**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

###### **WASHINGTON, D.C. 20549**

 

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**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 PERIODENDED march 31, 2002**

 

**COMMISSION FILE NO. 0-23928**

 

**PDS GAMING CORPORATION**

(exact name of Registrant as specified in its charter)

 

| **Minnesota**                                                  |   | **41-1605970**                       |
|----------------------------------------------------------------|--------|--------------------------------------|
| (State or other Jurisdiction of Incorporation or Organization) |   | (I.R.S. Employer Identification No.) |
|                                                           |   |                                 |
| **6171  McLeod Drive, Las Vegas, Nevada 89120**                |
| (Address of Principal  Executive Offices)                      |
|                                                           |   |                                 |
| **(702) 736-0700**                                             |
| (Issuer’s Telephone Number, Including Area Code)          |

 

Indicateby check mark whether the registrant (1) filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days.

 

Yes   ý                  No   o

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the last practicable date:

 

| **Class**                    |   | **Outstanding as of  May 13, 2002** |
|------------------------------|--------|------------------------------------------|
| Common Stock, $.01 par value |   | 3,796,683                                |

 

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###### **PDS GAMING CORPORATION AND SUBSIDIARIES**

 

###### **INDEX**

 
|     | **PART I        FINANCIAL INFORMATION**                              |
|----------|---------------------------------------------------------------------------------------------------------|
|     |                                                                                                    |
| Item 1.  | Financial Statements:                                                                                   |
|     |                                                                                                    |
|     | Consolidated Balance Sheets  — March 31, 2002 (Unaudited) and December 31, 2001                    |
|     |                                                                                                    |
|     | Consolidated  Statements of Income — Three Months Ended   March 31, 2002 and 2001 (Unaudited) |
|     |                                                                                                    |
|     | Consolidated  Statements of Cash Flows — Three Months Ended March 31, 2002 and 2001 (Unaudited)    |
|     |                                                                                                    |
|     | Notes to  Consolidated Financial Statements (Unaudited)                                                 |
|     |                                                                                                    |
| Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations             |
|     |                                                                                                    |
| Item  3. | Quantitative  and Qualitative Disclosures About Market Risk                                             |
|     |                                                                                                    |
|     | **PART II        OTHER INFORMATION**                                 |
|     |                                                                                                    |
| Item  4. | Submission  of Matters to a Vote of Security Holders                                                    |
|     |                                                                                                    |
| Item 5.  | Other Information                                                                                       |
|     |                                                                                                    |
| Item 6.  | Exhibits and  Reports on Form 8-K                                                                       |
|          |                                                                                                         |  |

 

2

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**PDSGAMING CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 

