-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BfkdQ2bn6sfDwbCifwcBF917w2nZZom5vCz0yrkgkDAY2g5a5VCS9MEO7gfjZYO/ OrcRyCwPWwJqOj64KNlr1A== /in/edgar/work/20000811/0000912057-00-036229/0000912057-00-036229.txt : 20000921 0000912057-00-036229.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-036229 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASINO DATA SYSTEMS CENTRAL INDEX KEY: 0000898756 STANDARD INDUSTRIAL CLASSIFICATION: [3577 ] IRS NUMBER: 880261839 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21426 FILM NUMBER: 692209 BUSINESS ADDRESS: STREET 1: 330 BIRTCHER DRIVE CITY: LAS VEGAS STATE: NV ZIP: 89118 BUSINESS PHONE: 7022695000 MAIL ADDRESS: STREET 1: 3300 BIRCHER DRIVE CITY: LAS VEGAS STATE: NV ZIP: 89118 10-Q 1 a10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: JUNE 30, 2000. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ 0-21426 ----------------------------------- (Commission File Number) CASINO DATA SYSTEMS -------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) NEVADA ------------------------------------------------------ (State or Other Jurisdiction of Incorporation or Organization) 88-0261839 ------------------------------------ (I.R.S. Employer Identification Number) 3300 BIRTCHER DRIVE, LAS VEGAS, NEVADA 89118 -------------------------------------------------------------- (Address of Principal Executive Offices) (702) 269-5000 -------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 18,485,379 shares of common stock outstanding as of August 7, 2000. -1- CASINO DATA SYSTEMS INDEX
PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheets June 30, 2000 and December 31, 1999............................................. 3 Unaudited Condensed Consolidated Statements of Income For the three months ended June 30, 2000 and 1999............................... 5 Unaudited Condensed Consolidated Statements of Income For the six months ended June 30, 2000 and 1999................................. 6 Unaudited Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2000 and 1999................................. 7 Notes to Unaudited Condensed Consolidated Financial Statements.................. 8 Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations....................................................... 11 Item 7a. Quantitative and Qualitative Disclosures about Market Risk...................... 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................... 15 Item 6. Exhibits and Reports on Form 8-K................................................ 16 Signatures ................................................................................ 17
-2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CASINO DATA SYSTEMS CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands)
June 30, December 31, 2000 1999 ----------- ---------- ASSETS Current Assets Cash and cash equivalents $ 17,130 $ 6,866 Restricted cash and cash equivalents 1,830 2,389 Investment securities 3,304 1,272 Restricted investment securities 1,698 1,309 Accounts receivable, net of allowance for doubtful accounts of $1,748 and $1,886, respectively 21,775 21,121 Current portion of notes receivable 2,648 4,324 Inventories, net 24,185 25,600 Prepaid expenses and other current assets 2,085 2,143 ----------- ---------- Total current assets 74,655 65,024 ----------- ---------- Property and equipment, net of accumulated depreciation of $8,969 and $7,517, respectively 15,877 17,762 Restricted investment securities 14,344 14,517 Deferred tax assets 10,172 10,172 Notes receivable, excluding current portion 348 539 Intangible assets, net of accumulated amortization of $1,068 and $1,001, respectively 104 122 Software development costs, net of accumulated amortization of $2,430 and $1,746, respectively 1,693 2,362 Other assets 398 389 ----------- ---------- Total non-current assets 42,936 45,863 ----------- ---------- Total assets $ 117,591 $ 110,887 =========== ==========
(Continued) See accompanying Notes to Condensed Consolidated Financial Statements -3- CASINO DATA SYSTEMS CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (UNAUDITED) (Dollars and share data in thousands)
June 30, December 31, 2000 1999 ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current portion of long-term debt $ -- $ 214 Accounts payable 3,538 1,427 Accrued expenses and customer deposits 8,639 8,567 Accrued slot liability 271 252 ----------- ---------- Total current liabilities 12,448 10,460 ----------- ---------- Non-current Liabilities Accrued slot liability 17,730 17,901 ----------- ---------- Total non-current liabilities 17,730 17,901 ----------- ---------- Shareholders' Equity Common stock, no par value. Authorized 100,000 shares; issued and outstanding 18,471 and 18,401 at June 30, 2000 and December 31, 1999, respectively 85,110 84,964 Accumulated earnings (deficit) 2,303 (2,438) ----------- ---------- Total shareholders' equity 87,413 82,526 ----------- ---------- Total liabilities and shareholders' equity $ 117,591 $ 110,887 =========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements -4- CASINO DATA SYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (Amounts in thousands, except per share data)
