<PAGE>
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: JUNE 30, 1998
-------------
[ ] 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 August 7, 1998.
Page 1 of 19
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CASINO DATA SYSTEMS
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Unaudited Consolidated Balance Sheet
June 30, 1998 and December 31, 1997 (audited) 3-4
Unaudited Consolidated Statements of Operations
For the six months ended June 30, 1998 and 1997 5
Unaudited Consolidated Statements of Operations
For the three months ended June 30, 1998 and 1997 6
Unaudited Consolidated Statements of Cash Flows
For the six months ended June 30, 1998 and 1997 7
Notes to Unaudited Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
PART II. OTHER INFORMATION
Items 1-6 17-18
Signatures 19
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASINO DATA SYSTEMS
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(unaudited)
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents including restricted amounts
of approximately $12,998 and $15,600, respectively $ 23,715 $ 27,873
Investment securities including restricted amounts of
$524 and $11, respectively 2,164 11
Accounts receivable, net of allowance for doubtful
accounts of $5,341 and $5,390, respectively 9,908 9,683
Due from related parties -- 144
Current portion of notes receivable 2,352 1,392
Income tax receivable 4,050 4,000
Inventories, net of reserve of $1,580 and
$1,125, respectively 14,855 14,192
Deferred tax asset 360 360
Assets held for sale 1,728 880
Prepaid expenses and other current assets 75 1,244
------------ ------------
Total current assets 59,207 59,779
Property and equipment, net 18,279 17,736
Investment securities, including restricted amounts of
approximately $6,746 and $6,601, respectively 6,746 8,080
Notes receivable, excluding current portion 1,395 1,627
Intangible assets, net of accumulated amortization of $1,963
and $1,120, respectively 5,432 6,256
Software development costs, net of accumulated amortization
of $164 and $128, respectively 2,998 1,954
Deferred tax asset 1,315 1,140
Deposits 381 384
------------ ------------
Total non-current assets 36,546 37,177
------------ ------------
Total assets $ 95,753 $ 96,956
------------ ------------
------------ ------------
</TABLE>
(continued)
3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
June 30, December 31,
1998 1997
(unaudited)
------------ ------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 1,285 $ 2,187
Accounts payable 2,926 3,911
Accrued expenses and customer deposits 7,654 7,444
Accrued slot liability 3,754 4,723
------------ ------------
Total current liabilities 15,619 18,265
Noncurrent liabilities:
Long-term debt, excluding current portion 40 267
Accrued slot liability 15,783 14,797
------------ ------------
Total noncurrent liabilities 15,823 15,064
Shareholders' equity:
Common stock, no par value. Authorized
100,000,000 shares; issued and outstanding
18,065,897 shares at June 30, 1998 and 18,065,897
shares at December 31, 1997 83,790 83,790
Retained deficit (19,479) (20,163)
------------ ------------
Total shareholders' equity 64,311 63,627
------------ ------------
Total liabilities and shareholders' equity $ 95,753 $ 96,956
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
--------- ---------
Revenues:
Systems and product sales $ 19,483 $ 19,119
Gaming operations 4,901 12,148
--------- ---------
24,384 31,267
Cost of goods sold 12,735 19,919
--------- ---------
Gross Margin 11,649 11,348
--------- ---------
Operating expenses:
Selling, general and administrative 8,653 13,030
Research and development 1,513 1,902
Depreciation and amortization 1,253 2,615
--------- ---------
Total operating expenses 11,419 17,547
--------- ---------
Income (Loss) from operations 230 (6,199)
--------- ---------
Other income (expense):
Interest and other income 963 663
Interest expense (148) (183)
--------- ---------
Total other income 815 480
--------- ---------
Income (loss) before income taxes 1,045 (5,719)
Income tax expense (benefit) 361 (1,887)
--------- ---------
Net income (loss) $ 684 ($3,832)
--------- ---------
--------- ---------
Basic net income (loss) per share $ 0.04 $ (0.21)
--------- ---------
--------- ---------
Diluted net income (loss) per share $ 0.04 $ (0.21)
--------- ---------
--------- ---------
Basic weighted average shares outstanding 18,066 18,036
--------- ---------
--------- ---------
Diluted weighted average shares outstanding 18,094 18,036
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE>
CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
--------- ---------
Revenues:
Systems and product sales $ 9,597 $12,043
Gaming operations 2,090 6,014
--------- ---------
11,687 18,057
Cost of goods sold 5,963 10,402
--------- ---------
Gross Margin 5,724 7,655
--------- ---------
Operating expenses:
Selling, general and administrative 4,295 6,350
Research and development 709 1,080
Depreciation and amortization 599 1,333
--------- ---------
Total operating expenses 5,603 8,763
--------- ---------
Income (Loss) from operations 121 (1,109)
--------- ---------
Other income (expense):
