-----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, Ozuc94tui8n/sSN2W37iVNfbb333eu3Rxgz7Ct5/ogdk9xwinW17zkzwbra2kNe3 Kf1G4w5wpseTdDgAuWoWpQ== 0001047469-99-020916.txt : 19990518 0001047469-99-020916.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-020916 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99625692 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 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: MARCH 31, 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 No.) 3300 BIRTCHER DRIVE, LAS VEGAS, NEVADA 89118 --------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (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: 18,065,897 SHARES OF COMMON STOCK OUTSTANDING AS OF APRIL 28, 1999. Page 1 of 21 CASINO DATA SYSTEMS INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Unaudited Condensed Consolidated Balance Sheets March 31, 1999 and December 31, 1998 (audited) 3-4 Unaudited Condensed Consolidated Statements of Operations For the three months ended March 31, 1999 and 1998 5 Unaudited Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 1999 and 1998 6 Notes to Condensed Unaudited Consolidated Financial Statements 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-16 Item 7a. Quantitative and Qualitative Disclosures about Market Risk 17 PART II. OTHER INFORMATION Items 1- 6 19-20 Signatures 21
2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CASINO DATA SYSTEMS CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
March 31, December 31, 1999 1998 (UNAUDITED) --------- ------------ ASSETS Current Assets: Cash and cash equivalents ............................. $ 4,497 $ 5,141 Restricted cash and cash equivalents .................. 7,754 8,111 Investment securities ................................. 1,716 1,691 Restricted investment securities ...................... 1,426 959 Accounts receivable, net of allowance for doubtful accounts of $2,922 and $3,516, respectively ......... 15,261 13,421 Current portion of notes receivable ................... 2,228 2,284 Income tax receivable ................................. 642 642 Inventories .......................................... 20,914 19,147 Deferred tax asset .................................... 1,176 1,176 Assets held for sale .................................. 922 922 Prepaid expenses and other current assets ............. 213 244 -------- -------- Total current assets ................................ 56,749 53,738 -------- -------- Property and equipment, net of accumulated depreciation of $6,002 and $5,349 respectively .......................... 19,546 19,828 Restricted investment securities ........................... 14,196 14,623 Notes receivable, excluding current portion ................ 1,119 1,137 Intangible assets, net of accumulated amortization of $3,213 and $2,795, respectively .............................. 4,264 4,649 Software development costs, net of accumulated amortization of $1,004 and $626, respectively ...................... 3,426 3,804 Deposits ................................................... 408 391 Deferred tax asset ......................................... 840 840 -------- -------- Total non-current assets ............................ 43,799 45,272 -------- -------- Total assets ............................................... $100,548 $ 99,010 -------- -------- -------- --------
(continued) See accompanying notes to condensed unaudited consolidated financial statements 3 LIABILITIES AND SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
March 31, December 31, 1999 1998 (UNAUDITED) --------- ------------ Current liabilities: Current portion of long-term debt ......... $ 78 $ 211 Accounts payable .......................... 3,499 3,687 Accrued expenses and customer deposits ......... 9,140 8,026 Accrued slot liability .................... 2,080 2,107 ------- ------- Total current liabilities ............... 14,797 14,031 ------- ------- Non-current liabilities: Accrued slot liability .................... 19,419 18,839 ------- ------- Total non-current liabilities ........... 19,419 18,839 ------- ------- Shareholders' equity: Common stock, no par value. Authorized 100,000,000 shares; issued and outstanding 18,065,897 shares at March 31, 1999 and December 31, 1998 ........................ 83,790 83,790 Accumulated deficit ....................... (17,458) (17,650) ------- ------- Total shareholders' equity .............. 66,332 66,140 ------- ------- Total liabilities and shareholders' equity ..... $100,548 $99,010 ------- ------- ------- -------