 
|                                                                                                                                                                      |   | **March 31,****2002** |       | **December 31, 2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|------------|-----------------------|--------|
|                                                                                                                                                                      |   | **(Unaudited)**       |       |                  |   |
| **ASSETS:**                                                                                                                                                               |   |                  |       |                  |   |
|                                                                                                                                                                      |   |                  |       |                  |   |
| Cash and cash  equivalents                                                                                                                                                |   | $                     | 6,549,000  |                  | $      | 4,086,000 |   |
| Restricted cash                                                                                                                                                           |   | 5,854,000             |       |                  |   |
| Notes, accounts  and leases receivable, net of allowances                                                                                                                 |   | 39,743,000            |       | 44,800,000            |   |
| Equipment under  operating leases, net                                                                                                                                    |   | 23,760,000            |       | 22,613,000            |   |
| Equipment held  for sale or lease                                                                                                                                         |   | 4,080,000             |       | 4,941,000             |   |
| Intangible  assets                                                                                                                                                        |   |                  |       | 1,712,000             |   |
| Other assets,  net                                                                                                                                                        |   | 10,187,000            |       | 6,905,000             |   |
|                                                                                                                                                                      |   | $                     | 90,173,000 |                  | $      | 85,057,000 |   |
|                                                                                                                                                                      |   |                  |       |                  |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY:**                                                                                                                           |   |                  |       |                  |   |
|                                                                                                                                                                      |   |                  |       |                  |   |
| Accounts payable                                                                                                                                                          |   | $                     | 7,834,000  |                  | $      | 1,279,000 |   |
| Customer  deposits                                                                                                                                                        |   | 2,230,000             |       | 2,147,000             |   |
| Notes payable                                                                                                                                                             |   | 55,931,000            |       | 53,640,000            |   |
| Subordinated  debt                                                                                                                                                        |   | 11,021,000            |       | 11,166,000            |   |
| Accrued expenses  and other                                                                                                                                               |   | 2,508,000             |       | 4,397,000             |   |
|                                                                                                                                                                      |   | 79,524,000            |       | 72,629,000            |   |
|                                                                                                                                                                      |   |                  |       |                  |   |
| Stockholders’  equity:                                                                                                                                               |   |                  |       |                  |   |
| Common stock,  $.01 par value, 20,000,000 shares authorized, 3,795,636 and 3,745,872 shares  issued and outstanding at March 31, 2002 and December 31, 2001, respectively |   | 38,000                |       | 37,000                |   |
| Additional  paid-in capital                                                                                                                                               |   | 11,805,000            |       | 11,712,000            |   |
| Retained  earnings (deficit)                                                                                                                                              |   | (1,194,000            | )          | 679,000               |   |
|                                                                                                                                                                      |   | 10,649,000            |       | 12,428,000            |   |
|                                                                                                                                                                      |   | $                     | 90,173,000 |                  | $      | 85,057,000 |   |

 

See notes to consolidated financial statements.

 

3

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###### **PDS GAMING CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**THREE MONTHS ENDED MARCH 31,**

**(Unaudited)**

 
|                                                         |   | **2002**   |       | **2001**  |   |
|--------------------------------------------------------------|--------|------------|------------|-----------|--------|
| **REVENUES:**                                                |   |       |       |      |   |
| Equipment sales  and sales-type leases                       |   | $          | 4,953,000  |      | $      | 1,672,000 |   |
| Operating lease  rentals                                     |   | 2,511,000  |       | 1,790,000 |   |
| Finance income                                               |   | 1,288,000  |       | 1,278,000 |   |
| Fee income                                                   |   | 340,000    |       | 2,469,000 |   |
| Casino                                                       |   | 375,000    |       | 327,000   |   |
|                                                         |   | 9,467,000  |       | 7,536,000 |   |
| **COSTS  AND EXPENSES:**                                     |   |       |       |      |   |
| Equipment sales  and sales-type leases                       |   | 4,348,000  |       | 1,593,000 |   |
| Depreciation on  leased equipment                            |   | 1,673,000  |       | 1,383,000 |   |
| Interest                                                     |   | 1,894,000  |       | 1,840,000 |   |
| Casino                                                       |   | 504,000    |       | 263,000   |   |
| Selling, general  and administrative                         |   | 1,438,000  |       | 975,000   |   |
| Depreciation and  amortization on other property             |   | 202,000    |       | 209,000   |   |
| Pre-opening  expenses                                        |   | 238,000    |       |      |   |
|                                                         |   | 10,297,000 |       | 6,263,000 |   |
| Income (loss) from continuing operations before income taxes |   | (830,000   | )          | 1,273,000 |   |
| Income taxes  (benefit)                                      |   | (349,000   | )          | 509,000   |   |
| Income (loss)  from continuing operations                    |   | (481,000   | )          | 764,000   |   |
| Discontinued  operations                                     |   | (1,392,000 | )          | (300,000  | )      |
| Net income (loss)                                            |   | $          | (1,873,000 | )         | $      | 464,000 |   |
|                                                         |   |       |       |      |   |
| **Earnings (loss) per share:**                               |   |       |       |      |   |
| Continuing operations:                                       |   |       |       |      |   |
| Basic                                                        |   | $          | (0.13      | )         | $      | 0.21 |   |
| Diluted                                                      |   | (0.13      | )          | 0.20      |   |
| Discontinued operations                                      |   | (0.37      | )          | (0.08     | )      |
| Net income (loss) — basic and diluted                   |   | (0.50      | )          | 0.12      |   |
|                                                         |   |       |       |      |   |
| **Weighted average shares  outstanding:**                    |   |       |       |      |   |
| Basic                                                        |   | 3,783,000  |       | 3,718,000 |   |
| Diluted                                                      |   | 3,783,000  |       | 3,764,000 |   |

