-----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, V8wmf8GqYXz1fwGDQRSHssQpUoLJIEpG2+pH3x7CWZGiMRbfK6/zdWHsIfr9kL2v nji5YwApbj37KWKaMiTwYQ== 0000912057-99-005494.txt : 19991117 0000912057-99-005494.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005494 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASINO DATA SYSTEMS CENTRAL INDEX KEY: 0000898756 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [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: 99751522 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 EXHIBIT 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: SEPTEMBER 30, 1999. [ ] 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: 18,388,696 SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 9, 1999. -1- CASINO DATA SYSTEMS INDEX
PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheet September 30, 1999 and December 31, 1998 (audited).............................. 3-4 Unaudited Condensed Consolidated Statement of Operations For the nine months ended September 30, 1999 and 1998........................... 5 Unaudited Condensed Consolidated Statement of Operations For the three months ended September 30, 1999 and 1998.......................... 6 Unaudited Condensed Consolidated Statement of Cash Flows For the nine months ended September 30, 1999 and 1998........................... 7 Notes to Unaudited Condensed Consolidated Financial Statements.................. 8-11 Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations....................................................... 11-16 Item 7a. Quantitative and Qualitative Disclosures about Market Risk...................... 16-17 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................... 17-18 Item 6. Exhibits and Reports on Form 8-K................................................ 18 Signatures ................................................................................ 19
-2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CASINO DATA SYSTEMS CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 3,831 $ 5,141 Restricted cash and cash equivalents 8,231 8,111 Investment securities 1,254 1,691 Restricted investment securities 1,463 959 Accounts receivable, net of allowance for doubtful accounts of $2,204 and $3,516, respectively 21,859 13,421 Current portion of notes receivable 5,600 2,284 Inventories 24,358 19,147 Prepaid expenses and other current assets 2,277 2,984 ------------ ----------- Total current assets 68,873 53,738 ------------ ----------- Property and equipment, net of accumulated depreciation of $7,483 and $5,349, respectively 18,368 19,828 Restricted investment securities 14,347 14,623 Notes receivable, excluding current portion 625 1,137 Intangible assets, net of accumulated amortization of $4,103 and $2,795, respectively 3,400 4,649 Software development costs, net of accumulated amortization of $1,726 and $626, respectively 2,704 3,804 Other assets 1,225 1,231 ------------ ----------- Total non-current assets 40,669 45,272 ------------ ----------- Total assets $ 109,542 $ 99,010 ============ ===========
(Continued) See accompanying Notes to Condensed Consolidated Financial Statements -3- CASINO DATA SYSTEMS CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (Dollars in Thousands)
September 30, December 31, 1999 1998 --------------- ------------ (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current portion of long-term debt $ 27 $ 211 Accounts payable 5,013 3,687 Accrued expenses and customer deposits 11,059 8,026 Accrued slot liability 1,893 2,107 ----------- ---------- Total current liabilities 17,992 14,031 ----------- ---------- Non-current Liabilities Accrued slot liability 20,502 18,839 ----------- ---------- Total non-current liabilities 20,502 18,839 ----------- ---------- Shareholders' Equity Common stock, no par value. Authorized 100,000,000 shares; issued and outstanding 18,368,982 and 18,065,897 at September 30, 1999 and December 31, 1998, respectively 84,747 83,790 Accumulated deficit (13,699) (17,650) ----------- ---------- Total shareholders' equity 71,048 66,140 ----------- ---------- Total liabilities and shareholders' equity $ 109,542 $ 99,010 =========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements - 4 - CASINO DATA SYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED) (Amounts in Thousands, Except Per Share Data)
Nine Months Ended September 30, ------------------------------------ 1999 1998 ------------ ------------ Revenue Systems and services $ 22,372 $ 17,282 Gaming devices 24,283 10,226 Recurring revenue 5,839 7,217 Signs 4,323 3,252 TurboPower 1,700 1,446 ----------- ---------- Total revenue 58,517 39,423 ----------- ---------- Cost of goods sold 31,507 20,960 ----------- ---------- Gross margin 27,010 18,463 ----------- ---------- Operating expenses Selling, general and administrative 14,945 13,052 Research and development 3,820 2,628 Loss from shareholder suit -- 1,000 Depreciation and amortization 3,136 1,893 ----------- ---------- Total operating expenses 21,901 18,573 ----------- ---------- Income (loss) from operations 5,109 (110) ----------- ----------- Other income (expense) Interest and other income, net 1,008 1,358 Interest expense (38) (129) ------------ ---------- Total other income, net 970 1,229 ----------- ---------- Income before income taxes 6,079 1,119 Income tax expense 2,128 387 ----------- ---------- Net income $ 3,951 $ 732 =========== ========== Basic net income per share $ .22 $ .04 =========== ========== Diluted net income per share $ .21 $ .04 =========== ========== Basic weighted average shares outstanding 18,182 18,066 =========== ========= Diluted weighted average shares outstanding 18,580 18,073 =========== =========