THREE MONTHS ENDED JUNE 30, ---------------------------------- 2000 1999 ----------- ---------- Revenue OASIS-TM- systems $ 8,235 $ 8,187 Gaming devices 8,931 10,741 Recurring revenue 1,029 1,952 Signs 1,333 1,449 TurboPower 678 439 ----------- ---------- Total revenue 20,206 22,768 Cost of goods sold 8,637 12,677 ----------- ---------- Gross margin 11,569 10,091 ----------- ---------- Operating expenses Selling, general and administrative 4,217 5,084 Research and development 1,988 1,583 Depreciation and amortization 942 1,049 ----------- ---------- Total operating expenses 7,147 7,716 ----------- ---------- Income from operations 4,422 2,375 ----------- ---------- Other income (expense) Interest and other income, net 416 613 Interest expense -- 12 ----------- ---------- Total other income, net 416 625 ----------- ---------- Income before income taxes 4,838 3,000 Income tax expense 1,693 1,050 ----------- ---------- Net income $ 3,145 $ 1,950 =========== ========== Basic net income per share $ 0.17 $ 0.11 =========== ========== Diluted net income per share $ 0.17 $ 0.11 =========== ========== Basic weighted average shares outstanding 18,458 18,143 =========== ========= Diluted weighted average shares outstanding 18,796 18,498 =========== =========
See accompanying Notes to Condensed Consolidated Financial Statements -5- CASINO DATA SYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (Amounts in thousands, except per share data)
SIX MONTHS ENDED JUNE 30, ------------------------------------ 2000 1999 ----------- ---------- Revenue OASIS-TM- systems $ 16,270 $ 15,083 Gaming devices 14,539 15,435 Recurring revenue 2,406 4,152 Signs 2,331 2,656 TurboPower 1,456 1,179 ----------- ---------- Total revenue 37,002 38,505 Cost of goods sold 15,658 21,363 ----------- ---------- Gross margin 21,344 17,142 ----------- ---------- Operating expenses Selling, general and administrative 9,043 9,261 Research and development 3,745 3,223 Depreciation and amortization 1,900 2,100 ----------- ---------- Total operating expenses 14,688 14,584 ----------- ---------- Income from operations 6,656 2,558 ----------- ---------- Other income (expense) Interest and other income, net 641 765 Interest expense (3) (28) ------------ ----------- Total other income, net 638 737 ----------- ---------- Income before income taxes 7,294 3,295 Income tax expense 2,553 1,153 ----------- ---------- Net income $ 4,741 $ 2,142 =========== ========== Basic net income per share $ 0.26 $ 0.12 =========== ========== Diluted net income per share $ 0.25 $ 0.12 =========== ========== Basic weighted average shares outstanding 18,437 18,105 =========== ========= Diluted weighted average shares outstanding 18,763 18,345 =========== =========
See accompanying Notes to Condensed Consolidated Financial Statements -6- CASINO DATA SYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (Dollars in thousands)
SIX MONTHS ENDED JUNE 30, ---------------------------------- 2000 1999 ------------ ---------- Cash Flows From Operating Activities: Net income $ 4,741 $ 2,142 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,900 2,100 Depreciation and amortization included in COGS 366 1,016 (Gain) loss on disposal of assets (64) 47 Write-off of net book value of assets -- (101) Provision for accounts receivable (139) (1,230) Provision for inventory obsolescence 1,050 699 Changes in assets and liabilities: Restricted cash and cash equivalents 559 384 Accounts and notes receivable 1,351 (5,297) Income tax receivable 581 -- Inventories 1,306 (1,589) Other assets and deposits (546) (4) Accounts payable 2,110 117 Accrued expenses, customer deposits and slot liability (78) 3,503 ------------ ---------- Net cash provided by operating activities 13,137 1,787 ----------- ---------- Cash Flows From Investing Activities: Purchases of unrestricted investment securities (2,032) (45) Purchases of investment securities to fund liabilities to jackpot winners (462) (994) Proceeds from sale of investment securities to fund liabilities to jackpot winners 246 167 Purchase of intangible assets (65) (57) Proceeds from sale of assets held for sale 30 72 Purchase of property, plant and equipment (751) (1,299) Proceeds from sale of property, plant and equipment 229 18 ----------- ---------- Net cash used in investing activities (2,805) (2,138) ----------- ---------- Cash Flows From