See accompanying notes to condensed unaudited consolidated financial statements 4 CASINO DATA SYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1999 1998 --------- --------- Revenues: Systems and services ................... $ 6,896 $ 5,373 Games .................................. 4,694 2,621 Gaming operations ...................... 2,200 2,811 Signs .................................. 1,207 1,338 TurboPower ............................. 740 554 -------- -------- 15,737 12,697 Cost of goods sold .................... 8,768 6,772 -------- -------- Gross Margin .......................... 6,969 5,925 -------- -------- Operating expenses: Selling, general and administrative .... 4,419 4,358 Research and development ............... 1,316 804 Depreciation and amortization .......... 1,051 654 -------- -------- Total operating expenses ............. 6,786 5,816 -------- -------- Income from operations ...................... 183 109 -------- -------- Other income (expense): Interest and other income (expense), net 152 459 Interest expense ....................... (40) (83) -------- -------- Total other income, net .............. 112 376 -------- -------- Income before income taxes ................. 295 485 Income tax expense .......................... 103 165 -------- -------- Net income .................................. $ 192 $ 320 -------- -------- -------- -------- Basic net income per share .................. $ 0.01 $ 0.02 -------- -------- -------- -------- Diluted net income per share ................ $ 0.01 $ 0.02 -------- -------- -------- -------- Basic weighted average shares outstanding ... 18,066 18,066 -------- -------- -------- -------- Diluted weighted average shares outstanding . 18,386 18,117 -------- -------- -------- --------
See accompanying notes to condensed unaudited consolidated financial statements CASINO DATA SYSTEMS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (Unaudited) (DOLLARS IN THOUSANDS)
1999 1998 ------------ ------------- Cash flows from operating activities: Net income $ 192 $ 320 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,051 654 Amortization of intangible assets 337 337 Amortization of software development 102 -- Loss on disposal of assets 100 -- Provision for doubtful accounts -- 32 Net decrease in deferred tax asset -- 165 Changes in assets and liabilities: Decrease (increase) in restricted cash 357 (742) (Increase) decrease in accounts receivable and notes receivable (1,766) 1,527 Increase in inventories (1,767) (479) Decrease (increase) in prepaid expenses, other current assets and deposits 14 (45) Decrease in accounts payable (188) (1,343) Increase in accrued liabilities, customer deposits and slot liability 1,667 284 ------------ ------------- Net cash provided by operating activities 99 710 ------------ ------------- Cash flows from investing activities: Increase in investment securities - Current (25) -- Increase in restricted investment securities - Current (467) (444) Increase in investment securities - Noncurrent -- (161) Decrease (increase) in restricted investment securities - 427 (221) Noncurrent Increase in intangible assets (33) (17) Increase in software development -- (750) Increase in property and equipment (512) (101) ------------ ------------- Net cash used in investing activities (610) (1,694) ------------ ------------- Cash flows from financing activities: Repayment of notes payable (133) (536) ------------ ------------- Net cash used in financing activities (133) (536) ------------ ------------- Net decrease in cash and cash equivalents (644) (1,520) Cash and cash equivalents at beginning of the period 5,141 12,273 ------------ ------------- Cash and cash equivalents at end of the period $ 4,497 $ 10,753 ------------ ------------- ------------ -------------
See accompanying notes to condensed unaudited consolidated financial statements 6 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) II 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 items for prior periods have been reclassified to conform with the current presentation. These reclassifications had no effect on net income as previously reported. 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 are, in the opinion of management, 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 the entire year. 7 (2) BUSINESS SEGMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No 131, "Disclosures About Segments of an Enterprise and Related Information" for financial statements for periods ending after December 15, 1997. This statement supersedes Statement No. 14 and 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. Note that the dollar amounts are in thousands.