See accompanying Notes to Condensed Consolidated Financial Statements - 5 - CASINO DATA SYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED) (Amounts in Thousands, Except Per Share Data)
Three Months Ended September 30, ------------------------------------ 1999 1998 ------------ ----------- Revenue Systems and services $ 7,289 $ 6,307 Gaming devices 8,848 4,911 Recurring revenue 1,687 2,316 Signs 1,667 1,068 TurboPower 521 437 ----------- ---------- Total revenue 20,012 15,039 ----------- ---------- Cost of goods sold 9,976 8,225 ----------- ---------- Gross margin 10,036 6,814 ----------- ---------- Operating expenses Selling, general and administrative 5,189 4,399 Research and development 1,260 1,115 Loss from shareholder suit -- 1,000 Depreciation and amortization 1,036 640 ----------- ---------- Total operating expenses 7,485 7,154 ----------- ---------- Income (loss) from operations 2,551 (340) ----------- ----------- Other income (expense) Interest and other income, net 243 395 Interest expense (10) 19 ------------ ---------- Total other income, net 233 414 ----------- ---------- Income before income taxes 2,784 74 Income tax expense 975 26 ----------- ---------- Net income $ 1,809 $ 48 =========== ========== Basic net income per share $ .10 $ .00 =========== ========== Diluted net income per share $ .10 $ .00 =========== ========== Basic weighted average shares outstanding 18,334 18,066 =========== ========== Diluted weighted average shares outstanding 18,840 18,066 =========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements -6- CASINO DATA SYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED) (Dollars in Thousands)
Nine Months Ended September 30, ------------------------------------ 1999 1998 ------------ ----------- Cash Flows From Operating Activities: Net income $ 3,951 $ 732 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,344 1,890 Amortization of intangible assets 1,011 1,011 Amortization of software development costs 306 34 Loss (gain) on disposal of assets 44 (25) Changes in assets and liabilities: (Increase) decrease in restricted cash (120) 5,121 Increase in accounts and notes receivable (10,600) (5,030) Decrease in income tax receivable -- 4,000 Increase in inventories (5,211) (2,306) Decrease in prepaid expenses, other current assets and deposits 54 836 Increase in accounts payable 1,326 68 Increase in accrued liabilities, customer deposits and slot liability 4,483 2,871 ----------- ---------- Net cash (used) provided by operating activities (1,412) 9,202 ------------ ---------- Cash Flows From Investing Activities: Decrease (increase) in investment securities - current 437 (1,674) Increase in restricted investment securities - current (504) (1,431) Increase in investment securities - non current -- 1,479 Decrease (increase) in restricted investment securities - non current 276 (2,888) Increase in intangible assets (59) (50) Increase in software development -- (2,348) Increase in property and equipment (838) (3,646) Decrease (increase) in assets held for sale 17 (303) ----------- ----------- Net cash used in investing activities (671) (10,861) ----------- ---------- Cash Flows From Financing Activities: Repayment of notes payable (184) (1,680) Proceeds from the issuance of stock 957 -- ----------- ---------- Net cash provided (used) in financing activities 773 (1,680) ----------- ---------- Net decrease in cash and cash equivalents (1,310) (3,339) Cash and cash equivalents at beginning of period 5,141 12,273 ----------- ---------- Cash and cash equivalents at end of period $ 3,831 $ 8,934 =========== ==========
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: systems and services, games, recurring revenue products, signs and software development tools (TurboPower). The consolidated financial statements include the accounts of Casino Data Systems and all of the subsidiaries mentioned above. All significant inter-company balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed unaudited 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. The accompanying condensed unaudited 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. (2) Business Segments Financial Accounting Standards Board Statement of Financial Accounting Standards No 131, "Disclosures About Segments of an Enterprise and Related Information" provides accounting guidance for reporting information about operating segments in annual financial statements and requires public business enterprises to report selected information about operating segments in interim financial reports. Following is the disclosure of the above items that management utilizes in measuring the profit or loss of each of the Company's segments.
