UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
ý QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
Commission File No. 0-23928
PDS GAMING CORPORATION
(exact name of Registrant as specified in its charter)
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Minnesota |
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41-1605970 |
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(State or other Jurisdiction of |
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(I.R.S. Employer |
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Incorporation or Organization) |
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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 ý No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
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Class |
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Outstanding as of August 6, 2002 |
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Common Stock, $.01 par value |
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3,797,901 |
PART I FINANCIAL INFORMATION
PART II OTHER INFORMATION
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2
PDS GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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June 30, |
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December
31, |
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ASSETS: |
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(Unaudited) |
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Cash and cash equivalents |
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$ |
2,542,000 |
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$ |
4,086,000 |
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Restricted cash |
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3,438,000 |
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Notes, accounts and leases receivable, net of allowances |
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44,398,000 |
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44,800,000 |
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Equipment under operating leases, net |
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34,980,000 |
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22,613,000 |
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Equipment held for sale or lease |
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4,171,000 |
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4,941,000 |
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Other assets, net |
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10,360,000 |
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8,617,000 |
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$ |
99,889,000 |
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$ |
85,057,000 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY: |
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Accounts payable |
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$ |
20,212,000 |
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$ |
1,279,000 |
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Customer deposits |
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2,285,000 |
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2,147,000 |
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Notes payable |
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55,132,000 |
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53,640,000 |
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Subordinated debt |
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9,581,000 |
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11,166,000 |
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Accrued expenses and other |
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2,540,000 |
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4,397,000 |
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89,750,000 |
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72,629,000 |
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Stockholders’ equity: |
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Common stock, $.01 par value, 20,000,000 shares authorized, 3,796,683 and 3,745,872 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively |
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38,000 |
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37,000 |
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Additional paid-in capital |
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11,808,000 |
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11,712,000 |
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Retained earnings (deficit) |
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(1,707,000 |
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679,000 |
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10,139,000 |
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12,428,000 |
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$ |
99,889,000 |
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$ |
85,057,000 |
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See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30,
(Unaudited)
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2002 |
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2001 |
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REVENUES: |
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Equipment sales and sales-type leases |
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$ |
4,089,000 |
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$ |
4,613,000 |
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Operating lease rentals |
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3,059,000 |
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2,271,000 |
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Finance income |
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1,097,000 |
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6,134,000 |
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Fee income (loss) |
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43,000 |
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(87,000 |
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Casino |
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528,000 |
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454,000 |
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8,816,000 |
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13,385,000 |
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COSTS AND EXPENSES: |
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Equipment sales and sales-type leases |
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3,395,000 |
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4,313,000 |
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Depreciation on leased equipment |
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2,000,000 |
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1,722,000 |
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Interest |
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1,792,000 |
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2,263,000 |
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Casino |
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725,000 |
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363,000 |
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Selling, general and administrative |
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724,000 |
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1,523,000 |
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Depreciation and amortization on other property |
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198,000 |
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296,000 |
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Collection and asset impairment provisions |
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31,000 |
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842,000 |
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8,865,000 |
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11,322,000 |
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Income (loss) before income taxes (benefit) |
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(49,000 |
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2,063,000 |
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Income taxes (benefit) |
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(20,000 |
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825,000 |
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Income (loss) from continuing operations |
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(29,000 |
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1,238,000 |
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Discontinued operations |
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(484,000 |
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(710,000 |
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Net income (loss) |
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$ |
(513,000 |
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$ |
528,000 |
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Earnings (loss) per share: |
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Continuing operations: |
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Basic |
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$ |
(0.01 |
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$ |
0.33 |
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Diluted |
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(0.01 |
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0.32 |
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Discontinued operations — basic and diluted |
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(0.13 |
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(0.19 |
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Net income (loss) — basic and diluted |
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(0.14 |
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0.14 |
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Weighted average shares outstanding: |
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Basic |
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3,797,000 |
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3,721,000 |
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Diluted |
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3,797,000 |
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3,910,000 |
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See notes to consolidated financial statements.