Interest and other income 504 380
Interest expense (65) (84)
--------- ---------
Total other income 439 296
--------- ---------
Income (loss) before income taxes 560 (813)
Income tax expense (benefit) 196 (268)
--------- ---------
Net income (loss) $ 364 ($545)
--------- ---------
--------- ---------
Basic net income (loss) per share $ 0.02 $ (0.03)
--------- ---------
--------- ---------
Diluted net income (loss) per share $ 0.02 $ (0.03)
--------- ---------
--------- ---------
Basic weighted average shares outstanding 18,066 18,036
--------- ---------
--------- ---------
Diluted weighted average shares outstanding 18,092 18,036
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to unaudited consolidated financial statements
6
<PAGE>
CASINO DATA SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 684 $(3,832)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,253 2,615
Deferred income taxes (175) --
Loss on disposal of assets 12 --
Provision for accounts receivable -- 418
Changes in assets and liabilities:
Decrease (increase) in accounts receivable,
due from related parties and notes receivable (809) 3,882
Increase in income tax receivable (50) --
Increase in inventories (663) (1,177)
Decrease (increase) in prepaid expenses and
other current assets and deposits 1,172 (79)
Decrease in accounts payable (985) (722)
Increase in accrued liabilities, customer
deposits and slot liability 228 5,855
--------- ---------
Net Cash provided by operating activities 667 6,960
--------- ---------
Cash flows from investing activities:
Net Increase in investment securities (819) (1,063)
Decrease (increase) in intangible assets 655 (55)
Investment in software development (1,081) (2,813)
Acquisitions of property and equipment (2,451) (2,016)
--------- ---------
Net cash used in investing activities (3,696) (5,947)
--------- ---------
Cash flows from financing activities:
Repayment of notes payable (1,129) (1,011)
Net proceeds from issuance of common stock -- 9
--------- ---------
Net cash used in financing activities (1,129) (1,002)
--------- ---------
Net (decrease) increase in cash and cash equivalents (4,158) 11
Cash and cash equivalents at beginning of year 27,873 21,482
--------- ---------
Cash and cash equivalents at end of year $ 23,715 $ 21,493
--------- ---------
--------- ---------
Supplemental disclosure of non-cash activities:
Transfer to assets held for sale from fixed assets $ 848 --
---------
---------
Transfer to fixed assets from other assets $ 877 --
---------
---------
</TABLE>
<PAGE>
NOTES TO 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 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'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 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. All prior period
EPS data have been restated to conform to SFAS 128.
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. Adoption of this statement will have no
material impact on the Company's financial statements.
8
<PAGE>
(2) NET (LOSS) INCOME PER COMMON SHARE: (IN THOUSAND 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:
<TABLE>
<CAPTION>
Six months Six months Three months Three months
ended ended ended ended
---------- ---------- ------------ ------------
June 30, June 30, June 30, June 30,
---------- ---------- ------------ ------------
1998 1997 1998 1997
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Numerator for earnings per share -
net Income (loss) $ 684 $(3,832) $ 364 $ (545)
---------- ---------- ------------ ------------
Denominator:
Denominator for basic earnings per share-
weighted average shares 18,066 18,036 18,066 18,036
Effect of dilutive securities
Stock options 28 0 26 0
---------- ---------- ------------ ------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 18,094 18,036 18,092 18,036
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Basic earnings per share $ 0.04 $ (0.21) $ 0.02 $ (0.03)
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Diluted earnings per share $ 0.04 $ (0.21) $ 0.02 $ (0.03)
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
</TABLE>
(3) 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 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 any unaccrued portion would
be expensed. There was no unaccrued portion at June 30, 1998. 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 $12,998,000 at June 30, 1998. The Company
also has approximately $7,270,000 segregated for the annuity payments for
jackpots already won.
9
<PAGE>
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, to which the Company will
respond in a timely fashion. 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 to be without merit, and intends to
vigorously defend against them. In addition, the Company maintains a policy
of insurance pursuant to which it has tendered these claims to the insurance
carrier. This insurance policy may cover all or a portion of the claims.
While the outcome of the actions 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.
A patron dispute was filed against the Company which allegedly arose
while a patron played 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 Ms. Freeman. Ms.