Revenues -------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- (In thousands) Systems and Services $ 7,289 $ 6,307 $22,372 $17,282 Gaming Devices 8,848 4,911 24,283 10,226 Recurring Revenue 1,687 2,316 5,839 7,217 Signs 1,667 1,068 4,323 3,252 TurboPower 521 437 1,700 1,446 ------- ------- ------- ------- Total $20,012 $15,039 $58,517 $39,423 ======= ======= ======= =======
-8-
Income (Loss) From Operations -------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- (In thousands) Systems and Services $3,278 $ 2,023 $ 9,177 $ 3,806 Gaming Devices (985) (2,111) (4,170) (4,109) Recurring Revenue 140 (393) (288) (423) Signs 33 143 (19) 480 TurboPower 85 (2) 409 136 ------ ------- ------- ------- Total $2,551 $ (340) $ 5,109 $ (110) ====== ======= ======= =======
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:
September 30, December 31, 1999 1998 ------------ ------------ (Unaudited) Raw materials $14,611 $ 9,734 Work in process 758 711 Finished goods 10,384 10,139 ------- -------- 25,753 20,584 Less reserve for obsolescence (1,395) (1,437) ------- -------- $24,358 $ 19,147 ======= ========
(4) Net Income Per Share The following is an analysis of the components of the shares used to compute net income per common share pursuant to SFAS 128.
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- (In thousands, except per share information) Numerator for earnings per share Net income $ 1,809 $ 48 $ 3,951 $ 732 ======= ======= ======= ======= Denominator for earnings per share Weighted average shares outstanding - basic 18,334 18,066 18,182 18,066 Effect of dilutive securities Stock options 506 -- 398 7 ------- ------- ------- ------- Weighted average shares outstanding - diluted 18,840 18,066 18,580 18,073 ======= ======= ======= ======= Basic earnings per share $ .10 $ .00 $ .22 $ .04 ======= ======= ======= ======= Diluted earnings per share $ .10 $ .00 $ .21 $ .04 ======= ======= ======= =======
-9- (5) Commitments and Contingencies In connection with the operation of its MSP Systems, the Company is liable for progressive jackpots, which are paid as an initial base jackpot component followed by an annuity (progressive component) paid out over 20 years after the prize is won. The base jackpot component is charged against income ratably over the amount of coin play expected to precede payout based on a statistical analysis. The progressive jackpot component increases based on the number of coins played. The accrual of these liabilities commensurate with coin play matches recognition of costs and revenues. The possibility exists that the winning combination may be hit before the Company has fully accrued the base jackpot component, at which time any unaccrued portion would be expensed. There was no unaccrued portion at September 30, 1999. To ensure adequate funds are available to pay the slot liability and to comply with gaming regulatory requirements, the Company has established restricted cash and cash equivalent accounts aggregating $8,231,000 at September 30, 1999. The Company also has restricted investment securities of $15,810,000 for annuity payments of jackpots already won. A patron dispute was filed against the Company in connection with the Company's Cool Millions dollars progressive slot machine at Splash Casino in Tunica, Mississippi. The dispute was heard by the Mississippi Gaming Commission, who decided that the patron had won only $5.00 rather than the jackpot of $1,742,000 as alleged by the patron. The patron appealed the Commission's decision to the Circuit Court of Tunica County. On January 16, 1998, the Court issued an Order reversing the Commission's decision and ordered the Company to pay the jackpot plus interest from April 8, 1995. As a result of the Circuit Court's Order, and with the consent of the Mississippi Gaming authorities, the Company reduced the Cool Millions dollar Mississippi jackpot by $1,742,000. The Company appealed the decision to the Mississippi Supreme Court. The Mississippi Supreme Court ruled in favor of the Company. Upon receiving the decision of the Mississippi Supreme Court in favor of the Company, the Company discontinued accruing interest on the disputed amount and adjusted the previously accrued interest balance of $411,000 to zero. The patron has requested a rehearing by the Mississippi Supreme Court. Subsequent to September 30, 1999 the court ruled in favor of the Company, denying the patrons request for a rehearing. Therefore, the claim will not have a material adverse effect on the Company's consolidated financial statements taken as a whole. 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 violated certain patent rights of Acres Gaming. Acres Gaming also filed a Motion for Preliminary Injunction which it later withdrew. 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 statements taken as a whole. On November 17, 1998, Acres filed a second lawsuit against the Company alleging that the Company's Pro Turbo 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 outcome will have a material adverse effect on the Company's consolidated financial statements taken as a whole. On October 28, 1999, International Game Technology, ("IGT") filed, but did not serve, a lawsuit against the Company, Williams Gaming, Sigma Gaming, and Silicon Gaming Company, in the Federal District Court for the State of Nevada, alleging that the Company violated certain patent rights of IGT relating to the use of touch screens on video gaming devices. Specifically, the lawsuit alleges that the Company's Bandit Bingo game and other video poker gaming devices infringe IGT's patent. The Company is investigating the claims and if the lawsuit is served, the Company will respond. While the Company believes the allegations contained in this lawsuit are without merit the claims have not progressed sufficiently for the Company to estimate a range of possible exposure, if any. The Company plans to vigorously defend itself. - 10 - 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. 