4
PDS GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30,
(Unaudited)
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2002 |
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2001 |
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REVENUES: |
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Equipment sales and sales-type leases |
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$ |
9,042,000 |
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$ |
6,285,000 |
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Operating lease rentals |
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5,570,000 |
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4,061,000 |
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Finance income |
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2,385,000 |
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7,412,000 |
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Fee income |
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383,000 |
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2,382,000 |
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Casino |
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903,000 |
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781,000 |
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18,283,000 |
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20,921,000 |
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COSTS AND EXPENSES: |
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Equipment sales and sales-type leases |
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7,743,000 |
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5,906,000 |
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Depreciation on leased equipment |
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3,673,000 |
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3,105,000 |
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Interest |
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3,686,000 |
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4,324,000 |
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Casino |
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1,229,000 |
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626,000 |
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Selling, general and administrative |
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2,134,000 |
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2,498,000 |
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Depreciation and amortization on other property |
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400,000 |
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505,000 |
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Pre-opening expenses |
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238,000 |
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Collection and asset impairment provisions |
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59,000 |
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842,000 |
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19,162,000 |
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17,806,000 |
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Income (loss) before income taxes (benefit) |
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(879,000 |
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3,115,000 |
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Income taxes (benefit) |
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(369,000 |
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1,246,000 |
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Income (loss) from continuing operations |
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(510,000 |
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1,869,000 |
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Discontinued operations |
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(1,876,000 |
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(877,000 |
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Net income (loss) |
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$ |
(2,386,000 |
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$ |
992,000 |
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Earnings (loss) per share: |
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Continuing operations: |
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Basic |
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$ |
(0.13 |
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$ |
0.50 |
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Diluted |
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(0.13 |
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0.47 |
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Discontinued operations — basic and diluted |
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(0.50 |
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(0.23 |
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Net income (loss): |
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Basic |
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(0.63 |
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0.27 |
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Diluted |
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(0.63 |
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0.25 |
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Weighted average shares outstanding: |
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Basic |
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3,790,000 |
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3,719,000 |
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Diluted |
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3,790,000 |
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3,937,000 |
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See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(Unaudited)
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2002 |
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2001 |
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OPERATING ACTIVITIES: |
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Net cash provided by continuing operating activities |
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$ |
9,511,000 |
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$ |
9,102,000 |
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Net cash used in discontinued operating activities |
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(164,000 |
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(1,113,000 |
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Net cash provided by operating activities |
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9,347,000 |
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7,989,000 |
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INVESTING ACTIVITIES: |
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Purchase of equipment for leasing |
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(6,780,000 |
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(5,996,000 |
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Proceeds from sale of equipment under operating leases |
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459,000 |
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2,697,000 |
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Other |
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(1,081,000 |
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Net cash used in investing activities |
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(7,402,000 |
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(3,299,000 |
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FINANCING ACTIVITIES: |
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Proceeds from borrowings |
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19,690,000 |
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10,121,000 |
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Repayment of borrowings |
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(17,385,000 |
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(12,266,000 |
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Increase in restricted cash |
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(3,438,000 |
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Repayment of subordinated debt |
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(2,453,000 |
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(70,000 |
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Proceeds from issuance of common stock |
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97,000 |
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13,000 |
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Net cash used in financing activities |
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(3,489,000 |
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(2,202,000 |
) |
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CHANGE IN CASH AND CASH EQUIVALENTS: |
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Net increase (decrease) in cash and cash equivalents |
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(1,544,000 |
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2,488,000 |
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Cash and cash equivalents at beginning of period |
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4,086,000 |
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2,033,000 |
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Cash and cash equivalents at end of period |
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$ |
2,542,000 |
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$ |
4,521,000 |
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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 (the “Company”), and the related notes, included within the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (the “2001 Form 10-K”), previously filed with the Securities and Exchange Commission.
The balance sheet at December 31, 2001 was derived from the audited financial statements included in the Company’s 2001 Form 10-K and reclassifications to conform with the current quarter presentation.
The Casino Operations division does not meet the criteria requiring recognition as an operating segment under Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information.