 

See notes to consolidated financial statements.

 

4

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###### **PDS GAMING CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**THREEMONTHS ENDED MARCH 31,**

**(Unaudited)**

 
|                                                    |   | **2002**    |      | **2001**   |   |
|---------------------------------------------------------|--------|-------------|-----------|------------|--------|
| **OPERATING  ACTIVITIES:**                              |   |        |      |       |   |
| Net cash  provided by continuing operating activities   |   | $           | 5,728,000 |       | $      | 4,204,000 |   |
| Net cash used in  discontinued operating activities     |   | (399,000    | )         | (300,000   | )      |
|                                                    |   |        |      |       |   |
| Net cash  provided by operating activities              |   | 5,329,000   |      | 3,904,000  |   |
|                                                    |   |        |      |       |   |
| **INVESTING  ACTIVITIES:**                              |   |        |      |       |   |
| Purchase of  equipment for leasing                      |   | (98,000     | )         | (2,461,000 | )      |
| Proceeds from  sale of equipment under operating leases |   | 269,000     |      | 320,000    |   |
|                                                    |   |        |      |       |   |
| Net cash  provided by (used in) investing activities    |   | 171,000     |      | (2,141,000 | )      |
|                                                    |   |        |      |       |   |
| **FINANCING  ACTIVITIES:**                              |   |        |      |       |   |
| Proceeds from  borrowings                               |   | 14,023,000  |      | 4,364,000  |   |
| Repayment of  borrowings                                |   | (11,300,000 | )         | (6,200,000 | )      |
| Increase in  restricted cash                            |   | (5,854,000  | )         |       |   |
| Proceeds from  issuance of common stock                 |   | 94,000      |      | 6,000      |   |
|                                                    |   |        |      |       |   |
| Net cash used in  financing activities                  |   | (3,037,000  | )         | (1,830,000 | )      |
|                                                    |   |        |      |       |   |
| **CHANGE  IN CASH AND CASH EQUIVALENTS:**               |   |        |      |       |   |
| Net increase  (decrease) in cash and cash equivalents   |   | 2,463,000   |      | (67,000    | )      |
| Cash and cash  equivalents at beginning of period       |   | 4,086,000   |      | 2,033,000  |   |
|                                                    |   |        |      |       |   |
| Cash and cash  equivalents at end of period             |   | $           | 6,549,000 |       | $      | 1,966,000 |   |

 

See notes to consolidated financial statements.

 

5

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**PDSGAMING CORPORATION AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****              BASIS OFPRESENTATION**

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of theinformation and disclosures required by generally accepted accountingprinciples for annual financial statements. In the opinion of management, all adjustments (including normal recurringadjustments) considered necessary for a fair presentation have beenincluded.  The results of operations forany interim period are not necessarily indicative of results for the fullyear.  For further information, pleaserefer to the consolidated financial statements of PDS Gaming Corporation (the“Company”), and the related notes, included within the Company’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2001 (the “2001 Form10-K”), previously filed with the Securities and Exchange Commission.

 

The balance sheet at December 31, 2001 was derivedfrom the audited financial statements included in the Company’s 2001 Form 10-K.