Freeman 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 jackpot, as directed by the
Mississippi Gaming authorities. The Company has accrued $382,000 of interest
expense as of June 30, 1998 toward the judgment in the event the Company
loses its appeal. 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.
In November of 1997, a customer of the Company filed for protection
under Chapter 11 of the United States Bankruptcy Code. The pre-petition debt
owed the Company is approximately $1,700,000, which amount has been included
in a Proof of Claim filed by the Company in the Bankruptcy action. A Plan of
Reorganization has been filed and approved by the Court. Pursuant to the
Plan of Reorganization, the Company is treated as a secured creditor in the
action. Pursuant to the Plan, the Company has been paid all pre-petition
arrearages and is current on all post-petition debt. In addition, the
Company has obtained personal guarantees from certain of the principals of
the debtor. While the outcome of the Bankruptcy 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.
In August of 1997, Casino Technology Incorporated ("CTI"), filed a
demand for arbitration of certain issues arising out of a Cross-License
Agreement between CTI and the Company pursuant to which the Company marketed
the Caribbean Stud video poker game. CTI alleged that the Company failed to
pay royalty fees due under the agreement. The Company has accrued
approximately $2,000,000 with respect to potential obligations arising out of
this agreement. The Company is contesting this
10
<PAGE>
amount because it believes it has been damaged as a result of certain actions
and/or inaction's of CTI and its principal. While the outcome of the
arbitration is not presently determinable, management does not believe the
outcome will have a material effect on the Company's financial statements 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 CDS violated certain patent rights of Acres Gaming.
Acres Gaming also filed a Motion for Preliminary Injunction. The Motion is
expected to be scheduled for a hearing in early October, 1998. The Company
intends to vigorously defend this action as it feels the action is without
merit. While the outcome of the actions 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.
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.
11
<PAGE>
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.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED
TO THE SIX MONTHS ENDED JUNE 30, 1997
REVENUES
Revenues decreased from $31,267,000 for the six months ended June 30,
1997 to $24,384,000 for the same period in 1998, a decrease of $6,883,000 or
22%. The decrease in revenues is primarily attributable to a decrease in
revenues from progressive operations of $7,247,000 partially offset by
increases in system and product sales of $364,000 for the six month period
ended June 30, 1998, compared to the same period in 1997. The decrease in
revenues from progressive operations is primarily attributable to the
termination of the Caribbean Stud Video Poker link in October 1997, the
termination of the Native American Cool Millions Dollar link in February 1998
and the termination of both the Nevada and Mississippi Cool Millions Dollar
links in April 1998. The increase in system and product sales is primarily
attributed to increased sales of gaming machines.
GROSS MARGIN
Costs of good sold decreased from $19,919,000 for the six months ended
June 30, 1997, to $12,735,000 for the same period in 1998, a decrease of
$7,184,000. Gross margin as a percentage of revenues increased from 36% for
the six months ended June 30, 1997 to 48% for the same period in 1998. The
increase in gross margin is primarily attributable to the increase in the
percentage of total revenue contributed by system sales, which generally have
higher gross margins than other CDS products, increased production
efficiencies and stronger cost controls.
OPERATING EXPENSES
Operating expenses decreased from $17,547,000 for the six months ended
June 30, 1997, to $11,419,000 for the same period in 1998, a decrease of
$6,128,000 or 35%. Operating expenses decreased as a percentage of revenues
from 56% for the six months ended June 30, 1997, to 47% for the same period
in 1998.
Selling, general and administrative expenses decreased from $13,030,000
for the six months ended June 30, 1997, to $8,653,000 for the same period in
1998, a decrease of $4,377,000. Selling, general and administrative expenses
as a percentage of revenues decreased from 42% for the six months ended June
30, 1997, to 36% for the same period in 1998. This decrease in selling,
general and administrative expenses is due to overall cost reductions during
the six months ended June 30, 1998 as compared to the same period in 1997.
Research and development expenses decreased from $1,902,000 for the six
months ended June 30, 1997, to $1,513,000 for the same period in 1998. The
decrease is primarily attributable to a
12
<PAGE>
decrease in personnel dedicated to research and development. Major
expenditures during the six months ended June 30, 1998 primarily included the
development of additional video interactive games. Research and development
expenses as a percentage of revenues remained the same at 6% for the six
months ended June 30, 1997, and 1998.
Depreciation and amortization decreased from $2,615,000 for the six
months ended June 30, 1997, to $1,253,000 for the same period in 1998. The
decrease is primarily due to the decreased fixed asset balance as a result of
the restructuring and impairment charges in the fourth quarter of 1997.