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 statements taken as a whole. 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. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1998 OVERVIEW Income from operations was $5,109,000 for the nine months ended September 30, 1999 compared with a loss of $110,000 for the nine months ended September 30, 1998, an increase of $5,219,000. Net income increased from $732,000 for the nine months ended September 30, 1998 to $3,951,000 for the same period in 1999, an improvement of $3,219,000. Total revenue for the nine months ended September 30, 1999 was $58,517,000 compared with $39,423,000 for the same period in 1998, an increase of $19,094,000 or 48%. This increase is primarily due to higher revenue from the sales of gaming devices and systems and services. Systems and services revenue was $22,372,000 and $17,282,000 for the nine months ended September 30, 1999 and 1998, respectively, an increase of $5,090,000 or 29%. This increase is primarily attributable to 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 $5,371,000 from $3,806,000 to $9,177,000 for the nine months ended September 30, 1998 and 1999, respectively. This increase is primarily the result of increased revenue and a slightly improved gross margin percentage, offset in part by higher corporate expenses. Revenue from the sale of gaming devices increased $14,057,000 from $10,226,000 for the nine month period ended September 30, 1998 to $24,283,000 for the same 1999 period. This increase in revenue is primarily attributable to sales of the Bandit-TM- Bingo game, which comprised 58% of the units sold in the nine months ended September 30, 1999. Bingo, the first of a series of games designed on the Company's proprietary Bandit platform was introduced for sale late in the fourth quarter of 1998. This segment's operating loss of $4,170,000 for the nine months ended September 30, 1999 was $61,000 higher than the same prior year period, primarily due to increased operating expenses, including research and development and corporate expenses, offset in part by an improved gross margin and higher revenue. Revenue from the recurring revenue segment was $5,839,000 and $7,217,000 for the nine months ended September 30, 1999 and 1998, respectively, a decrease of 19% or $1,378,000. This revenue decline is primarily the result of a reduction in the number of Cool Millions-TM- operating units in service from 271 linked units at September 30, 1998 to 50 linked units at September 30, 1999. This decrease in units combined with lower levels of play on the recurring revenue products was partially offset by revenues from the Xtreme-TM- link which began operation in the third quarter of 1998. This segment's operating loss for the nine months ended September 30, 1999 was $135,000 lower than prior year due to an improved gross margin partially offset by lower revenues and higher operating costs. Signs revenue increased from $3,252,000 for the nine months ended September 30, 1998 to $4,323,000 for the same period in 1999, an increase of $1,071,000 or 33%. This increase is primarily due to higher sales of games related - 11 - signage. Operating income from signs decreased from $480,000 to a loss of $19,000 for the nine months ended September 30, 1998 and 1999, respectively, primarily due to lower margins and higher operating expenses. Revenue of $1,700,000 from TurboPower Software was $254,000, or 18%, higher for the nine months ended September 30, 1999 compared with the same prior year period, primarily due to new product releases. Operating income from this segment increased $273,000 for the nine months primarily attributable to the increase in revenues. GROSS MARGIN The gross margin percentage was 46% for the nine months ended September 30, 1999 compared with 47% for the same period in 1998. This slight decrease is primarily due to a revenue mix more heavily weighted toward game sales. Revenue from games represented 41% of total revenue for the nine months ended September 30, 1999 compared with 26% of total revenue for the same period in the prior year. OPERATING EXPENSES Operating expenses were $21,901,000 and $18,573,000 for the nine months ended September 30, 1999 and 1998, respectively, an increase of $3,328,000 or 18%. Operating expenses decreased as a percentage of revenues from 47% for the nine months ended September 30, 1998, to 37% for the same period in 1999. Selling, general and administrative expenses increased from $13,052,000 for the nine months ended September 30, 1998, to $14,945,000 for the same period in 1999, an increase of $1,893,000 or 15%. Selling, general and administrative expenses as a percentage of revenues decreased from 33% for the nine months ended September 30, 1998, to 26% for the same period in 1999. The increase in selling, general