 

The Casino Operations division does not yet meet thecriteria requiring recognition as an operating segment under Statement ofFinancial Accounting Standards No. 131,*Disclosures about Segments of an Enterprise and Related Information.*

 

**2.****              NOTES PAYABLE**

 

Notes payable consist of the following:

 
|                                                                                                                                                                                                    |   | **March 31, 2002** |       | **December 31, 2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-----------------------|--------|
| Recourse lines of credit with a maximum aggregate balance of $20,150,000  bearing interest at rates from 5.50% to 10.50%, secured by related investment  in leases and equipment held for sale or lease |   | $                  | 11,533,000 |                  | $      | 5,440,000 |   |
| Equipment notes  bearing interest at rates from 7.13% to 15.08%, secured by related investment  in leases:                                                                                              |   |               |       |                  |   |
| Recourse                                                                                                                                                                                                |   | 19,930,000         |       | 21,862,000            |   |
| Non-recourse                                                                                                                                                                                            |   | 24,793,000         |       | 26,723,000            |   |
|                                                                                                                                                                                                    |   | 56,256,000         |       | 54,025,000            |   |
| Unamortized loan  discounts                                                                                                                                                                             |   | (325,000           | )          | (385,000              | )      |
|                                                                                                                                                                                                    |   | $                  | 55,931,000 |                  | $      | 53,640,000 |   |

 

6

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**3.****                        DISCONTINUEDOPERATIONS**

 

At the end of the firstquarter 2002, the Company discontinued operations of its Table Games divisionand certain components of its Casino Slot Exchange® division, due tounacceptable operating results resulting from, among other things, slower thananticipated customer installations and the regulatory approval process.  Accordingly, the Company has reclassifiedthese activities as discontinued operations. As a result of these decisions, the Company recognized a disposal lossof $993,000 primarily related to the write-off of certain intangibles in theTable Games and Casino Slot Exchange® divisions.  In addition, due to the decision to forego further reconditioningactivities, the Company provided a reserve for its related parts inventory ofapproximately $300,000 solely to liquidate the inventory quickly and reduce theassociated on-going carrying costs.  Inaccordance with Statement of Financial Accounting Standards No. 144, *Accounting for the Impairment or Disposal of Long-LivedAssets*, the Company will not make a one-time entry to accrueexpected future losses from discontinued operations.  Rather, the Company will report any future losses fromdiscontinued operations in the periods in which they occur.

 

Results from discontinuedoperations are as follows for the three months ended March 31:

 
|                             |   | **2002** |       | **2001** |     |
|----------------------------------|--------|----------|------------|----------|----------|
| Loss on discontinued operations: |   |     |       |     |     |
| Loss on disposal                 |   | $        | (993,000   | )        |     |   |
| Operating loss                   |   | (399,000 | )          | $        | (300,000 | ) |
|                             |   | $        | (1,392,000 | )        | $        | (300,000 | ) |
| Loss per share:                  |   |     |       |     |     |
| Loss on disposal                 |   | $        | (0.26      | )        |     |   |
| Operating loss                   |   | (0.11    | )          | $        | (0.08    | ) |
|                             |   | $        | (0.37      | )        | $        | (0.08 | ) |

 

**4.****                        CONTINGENCIESAND COMMITMENTS**

 

In May 2002, the Companyreceived notification that Tekbilt, Inc. (“Claimant”) has submitted a Demandfor Arbitration to the American Arbitration Association in connection with theCompany’s alleged breach of a Distributor Agreement (the “Agreement”) withClaimant in connection with the Company’s discontinued operations.  In the notification, Claimant alleges thatthe Company is in breach of the terms of the Agreement and that such breach hascaused Claimant to sustain substantial damages.  The monetary damages sought by Claimant are unspecified.

 

Although unable to predictthe outcome of this matter, management believes the Claimant’s claim to bewithout merit and will vigorously pursue all legal defenses available toit.  Management, further, does notbelieve that the outcome of such arbitration is likely to have a materialadverse effect on the Company.