Financing Activities: Repayment of notes payable (214) (157) Proceeds from the issuance of stock 146 443 ----------- ---------- Net cash (used in) provided by financing activities (68) 286 ------------ ---------- Net increase (decrease) in cash and cash equivalents 10,264 (65) Cash and cash equivalents at beginning of period 6,866 5,141 ----------- ---------- Cash and cash equivalents at end of period $ 17,130 $ 5,076 =========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements -7- CASINO DATA SYSTEMS NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) Description of Business and Summary of Significant Accounting Policies Casino Data Systems, a Nevada corporation, was incorporated in June 1990. Each of the following corporations are wholly owned subsidiaries of Casino Data Systems: CDS Services Company; CDS Graphics and Imaging Company; CDS Signs, Inc.; TurboPower Software Company, and CDS Gaming Company (collectively the "Company"). The Company's operations consist principally of: (i) the development, licensing and sale of casino management information systems (the OASIS-TM- System); (ii) the operation of multi-site link progressive (MSP) systems; (iii) the design and manufacture of video interactive gaming machines, and (iv) the design and manufacture of casino meters, signs and graphics. The Company also creates software development tools for sale to outside software professionals and for use by the Company's own software engineers. The Company provides these products through operation of five segments: OASIS systems, gaming devices, recurring revenue products, signs and software development tools (TurboPower). PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Casino Data Systems and all of the subsidiaries mentioned above. All significant intercompany balances and transactions have been eliminated in consolidation. RECLASSIFICATION Certain prior year balances have been reclassified to conform to the current year presentation. BASIS OF PRESENTATION Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's annual report as filed on Form 10-K for the year ended December 31, 1999. The accompanying unaudited condensed consolidated financial statements contain all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results of operations that will be achieved for an entire year. RECENTLY ISSUED ACCOUNTING STANDARDS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 clarifies existing accounting principles related to revenue recognition in financial statements. The Company is required to comply with the provisions of SAB 101 by the fourth quarter of 2000. Due to the nature of the Company's operations, management does not believe that SAB 101 will have a significant impact on the Company's financial statements. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Company include the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable, the estimated reserve -8- for inventory obsolescence, the estimated valuation allowance for deferred tax assets, and the estimated cash flows used in assessing the recoverability of long-lived assets. Actual results could differ from those estimates. (2) Business Segments Following is the disclosure of the items that management utilizes in measuring the profit or loss of each of the Company's segments.
REVENUES Three Months Ended Six Months Ended JUNE 30, JUNE 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands) OASIS Systems $ 8,235 $ 8,187 $ 16,270 $ 15,083 Gaming Devices 8,931 10,741 14,539 15,435 Recurring Revenue 1,029 1,952 2,406 4,152 Signs 1,333 1,449 2,331 2,656 TurboPower 678 439 1,456 1,179 --------- ---------- --------- --------- Total $ 20,206 $ 22,768 $ 37,002 $ 38,505 ========== ========== ========== ==========
INCOME (LOSS) FROM OPERATIONS Three Months Ended Six Months Ended JUNE 30, JUNE 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands) OASIS Systems $ 3,956 $ 3,240 $ 7,187 $ 6,054 Gaming Devices 584 (804) (378) (2,860) Recurring Revenue 14 (249) 109 (831) Signs (222) 162 (547) (202) TurboPower 90 26 285 397 --------- ---------- --------- --------- Total $ 4,422 $ 2,375 $ 6,656 $ 2,558 ========== ========== ========== ==========
Corporate expenses have been allocated to each segment based on an estimate of each segment's utilization of corporate resources. (3) Inventories Inventories consist of the following:
June 30, December 31, 2000 1999 ----------- ---------- Raw materials $ 15,680 $ 15,710 Work in process 1,126 292 Finished goods 10,199 11,368 ----------- ---------- 27,005 27,370 Less reserve for obsolescence (2,820) (1,770) ---------- ---------- $ 24,185 $ 25,600 ============ ==========
-9- (4) Net Income Per Share The following is an analysis of the components of the shares used to compute net income per common share.