2. NOTES PAYABLE
Notes payable consist of the following:
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June 30, |
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December
31, |
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Recourse lines of credit with a maximum aggregate balance of $22,930,000 bearing interest at rates from 5.75% to 10.50%, secured by related investment in leases and equipment held for sale or lease |
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$ |
13,975,000 |
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$ |
5,440,000 |
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Equipment notes bearing interest at rates from 7.26% to 15.08%, secured by related investment in leases: |
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Recourse |
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18,479,000 |
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21,862,000 |
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Non-recourse |
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23,146,000 |
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26,723,000 |
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55,600,000 |
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54,025,000 |
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Unamortized loan discounts |
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(468,000 |
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(385,000 |
) |
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$ |
55,132,000 |
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$ |
53,640,000 |
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7
PDS GAMING CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. DISCONTINUED OPERATIONS
At the end of the first quarter 2002, the Company discontinued operations of its Table Games division and certain components of its Casino Slot Exchange® division, due to unacceptable operating results resulting from, among other things, slower than anticipated customer installations, inadequate profit margins and the continuing costs of maintaining exclusive rights to certain intellectual property. Accordingly, the Company has reclassified 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. As a result of these decisions, the Company recognized a disposal loss of $993,000 in the three months ended March 31, 2002 primarily related to the write-off of certain intangibles in the 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 $300,000 in the three months ended March 31, 2002 solely to liquidate the inventory quickly and reduce the associated on-going carrying costs.
Results from discontinued operations, net of income tax benefit, are as follows:
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Three Months Ended June 30 |
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Six Months Ended June 30 |
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2002 |
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2001 |
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2002 |
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2001 |
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Loss on discontinued operations: |
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Loss on disposal |
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$ |
(993,000 |
) |
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Operating loss |
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$ |
(484,000 |
) |
$ |
(710,000 |
) |
(883,000 |
) |
$ |
(877,000 |
) |
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$ |
(484,000 |
) |
$ |
(710,000 |
) |
$ |
(1,876,000 |
) |
$ |
(877,000 |
) |
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Loss per share (diluted): |
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Loss on disposal |
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$ |
(0.26 |
) |
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Operating loss |
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$ |
(0.13 |
) |
$ |
(0.19 |
) |
(0.24 |
) |
$ |
(0.23 |
) |
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$ |
(0.13 |
) |
$ |
(0.19 |
) |
$ |
(0.50 |
) |
$ |
(0.23 |
) |
As of June 30, 2002, the assets associated with discontinued operations consisted of the Company’s inventory of certain slot machines and table games and its investment in DigiDeal Corporation, with a carrying value of $2.9 million and $700,000, respectively.
4. CONTINGENCIES AND COMMITMENTS
In May 2002, the Company received notification that Tekbilt, Inc. (“Claimant”) has submitted a Demand for Arbitration to the American Arbitration Association in connection with the Company’s alleged breach of a Distributor Agreement (the “Agreement”) with Claimant in connection with the Company’s discontinued operations. In the notification, Claimant alleges that the Company is in breach of the terms of the Agreement and that such breach has caused Claimant to sustain substantial damages. The monetary damages sought by claimant are unspecified.
Although unable to predict the outcome of this matter, management believes the Claimant’s 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.
8
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 to the gaming industry. 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. In early 2001, the Company received a non-restricted gaming license to operate The Gambler casino, now known as Rocky’s Sports Pub and Grill (“Rocky’s”), 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. In addition to its leasing activities, the Company also originates note transactions which it generally 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 distribute used gaming devices (which its gaming licenses in the above-referenced states permit it to do) 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 subject to quarterly fluctuations resulting from a variety of factors, including, but not limited to, (i) variations in the mix of financing transactions between operating leases, direct finance leases and notes receivable, (ii) changes in the gaming industry which affect the demand for 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.
