and any other-than-temporary declines in other asset values. In determining losses, the Company's management considers economic conditions, the activity in used equipment markets, the effect of actions by equipment manufacturers, the financial condition of customers, the expected courses of action by lessees with regard to leased equipment at termination of the initial lease term, changes in technology and other factors which management believes are relevant. Recoverability of an asset value is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If a loss is indicated, the loss to be recognized is measured by the amount by which the carrying amount of the asset exceeds the net realizable value of the asset. Asset charge-offs are recorded upon the disposition of the underlying assets. Management reviews the Company's assets on a quarterly basis to determine the adequacy of the allowances for losses.
RESULTS OF OPERATIONS
The Company reported net income of $260,000 or $0.07 per diluted share in the first quarter 2003 compared to a net loss of $1,873,000 or $0.50 per diluted share in the first quarter 2002. The first quarter 2002 results include a loss from continuing operations of $481,000 and a loss from discontinued operations of approximately $1.4 million. The Company completed $31.5 million in originations in the first quarter 2003 compared with $9.5 million in the first quarter 2002. Originations in the first quarter 2003 included $28.1 million sourced through a single customer.
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Revenues from equipment sales and sales-type leases decreased by $3.1 million to $1.9 million for the period ended March 31, 2003, compared to $5.0 million for the year earlier quarter. The prior year quarter included revenue of $3.5 million from the conversion of two operating leases to sales-type leases. Costs of equipment sales and sales-type leases decreased by $2.7 million to $1.5 million in the first quarter 2003 from $4.2 million in the first quarter 2002. Of this decrease, $3.2 million was associated with the two operating leases converted to sales-type leases in the year earlier period. Gross margin percentages related to revenues from equipment sales and sales-type leases were 20% and 15% for the quarters ended March 31, 2003 and 2002, respectively.
The Company's average monthly operating lease portfolio was $43.3 million, a 106% increase from the average monthly operating lease portfolio of $21.0 million during the first quarter 2002. This increase is due to the high volume of operating lease originations that took place in the second and fourth quarters of 2002 and the first quarter of 2003. Rental revenues from operating leases increased to $5.4 million in the first quarter 2003 compared to $2.5 million in the first quarter 2002. Depreciation on the related leased assets increased to $3.8 million in the first quarter 2003 compared to $1.7 million in the first quarter 2002. The increase in rental revenue from operating leases and depreciation was due to the increase in the Company's average operating lease portfolio.
Finance income totaled $1.0 million in the first quarter of 2003 compared to $1.3 million in the first quarter of 2002. This decrease is primarily the result of the 27% decrease in the average monthly portfolio of notes receivable and direct finance leases held by the Company during the first quarter 2003 compared to the first quarter 2002.
Fee income for the first quarter 2003 was $976,000 compared to $340,000 for the year earlier quarter. The increase in fee income is related to a higher level of originations in the first quarter 2003 which produced fees. Fee income is non-recurring in nature.
Casino revenues and costs represent the operations of Rocky's. Casino revenues were $163,000 in the first quarter 2003 compared to $341,000 in the first quarter 2002. Casino costs, excluding depreciation and amortization, decreased to $311,000 in the first quarter 2003 from $708,000 in the first quarter 2002. Included in the expenses of the first quarter 2002 were pre-opening expenses of $238,000 representing non-recurring costs related to the remodeling and retheming of Rocky's. The increased loss from casino operations, before pre-opening expenses, reflects the continued weakness of the Reno, Nevada gaming market.
Interest expense totaled $2.2 million in the first quarter 2003 compared to $1.9 million in the first quarter 2002. This increase reflects higher average debt levels and a higher weighted average cost of funds in the first quarter 2003, compared to the first quarter 2002. The weighted average cost of funds, which includes the amortization of capitalized loan costs, was 12.7% in the first quarter 2003 compared to 11.5% in the first quarter 2002.
Selling, general and administrative expenses totaled $1.0 million in the first quarter 2003 and $1.6 million in the first quarter 2002. The decrease of $600,000 primarily reflects reduced payroll costs of $409,000 and increased capitalized indirect costs of loan originations of $212,000, due to higher originations, partially offset by increased legal costs of $101,000.