Three Months Ended Six Months Ended JUNE 30 JUNE 30, ------------------------- -------------------------- 2000 1999 2000 1999 ---------- ---------- --------- ----------- (In thousands, except per share information) Numerator for earnings per share Net income $ 3,145 $ 1,950 $ 4,741 $ 2,142 ========== ========== ========= ========== Denominator for earnings per share Weighted average shares outstanding - basic 18,458 18,143 18,437 18,105 Effect of dilutive securities Stock options 338 355 326 240 ---------- ---------- ---------- ---------- Weighted average shares outstanding - diluted 18,796 18,498 18,763 18,345 ========== ========== ========= ========== Basic earnings per share $ 0.17 $ 0.11 $ 0.26 $ 0.12 ========== ========== ========= ========== Diluted earnings per share $ 0.17 $ 0.11 $ 0.25 $ 0.12 ========== ========== ========= ==========
(5) Related Party Pursuant to an agreement effective June 1, 2000, the Company is paying Michael D. Rumbolz, a director of the Company, $8,333 per month for consulting services. (6) Commitments and Contingencies On May 19, 1998, Acres Gaming Corporation filed an action against the Company, Mikohn Gaming Corporation, New York New York Hotel & Casino, LLC, and Sunset Station Hotel & Casino, in the Federal Court for the State of Nevada, alleging that the Company's ProTurbo Software module violated certain patent rights of Acres Gaming. Acres Gaming also filed a Motion for Preliminary Injunction, which was later withdrawn by Acres. The Company has answered the lawsuit asserting defenses and counterclaims seeking a declaration of invalidity, noninfringement and unenforceability of the patent asserted. The Company believes this action is without merit and will continue to vigorously defend itself. While the outcome of this lawsuit is not presently determinable, management does not expect the outcome will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. On November 17, 1998, Acres filed a second lawsuit against the Company alleging that the Company's ProTurbo Software module violates certain patent rights of a second Acres patent. The Company has filed an answer and a counterclaim seeking a declaration of invalidity, noninfringement and unenforceability of the patent asserted. The Company has filed additional counterclaims for alleged patent misuse, spoliation of evidence, antitrust violations and unfair competition. The Company believes that this action is without merit and will continue to vigorously defend itself. While the outcome of this lawsuit is not presently determinable, management does not expect the outcome will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. The Company and its subsidiaries are also involved from time to time in other various claims and legal actions arising in the ordinary course of business including, but not limited to, administrative claims and legal actions brought in state and federal courts by patrons of the Company's MSP games, wherein the patron may allege the winning of jackpot awards or some multiple thereof. Because of the size of the jackpots that a patron may play for, related patron disputes often involve sizable claims. The loss of a sizable patron dispute claim could have a material adverse effect on the Company. For example, the Company is currently litigating two patron disputes that it has -10- won on every level of review, however the patrons have continued to appeal the decisions. One dispute has been appealed by the patron to the Supreme Court of the State of Mississippi, and the patron alleges a claim for two identical jackpots of over $2.7 million each. A second dispute has been appealed by a patron to the Supreme Court of the State of Nevada, who alleges a claim for over $8 million. In either case, if the patron were to win, the Company would be liable to pay $1 million immediately (plus interest) with the remainder to be paid in installments over twenty years in an annuity. However, management believes that the likelihood of success by those making such claims is remote and that the ultimate outcome of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this document and the Consolidated Financial Statements and Notes thereto included in the Company's annual report on Form 10-K. THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1999 OVERVIEW Income from operations was $4,422,000 for the three months ended June 30, 2000 compared with $2,375,000 for the three months ended June 30, 1999, an increase of $2,047,000 or 86%. Net income increased from $1,950,000 for the three months ended June 30, 1999 to $3,145,000 for the same period in 2000, an improvement of $1,195,000. Total revenue for the three months ended June 30, 2000 was $20,206,000 compared with $22,768,000 for the same period in 1999, a decrease of $2,562,000 or 11%. This decrease is primarily due to lower sales of gaming devices and a decrease in recurring revenue. OASIS systems revenue was $8,235,000 and $8,187,000 for the three months ended June 30, 2000 and 1999, respectively, an increase of $48,000. This slight increase reflects