 

7

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The Company is engaged in the business of financingand leasing gaming equipment to the gaming industry.  The gaming equipment financed by the Company consists mainly ofslot 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 leasingcompany licensed in the states of Nevada, New Jersey, Colorado, Illinois, Iowa,Indiana, Minnesota, Mississippi, New Mexico and Washington to provide thisfinancing alternative.  In early 2001,the Company received a non-restricted gaming license to operate The Gamblercasino, now known as Rocky’s Sports Pub and Grill, in Reno, Nevada and formedits Casino Operations Division.

 

The Company’s strategy is to increase recurringrevenues and cash flows through its operating divisions and by acquiring andoperating casinos.  In addition to itsleasing activities, the Company also originates note transactions which it generallysells to third parties for fee income. In some of its transactions, the Company holds the leases or notes for aperiod of time after origination, or retains a partial ownership interest inthe leases or notes.  The Companybelieves its ability to distribute used gaming devices (which its gaminglicenses in the above-referenced states permit it to do) enhances the gamingdevices’ values at the end of an operating lease and facilitates additionalfinancing transactions.  The Company’saccess to lower cost financing and equipment, industry knowledge and presencein multiple jurisdictions provide advantages in identifying casino ownershipopportunities.

 

The Company’s quarterly operating results, includingnet income, have historically fluctuated due to the timing of completion oflarge financing transactions, as well as the timing of recognition of theresulting fee income upon subsequent sale. These transactions can be in the negotiation and documentation stage forseveral months, and recognition of the resulting fee income by the Company mayfluctuate greatly from quarter to quarter. Thus, the results of any quarter are not necessarily indicative of theresults which may be expected for any other period.

 

The Company’s operating results are subject toquarterly fluctuations resulting from a variety of factors, including, but notlimited to, (i) variations in the mix of financing transactions betweenoperating leases, direct finance leases and notes receivable, (ii) changes inthe gaming industry which affect the demand for reconditioned gaming devicessold by the Company at lease termination, and (iii) economic conditions, inwhich a detrimental change can cause customers to delay new investments andincrease the Company’s bad debt exposure, and reduce the level of fee incomeobtained through the sale of leases or financing transactions.

 

#### **Results Of Operations**

 

The Company reported a net loss of $1.9 million or$0.50 per diluted share in the first quarter 2002 compared to net income of$464,000 or $0.12 per diluted share in the first quarter 2001.  The first quarter 2002 results include aloss from continuing operations of $481,000 and a loss from discontinuedoperations of $1.4 million.  The firstquarter results of 2001 include income from continuing operations of $764,000and a loss from discontinued operations of $300,000.

 

**ContinuingOperations**

 

Revenues from equipment sales and sales-type leasesincreased by $3.3 million to $5.0 million for the period ended March 31, 2002compared to $1.7 million for the year earlier quarter.  This is primarily due to an increase in thesale of equipment during the term or at the termination of leases.  Gross margins related to these sales were12% and 5% for the quarters ended March 31, 2002 and 2001, respectively.

 

The Company’s average operating lease portfolio was$23.2 million during the first quarter 2002, a 57% increase from the averageoperating lease portfolio of $14.7 million during the first quarter 2001.  This increase is due to higher originationsduring the first quarter 2002 compared to the same period last year.   The Company completed $9.5 million inoriginations in the first quarter 2002, compared with $6.3 million in the firstquarter 2001.  Rental revenues fromoperating leases increased to $2.5 million in the first quarter 2002 comparedto $1.8 million in the first quarter 2001. Depreciation on the related leased assets increased to $1.7 million inthe first quarter 2002 compared to $1.4 million in the first quarter 2001.

 

8

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Finance income totaled $1.3million in the first quarters of both 2002 and 2001.  The average portfolio of notes receivable and direct financeleases held by the Company during the first quarter 2002 did not differ significantlyfrom the average portfolio held during the first quarter 2001.

 

Fee income totaled $340,000 in the first quarter 2002compared to $2.5 million in the first quarter 2001.  The prior quarter fee income was comprised of a fee for financialadvisory services for a significant customer compared to the current quarterthat primarily consisted of fees generated from the sale of direct financeleases.

