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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: SEPTEMBER 30, 1997
------------------
[ ] 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: 18,055,022 shares of common
stock outstanding as of October 7, 1997. ---------------------------
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Page 1 of 19
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CASINO DATA SYSTEMS
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Unaudited Consolidated Balance Sheet
September 30, 1997 and December 31, 1996 (audited) 3-4
Unaudited Consolidated Statements of Operations
For the nine months ended September 30, 1997 and 1996 5
Unaudited Consolidated Statements of Operations
For the three months ended September 30, 1997 and 1996 6
Unaudited Consolidated Statements of Cash Flows
For the nine months ended September 30 1997 and 1996 7
Notes to Unaudited Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-17
PART II. OTHER INFORMATION
Items 1-6 18
Signatures 19
2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASINO DATA SYSTEMS
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents including restricted amounts
of approximately $15,700,000 and $12,000,000,
respectively $ 26,188,379 $ 21,482,173
Investment securities including restricted amounts of
$455,326 and $440,000, respectively 455,326 844,303
Accounts receivable, net of allowance for doubtful
accounts of $2,496,000 and $2,400,000, respectively 11,606,868 20,369,624
Due from related parties, net of allowance for doubtful
accounts of $0 and $500,000, respectively 244,000 2,512,143
Current portion of notes receivable 1,510,141 3,520,542
Income tax receivable 2,144,943 1,288,561
Inventories, net of reserve of $640,000 and $0,
respectively 17,274,888 15,219,571
Deferred tax asset 282,360 2,261,877
Prepaid expenses and other current assets 1,656,446 1,265,601
------------- -------------
Total current assets 61,363,351 68,764,395
Property and equipment, net 34,487,219 35,435,854
Investment securities, including restricted amounts of
approximately $5,425,000 and $4,474,000, respectively 6,904,272 5,957,956
Notes receivable, excluding current portion 1,780,761 1,280,321
Intangible assets, net 9,245,390 9,539,254
Software development costs, net of accumulated amortization
of $109,636 and $54,736, respectively 7,418,337 2,903,288
Deferred tax asset 3,095,462 1,115,945
Deposits 431,811 425,331
------------- -------------
Total assets $ 124,726,603 $ 125,422,344
------------- -------------
------------- -------------
</TABLE>
(continued)
3
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LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 2,146,402 $ 2,032,187
Accounts payable 2,410,397 2,939,888
Accrued expenses and customer deposits 4,550,224 2,691,341
Accrued slot liability 4,117,993 2,874,918
------------- -------------
Total current liabilities 13,225,016 10,538,334
Noncurrent liabilities:
Long-term debt, excluding current portion 824,471 2,450,159
Accrued slot liability 13,570,925 9,257,308
------------- -------------
Total noncurrent liabilities 14,395,396 11,707,467
Shareholders' equity:
Common stock; authorized 100,000,000 shares,
no par value; 18,055,022 issued and outstanding
at September 30, 1997 and 18,033,647 issued and
outstanding at December 31, 1996 83,733,393 83,624,448
Retained earnings 13,372,798 19,552,095
------------- -------------
Total shareholders' equity 97,106,191 103,176,543
------------- -------------
Total liabilities and shareholders' equity $ 124,726,603 $ 125,422,344
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
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CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1997 1996
----------- -----------
Revenues:
Systems and product sales $24,361,092 $37,619,317
Gaming operations 17,452,244 17,767,132
----------- -----------
41,813,336 55,386,449
----------- -----------
Costs and expenses:
Cost of goods sold 27,345,288 27,678,847
Selling, general and administrative 17,788,882 14,175,663
Research and development 2,935,570 2,214,480
Depreciation and amortization 3,857,755 2,016,857
----------- -----------
Total costs and expenses 51,927,495 46,085,847
----------- -----------
(Loss) income from operations (10,114,159) 9,300,602
----------- -----------
Other income (expense):
Interest and other income 1,150,920 5,087,124
Interest expense (259,557) (369,521)
----------- -----------
Total other income 891,363 4,717,603
----------- -----------
(Loss) income before income taxes (9,222,796) 14,018,205
Income tax (benefit) expense (3,043,500) 4,608,075
----------- -----------
Net (loss) income ($6,179,296) $9,410,130
----------- -----------
----------- -----------
Net (loss) income per common and equivalent share $ (0.34) $ 0.55
----------- -----------
----------- -----------
Weighted average shares outstanding 18,036,000 17,132,000