continued strong sales of the Company's Windows (Windows is a registered trademark of Microsoft Corporation) based OASIS product, which was introduced into the market late in the fourth quarter of 1998. Operating income from this segment increased $716,000 from $3,240,000 to $3,956,000 for the three months ended June 30, 1999 and 2000, respectively. This increase is primarily the result of a higher gross margin based on the sales mix between software and hardware products, combined with lower corporate expenses. Revenue from the sale of gaming devices decreased $1,810,000 from $10,741,000 for the three month period ended June 30, 1999 to $8,931,000 for the same fiscal 2000 period. This decrease in revenue is primarily attributable to decreased unit sales in the second quarter of 2000 compared with 1999 due to strong sales of the Bandit Bingo-TM- product in 1999, with no similar strong selling product in 2000. Despite the lower revenue base, this segment reported an operating profit of $584,000 for the three months ended June 30, 2000 compared with an operating loss of $804,000 for the same prior year period, primarily due to an improved gross margin due to manufacturing efficiencies, and lower corporate expenses. Revenue from the recurring revenue segment was $1,029,000 and $1,952,000 for the three months ended June 30, 2000 and 1999, respectively, a decrease of 47% or $923,000. This revenue decline is primarily the result of a more than 50% reduction in the number of Cool Millions-TM- and Xtreme-TM- operating units in service from June 30, 1999 to June 30, 2000, due to the maturation of these products. Operating income for the three months ended June 30, 2000 was $14,000, an improvement of $263,000 from the loss of $249,000 for the same period of the prior year. This improvement is primarily attributable to a higher gross margin percentage combined with lower operating costs and lower corporate expenses, offset in part by lower revenues. Signs revenue decreased $116,000, or 8%, from $1,449,000 for the three months ended June 30, 1999 to $1,333,000 for the same period in 2000. This decrease is primarily due to lower sales of game related signage. The operating loss of $222,000 from signs decreased from a profit of $162,000 for the three months ended June 30, 2000 and 1999, respectively, primarily due to a lower revenue and a lower gross margin the result of manufacturing inefficiencies. -11- Revenue of $678,000 from TurboPower Software was $239,000, or 54%, higher for the three months ended June 30, 2000 compared with the same prior year period. Operating income from this segment increased $64,000 for the three months ended June 30, 2000 compared with the same prior year period, primarily attributable to the increase in revenue, offset in part by increased operating expenses. GROSS MARGIN The gross margin percentage was 57% for the three months ended June 30, 2000 compared with 44% for the same period in 1999. This increase is attributable to manufacturing efficiencies, primarily in the production of gaming devices. OPERATING EXPENSES Operating expenses were $7,147,000 and $7,716,000 for the three months ended June 30, 2000 and 1999, respectively, a decrease of $569,000 or 7%. Operating expenses increased slightly as a percentage of revenue from 34% for the three months ended June 30, 1999, to 35% for the same period in 2000. Selling, general and administrative expenses decreased from $5,084,000 for the three months ended June 30, 1999, to $4,217,000 for the same period in 2000, a decrease of $867,000 or 17%. Selling, general and administrative expenses as a percentage of revenues decreased slightly from 22% for the three months ended June 30, 1999, to 21% for the same period in 2000. The decrease in selling, general and administrative expenses is primarily attributable to decreased legal costs related to litigation and lower commission expense on the lower revenue base. Research and development expenses increased from $1,583,000 for the three months ended June 30, 1999, to $1,988,000 for the same period in 2000, an increase of $405,000 or 26%. Research and development expenses as a percentage of revenues were 10% for the three months ended June 30, 2000 and 7% for the same period in 1999. The increase in expense is primarily due to increased headcount in the engineering departments primarily responsible for the ongoing design and development of new products for the Company. Depreciation and amortization expense decreased from $1,049,000 for the three months ended June 30, 1999, to $942,000 for the same period in 2000, a decrease of $107,000 or 10%. The decrease in depreciation and amortization is primarily due to decreased amortization of royalties and software development costs. OTHER INCOME, NET Other income, net, is primarily comprised of interest income, interest expense and gains and losses on disposal of assets. Other income, net, decreased from $625,000 for the three months ended June 30, 1999, to $416,000 for the same period in 2000, a decrease of $209,000 or 33%. This decrease is primarily