REVENUES -------- Three Months Ended March 31, 1999 1998 ---- ---- Systems and Services..................................... $ 6,896 $ 5,373 Games.................................................... 4,694 2,621 Recurring Revenue........................................ 2,200 2,811 Signs.................................................... 1,207 1,338 TurboPower............................................... 740 554 --------- --------- Total.................................................. $ 15,737 $ 12,697 --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS ----------------------------- Three Months Ended March 31, 1999 1998 ---- ---- Systems and Services..................................... $2,739 $589 Games.................................................... (2,268) (1,016) Recurring Revenue........................................ (361) 140 Signs.................................................... (239) 267 TurboPower............................................... 312 129 ----------- -------- Total.................................................. $ 183 $ 109 ----------- -------- ----------- --------
Corporate expenses have been allocated to each segment based on management's estimate of each segment's utilization of corporate resources. 8 (3) NET INCOME PER SHARE: (IN THOUSANDS EXCEPT PER SHARE DATA) 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 Three months ended ended March 31, March 31, 1999 1998 --------- --------- Numerator for earnings per share -net Income $ 192 $ 320 ------- ------ Denominator: Denominator for basic earnings per share- weighted average shares 18,066 18,066 Effect of dilutive securities Stock options 320 51 ---------- --------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed issuances 18,386 18,117 ---------- --------- Denominator for diluted earnings per share - Basic earnings per share $ 0.01 $ 0.02 ---------- --------- ---------- --------- Diluted earnings per share $ 0.01 $ 0.02 ---------- --------- ---------- ---------
(4) COMMITMENTS & 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 March 31, 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 accounts aggregating $7,754,000 at March 31, 1999. The Company also has restricted investment securities of $15,622,000 for the annuity payments for jackpots already won. In December, 1996, a class action complaint was filed in the United States District Court, District of Nevada, by Gary A. Edwards against the Company and certain present and former Company executives. Three additional purported shareholder class actions were filed in 1997 in connection with the same drop in stock price following the December 16, 1996 press release. The Company won a motion to dismiss the First Amended Complaint filed by Edwards. The court, however, granted Edwards leave to amend his Complaint. On July 13, 1998, Edwards filed a Second Amended Complaint. Pending 9 settlement, the parties stipulated to stay the Company's response to this complaint. On May 29, 1997, SCHWARTZ V. CASINO DATA SYSTEMS, was filed in the United States District Court for the District of Nevada, alleging violations of Sections 10(b) and 20(a) of the 1934 ACT and SEC Rule 10b-5 and seeking economic recovery on behalf of the same alleged class of investors. On December 16, 1997, GRANT V. CASINO DATA SYSTEMS, was filed in the District Court of the State of Nevada alleging common law fraud and seeking economic recovery on behalf of the same alleged class of investors. On December 9, 1997, GIOVANNONI V. CASINO DATA SYSTEMS, was filed in the Superior Court of the State of California in San Francisco alleging violation of California Corporations Code Sections 25400 and 25500 and California Business and Professions Code Sections 17200 and 17500. Management believes these claims were without merit, and would have continued to vigorously defend against them. However, due to the inherent risks and ongoing expense of maintaining litigation, management determined it to be in the best interests of the Company to settle the claims. Subject to court approval, the parties have agreed to a settlement of all four related lawsuits, pursuant to which the Company paid $1 million in November 1998. The settlement is proceeding through the court. Notice of the lawsuit proposed settlement has been sent to class members. The related charge was reflected as loss from shareholder suit in the consolidated statement of operations for the year ended December 31, 1998. 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. The Company contends the ruling is in error and has appealed the decision to the Mississippi Supreme Court. 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. If successful on appeal, the Company would return this amount to the Company's then-existing outstanding multi-site progressive system jackpot, as directed by the Mississippi Gaming authorities. The Company has accrued the entire jackpot and continues to accrue interest in the event the Company loses its appeal. The Company has accrued $391,021 of interest expense as of March 31, 1999. CDS has filed an appeal brief with, and has had oral argument in front of, the Mississippi Supreme Court. The parties await a decision from the count. While the outcome of the action described above 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 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. The Company filed its Response to the Motion for Preliminary Injunction ("Response") along with its own Motion for Summary Judgment ("MSJ") requesting dismissal of Acres' claims. After reviewing the Company's Response and Motion for Summary Judgment, Acres withdrew their Motion for Preliminary Injunction. The Company's Motion for Summary Judgment remains on file, awaiting a hearing date to be set by the court. 