and administrative expenses is primarily attributable to increased legal costs and higher commissions related to the higher revenue. The change in selling, general and administrative expenses as a percentage of revenue is partly due to the fixed nature of some expenses which do not fluctuate with revenue. Research and development expenses increased from $2,628,000 for the nine months ended September 30, 1998, to $3,820,000 for the same period in 1999, an increase of $1,192,000 or 45%. Research and development expenses as a percentage of revenues remained at 7% for the nine months ended September 30, 1999 and 1998. Depreciation and amortization expense increased from $1,893,000 for the nine months ended September 30, 1998, to $3,136,000 for the same period in 1999, an increase of $1,243,000 or 66%. The increase in depreciation and amortization is primarily due to nine months of expense in 1999 related to the Xtreme link which began operation in the second quarter of 1998, combined with amortization of software development costs related to the Bandit platform, which began in the fourth quarter of 1998. OTHER INCOME, NET Other income, net, is comprised of interest income, interest expense, gains and losses on disposal of assets and other transactions that are not the result of normal operations. Other income, net, decreased from $1,229,000 for the nine months ended September 30, 1998, to $970,000 for the same period in 1999, a decrease of $259,000 or 21%. This decrease is primarily due to lower interest income partially offset by the reversal of approximately $411,000 of interest expense related to a favorable lawsuit decision by a court of law, in the second quarter of 1999. THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1998 OVERVIEW Income from operations was $2,551,000 for the three months ended September 30, 1999, compared with a loss of $340,000 for the same prior year period, an increase of $2,891,000. Net income increased from $48,000 for the three months ended September 30, 1998 to $1,809,000 for the same period in 1999, an improvement of $1,761,000. - 12 - Total revenue for the three months ended September 30, 1999 was $20,012,000 compared with $15,039,000 for the same prior year period. This is an increase of $4,973,000, or 33%, due primarily to higher sales of systems and services products and gaming devices. Systems and services revenue was $7,289,000 for the third quarter of 1999 compared with $6,307,000 for the third quarter of 1998, an increase of $982,000 or 16%. This increase is primarily due to sales of the Oasis Windows product, which was introduced for sale late in the fourth quarter of 1998. Operating income from this segment was $3,278,000 for the current quarter compared with $2,023,000 for the same quarter in the prior year, an increase of $1,255,000. This increase is primarily due to the increased revenue partially offset by increase operating and corporate expenses. Revenue from the sale of gaming devices increased from $4,911,000 for the three months ended September 30, 1998 to $8,848,000 for the three months ended September 30, 1999, an improvement of $3,937,000. Sales of the Bandit Bingo game, which began late in the fourth quarter of 1998, were the primary reason for the increase. This segment's operating loss decreased from $2,111,000 for the third quarter of 1998 to $985,000 for the same 1999 period due primarily to increased revenue and gross margin percentage, partially offset by higher operating and corporate expenses. The recurring revenue segment experienced a 27% decline in revenue for the third quarter of 1999 compared with the same prior year period. Revenue was $1,687,000 for the three months ended September 30, 1999 compared with $2,316,000 for the prior year. This decline in revenue was primarily attributable to fewer machines on the Cool Millions links combined with lower levels of play. The total number of linked units decreased 41% between September 30, 1998 and September 30, 1999, primarily due to the closing of the Mississippi link in February 1999 combined with a reduction in linked machines in Nevada. The number of Cool Millions linked units decreased 221 units, from 271 at September 30, 1998 to 50 at September 30, 1999. Operating income for this segment for the three months ended September 30, 1999 was $140,000 compared with a loss of $393,000 for the same three month period of 1998. This increase is principally attributable to an increased gross margin percentage offset in part by the lower revenue. Revenue from signs was $1,667,000, an increase of 56%, or $599,000, for the three months ended September 30, 1999 compared with the same 1998 period. This increase is primarily attributable to the increased sales of games related signage. Operating income for this segment decreased from $143,000 to $33,000 for the third quarter of 1999 compared with 1998, primarily due to a lower gross margin percentage on higher revenue combined with higher operating expenses. TurboPower revenue increased 19%, from $437,000 for the three months ended September 30, 1998 to $521,000 for the same period in 1999. This segment's operating income increased $87,000, from a loss of $2,000 for the third quarter of 1998 to a profit of $85,000 for the same 1999 period primarily due to the increased revenue. GROSS MARGIN The gross margin percentage increased from 45% for the three months ended September 