The estimated effective income tax rate was 36% in the first quarter 2003 and 42% in the first quarter 2002. In both periods, the effective rate was higher than the federal statutory tax rate of 34% due primarily to state income taxes and permanent tax differences.
Loss from discontinued operations was $1.4 million in the first quarter 2002. The loss consisted of a loss on disposal of $993,000 and an operating loss of $399,000. The loss on disposal was primarily related to the write-off of certain intangibles in the Company's Table Games and Casino Slot Exchange divisions. In addition, due to the decision to forego further reconditioning activities, the Company provided a reserve for its related parts inventory of approximately $300,000 to liquidate the inventory
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quickly and reduce the associated on-going carrying costs. There was no loss from discontinued operations during the first quarter 2003.
See Note 4 to the Consolidated Financial Statements for description of the Company's Discontinued Operations.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, the Company had $1.7 million in cash and cash equivalents, $4.9 million in availability on lines of credit and restricted cash of $2.4 million, of which $206,000 was immediately available to fund the originations of leases. The funds necessary to support the Company's activities have been provided by cash flows generated primarily from operating activities and various forms of recourse and non-recourse borrowings from banks, financial institutions and financial intermediaries. Payments under the Company's borrowings and the maturities of its borrowings are typically structured to match the payments under the leases and notes collateralizing the borrowings. The Company manages its portfolio to optimize concentration among customers and geographic markets. To achieve this goal, it will from time to time sell or externally finance transactions originated, including those 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.
Equipment vendors payable at March 31, 2003 is $19.3 million. Amounts due equipment vendors are generally settled with the proceeds of borrowings utilizing the underlying leases and related equipment as security. Through May 12, 2003, $9.4 million of the balance outstanding at March 31, 2003 was paid with the proceeds of debt financing.
On February 24, 2003, the Company announced that it had entered into a letter of intent with respect to a proposal submitted by a management group consisting of Johan P. Finley, the Company's Chairman and Chief Executive Officer, Lona M.B. Finley, the Company's Executive Vice President, Secretary and Chief Administrative Officer, and Peter D. Cleary, the Company's President, Chief Operating Officer and Treasurer (collectively, the "Management Group"), to acquire all of the approximately 69% of the outstanding shares of the Company's common stock not already owned by the Management Group. Under the terms of the letter of intent, the Company will pay certain fees and costs associated with the transaction, consisting primarily of legal costs and investment banking fees. Management estimates that such costs will be in the range of $500,000 to $700,000, with said costs being paid from general corporate funds.
CASH FLOW
During the first quarter 2003, cash provided by operating activities totaled $12.3 million compared to cash provided by operating activities (continuing and discontinued, combined) of $7.6 million in the first quarter 2002. The increase in cash provided by operating activities during the first quarter 2003 primarily results from an increase in collections of accounts receivable of $7.2 million, an increase in income from operations of $3.5 million, a decrease in payments of accrued expenses of $2.2 million and decreased purchases of equipment to be placed under direct finance leases of $1.9 million, partially offset by a decrease in collections on notes and direct finance leases of $11.2 million. Cash used in investing activities totaled $12.7 million in the first quarter 2003 compared to cash used in investing activities of $1.5 million in the first quarter 2002. The increase in cash used in investing activities is primarily the result of increased purchases of equipment to be placed under operating leases in the amount of $12.0 million. Cash provided by financing activities totaled $2.0 million in the first quarter 2003 compared to cash used in financing activities of $3.6 million in the first quarter 2002. The increase primarily reflects increases in borrowings to finance higher levels of lease originations in 2003.
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At March 31, 2003, total borrowings were $72.0 million, compared to $69.0 million at December 31, 2002. At March 31, 2003, the Company's revolving credit and working capital facilities aggregated approximately $15.7 million at interest rates ranging from 5.25% to 10.50%. Advances under these agreements aggregated approximately $10.8 million at March 31, 2003. 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.