----------- -----------
----------- -----------
See accompanying notes to unaudited consolidated financial statements
5
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CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1997 1996
----------- -----------
Revenues:
Systems and product sales $ 5,242,266 $14,190,846
Gaming operations 5,304,306 7,063,675
----------- -----------
10,546,572 21,254,521
----------- -----------
Costs and expenses:
Cost of goods sold 7,426,061 11,315,080
Selling, general and administrative 4,758,909 5,047,594
Research and development 1,033,406 734,998
Depreciation and amortization 1,243,259 783,664
----------- -----------
Total costs and expenses 14,461,635 17,881,336
----------- -----------
(Loss) Income from operations (3,915,063) 3,373,185
----------- -----------
Other income (expense):
Interest and other income 486,926 4,279,634
Interest expense (75,631) (116,358)
----------- -----------
Total other income 411,295 4,163,276
----------- -----------
(Loss) income before income taxes (3,503,768) 7,536,461
Income tax (benefit) expense (1,156,243) 2,525,668
----------- -----------
Net (loss) income ($2,347,525) $ 5,010,793
----------- -----------
----------- -----------
Net (loss) income per common and equivalent share $ (0.13) $ 0.27
----------- -----------
----------- -----------
Weighted average shares outstanding 18,038,000 18,430,000
----------- -----------
----------- -----------
See accompanying notes to unaudited consolidated financial statements
6
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CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (6,179,296) $ 9,410,130
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,857,755 2,113,304
Provision for doubtful accounts 404,000 -
Net increase in deferred tax asset - (1,912,512)
Changes in assets and liabilities
Decrease (increase) in accounts receivable, notes
receivable and due from related parties 11,280,478 (12,835,565)
Increase in inventories (2,055,317) (9,543,728)
Decrease in prepaid expenses, other current
assets and deposits (397,326) (2,614,292)
Decrease in accounts payable (529,491) 1,395,562
Increase in slot liability, accrued expenses and
customer deposits 7,415,575 8,225,530
------------ ------------
Net cash provided by (used in) operating activities 13,796,378 (5,761,571)
------------ ------------
Cash flows used in investment activities:
Net increase in investment securities (557,339) (4,950,471)
Acquisitions of property and equipment (2,442,844) (11,429,398)
Investment in software development (4,569,949) -
Increase in intangible assets (117,512) (3,534,623)
------------ ------------
Net cash used in investment activities (7,687,644) (19,914,492)
------------ ------------
Cash flows (used in) provided by financing activities:
Repayment of debt (1,511,473) (1,410,676)
Proceeds from issuance of notes - 2,080,186
Net proceeds from issuance of common stock 108,945 46,515,565
------------ ------------
Net cash provided by financing activities (1,402,528) 47,185,075
------------ ------------
Net increase in cash and cash equivalents 4,706,206 21,509,012
Cash and cash equivalents at beginning of period 21,482,173 13,156,998
------------ ------------
Cash and cash equivalents at end of period $ 26,188,379 $ 34,666,010
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 the Company:
CDS Services Company; CDS Graphics and Imaging Company; CDS Signs, Inc.;
TurboPower Software Company, and CDS Gaming Company (collectively the
"Company"). The Company currently operates in one line of business whose
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 currently operates
solely in the U.S.
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 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 the interim periods are not necessarily indicative of the results
of operations for an entire year.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 Earnings Per Share, (SFAS 128) which
establishes standards for computing and presenting earnings per share (EPS),
which replaces the presentation of primary and fully diluted EPS with a
presentation of basic and diluted EPS. SFAS 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. After adoption, all prior period EPS data
will be restated to conform to SFAS 128. Adoption of SFAS 128 would have no
impact on net loss per share for the nine and three months ended September 30,
1997.
In February 1997, the Financial Accounting Standard Board issued SFAS
No.129, "Disclosure of Information about Capital Structure" (SFAS No.129). SFAS
No.129 establishes standards for disclosing information about an entity's
capital structure. The Company complies with the disclosure requirements of
this statement which is effective for periods ending after December 15, 1997 and
anticipates that implementation will not significantly impact the Company's
financial presentation of its capital structure.