30, 1998 to 50% for the same three month period in 1999. This increase is primarily attributable to the positive effect of manufacturing and purchasing efficiencies realized in the third quarter of 1999. These efficiencies were partially offset by a revenue mix that was more heavily weighted toward the lower margin games sales. Revenue from games represented 44% of total revenue for the three months ended September 30, 1999 compared with 33% of total revenue for the same quarter in prior year. The amount of systems and services revenue as a percentage of total revenue declined from 42% for the quarter ended September 30, 1998 to 36% for the same quarter in 1999. OPERATING EXPENSES Operating expenses increased slightly from $7,154,000 for the three months ended September 30, 1998, to $7,485,000 for the same period in 1999, an increase of $331,000 or 5%. Operating expenses decreased as a percentage of revenues from 48% for the three months ended September 30, 1998, to 37% for the same period in 1999. - 13 - Selling, general and administrative expenses increased from $4,399,000 for the three months ended September 30, 1998, to $5,189,000 for the same period in 1999, an increase of $790,000 or 18%. Selling, general and administrative expenses as a percentage of revenues decreased slightly from 29% for the three months ended September 30, 1998, to 26% for the same period in 1999. The increase in selling, general and administrative expenses is primarily attributable to higher legal costs and increased commissions related to the higher level of sales for the current quarter. The change in selling, general and administrative expenses as a percentage of revenue is partly due to the fixed nature of some expenses which do not fluctuate with revenue. Research and development expenses were $1,260,000 for the third quarter of 1999 compared with $1,115,000 for the same quarter in 1998, an increase of $145,000 or 13%. Research and development expenses as a percentage of revenues decreased from 7% for the three months ended September 30, 1998 to 6% for the same period in 1999. The increase is principally due to increases in headcount. Depreciation and amortization expense increased from $640,000 to $1,036,000 for the three months ended September 30, 1998 compared with the same period in 1999. This increase is primarily attributable to an increase in the average number of units on the Xtreme link for the third quarter of 1999 of 319 units compared with 295 units for the third quarter of 1998. Also contributing to the increase was amortization of software development costs, related to the Bandit platform, which began in the fourth quarter of 1998. OTHER INCOME, NET Other income, net, is comprised of interest income, interest expense, gains and losses on disposal of assets and other transactions that are not the result of normal operations. Other income, net, decreased from $414,000 for the three months ended September 30, 1998, to $233,000 for the same period in 1999, a decrease of $181,000 or 44%. This decrease is primarily due to lower interest income in 1999 compared with 1998. 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 $12,062,000 at September 30, 1999, compared with $13,252,000 at December 31, 1998, of which $8,231,000 and $8,111,000, 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 September 30, 1999, the Company's accrued slot liability for its MSP systems aggregated $22,395,000. There was no unaccrued slot liability. In connection with these slot liabilities and in accordance with gaming requirements, the Company established restricted cash accounts aggregating approximately $8,231,000 at September 30, 1999 to ensure availability of adequate funds to pay for future jackpot liabilities. The Company also has restricted investment securities approximating $15,810,000 as of September 30, 1999 for the payment of 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 accrue each base jackpot amount. Such occurrences could have a material adverse impact on the Company's results of operations in the reporting period in which the jackpots hit. The Company's ratio of current assets to current liabilities is 3.8 to 1 at September 30, 1999, while the noncurrent liabilities to equity ratio is .29 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. YEAR 2000 The year 2000 issue is the result of computer programs written using two digits (rather than four) to define years. Computers or other equipment with date-sensitive software may recognize "00" as 1900 rather than 2000. This could result in system failures or miscalculations. If the Company, or its customers, suppliers or other third parties fail to correct year 2000 issues, the Company's operations may be adversely affected. - 14 - Over the last year, the Company has assessed the impact of year 2000 issues on its internal processing systems and on the products produced and sold by the Company. In September 1998, the Company formed an internal committee comprised of management from every operational and functional department of the Company. This committee is responsible for identifying and testing systems that may be subject to year 2000 issues and for formulating contingency plans if the Company experiences year 2000 issues. The Company's internal information system, put into operation in the second quarter of 1998, has been certified by the vendor as year 2000 compliant. The operating