 

Casino revenues and costs represent the operations ofRocky’s Sports Pub and Grill (“Rocky’s”) in Reno, Nevada.  Casino revenues were $375,000 in the firstquarter 2002 compared to $327,000 in the first quarter 2001.  Casino costs increased to $504,000 in thefirst quarter 2002 from $263,000 in the first quarter 2001.  The loss from casino operations is due tolower than anticipated revenues and construction at Rocky’s.  Depreciation and amortization related tocasino operations totaled $78,000 and $49,000 for the periods ended March 31,2002 and 2001, respectively. Pre-opening expenses in the amount of $238,000 for the first quarter2002 represent non-recurring costs related to the remodeling and retheming ofRocky’s.

 

Interest expense totaled $1.9 million in the firstquarter 2002 compared to $1.8 million in the first quarter 2001.  This increase reflects the increasedinterest associated with higher average debt levels, largely offset by lowercosts of borrowing due to reductions in interest rates.

 

Selling, general and administrative expenses totaled$1.4 million in the first quarter 2002 and $975,000 in the first quarter2001.  The increase primarily reflectsnonrecurring charges for legal and consulting fees in the amount of $175,000and an increase in costs related to the retail stores (which were acquired inmid-2001) and salaries of approximately $250,000.

 

**DiscontinuedOperations**

 

Loss from discontinued operations was $1.4 million inthe first quarter 2002 compared to $300,000 in the prior year’s quarter.  The loss for the period ended March 31, 2002consisted of a loss on disposal of discontinued operations of $993,000.  There was no such disposal loss in the prioryear quarter.

 

See Note 3 to the Consolidated Financial Statementsfor description of the Company’s Discontinued Operations.

 

**IncomeTaxes**

** **

The estimated effective income tax rate was 42% in thefirst quarter 2002 and 40% in the first quarter 2001.  In both periods, the effective rate was higher than the federalstatutory tax rate of 34% due primarily to state income taxes and permanent taxdifferences.

 

**Liquidity and Capital Resources**

 

The Company’s activities are principally funded byproceeds from sales-type, direct finance and operating leases, equipment sales,fee income and proceeds from various forms of non-recourse and recourse bankdebt.  Management believes the Company’sability to generate cash from operations is sufficient to fund operations.

 

Cash and cash equivalents totaled $6.5 million atMarch 31, 2002 and $4.1 million at December 31, 2001.  During the first quarter 2002, cash provided by continuingoperating activities totaled $5.7 million compared to cash provided bycontinuing operating activities of $4.2 million in the first quarter 2001.  The higher level of cash provided bycontinuing operating activities during the first quarter 2002 primarily resultsfrom a payoff of notes receivable.  Thecash provided by continuing operating activities was partially offset by thecash used in discontinued operating activities of $399,000 and $300,000 in thefirst quarter of 2002 and 2001, respectively. Cash provided by investing activities totaled $171,000 in the firstquarter 2002 compared to cash used in investing activities of $2.1 million inthe first quarter 2001.  The lower levelof investment reflects a decrease in equipment purchased for operatingleases.  Cash used in financing activitiestotaled $3.0 million in the first quarter 2002 compared to $1.8 million in thefirst quarter 2001.  The increaseprimarily reflects a higher level of normally scheduled repayments ofborrowings.

 

At March 31, 2002, total borrowings were $67.0million, compared to $64.8 million at December 31, 2001.  At March 31, 2002, the Company’s revolvingcredit and working capital facilities aggregated approximately $20.1 million atinterest rates ranging from 5.5% to 10.5%. Advances under these agreements aggregated approximately $11.5 millionat March 31, 2002.  The Company’scurrent financial resources, including estimated cash flows from operations andthe revolving credit facilities, are expected to be sufficient to fund theCompany’s anticipated working capital needs. The Company is, from time to time, dependent upon the need to liquidateor externally

 

9

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finance transactions originated and held in its investmentportfolio.  The Company continues toexplore other possible sources of capital; however, there is no assurance thatadditional capital, if required, can be obtained or will be available on termsacceptable to the Company.