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. 10 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 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. 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. 11 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 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 MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1998 OVERVIEW Income from operations increased from $109,000 and for the three months ended March 31, 1998 to $183,000 for the same period in 1999, an increase of $74,000 or 68%. Net income decreased from $320,000 for the three months ended March 31, 1998 to $192,000 for the same period in 1999, a decrease of $128,000 or 40%. The increase in income from operations is primarily attributable to an increase in sales from the Oasis Windows* based product which became available for sale late in the fourth quarter of 1998 and increased sales of Bandit(TM) Bingo games. In addition to increasing revenues, the Company reduced costs and increased production efficiencies relative to the same period in 1998. The decrease in net income is primarily due to a decrease in other income which is attributable to a loss on disposal of assets combined with a decrease of interest income due to lower investment balances. REVENUES Total revenues increased from $12,697,000 for the three months ended March 31, 1998 to $15,737,000 for the same period in 1999, an increase of $3,040,000 or 24%. This increase is primarily attributable to increased system and services sales of $1,523,000 and increased game sales of $2,073,000, partially offset by a decrease in revenue from recurring revenue products of $611,000. System and services revenues increased from $5,373,000 for the three months ended March 31, 1998 to $6,896,000 for the same period in 1999, an increase of $1,523,000 or 28%. The increase in systems and services revenues is primarily attributable to sales of the Company's Windows based Oasis product which was introduced into the market for sale late in the fourth quarter of 1998. Revenues from game sales increased from $2,621,000 for the three months ended March 31, 1998 to $4,694,000 for the same period in 1999, an increase of $2,073,000 or 79%. This increase is primarily attributable to the increased portfolio of games available for sale. The most notable new addition and contributor to the increased sales is the Bandit(TM) Bingo game. Revenues from the recurring revenue segment decreased from $2,811,000 for the three months ended March 31, 1998 to $2,200,000 for the same period in 1999, a decrease of $611,000 or 22%. This decrease is primarily attributable to a decrease in the number of operating units and lower level of play on the Company's Cool Millions products for the three months ended March 31, 1999 as compared to the same period in 1998. Revenues from TurboPower Software increased from $554,000 for the three months ended March 31, 1998 to $740,000 for the same period in 1999, an increase of $186,000 or 34%. This increase is primarily attributable to sales of a new product released in the first quarter of 1999. 12 Revenues from sign sales decreased from $1,338,000 for the three months ended March 31, 1998 to $1,207,000 for the same period in 1999, a decrease of $131,000 or 10%. GROSS MARGIN Total gross margin increased from $5,925,000 for the three months ended March 31, 1998, to $6,969,000 for the same period in 1999, an increase of $1,044,000 or 18%. Gross margin as a percentage of revenues decreased from 47% for the three months ended March 31, 1998 to 44% for the same period in 1999. The decrease in gross margin is primarily attributable to the sales mix, which was more heavily weighted toward game sales which generally have a lower gross margin than the Company's other products. Systems and services gross margin increased from $3,228,000 for the three months ended March 31, 1998 to $5,314,000 for the same period in 1999, and increase of $2,086,000 or 65%. This increase is attributable to increased sales combined with a sales mix more heavily weighted toward software sales which generally have higher gross margins than other systems and services products. Gross margin contributed by game sales decreased from $122,000 for the three months ended March 31, 1998 to a loss of $141,000 for the same period in 1999, a decrease of $263,000 or 216%. This decrease is primarily attributable inefficiencies related to the initial production of the Bandit Bingo games. Gross margin contributed by recurring revenue products decreased from $1,273,000 for the three months ended March 31, 1998 to $779,000 for the same period in 1999, a decrease of $494,000 or 39%. This decrease is primarily attributable to decreased revenues and to one-time rollout expenses associated