system that this software uses has also been certified as year 2000 compliant by the third party manufacturer. The Company has tested certain attributes of this system by processing test information in the year 2000 format. The results of those tests confirmed that the tested attributes are year 2000 compliant. Additional testing will be performed on the remaining attributes. Management expects to be completed with this testing in November 1999. Based on the vendor assurances, and the results of the preliminary testing, the Company believes that it will not experience any disruption in daily operations with this system related to year 2000 issues; however, if such disruption should occur, the Company believes that it could maintain ongoing operations through manual record keeping procedures until the computerized system functionality is reestablished. The Company is also in the process of testing and upgrading all desktop computers and their associated software for year 2000 compliance. This testing is expected to be complete by November 1999. The total cost of upgrading non-compliant personal computers and software is expected to be $225,000. Through September 30, 1999 approximately $214,000 has been spent on year 2000 compliant software upgrades. The Company operates its MSP systems using its own proprietary software which utilizes a third party operating system which was not year 2000 compliant. The Company upgraded the operating system to a certified year 2000 compliant version at an approximate cost of $10,000. With this upgrade, the Company does not believe it will experience any disruption of MSP operations; however, the MSP technology is dependent upon third party phone service as well as computerized information systems and electricity at the various casino sites where the MSP equipment is deployed. Disruption in any of these areas could render MSP operations inoperable until service is reestablished. The Company continues to review the impact of year 2000 issues concerning the Company's production facility. No concerns have been identified. Therefore, at this time, the Company believes that there will not be any material adverse affect on its production capabilities resulting from year 2000 issues related to the Company's production processes. The Company also sells proprietary software to third parties. The Company has year 2000 compliant versions of this software; however, a portion of the Company's customer base uses a version of the software that includes certain modules which are not year 2000 compliant. The Company has notified all of these customers that they require an upgrade to become year 2000 compliant. The Company has completed approximately 90% of customer upgrades and plans to complete all such upgrades on customers covered by purchased maintenance agreements in calendar year 1999 at an estimated cumulative cost of approximately $100,000. Through September 30, 1999 approximately $92,000 has been spent. The Company has also planned the resources necessary to complete the upgrades for customers that are not under maintenance agreements; however, performing these upgrades is contingent upon these customers contracting for a fee with the Company to purchase an upgrade. A portion of the gaming devices sold by the Company to third parties are not year 2000 compliant. The Company plans to provide an upgrade on these units prior to December 31, 1999 at an estimated cumulative cost of approximately $10,000. The Company has sent written questionnaires to its significant manufacturing materials suppliers, banks, telecommunications suppliers, utility providers and payroll service to assess their year 2000 readiness and the effect these third parties could have on the Company. No concerns have been identified. The Company plans to maintain communication with significant suppliers and vendors with respect to this issue. Based on current assessments and testing, the Company does not expect year 2000 issues to have a material adverse effect on the Company's financial position, results of operations or cash flows. However, risk exists regarding non- -15- compliance of third parties with operational importance to the Company, such as key suppliers and customers, utilities, telecommunication providers, or financial institutions, which could result in lost production, sales, or administrative difficulties on the part of the Company. Year 2000 issues, if severe, could have a material effect on the Company. Pending completion of the year 2000 assessment, the Company will finalize a contingency plan to address possible risks of year 2000 noncompliance on the Company's financial position. Though assessment and testing will be ongoing throughout 1999, the Company expects to have its assessment, testing and contingency planning completed by November 1999. 