due to the one-time reversal of approximately $411,000 of interest expense due to a favorable lawsuit settlement in the second quarter of 1999 which did not occur in 2000, partially offset by an increase in interest income due to higher cash balances in 2000. SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1999 OVERVIEW Income from operations was $6,656,000 for the six months ended June 30, 2000 compared with $2,558,000 for the six months ended June 30, 1999, an increase of $4,098,000 or 160%. Net income increased from $2,142,000 for the six months ended June 30, 1999 to $4,741,000 for the same period in 2000, an improvement of $2,599,000. Total revenue for the six months ended June 30, 2000 was $37,002,000 compared with $38,505,000 for the same period in 1999, a decrease of $1,503,000 or 4%. This decrease is primarily due to lower sales of gaming devices and a decrease in recurring revenue. OASIS systems revenue was $16,270,000 and $15,083,000 for the six months ended June 30, 2000 and 1999, respectively, an increase of $1,187,000 or 8%. This increase is primarily attributable to continued strong sales of the -12- Company's Windows (Windows is a registered trademark of Microsoft Corporation) based OASIS product, which was introduced into the market late in the fourth quarter of 1998. Operating income from this segment increased $1,133,000 from $6,054,000 to $7,187,000 for the six months ended June 30, 1999 and 2000, respectively. This increase is primarily the result of higher revenue, offset in part by a higher portion of corporate expenses Revenue from the sale of gaming devices decreased $896,000 from $15,435,000 for the six month period ended June 30, 1999 to $14,539,000 for the same fiscal 2000 period. This decrease in revenue is primarily attributable to decreased unit sales in the second quarter of 2000 compared with 1999 due to strong sales of the Bandit Bingo-TM- product in 1999, with no similar strong selling product in 2000. This segment's operating loss of $378,000 for the six months ended June 30, 2000 was $2,482,000 lower than the same prior year period, primarily due to an improved gross margin due to manufacturing efficiencies and reduced operating expenses offset in part by lower revenue and an increased portion of corporate expenses. Revenue from the recurring revenue segment was $2,406,000 and $4,152,000 for the six months ended June 30, 2000 and 1999, respectively, a decrease of 42% or $1,746,000. This revenue decline is primarily the result of a reduction by more than 50% in the number of Cool Millions-TM- and Xtreme-TM- operating units in service due to the maturation of these products. Operating income for the six months ended June 30, 2000 was $109,000, an improvement of $940,000 from the loss of $831,000 in the prior year. This improvement is primarily attributable to a higher gross margin, lower operating costs and a lower portion of corporate expenses, partially offset by reduced revenues. Signs revenue decreased from $2,656,000 for the six months ended June 30, 1999 to $2,331,000 for the same period in 2000, a decrease of $325,000 or 12%. This decrease is primarily due to lower sales of games' related signage. The operating loss from signs increased from $202,000 to $547,000 for the six months ended June 30, 1999 and 2000, respectively, primarily due to lower revenues and a lower gross margin due to manufacturing inefficiencies, offset in part by a reduced portion of corporate expenses. Revenue of $1,456,000 from TurboPower Software was $277,000, or 23%, higher for the six months ended June 30, 2000 compared with the same prior year period, primarily the result of new product releases in 2000. Operating income from this segment decreased $112,000 for the six months ended June 30, 2000 compared with the same prior year period, primarily attributable to increased operating expenses related to increased engineering headcount. GROSS MARGIN The gross margin percentage was 58% for the six months ended June 30, 2000 compared with 45% for the same period in 1999. This increase is mainly the result of manufacturing efficiencies, primarily in the production of gaming devices. OPERATING EXPENSES Operating expenses were $14,688,000 and $14,584,000 for the six months ended June 30, 2000 and 1999, respectively, an increase of $104,000. Operating expenses increased slightly as a percentage of revenue from 38% for the six months ended June 30, 1999, to 40% for the same period in 2000. Selling, general and administrative expenses decreased from $9,261,000 for the six months ended June 30, 1999, to $9,043,000 for the same period in 2000, a decrease of $218,000. Selling, general and administrative expenses as a percentage of revenues remained consistent at 24% for the six months ended June 30, 2000 and 1999. The decrease in selling, general and administrative expenses is primarily attributable to lower legal costs related to litigation. Research and development expenses increased from $3,223,000 for the six months ended June 30, 1999, to $3,745,000 for the same period in 2000, an