with the Company's Xtreme Link products. Gross margin from TurboPower Software increased from $559,000 for the three months ended March 31, 1998 to $739,000 for the same period in 1999, an increase of $180,000 or 32%. This increase is due primarily to increased sales. Gross margin from sign sales decreased from $744,000 for the three months ended March 31, 1998 to $278,000 for the same period in 1999, a decrease of $466,000 or 63%. This decrease is primarily attributable to fixed charges spread over fewer sales. OPERATING EXPENSES Operating expenses increased from $5,816,000 for the three months ended March 31, 1998, to $6,786,000 for the same period in 1999, an increase of $970,000 or 17%. Operating expenses decreased as a percentage of revenues from 46% for the three months ended March 31, 1998, to 43% for the same period in 1999. Selling, general and administrative expenses increased from $4,358,000 for the three months ended March 31, 1998, to $4,419,000 for the same period in 1999, an increase of $61,000 or 1%. Selling, general and administrative expenses as a percentage of revenues decreased from 34% for the three months ended March 31, 1998, to 28% for the same period in 1999. This increase in selling, 13 general and administrative expenses is primarily attributable to higher commissions and travel and related expenses as a result of the higher revenues. Research and development expenses increased from $804,000 for the three months ended March 31, 1998, to $1,316,000 for the same period in 1999, an increase of $512,000 or 64%. Research and development expenses as a percentage of revenues increased from 6% for the three months ended March 31, 1998 to 8% for the same period in 1999. The increase is primarily attributable to an increase in personnel. Depreciation and amortization increased from $654,000 for the three months ended March 31, 1998, to $1,051,000 for the same period in 1999 an increase of $397,000 or 61%. The increase in depreciation and amortization is primarily due to an increased number of units on the Xtreme link. OTHER INCOME, NET Other income is comprised of rental, interest, gain on disposal of assets, and other forms of income, offset by interest expense, loss on disposal of assets, and other transactions that are not the result of normal operations. Other income decreased from $376,000 for the three months ended March 31, 1998, to $112,000 for the same period in 1999, a decrease of $264,000 or 70%. The decrease is primarily due to a loss on disposal of assets of $100,000 and decreased interest income due to lower investment balances. NET INCOME Net income decreased from $320,000 for the three months ended March 31, 1998, to $192,000 for the same period in 1999, a decrease of $128,000 or 40%. The decrease in net income is the result of the matters discussed above. 14 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 $12,251,000 at March 31, 1999, as compared to $13,252,000 at December 31, 1998, of which $7,754,000 and $8,111,000, respectively, were restricted for payment of slot liabilities. The Company generated cash from operations of $99,000 during the three months ended March 31, 1999. Certain jurisdictions in which MSP systems operate require that the Company maintain restricted funds for the payment of jackpot prizes. The amount of funds required is dependent on several factors including the type and denomination of the games and the regulatory requirements. At March 31, 1999, the Company's accrued slot liability for its MSP systems aggregated $21,499,000. 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 $7,754,000 at March 31, 1999 to ensure availability of adequate funds to pay for future jackpot liabilities. The Company also has restricted investment securities approximating $15,622,000 as of March 31, 1999 for the payment of jackpots already won. Although statistically remote, 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 are hit. The Company's ratio of current assets to current liabilities is 3.8 to 1 at March 31, 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 that may result in working capital additions that exceed available cash and cash equivalents to be provided by operations. However, there can be no assurance that the Company will be able to obtain additional sources of capital. 15 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, businesses operations will be affected. The Company is in the process of assessing the impact of the 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. This committee is also responsible 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 September 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 computerized system functionality is reestablished. The Company is also in the process of testing all desktop computers and their associated software for year 2000 compliance. This testing is expected to be completed by September 1999. The cost of upgrading non-compliant personal computers and software is expected to be $225,000. The Company operates its MSP systems using its own proprietary software which utilizes a third party operating system which is not year 2000 compliant. The Company is in the process of upgrading the operating system to a certified year 2000 compliant version and will modify its proprietary software as necessary. This upgrade will be completed in calendar year 1999 and the cost of completing this upgrade is expected to be $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 would 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. 