In June 1997, the Financial Accounting Standard Board issued SFAS No.130,
"Reporting Comprehensive Income" (SFAS No.130). SFAS No.130 requires companies
to classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
sections of a statement of financial position, and is effective for financial
statements issued for fiscal years beginning after December 15, 1997. The
Company is currently assessing the impact on the financial statements and, for
the three months and nine months ended September 30, 1997, the Company
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believes that SFAS No.130 will not result in comprehensive income different from
the net income reported in the accompanying consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information" (SFAS No.
131). SFAS No. 131 establishes additional standards for segment reporting in
the financial statements and is effective for fiscal years beginning after
December 15, 1997. The Company is currently assessing the impact on the
financial statements.
(2) INVENTORIES:
Inventories consist of the following:
September 30, December 31,
1997 1996
------------- ------------
Raw materials $10,419,763 $ 9,943,220
Work in process 635,297 663,340
Finished goods 6,219,828 4,613,011
----------- -----------
$17,274,888 $15,219,571
----------- -----------
----------- -----------
As of September 30, 1997, approximately $3,150,000 of finished goods inventory
represented gaming machines located at various casino sites on a no obligation
trial basis. Such machines will either be purchased by the respective casino at
the expiration of the trial period or will be returned to the Company. Returned
games may be sold at a discount, refurbished or returned to casino sites on new
trial periods. Games to be sold at a discount are adjusted to the lower of cost
or market upon return to the Company. Refurbishment costs are expensed as
incurred.
(3) INTANGIBLE ASSETS:
Intangible assets consist of costs associated with the establishment of
trademarks, copyrights and patents; purchase of a patent license; gaming
licenses in various jurisdictions; the excess of the purchase price over the net
assets of an acquired business (goodwill); and the purchase price of a
technology release agreement; all of which are capitalized and amortized using
the straight-line or revenue matching method over a period of 3.5 years to 15
years.
During 1996, the Company capitalized $4,932,646 in costs associated with the
acquisition of a Telnaes patent license which will be utilized in certain gaming
machines developed by the Company. The patent expires in May 2001 and will be
amortized using the straight-line method over its remaining life of 3.5 years
beginning in the fourth quarter of 1997 commensurate with the sale of gaming
machines utilizing the Telnaes patent.
(4) LONG-TERM DEBT:
During May 1996, the Company entered into a $20,000,000 revolving line of
credit ("line of credit") with U.S. Bank of Nevada which expires in May 1998.
The line of credit is secured by the Company's accounts receivable, inventory
and general intangibles. The line of credit bears interest at a variable rate
equal to the bank's base rate, which was 8.25% at September 30, 1997. There was
no amount outstanding or available under the line of credit at September 30,
1997. Advances under the line are limited to a multiple of the Company's
earnings before interest, taxes, depreciation, and amortization over the past
four quarters and are also subject to maintenance of certain financial covenants
and ratios. The Company has reserved $5 million of this line of credit to
secure an irrevocable letter of credit pursuant to other equipment financing
agreements. These equipment financing agreements are
9
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collateralized by the related equipment and contain certain restrictive
covenants, including the requirement for a three year letter of credit securing
payment in the amount of 50% of the outstanding principal balance.
Future minimum payments under equipment financing agreements are as follows:
Payments
--------
1997 remaining payments $ 588,983
1998 2,315,997
1999 267,173
2000 9,315
----------
Total minimum payments 3,181,468
Less interest 210,595
----------
Minimum payments less interest 2,970,873
Less current portion 2,146,402
----------
Long-term portion $ 824,471
----------
----------
(5) NET (LOSS) INCOME PER COMMON SHARE:
The following is an analysis of the components of the shares used to
compute net income (loss) per share:
Three months ended
---------------------------
September 30, September 30,
1997 1996
---------- ----------
Weighted average shares outstanding 18,038,245 17,853,771
Weighted average shares outstanding related
to the shares granted under the employee stock
option plan 0 576,229
---------- ----------
18,036,000 18,430,000
---------- ----------
---------- ----------
(6) RELATED PARTY TRANSACTIONS:
A shareholder and former director of the Company and the spouse
(collectively the "Principals") of the Chairman of the Company are majority
shareholders in Kiland Distributing Corporation ("KDC"), a distributor of the
Company's products. Prior to the reporting period, the Company utilized KDC for
substantially all sales in the mid-west region of the United States. During the
nine months ended September 30, 1997, the Company made sales to KDC of
approximately $169,000. The sales, recorded net of distributor discounts,
represent less than 1% of the Company's revenues for the nine months ended
September 30, 1997. The Company and KDC reached an agreement regarding the
settlement of accounts receivable of $3,059,497 for approximately $2.4 million.