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 a significant 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; the effects of the proposed going private transaction; uncertainty of market acceptance of the Company's products and services; unproven performance of Rocky's; 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; 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.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Within 90 days prior to the filing date of this Quarterly Report on Form 10-Q (the "Evaluation Date"), the Company evaluated, under the supervision of its Chief Executive Officer and its President, Chief Operating Officer, Treasurer and Interim Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures. Based on this evaluation, the Company concluded that its disclosure controls and procedures are effective to ensure that information the Company is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.
Changes in internal controls. Subsequent to the Evaluation Date, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
In May 2002, the Company received notification that Tekbilt, Inc. ("Claimant") had submitted a Demand for Arbitration to the American Arbitration Association alleging breach of a Distributor Agreement (the "Agreement") with Claimant in connection with the Company's discontinued operations. In the notification, Claimant alleged that such breach has caused Claimant to sustain substantial damages. The monetary damages sought by claimant are unspecified. The Company timely filed its Answering Statement and has asserted a Counterclaim against Claimant. The Company seeks the dismissal of Claimant's claims in their entirety, an award of monetary damages and reimbursement of all costs and expenses incurred by the Company as a result of the case, including attorneys fees. Neither party has specified its alleged damages. The case is in a preliminary stage, and the hearing before the American Arbitration Association panel is expected to occur in 2003. Although unable to predict the outcome of this matter, management believes the claim to be without merit and will vigorously pursue all legal defenses available to it. Management, further, does not believe that the outcome of such arbitration is likely to have a material adverse effect on the Company. Accordingly, no accounting recognition has been provided for losses, if any.
On February 24, 2003, the Company announced that it had entered into a letter of intent (the "Letter of Intent") with respect to a proposal submitted by a management group consisting of Johan P. Finley, the Company's Chairman and Chief Executive Officer, Lona M.B. Finley, the Company's Executive Vice President, Secretary and Chief Administrative Officer, and Peter D. Cleary, the Company's President, Chief Operating Officer and Treasurer (collectively, the "Management Group"), to acquire all of the approximately 69% of the outstanding shares of the Company's common stock not already owned by the Management Group (the "Proposed Transaction").
On March 7, 2003, the Company announced that it had been named as a defendant in a purported class action lawsuit filed by a shareholder in District Court, Clark County, Nevada in connection with the Proposed Transaction. The complaint alleged that members of the Company's Board of Directors violated their fiduciary duties in approving the Letter of Intent with respect to the proposal submitted by the Management Group, and sought to enjoin the Management Group from acquiring the shares. On April 25, 2003, the Company announced the voluntary dismissal of this lawsuit by the plaintiff.
On May 12, 2003, the Company announced that it had been named as a defendant in an additional purported class action lawsuit filed by a shareholder in District Court, Clark County, Nevada in connection with the Proposed Transaction. The complaint alleges that members of the Company's Board of Directors violated their fiduciary duties in approving the Letter of Intent with respect to the
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proposal submitted by the Management Group, and seeks to enjoin the Management Group from acquiring the shares. The Company believes the allegations are without merit and intends to vigorously defend the lawsuit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| Exhibit Number |
Description |
|
|---|---|---|
| 99.1 | Press release, dated April 25, 2003, announcing the dismissal of a purported class action lawsuit filed by a shareholder | |
99.2 |
Press release, dated May 12, 2003, announcing the filing of a purported class action lawsuit filed by a shareholder |
|
99.3 |
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
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: May 15, 2003 | By: | /s/ PETER D. CLEARY Peter D. Cleary President, Chief Operating Officer, Treasurer and Interim Chief Financial Officer (a duly authorized officer) |
||
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I, Johan P. Finley, Chairman and Chief Executive Officer of PDS Gaming Corporation, certify that:
Date: May 15, 2003 |
By: |
/s/ JOHAN P. FINLEY Johan P. Finley, Chairman and Chief Executive Officer |
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I, Peter D. Cleary, President, Chief Operating Officer, Treasurer and Interim Chief Financial Office of PDS Gaming Corporation, certify that:
Date: May 15, 2003 |
By: |
/s/ PETER D. CLEARY Peter D. Cleary, President, Chief Operating Officer, Treasurer and Interim Chief Financial Office |
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