increase of $522,000 or 16%. Research and development expenses as a percentage of revenues were 10% for the six months ended June 30, 2000 and 8% for the same 1999 period. The increase is primarily due to increased headcount in the departments responsible for the design and development of new products for the Company. -13- Depreciation and amortization expense decreased from $2,100,000 for the six months ended June 30, 1999, to $1,900,000 for the same period in 2000, a decrease of $200,000 or 10%. The decrease in depreciation and amortization is primarily due to decreased amortization of royalties and software development costs. OTHER INCOME, NET Other income, net, is primarily comprised of interest income, interest expense and gains and losses on disposal of assets. Other income, net, decreased from $737,000 for the six months ended June 30, 1999, to $638,000 for the same period in 2000, a decrease of $99,000 or 13%. This decrease is primarily due to the one-time reversal of approximately $411,000 in interest expense due to a favorable lawsuit settlement in the second quarter of 1999 which did not occur in 2000, partially offset by increased interest income due to higher cash balances in 2000. LIQUIDITY AND CAPITAL RESOURCES To date, the Company has financed its operating and capital expenditures primarily through cash flows from its operations and cash from proceeds of its equity offerings. The Company had cash and cash equivalents of $18,960,000 at June 30, 2000, compared with $9,255,000 at December 31, 1999, of which $1,830,000 and $2,389,000, respectively, were restricted for payment of slot liabilities. Certain jurisdictions in which MSP systems operate require that the Company maintain restricted funds for the payment of jackpot prizes. At June 30, 2000, the Company's accrued slot liability for its MSP systems aggregated $17,730,000. In connection with these slot liabilities and in accordance with regulatory requirements, the Company established restricted cash accounts aggregating approximately $1,830,000 at June 30, 2000 to ensure availability of adequate funds to pay for jackpot liabilities associated with jackpot prizes offered but yet to be awarded. The Company also has restricted investment securities approximating $16,042,000 as of June 30, 2000 for annuity payments related to jackpots already won. Although statistically unlikely, a possibility exists that multiple jackpots may be awarded prior to the time period over which game play has generated sufficient revenue to fully accrue each jackpot amount. Such occurrences could have a material adverse impact on the Company's results of operations in the reporting period in which such jackpots would hit. The Company's ratio of current assets to current liabilities is 6.0 to 1 at June 30, 2000, while the noncurrent liabilities to equity ratio is .20 to 1. Based on this financial position, the Company believes it could obtain additional long-term financing for growth. However, there can be no assurance that the Company will be able to obtain additional sources of capital. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to the impact of interest rate changes and the changes in the market values of its investments. The Company's interest rate exposure relates primarily to the Company's investment portfolio. The Company has not used derivative financial instruments in its investment portfolio. The Company invests its excess cash primarily in debt instruments of the U.S. Government and its agencies and state and other municipal government agencies. By policy, the Company limits the amount of credit exposure to any one issuer. The Company protects and preserves its invested funds by limiting default, market and reinvestment risk. Investments in fixed rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates. The Company may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company is including the following cautionary statement to take advantage of the "safe harbor" provisions of the PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 for any forward-looking statement made by, -14- or on behalf of, the Company. The factors identified in this cautionary statement are important factors (but not necessarily all the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result, or be achieved or accomplished. Taking into account the foregoing, the following are identified as important risk factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company: - - A decline in demand for, or appeal of, the Company's products, or a decline in the rate of growth of new and existing markets for the Company's products. - - The inability of the Company to develop new competitive products in a timely fashion. - - An increase in popularity of competitor's products. - - The entry into the market by new competitors and competition with more well established manufacturers and distributors. - - The loss or retirement of our key executives. - - Approval of competitor's patent applications resulting in an inability to use intellectual property upon which the