The settlement included the transfer of substantially all of KDC's assets to the
Company which included cash, accounts receivable and fixed assets. The
settlement also included forgiveness of certain accounts payable from the
Company to KDC and the execution of a $144,000 unsecured promissory note from
the Principals to the Company. The promissory note bears interest at 10% and
matures on February 7, 1998. Concurrent with the settlement, the Company
terminated its business relationship with KDC.
A director of the Company is associated with a law firm that has rendered
various legal services to the Company. The Company paid the firm $48,363 during
the nine months ended September 30, 1997, for legal services rendered.
10
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(7) 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 when the
prize is won. The base jackpot component is charged to revenue 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 the liability 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 the unaccrued portion would be expensed. The unaccrued portion at
September 30, 1997 was approximately $1,346,966. To ensure adequate funds are
available to pay the slot liability, and to comply with gaming regulatory
requirements, the Company has established segregated cash accounts aggregating
approximately $15,710,000 at September 30, 1997. The Company also has
approximately $5,880,000 segregated for the annuity payments of jackpots already
won.
On February 5, 1996, the Company entered into a five-year cross-license and
development agreement with Casino Technology Incorporated ("CTI"), licensee of
certain intellectual property rights for the Caribbean Stud video poker game, to
use certain of these property rights to develop and manufacture gaming machines
and to operate MSP systems using these machines in certain jurisdictions. The
agreement provides for the Company to pay fixed royalties or, upon receipt of
certain gaming licenses by CTI, the formation and licensing of a joint venture
between the parties. The parties would equally share in the net income of the
joint venture. The parties are currently in dispute concerning the respective
performance of the terms of the agreement which is currently in arbitration. In
October 1997, the Company discontinued the two Caribbean Stud video poker MSP
systems. The Company will convert the Caribbean Stud video poker games to other
video poker programs in preparation for sale. Management expects to sell these
games at a discounted price that exceeds book value. The conversion costs will
be expensed as incurred.
In November 1996, the Company entered into an agreement with a third party
requiring that the Company pay $330,000, in monthly installments, through March
1998 in exchange for the enhancement of the artistic display qualities of
existing and future video interactive gaming machines.
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. In May 1997, a separate class
action complaint was filed in the United States District Court of Nevada by
Barry Schwartz and Julian Phelps against the Company and certain present and
former Company executives. The complaints allege that the market price of the
Company's common stock was artificially inflated during the Class Period due to
misrepresentation and omissions in press releases and other statements made by
the Company's executives to the investing public. Management believes these
claims to be without merit and intends to vigorously defend against these
actions. While the outcome of the actions described above is not presently
determinable, management does not expect that the outcome will have a material
adverse effect on the Company's results of operations, financial position or
cash flows.
The Company and its subsidiaries are also involved from time to time in
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
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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 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, 1997, COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
OVERVIEW
Income from operations and net income decreased from $9,300,602 and
$9,410,130, respectively for the nine months ended September 30, 1996, to losses
of ($10,114,159) and ($6,179,296), respectively, for the same period in 1997.
This represents a decrease of $19,414,761 in income from operations and a
decrease of $15,589,429 in net income. The decrease in income from operations
and net income is primarily related to a decrease in total revenues and an
increase in the cost of goods sold as a percentage of revenues for the nine
months ended September 30, 1997 as compared to the same period in 1996.
REVENUES
Revenues decreased from $55,386,449 for the nine months ended September 30,
1996, to $41,813,336 for the same period in 1997, a decrease of $13,573,113 or
25%. The decrease in revenues is primarily attributable to a decrease in sales
of the Company's OASIS II system for the nine month period ended September 30,
1997, compared to same period in 1996 partially offset by increased revenues
from the sale of gaming machines. The Company had revenue from the sale of
gaming machines of $3,913,548 for the nine months ended September 30, 1997, as
compared to $2,431,698 during the same period in 1996. The increase in games
sales is due primarily to an increased portfolio of licensed products.