OTHER INCOME
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 increased from $480,000 for the six months ended June 30, 1997,
to $815,000 for the same period in 1998. The increase is primarily due to
increased interest income during the six months ended June 30, 1998.
NET INCOME (LOSS)
Net income (loss) increased from a loss of ($3,832,000) for the six
months ended June 30, 1997, to income of $684,000 for the same period in
1998, an increase of $4,516,000. The increase in net income is primarily
related to the increase in gross margin, the decrease in operating expenses
and the increase in other income for the six months ended June 30, 1998,
compared to the same period ended June 30, 1997.
THE QUARTER ENDED JUNE 30, 1998 COMPARED
TO THE QUARTER ENDED JUNE 30, 1997
REVENUES
Revenues decreased from $18,057,000 for the three months ended June 30,
1997 to $11,687,000 for the same period in 1998, a decrease of $6,370,000 or
35%. Revenues from progressive operations decreased $3,924,000 or 65%, and
revenues from systems and product sales decreased $2,446,000 or 20% for the
three months ended June 30, 1998 as compared to the same period in 1997. The
decrease in revenues from progressive operations is primarily attributable to
the termination of the Native American Cool Millions link in February 1998,
the termination of the Caribbean Stud Video poker link in October 1997 and
the termination of both the Nevada and Mississippi Cool Millions Dollar links
in April 1998. The decrease in systems and product sales is primarily
attributable to a decrease in revenues from OASIS II system contracts, a
decrease in sign and meter sales and the termination of graphics external
operations. The decrease in systems and product sales was partially offset
by an increased sales of gaming machines.
GROSS MARGIN
Costs of good sold decreased from $10,402,000 for the three months ended
June 30, 1997, to $5,963,000 for the same period in 1998, a decrease of
$4,439,000. Gross margin as a percentage of revenues increased from 42% for
the three months ended June 30, 1997 to 49% for the same period in 1998. The
increase in gross margin is primarily attributable to the increase in the
percentage of total revenue contributed by system sales which generally have
higher gross margins than other CDS products.
13
<PAGE>
OPERATING EXPENSES
Operating expenses decreased from $8,763,000 for the three months ended
June 30, 1997, to $5,603,000 for the same period in 1998, a decrease of
$3,160,000 or 36%. Operating expenses decreased as a percentage of revenues
from 49% for the three months ended June 30, 1997, to 48% for the same period
in 1998.
Selling, general and administrative expenses decreased from $6,350,000
for the three months ended June 30, 1997, to $4,295,000 for the same period
in 1998, a decrease of $2,055,000. Selling, general and administrative
expenses decreased due to overall cost reductions during the three months
ended June 30, 1998 as compared to the same period in 1997.
Research and development expenses decreased from $1,080,000 for the
three months ended June 30, 1997, to $709,000 for the same period in 1998.
The decrease is primarily attributable to a decrease in personnel dedicated
to research and development. Research and development expenses as a
percentage of revenues remained the same at 6% for the three months ended
June 30, 1997, and 1998.
Depreciation and amortization decreased from $1,333,000 for the three
months ended June 30, 1997, to $599,000 for the same period in 1998. The
decrease is primarily due to the decreased fixed asset balance as a result of
the restructuring and impairment charges in the fourth quarter of 1997.
OTHER INCOME
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 increased from $296,000 for the three months ended June 30,
1997, to $439,000 for the same period in 1998. The increase is primarily due
to increased interest income during the three months ended June 30, 1998.
NET INCOME (LOSS)
Net income (loss) increased from a loss of ($544,000) for the three
months ended June 30, 1997, to income of $364,000 for the same period in
1998, an increase of $908,000. The increase in net income is primarily
related to the decrease in operating expenses combined with the increase in
other income.
14
<PAGE>
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
$23,715,000 at June 30, 1998, as compared to $27,873,000 at December 31,
1997, of which $12,998,000 and $15,600,000, respectively, are restricted for
payment of slot liabilities. The Company generated cash from operations of
$667,000 during the six months ended June 30, 1998.
The Company used $3,696,000 of cash in investing activities during the
six months ended June 30, 1998 primarily related to $2,451,000 in equipment
to be used in operations; $1,081,000 invested in software development;
$819,000 invested in held-to-maturity securities; and a decrease of $655,000
in the intangible asset balance.
The Company used $1,129,000 of cash in financing activities for payments
made on outstanding debt during the six months ended June 30, 1998.