The Company reported a net loss of $513,000 or $0.14 per diluted share in the second quarter 2002 compared to net income of $528,000 or $0.14 per diluted share in the second quarter 2001. The second quarter 2002 results include a loss from continuing operations of $29,000 and a loss from discontinued operations of $484,000. The second quarter results of 2001 include income from continuing operations of $1,238,000 and a loss from discontinued operations of $710,000. Gross originations of financing transactions were $20.4 million in the second quarter 2002, compared with $14.9 million in the year-earlier quarter (the year-earlier quarter also included the purchase of a lease transaction from a third party for $17.0 million). Shipments of gaming devices increased to 2,074 in the second quarter 2002 from 1,270 in the year-earlier quarter.
The Company reported a net loss of $2,386,000 or $0.63 per diluted share for the six months ended June 30, 2002 compared to net income of $992,000 or $0.25 per diluted share for the six months ended June 30, 2001. The results for the six months ended June 30, 2002 include a loss from continuing operations of $510,000 and a loss from discontinued operations of $1,876,000. The results for the six months ended June 30, 2001 include income from continuing operations of $1,869,000 and a loss from discontinued operations of $877,000. Gross originations of financing transactions were $29.9 million for the six months ended June 30, 2002, compared with $21.2 million in the year-earlier period (the year-earlier period also included the purchase of a lease transaction from a third party for $17.0 million). Shipments of gaming devices were 3,100 and 3,400 for the six months ended June 30, 2002 and 2001, respectively.
9
Three Months ended June 30, 2002 and 2001
Continuing operations
Revenues in the second quarter 2002 totaled $8.8 million compared to $13.4 million in the year-earlier quarter, a decrease of $4.6 million. This decline primarily reflects a one-time transaction in the quarter ended June 30, 2001 in which the Company recognized $4.8 million of finance income.
Revenues from equipment sales and sales-type leases totaled $4.1 million in the second quarter of 2002 compared to $4.6 million in the year-earlier quarter, a decrease of $500,000. Such revenues include sales of used gaming devices previously under lease and sales of equipment at the inception of a lease in which a dealer’s profit or loss on the subject equipment is recognized. Differences in revenue result from normal variations in the volume of significant transactions among accounting periods. Costs of such sales totaled $3.4 million and $4.3 million in the quarters ended June 30, 2002 and 2001, respectively. Gross margin increased from 7% in the prior year quarter to 17% in the current year quarter. This increase primarily reflects more favorable pricing in the markets served by the Company.
Rental revenues from operating leases increased by $800,000, or 35%, to $3.1 million in the second quarter 2002 compared to $2.3 million in the year-earlier quarter as a result of a larger portfolio of operating leases. Related depreciation was $2.0 million and $1.7 million for the quarters ended June 30, 2002 and 2001, respectively. Depreciation on operating leases as a percentage of rental revenues decreased from 76% in the prior-year quarter to 65% in the second quarter 2002. This decrease is due to our normal recurring quarterly portfolio review that resulted in acceleration of depreciation on certain leases in the prior-year quarter.
Finance income decreased to $1.1 million in the second quarter 2002 compared to $6.1 million in the year-earlier quarter for the reason discussed above.
Casino revenues increased to $528,000 in the second quarter 2002 from $454,000. This $74,000 increase reflects revenue from additional gaming devices placed in service in 2002. Casino expenses increased to $725,000 in the current year quarter compared to $363,000 in the second quarter 2001. The increased expenses are due to expansion of the casino in the first quarter 2002 and are primarily comprised of increased payroll and related costs and advertising. The Reno market is down approximately 8%, primarily as a result of the economic downturn in the Silicon Valley region, decreased air travel and new Native American casinos in Northern California.
Interest expense totaled $1.8 million in the quarter ended June 30, 2002, compared to $2.3 million in the second quarter of 2001. The decrease of $471,000 reflects a general decline in interest rates.
Selling, general and administrative expenses totaled $724,000 in the second quarter 2002 and $1.5 million in the year-earlier quarter. The decrease of approximately $800,000 reflects an increase of $286,000 of overhead capitalized as initial direct costs. Although prior year originations exceeded current year originations, $17.0 million in originations in the prior year related to a direct finance lease transaction, and therefore no initial direct costs were recorded. The remaining decrease consists primarily of lower payroll and related costs due to head count reductions and the nonrecurring expenses of the 2001 exchange offering related to the Company’s subordinated debt.