COSTS AND EXPENSES
Costs and expenses increased from $46,085,847 for the nine months ended
September 30, 1996, to $51,927,495 for the same period in 1997, an increase of
$5,841,648, or 13%. Operating costs and expenses, excluding cost of goods sold,
increased as a percentage of revenues from 33% for the nine months ended
September 30, 1996, to 59% for the same period in 1997. Cost of goods sold
decreased from $27,678,847 for the nine months ended September 30, 1996, to
$27,345,288 for the same period in 1997, a decrease of $333,559. Gross margins
as a percentage of revenues decreased from 50% for the
12
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nine months ended September 30, 1996 to 35% for the same period in 1997. The
decrease in gross margin is primarily attributable to the increase in the
percentage of total revenue contributed by MSP and gaming machine operations,
which generally have lower gross margins than the Company's systems business and
to fixed overhead costs associated with producing and servicing the Company's
products.
In October 1997, the Company discontinued the two Caribbean Stud video
poker MSP systems. While revenues from this product will be eliminated,
management expects this discontinuance will have a positive effect on gross
margin as the related fixed royalty fee will be eliminated. The Company will
convert the Caribbean Stud video poker games to other video poker programs in
preparation for sale. Management expects to sell these games at a discounted
price that exceeds book value. The conversion costs will be expensed as
incurred.
Selling, general and administrative expenses increased from $14,175,663 for
the nine months ended September 30, 1996, to $17,788,882 for the same period in
1997, an increase of $3,613,219. The increase is primarily attributable to
higher personnel and associated payroll and marketing expenses.
Research and development expenses increased from $2,214,480 for the nine
months ended September 30, 1996, to $2,935,570 for the same period in 1997.
Major expenditures during the nine months ended September 30, 1997 primarily
included the development of additional video interactive games. Research and
development expenses as a percentage of revenues increased from 4% for the nine
months ended September 30, 1996, to 7% for the same period in 1997.
Depreciation and amortization increased from $2,016,857 for the nine months
ended September 30, 1996, to $3,857,755 for the same period in 1997. The
increase is primarily due to depreciation of an increased number of MSP games in
operation.
Other income is comprised of rental, interest and other miscellaneous forms
of income, offset by interest expense, not derived from normal operations.
Other income decreased from $4,717,603 for the nine months ended September 30,
1996, to $891,363 for the same period in 1997. The decrease is primarily due to
a one-time settlement payment from IGT to the Company during the third quarter
of 1996.
NET (LOSS) INCOME
Net income decreased from $9,410,130 for the nine months ended September
30, 1996, to a loss of ($6,179,296) for the same period in 1997, a decrease of
$15,589,246. The decrease in net income is due primarily to the decrease in
revenues from the sale of OASIS II systems, the increase in the sale of products
with lower gross margins and the increase in the Company's fixed overhead costs
associated with the CDS Games division. Based on the net loss experienced
through the first nine months of 1997, the maturation of OASIS II system sales
and the relatively recent introduction of CDS Games into the market place, the
Company believes it will report a net loss for the year ended December 31, 1997.
QUARTER ENDED SEPTEMBER 30, 1997, COMPARED
TO THE QUARTER ENDED SEPTEMBER 30, 1996
OVERVIEW
Income from operations and net income decreased from $3,373,185 and
$5,010,793, respectively for the three months ended September 30, 1996, to
losses of ($3,915,063) and ($2,347,525), respectively, for the same period in
1997. This represents a decrease of $7,288,248 in income from operations and a
13
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decrease of $7,358,318 in net income. The decrease in income from operations
and net income is primarily related to decreased OASIS II systems sales, lower
revenues from progressive operations and increased costs associated with the CDS
Games division.
REVENUES
Revenues decreased from $21,254,521 for the three months ended September
30, 1996, to $10,546,572 for the same period in 1997, a decrease of $10,707,949,
or 50%. The decrease in revenues is primarily attributable to a decrease in
sales of the Company's OASIS II systems and a decrease in revenues from
progressive operations for the three month period ended September 30, 1997,
compared to the same period in 1996. The decrease in revenues from progressive
operations is primarily attributable to reduction in the average daily coin-in
per machine.