Company relies to manufacture and sell its products or denial of approval of the Company's patent applications. - - Unfavorable public referendums or anti-gaming legislation. - - Unfavorable legislation affecting or directed at manufacturers or operators of gaming products and systems. - - The effect of regulatory and governmental actions including, without limitations, delays in regulatory approval for the Company's products, or the limitation, conditioning, suspension or revocation of any of the Company's licenses. - - Unfavorable determination of suitability by gaming regulatory authorities with respect to our officers, directors, key employees or business partners. - - With respect to legal actions pending against the Company, the discovery of facts not presently known to the Company or determination by judges, juries or other finders of fact which do not accord with the Company's evaluation of the possible liability or outcome of existing litigation. We do not undertake to update our forward looking statement to reflect future events or circumstances. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 19, 1998, Acres Gaming Corporation filed an action against the Company, Mikohn Gaming Corporation, New York New York Hotel & Casino, LLC, and Sunset Station Hotel & Casino, in the Federal Court for the State of Nevada, alleging that the Company's ProTurbo Software module violated certain patent rights of Acres Gaming. Acres Gaming also filed a Motion for Preliminary Injunction, which was later withdrawn by Acres. The Company has answered the lawsuit asserting defenses and counterclaims seeking a declaration of invalidity, noninfringement and unenforceability of the patent asserted. The Company believes this action is without merit and will continue to vigorously defend itself. While the outcome of this lawsuit is not presently determinable, management does not expect the outcome will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. On November 17, 1998, Acres filed a second lawsuit against the Company alleging that the Company's ProTurbo Software module violates certain patent rights of a second Acres patent. CDS has filed an answer and a counterclaim seeking a declaration of invalidity, noninfringement and unenforceability of the patent asserted. The Company has filed additional counterclaims for alleged patent misuse, spoliation of evidence, antitrust violations and unfair competition. The Company believes that this action is without merit and will continue to vigorously defend itself. While the outcome of this lawsuit is not presently determinable, management does not expect the -15- outcome will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. The Company and its subsidiaries are also involved from time to time in other various claims and legal actions arising in the ordinary course of business including, but not limited to, administrative claims and legal actions brought in state and federal courts by patrons of the Company's MSP games, wherein the patron may allege the winning of jackpot awards or some multiple thereof. Because of the size of the jackpots that a patron may play for, related patron disputes often involve sizable claims. The loss of a sizable patron dispute claim could have a material adverse effect on the Company. For example, the Company is currently litigating two patron disputes that it has won on every level of review, however the patrons have continued to appeal the decisions. One dispute has been appealed by the patron to the Supreme Court of the State of Mississippi, and the patron alleges a claim for two identical jackpots of over $2.7 million dollars each. A second dispute has been appealed by a patron to the Supreme Court of the State of Nevada, who alleges a claim for over $8 million dollars. In either case, if the patron were to win, the Company would be liable to pay $1 million dollars immediately (plus interest) with the remainder to be paid in installments over twenty years in an annuity. However, management believes that the likelihood of success by those making such claims is remote and that the ultimate outcome of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits Exhibit 27.1 Financial Data Schedule There were no reports filed on Form 8-K for the three month period ended June 30, 2000. -16- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CASINO DATA SYSTEMS ------------------- Registrant Date: August 10, 2000 /s/ Steven A. Weiss --------------------------- ---------------------------------- Steven A. Weiss Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Date: August 10, 2000 /s/ Ron Rowan --------------------------- ---------------------------------- Ron Rowan Chief Financial Officer (Principal Financial and Accounting Officer) -17- EX-27 2 ex-27.txt EXHIBIT 27
5 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 18,960 5,002 24,485 1,748 24,185 74,655 15,877 8,969 117,591 12,448 0 0 0 85,110 0 117,591 37,002 37,002 15,658 9,043 5,645 0 3 7,294 2,553 4,741 0 0 0 4,741 .26 .25
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