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, 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: - - Risks associated with developing gaming machines that offer technological advantages or unique entertainment features to enable the Company to effectively compete in the gaming machine market. - - Possible adverse effects upon revenues if the Company experiences delays in developing or obtaining regulatory approval of new products, including the possible adverse effects resulting from the time delay associated with modifying products to meet regulation changes, such as the proposed amendments to Nevada Regulation 14. - - Possible adverse effects on revenues if new products or enhancements do not gain customer acceptance. - - Possible adverse effects on revenues due to the difficulty in competing with well-established competitors in markets for the Company's products, including without limitation, casino management information systems, MSP products and gaming machines. - - Possible adverse effects on revenues associated with the dependence upon Steven A. Weiss, a key employee of the Company. - - The general profitability of the gaming industry at large can substantially affect the Company's revenues. -16- - - Even though the Company seeks to protect its intellectual property upon which it relies to sell its products, there is the possibility of adverse affects on revenue generation if such intellectual property were not protected or available for use due to patents issued to competitors. - - Possible adverse affects related to any negative outcome of pending or threatened litigation. - - The Year 2000 Project and the date on which the Company believes it will be completed are based on Management's best estimates, which are derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no assurance that there will be no delay in, or no increased costs associated with, the implementation of the Year 2000 Project. Specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, timely responses by third-parties and suppliers, and similar uncertainties. The Company's inability to implement Year 2000 changes could have an adverse effect on future results of operations. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A patron dispute was filed against the Company in connection with the Company's Cool Millions dollars progressive slot machine at Splash Casino in Tunica, Mississippi. The dispute was heard by the Mississippi Gaming Commission, who decided that the patron had won only $5.00 rather than the jackpot of $1,742,000 as alleged by the patron. The patron appealed the Commission's decision to the Circuit Court of Tunica County. On January 16, 1998, the Court issued an Order reversing the Commission's decision and ordered the Company to pay the jackpot plus interest from April 8, 1995. As a result of the Circuit Court's Order, and with the consent of the Mississippi Gaming authorities, the Company reduced the Cool Millions dollar Mississippi jackpot by $1,742,000. The Company appealed the decision to the Mississippi Supreme Court. The Mississippi Supreme Court ruled in favor of the Company. Upon receiving the decision of the Mississippi Supreme Court in favor of the Company, the Company discontinued accruing interest on the disputed amount and adjusted the previously accrued interest balance of $411,000 to zero. The patron has requested a rehearing by the Mississippi Supreme Court. Subsequent to September 30, 1999 the court ruled in favor of the Company, denying the patrons request for a rehearing. Therefore, the claim will not have a material adverse effect on the Company's consolidated financial statements taken as a whole. 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 violated certain patent rights of Acres Gaming. Acres Gaming also filed a Motion for Preliminary Injunction which it later withdrew. 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 statements taken as a whole. On November 17, 1998, Acres filed a second lawsuit against the Company alleging that the Company's Pro Turbo 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 outcome will have a material adverse effect on the Company's consolidated financial statements taken as a whole. On October 28, 1999, International Game Technology, ("IGT") filed, but did not serve, a lawsuit against the Company, Williams Gaming, Sigma Gaming, and Silicon Gaming Company, in the Federal District Court for the State of Nevada, alleging that the Company violated certain patent rights of IGT relating to the use of touch screens on video gaming devices. Specifically, the lawsuit alleges that the Company's Bingo game and other video poker gaming devices infringe IGT's patent. The Company is investigating the claims and if the lawsuit is served, the Company will respond. While the Company believes the allegations contained in this lawsuit are without merit the -17- claims have not progressed sufficiently for the Company to estimate a range of possible exposure, if any. The Company plans to vigorously defend itself. 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. 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 statements taken as a whole. 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 nine month period ended September 30, 1999. -18- 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: November 12, 1999 /s/ Steven A. Weiss --------------------------- -------------------------------- Steven A. Weiss Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Date: November 12, 1999 /s/ Lee Lemas --------------------------- -------------------------------- Lee Lemas Chief Operating and Financial Officer (Principal Financial and Accounting Officer) -19- EX-27 2 EXHIBIT 27
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 12,062 2,717 28,084 2,204 24,358 68,873 18,368 7,483 109,542 17,992 27 0 0 84,747 0 109,542 58,517 58,517 31,507 14,945 6,956 0 38 6,079 2,128 3,951 0 0 0 3,951 .22 .21
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