COSTS AND EXPENSES
Costs and expenses decreased from $17,881,336 for the three months ended
September 30, 1996, to $14,461,635 for the same period in 1997, a decrease of
$3,419,701, or 19%. Operating costs and expenses, excluding cost of goods sold,
increased as a percentage of revenues from 31% for the three months ended
September 30, 1996, to 67% for the same period in 1997. Cost of goods sold
decreased from $11,315,080 for the three months ended September 30, 1996, to
$7,426,061 for the same period in 1997, a decrease of $3,889,019. Gross margin
as a percentage of revenues decreased from 47% for the three months ended
September 30, 1996 to 30% for the same period in 1997. The decrease in gross
margin is primarily attributable to the increase in the percentage of total
revenue contributed by gaming machine sales, which generally have lower gross
margins than other CDS products and increased overhead costs associated with
producing and servicing the Company's products.
In October 1997, the Company discontinued the two Caribbean Stud video
poker MSP systems. While revenues from this product will be eliminated,
management expects this discontinuance will have a positive effect on gross
margin as the related fixed royalty fee will be eliminated. The Company will
convert the Caribbean Stud video poker games to other video poker programs in
preparation for sale. Management expects to sell these games at a discounted
price that exceeds book value. The conversion costs will be expensed as
incurred.
Selling, general and administrative expenses decreased from $5,047,594 for
the three months ended September 30, 1996, to $4,758,909 for the same period in
1997, a decrease of $288,685. This decrease reflects general cost reductions in
most expense categories. Selling, general and administrative expenses as a
percentage of revenues increased from 24% for the three months ended September
30, 1996, to 45% for the same period in 1997. Selling, general and
administrative expenses increased as a percentage of revenue primarily due to
the lower revenue base for the three months ended September 30, 1997 as compared
to the same period in 1996.
Research and development expenses increased from $734,998 for the three
months ended September 30, 1996, to $1,033,406 for the same period in 1997.
Major expenditures during the three months ended September 30, 1997 primarily
included the development of additional video interactive games. Research and
development expenses as a percentage of revenues increased from 4% for the three
months ended September 30, 1996, to 10% for the same period in 1997.
Depreciation and amortization increased from $783,664 for the three months
ended September 30, 1996, to $1,243,259 for the same period in 1997. The
increase is primarily due to depreciation of an increased number of MSP games in
operation.
14
<PAGE>
Other income is comprised of rental, interest and other forms of income,
offset by interest expense, that are not the result of normal operations. Other
income decreased from $4,163,276 for the three months ended September 30, 1996,
to $411,295 for the same period in 1997. The decrease is primarily due to a
one-time settlement payment from IGT to the Company during the third quarter of
1996.
NET (LOSS) INCOME
Net income decreased from $5,010,793 for the three months ended September
30, 1996, to a loss of ($2,347,525) for the same period in 1997, a decrease of
$7,358,318. The decrease in net income is due primarily to the decreases in
revenues from the sale of OASIS II systems and progressive operations, the
increase in the sale of products with a lower gross margin and the increase in
the Company's fixed overhead costs primarily associated with the start-up of the
CDS Games division. Based on the net loss experienced through the first nine
months of 1997, the maturation of OASIS II system sales, and the relatively
recent introduction of CDS gaming machines into the market place, the Company
believes it will report a net loss for the year ended December 31, 1997.
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 $26,188,379 at
September 30, 1997, as compared to $21,482,173 at December 31, 1996. The
Company generated cash from operations of $13,796,378 during the nine months
ended September 30, 1997. The most significant factor contributing to this cash
generation was collection activity resulting in a net decrease of accounts
receivable of $11,280,478 for the nine months ended September 30, 1997.
The Company used $7,687,644 in investing activities for the nine months
ended September 30, 1997. These investment activities included: $4,569,949
investment in software development; $2,442,884 in equipment to be used in
operations; $117,512 for the purchase of intangible assets and $557,339 invested
in held-to-maturity securities.
The Company used $1,402,528 in financing activities for the nine months
ended September 30, 1997. The Company received proceeds from the sale of common
stock related to the employee stock option plan of $108,945 and made payments on
outstanding debt of $1,511,473.