Collection and asset impairment provisions were $31,000 and $842,000 for the periods ended June 30, 2002 and 2001, respectively. During the second quarter of 2001, the Company provided for a possible loss contingency related to one significant customer. No such transaction occurred in the current year quarter.
Discontinued Operations
Loss from discontinued operations was $484,000 in the second quarter 2002 compared to $710,000 in the prior year’s quarter. The decrease of $226,000 is due primarily to collection and impairment provisions and inventory reserves.
See Note 3 to the Consolidated Financial Statements for description of the Company’s Discontinued Operations.
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Income Taxes
The estimated effective income tax rate was 42% in the second quarter 2002 and 40% in the second quarter 2001. 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.
Continuing operations
Revenues in the six months ended June 30, 2002 totaled $18.3 million compared to $20.9 million in the year-earlier period. The decrease in revenues of $2.6 million is primarily attributable to a decrease in finance income of $5.0 million and a decrease in fee income of $2.0 million, partially offset by an increase in operating lease revenues of $1.5 million and an increase in equipment sales and sales-type leases of $2.7 million.
Revenues from equipment sales and sales-type leases totaled $9.0 million in the six months ended June 30, 2002, compared to $6.3 million in the year-earlier period, an increase of $2.7 million. Such revenues include sales of used gaming devices previously under lease and sales of equipment at the inception of a lease in which a dealer’s profit or loss on the subject equipment is recognized. Differences in revenue result from normal variations in the volume of significant transactions among accounting periods. Costs of such sales totaled $7.7 million and $5.9 million, respectively. Gross margin increased from 6% in the prior year to 14% in the current year. This increase primarily reflects more favorable pricing in the markets served by the Company.
Rental revenues from operating leases increased to $5.6 million for the six months ended June 30, 2002 compared to $4.1 million in the year-earlier period. This $1.5 million increase reflects the increase in the size of the Company’s portfolio of operating leases. Related depreciation was $3.7 million and $3.1 million for the six months ended June 30, 2002 and 2001, respectively.
Finance income declined $5.0 million for the six months ended June 30, 2002 compared to the year earlier period as a result of the non-recurring transactions involving a significant customer discussed above.
Fee income totaled $383,000 in the six months ended June 30, 2002 compared to $2.4 million in the year-earlier period, a decrease of $2.0 million. Fee income in the year-earlier period was a nonrecurring fee from a significant customer.
Casino revenues totaled $903,000 in the six months ended June 30, 2002 compared to $781,000 in the year-earlier period, and increase of $122,000. Related casino costs were $1.2 million and $626,000 in the six months ended June 30, 2002 and 2001, respectively. In addition, the Company recorded one-time pre-opening expenses of $238,000 in the six months ended June 30, 2002. The increase in casino revenues reflects the additional casino revenues from the expansion of Rocky’s at the beginning of 2002. The increase in expenses reflects delays in construction, higher payroll and related costs and advertising associated with the expansion.
Interest expense totaled $3.7 million in the six months ended June 30, 2002 compared to $4.3 million in the year-earlier period. The decrease reflects the general decline in interest rates.
Selling, general and administrative expenses totaled $2.1 million in the six months ended June 30, 2002 compared to $2.5 million in the year-earlier period. As with the quarter ended June 30, 2002, the reduced expenses are primarily due to increased overhead capitalized as initial direct costs, reduced payroll and related costs and the nonrecurring expenses of the 2001 exchange offering related to the Company’s subordinated debt.
Discontinued Operations
Loss from discontinued operations was $1.9 million in the six months ended June 30, 2002 compared to $877,000 in the prior year period. The decrease of $1.0 million is due primarily to the write-off of certain intangible assets and inventory reserves, net of reductions in collection and impairment provisions.
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See Note 3 to the Consolidated Financial Statements for description of the Company’s Discontinued Operations.