16 The Company also sells proprietary software to third parties. The Company has year 2000 compliant versions of this software; however, the majority 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 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. 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. 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. 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-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 September 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 exposure to market rate risk for changes in interest rates 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. 17 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. - - 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. - - 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. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In December, 1996, a class action complaint was filed in the United States District Court, District of Nevada, by Gary A. Edwards against the Company and certain present and former Company executives. Three additional purported shareholder class actions were filed in 1997 in connection with the same drop in stock price following the December 16, 1996 press release. The Company won a motion to dismiss the First Amended Complaint filed by Edwards. The court, however, granted Edwards leave to amend his Complaint. On July 13, 1998, Edwards filed a Second Amended Complaint. Pending settlement, the parties stipulated to stay the Company's response to this complaint. On May 29, 1997, SCHWARTZ V. CASINO DATA SYSTEMS, was filed in the United States District Court for the District of Nevada, alleging violations of Sections 10(b) and 20(a) of the 1934 ACT and SEC Rule 10b-5 and seeking economic recovery on behalf of the same alleged class of investors. On December 16, 1997, GRANT V. CASINO DATA SYSTEMS, was filed in the District Court of the State of Nevada alleging common law fraud and seeking economic recovery on behalf of the same alleged class of investors. On December 9, 1997, GIOVANNONI V. CASINO DATA SYSTEMS, was filed in the Superior Court of the State of California in San Francisco alleging violation of California Corporations Code Sections 25400 and 25500 and California Business and Professions Code Sections 17200 and 17500. Management believes these claims were without merit, and would have continued to vigorously defend against them. However, due to the inherent risks and ongoing expense of maintaining litigation, management determined it to be in the best interests of the Company to settle the claims. Subject to court approval, the parties have agreed to a settlement of all four related lawsuits, pursuant to which the Company paid $1 million in November 1998. The settlement is proceeding through the court. Notice of the lawsuit proposed settlement has been sent to class members. The related charge was reflected as loss from shareholder suit in the consolidated statement of operations for the year ended December 31, 1998. 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. The Company contends the ruling is in error and has appealed the decision to the Mississippi Supreme Court. 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 has accrued the entire jackpot amount plus $391,021 of interest expense as of March 31, 1999 toward the judgment in the event the Company loses its appeal. CDS has filed an appeal brief with, and has had oral argument in front of, the Mississippi Supreme Court. The parties await a decision from the court. While the outcome of the action described above 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 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. 19 The Company filed its Response to the Motion for Preliminary Injunction ("Response") along with its own Motion for Summary Judgment ("MSJ") requesting dismissal of Acres' claims. After reviewing the Company's Response and Motion for Summary Judgment, Acres withdrew their Motion for Preliminary Injunction. The Company's Motion for Summary Judgment remains on file, awaiting a hearing date to be set by the court. 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 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. 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 three month period ended March 31, 1999. 20 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: MAY 15, 1999 /S/ STEVEN A. WEISS --------------------------- ------------------------------------ Steven A. Weiss Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Date: MAY 15, 1999 /S/ LEE LEMAS --------------------------- ------------------------------------ Lee Lemas Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer) 21 EX-27 2 EXHIBIT 27
5 1,000 U.S. 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 12,251 3,142 17,489 2,922 20,914 56,749 19,546 6,002 100,548 14,797 78 0 0 83,790 0 100,548 15,737 15,737 8,768 4,419 2,367 0 40 295 103 192 0 0 0 192 $.01 $.01
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