Certain jurisdictions in which MSP systems operate require that the Company
maintain segregated funds for the payment of jackpot prizes. The amount of
funds required is dependent on several factors, including the type and
denomination of games and regulatory requirements. At September 30, 1997, the
Company's accrued slot liability for its MSP systems aggregated approximately
$17,688,918 and the unaccrued slot liability was approximately $1,346,966. The
unaccrued slot liability is the amount of the base jackpot component that has
not been fully accrued. In connection with these slot liabilities and in
accordance with gaming requirements, the Company established segregated cash
accounts aggregating approximately $15,700,000 at September 30, 1997 to ensure
availability of adequate funds to pay this liability. The Company also has
investment securities approximating $5,880,000 segregated as of September 30,
1997 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.
15
<PAGE>
The Company has financed certain equipment under agreements for an
aggregate amount of $2,970,873. These equipment agreements are collateralized
by the related equipment and contain certain restrictive covenants, including
the requirement for a three-year letter of credit securing payment in the amount
of 50% of the current principal balance.
During May 1996, the Company entered into a $20,000,000 revolving line of
credit ("line of credit") with U.S. Bank of Nevada which expires in May 1998.
The line of credit is secured by the Company's accounts receivable, inventory
and general intangibles. The line of credit bears interest at a variable rate
equal to the bank's base rate, which was 8.25% at September 30, 1997. There was
no amount outstanding or available under the line of credit at September 30,
1997. Advances under the line are limited to a multiple of the Company's
earnings before interest, taxes, depreciation, and amortization over the past
four quarters and are also subject to maintenance of certain financial covenants
and ratios. The Company has reserved $5 million of this line of credit to
secure an irrevocable letter of credit pursuant to equipment financing
agreements. The equipment financing agreements are collateralized by the
related equipment and contain certain restrictive covenants, including the
requirement for a three year letter of credit securing payment in the amount of
50% of the outstanding principal balance.
The Company's ratio of unrestricted current assets to current liabilities
was 3.5 to 1 at September 30, 1997, while the noncurrent liabilities to equity
ratio was .15 to 1. Based on this financial position, the Company believes it
could obtain additional long-term financing for working capital requirements
resulting from growth that may exceed available cash and cash equivalents, cash
to be provided by operations and funds available under its line of credit.
However, there can be no assurance that the Company will be able to obtain
additional sources of capital or that such capital could be obtained under
generally favorable terms.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements that are forward-looking, such as statements made or to be made by
the Company) contains statements that are forward-looking, such as statements
relating to plans for future expansion and other business development activities
as well other capital spending, financial sources and the effects of regulation
and competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating to developing
gaming machines that offer technological advantages or unique entertainment
features in order for the Company to be able to effectively compete in the
gaming machine market. There are possible adverse effects upon revenues if the
Company experiences delays in developing or obtaining regulatory approval of new
products. There may be negative effects on revenues if new products or
enhancements do not gain customer acceptance. There may be 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. There may be
adverse effects on revenues due to the risks associated with the dependence upon
Steven Weiss, a key employee of the Company. The general profitability of the
gaming industry at large substantially affects the Company's opportunity for
sales of its products. The Company's ability to protect the intellectual
property upon which it relies can never be guaranteed even though the Company
takes precautions to protect its intellectual property.
16
<PAGE>
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. In May 1997, a separate class
action complaint was filed in the United States District Court of Nevada by
Barry Schwartz and Julian Phelps against the Company and certain present and
former Company executives. The complaints allege that the market price of the
Company's common stock was artificially inflated during the Class Period due to
misrepresentation and omissions in press releases and other statements made by
the Company's executives to the investing public. Management believes these
claims to be without merit and intends to vigorously defend against them. While
the outcome of the actions described above is not presently determinable,
management does not expect that the outcome will have a material adverse effect
on the Company's results of operations, financial position or cash flows.
The Company and its subsidiaries are also involved from time to time in
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. Financial Data Schedule
There were no reports filed on Form 8-K for the nine month period ended
September 30, 1997.
17
<PAGE>
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 7, 1997
--------------------- ---------------------------------
Diana L. Bennett
President, Chief Operating
Officer, and Director
Date: November 7, 1997
--------------------- ---------------------------------
Ronald M. Rowan
Corporate Controller
(Principal Accounting Officer)
18
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