 

Inflation has not had a significant impact on theCompany’s operations.

 

On May 8, 2002, the Company announced thediscontinuation of its Table Games division and certain components of itsCasino Slot Exchange® division.  As aresult, the Company terminated the employment of approximately 10% of itsemployees.  The Company estimates thatthe reduction in staffing will result in an approximate $400,000 reduction inannual overhead over the next twelve months.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

#### **Interest Rate Risk**

 

Substantiallyall of the Company’s borrowings are under fixed interest rates, and maturitiesare matched with the cash flows of leased assets and notes receivables.  A changing interest rate environment willnot significantly impact the Company’s margins since the effects of higher orlower borrowing costs would be reflected in the rates for newly originatedleases or collateralized loans. Therefore, consistent with the Company’s strategy and intention to holdmost of its originations to maturity, the Company does not have a significantexposure to interest rate changes.

 

#### **Currency Risk**

 

TheCompany does not have a significant exposure to foreign currency risk becauseall of its sales to customers in foreign countries are transacted in UnitedStates dollars.

 

**Forward-LookingStatements**

 

Certain statements contained herein constitute“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Suchforward-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 comparableterminology.  Such forward-lookingstatements involve known or unknown risks, uncertainties and other factors whichmay cause the actual results, performance, or achievements of the Company, orindustry results, to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements.  Such factors include, butare not limited to, the following: strict regulation and changes in regulationsimposed by gaming authorities; the limitation, conditioning, suspension orrevocation of gaming licenses and entitlements held by the Company; competitionthe Company faces or may face in the future; the continued acceptance of theCompany’s products and services; the inability to complete currentlyanticipated finance and lease transactions; worse than expected results fromthe Company’s casino operations; a decline in the public acceptance of gaming;unfavorable public referendums or legislation, particularly as they relate togaming; the ability of the Company to continue to obtain adequate financing onacceptable terms; changes in interest rates; the ability of the Company torecover its investment in gaming equipment leased under operating leases; therisk of default by the Company’s customers with respect to its financingtransactions; the Company’s dependence on key employees; potential fluctuationsin the Company’s quarterly results; general economic and business conditions;and other factors detailed from time to time in the Company’s reports filedwith the Securities and Exchange Commission.

 

10

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**PART II - Other Information**

 

**ITEM4.  Submission of Matters to a Vote ofSecurity Holders**

 

The Company held its annualmeeting of shareholders on May 10, 2002 for the purposes of (1) electingmembers of the Board of Directors of the Company, (2) ratifying the appointmentof Piercy, Bowler, Taylor and Kern, Certified Public Accountants and BusinessAdvisors, as the independent accountants of the Company for the fiscal yearending December 31, 2002, and (3) approving the 2002 Stock Option Plan.

 

There were 3,796,683 sharesof Common Stock entitled to vote at the meeting and a total of 3,247,710 shares(85.5%) were represented at the meeting. The shareholder voting was as follows:

 

1.               Election of Directors:

 
|              |   | **For**   |   | **Withhold Authority** |
|-------------------|--------|-----------|--------|------------------------|
| Johan P. Finley   |   | 3,204,610 |   | 43,100                 |
| Peter D. Cleary   |   | 3,205,910 |   | 41,800                 |
| Joel M. Koonce    |   | 3,205,910 |   | 41,800                 |
| James L. Morrell  |   | 3,205,910 |   | 41,800                 |
| Patrick R. Cruzen |   | 3,205,910 |   | 41,800                 |
| Lona M.B. Finley  |   | 3,197,110 |   | 50,600                 |

 

2.               To ratify the appointment of Piercy, Bowler,Taylor and Kern, Certified Public Accountants and Business Advisors, as theindependent accountants of the Company for the fiscal year ending December 31,2002:

** **
| **For**   |   | **Against** |   | **Abstain** |
|-----------|--------|-------------|--------|-------------|
| 3,242,060 |   | 4,650       |   | 1,000       |

 

3.               To approve the 2002 Stock Option Plan:

 
| **For**   |   | **Against** |   | **Abstain** |   | **Broker  Non-Vote** |
|-----------|--------|-------------|--------|-------------|--------|----------------------|
| 1,369,342 |   | 117,450     |   | 14,700      |   | 1,746,218            |

 

**ITEM 5.  Other Information**

 

**DiscontinuedOperations; Amendment and Termination of Agreements with DigiDealCorporation. **At theend of the first quarter 2002, the Company discontinued operations of its TableGames division and certain components of its Casino Slot Exchange® division,due to unacceptable operating results. As a result, the Company has reclassified these activities asdiscontinued operations as of the first quarter 2002.  In this regard, the Company decided to discontinue andsubsequently negotiated a mutual termination of its exclusive manufacturing anddistribution agreement for the Digital Card System® (“DCS”).  The Company will assemble, distribute andsupport its remaining inventory of DCS products on a non-exclusive basis in alimited geographical area.  In addition,at the end of the first quarter 2002, the Company discontinued its Casino SlotExchange® operations, under which it sold reconditioned gaming devices. TheCompany will continue to sell gaming products under expiring or terminatedgaming equipment leases.

 

In terminating its exclusive manufacturing anddistribution agreement for the DCS, the Company entered into an Amendment andTermination Agreement and other ancillary agreements with DigiDeal Corporation(“DigiDeal”) as of May 3, 2002 through which the Company and DigiDeal mutuallyagreed to amend and/or terminate the various agreements between them.  Through these agreements, the parties, amongother things, amended a prior subscription agreement to provide for the Companyto purchase 108,108 shares of DigiDeal common stock for $200,000, DigiDealgranted a non-exclusive license for the DCS to the Company with respect to itsinventory of DCS products and the Company transferred certain of itsintellectual property to the DCS to DigiDeal. In addition, the Company granted an option to DigiDeal to purchase thesoftware developed by the Company.

 

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**Renewalof Line of Credit. **OnMay 9, 2002, the Company announced the renewal of its $3.5 million workingcapital line of credit with U.S. Bank, N.A.. The renewal continues the Company’s business relationship with U.S.Bank, Nevada, which began in 1997.

 

**ITEM6.  Exhibits and Reports on Form 8-K**

 

a)              The followingexhibits are included with this quarterly report on Form 10-Q as required byItem 601 of Regulation S-K.

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                           |
| 10.1                |   | Promissory Note, dated March 13, 2002, between First  Savings Bank and the Registrant                                                                                                                                                          |
|                |   |                                                                                                                                                                                                                                           |
| 10.2                |   | Amendment to Loan Agreement and Note, dated May 3,  2002, between  U.S. Bank N.A. and the  Registrant                                                                                                                                     |
|                |   |                                                                                                                                                                                                                                           |
| 10.3                | *      | Amendment and Termination Agreement, dated May 3,  2002, by and between DigiDeal Corporation and the Registrant                                                                                                                                |
|                |   |                                                                                                                                                                                                                                           |
|                | *      | Confidential treatment has been requested with  respect to certain portions of this agreement, including the exhibits  thereto, of which certain portions have been omitted and filed separately  with the Securities and Exchange Commission. |

 

b)             Reports on Form8-K.  There were no reports on Form 8-Kduring the quarter ended March 31, 2002 or during the period from March 31,2002 to the date of this Quarterly Report on Form 10-Q.

**Signature**

 

In accordance with the requirements of the Securities Exchange Act of1934, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                       | **PDS  GAMING CORPORATION**           |   |
|----------------------------|---------------------------------------|--------|
|                       |                                  |   |
| Dated:  May  15, 2002 | By: /s/ Martha Vlcek                  |   |
|                       | Chief Financial Officer and Treasurer |   |
|                       | (a duly authorized officer)           |   |

 

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