Income Taxes
The estimated effective income tax rate was 42% in the six months ended June 30, 2002 and 40% 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 $2.5 million at June 30, 2002 and $4.1 million at December 31, 2001. During the six months ended June 30, 2002, operating activities provided cash of $9.3 million compared to $8.0 million in the year-earlier period. For the six months ended June 30, 2002, investing activities, consisting primarily of equipment purchased for leasing, utilized cash of $7.4 million, and $3.5 million was utilized in financing activities, consisting primarily of repayment of borrowings. Restricted cash represents amounts advanced by lenders to the Company to be used for funding future leasing transactions.
Included in accounts payable at June 30, 2002 is $19.4 million payable to vendors of equipment presently under lease with customers. Amounts due equipment vendors are generally settled with the proceeds of borrowings utilizing the underlying leases and related equipment as security. Subsequent to June 30, 2002, either permanent financing or firm commitments from lenders for such financing had been obtained related to equipment under lease.
Effective March 31, 2002, the Company amended a line of credit, reducing the maximum borrowings under the line from $3.5 million to $2 million, and changed the expiration date to December 31, 2002. The line of credit is utilized to finance games in inventory. Borrowings under the line averaged approximately $350,000 during the six months ended June 30, 2002. The reduction in credit available under the line is not expected to have an impact on the Company’s on-going operations because the Company has discontinued the operation of its Table Games division and certain components of its Casino Slot Exchange division, and consequently, the number of games in inventory has declined and is expected to continue to decline.
At June 30, 2002, total borrowings were $64.7 million, compared to $64.8 million at December 31, 2001. At June 30, 2002, the Company’s credit and working capital facilities aggregated $22.9 million at interest rates ranging from 5.75% to 10.5%. Advances under these agreements aggregated $14.0 million at June 30, 2002. The Company’s current financial resources, including estimated cash flows from operations and the 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’s total investment portfolio was $79.4 million at June 30, 2002, compared to $67.4 million at December 31, 2001. 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 is not expected to have a significant impact on the Company’s operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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 lease and loan originations to maturity, the Company does not have a significant exposure to interest rate changes.
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.
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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 continued acceptance of the Company’s products and services; the inability to complete currently anticipated finance and lease transactions; worse than expected results from the Company’s casino operations; 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; changes in interest rates; 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.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In May 2002, the Company received notification that Tekbilt, Inc. (“Claimant”) has submitted a Demand for Arbitration to the American Arbitration Association in connection with the Company’s alleged breach of a Distributor Agreement (the “Agreement”) with Claimant in connection with the Company’s discontinued operations. In the notification, Claimant alleges that the Company is in breach of the terms of the Agreement and that such breach has caused Claimant to sustain substantial damages. The monetary damages sought by claimant are unspecified.
Although unable to predict the outcome of this matter, management believes the Claimant’s 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
On July 12, 2002, the Company announced that Martha Vlcek, its Chief Financial Officer and Treasurer, tendered her resignation in order to pursue other interests. While the Company searches for a replacement, Peter D. Cleary, President and Chief Operating Officer, has assumed the role of Interim Chief Financial Officer and Treasurer.
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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.
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Exhibit Number |
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Description |
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10.1 |
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Master Loan Agreement, dated as of May 14, 2002, by
and among PDS Gaming Corporation, PDS Gaming Corporation-Nevada, PDS Gaming
Corporation- |
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b) Reports on Form 8-K. A Form 8-K was filed in July 2002 to report the termination of Johan P. Finley’s (the Company’s Chief Executive Officer) Rule 10b5-1 Stock Sales Plan effective July 11, 2002. A Form 8-K was filed contemporaneously with the filing of this Quarterly Report on Form 10-Q to report the submission to the Securities and Exchange Commission of the certification required by its chief executive officer and chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to this Quarterly Report on Form 10-Q. There were no other reports on Form 8-K during the quarter ended June 30, 2002 or during the period from June 30, 2002 to the filing 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.
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PDS GAMING CORPORATION |
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Dated: August 14, 2002 |
By:/s/ Peter D. Cleary |
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President, Chief Operating Officer and Interim Chief Financial Officer and Treasurer |
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(a duly authorized officer) |
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