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 the games and the regulatory requirements. At June 30,
1998, the Company's accrued slot liability for its MSP systems aggregated
approximately $19,537,000. There was no unaccrued slot liability. In
connection with these slot liabilities and in accordance with gaming
requirements, the Company established segregated cash accounts aggregating
approximately $12,998,000 at June 30, 1998 to ensure availability of adequate
funds to pay this liability. The Company also has investment securities
approximating $7,270,000 segregated as of June 30, 1998 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 has financed certain equipment under agreements for an
aggregate amount of $1,310,000. 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 million revolving line
of credit ("line of credit") with U.S. Bank of Nevada which expired in May
1998. The Company maintains an irrevocable letter of credit pursuant to
equipment financing agreements which mature in December 1998.
The Company's ratio of current assets to current liabilities is 3.8 at
June 30, 1998, while the noncurrent liabilities to equity ratio is .25 to 1.
Based on this financial position, the Company believes it could obtain
additional long-term financing for anticipated growth that may result in
working capital additions that exceed available cash and cash equivalents and
cash to be provided by operations. However, there can be no assurance that
the Company will be able to obtain additional sources of capital during 1998.
15
<PAGE>
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. 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, to which the Company will
respond in a timely fashion. 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 to be without merit, and intends to
vigorously defend against them. In addition, the Company maintains a policy
of insurance pursuant to which it has tendered these claims to the insurance
carrier. This insurance policy may cover all or a portion of the claims.
While the outcome of the actions 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.
A patron dispute was filed against the Company which allegedly arose
while a patron played 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 Ms. Freeman. Ms.
Freeman 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 jackpot, as directed by the
Mississippi Gaming authorities. The Company has accrued $382,000 of interest
expense as of June 30, 1998 toward the judgment in the event the Company
loses its appeal. 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.
In November of 1997, a customer of the Company filed for protection
under Chapter 11 of the United States Bankruptcy Code. The pre-petition debt
owed the Company is approximately $1,700,000, which amount has been included
in a Proof of Claim filed by the Company in the Bankruptcy action. A Plan of
Reorganization has been filed and approved by the Court. Pursuant to the
Plan of Reorganization, the Company is treated as a secured creditor in the
action. Pursuant to the Plan, the Company has been paid all pre-petition
arrearages and is current on all post-petition debt. In addition, the
Company has obtained personal guarantees from certain of the principals of
the debtor. While the outcome of the Bankruptcy 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.
17
<PAGE>
In August of 1997, Casino Technology Incorporated ("CTI"), filed a
demand for arbitration of certain issues arising out of a Cross-License
Agreement between CTI and the Company pursuant to which the Company marketed
the Caribbean Stud video poker game. CTI alleged that the Company failed to
pay royalty fees due under the agreement. The Company has accrued
approximately $2,000,000 with respect to potential obligations arising out of
this agreement. The Company is contesting this amount because it believes it
has been damaged as a result of certain actions and/or inaction's of CTI and
its principal. While the outcome of the arbitration is not presently
determinable, management does not believe the outcome will have a material
effect on the Company's financial statements 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 CDS violated certain patent rights of Acres Gaming.
Acres Gaming also filed a Motion for Preliminary Injunction. The Motion is
expected to be scheduled for a hearing in early October, 1998. The Company
intends to vigorously defend this action as it feels the action is without
merit. While the outcome of the actions 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.
ITEM 5. OTHER INFORMATION
On May 21, 1998, the Securities and Exchange Commission adopted an
amendment to Rule 14a-4, as promulgated under the Securities and Exchange Act
of 1934. The amendment to 14a-4(c)(1) governs the Company's use of its
discretionary proxy voting authority with respect to a shareholder proposal
which the shareholder has not sought to include the Company's proxy statement.
The new amendment provides that if a proponent of a proposal fails to notify
the Company at least 45 days prior to the month and day of mailing of the
prior year's proxy statement, then the management proxies will be allowed to
use their discretionary voting authority when the proposal is raised at the
meeting, without any discussion of the matter in the proxy statement.
The Company expects that its 1999 Annual Meeting of Shareholders will
be held on or about May 14, 1999. Therefore, if the Company is not provided
notice of a shareholder proposal which the shareholder has not previously
sought to include in the Company's proxy statement by March 30, 1999, the
management proxies will be allowed to use their discretionary authority as
outlined above.
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 six month period ended June 30,
1998.
18
<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: August 13, 1998 /s/ HOWARD YENKE
---------------------- -------------------------------
Howard Yenke
Chief Executive Officer
Date: August 13, 1998 /s/ LEE LEMAS
---------------------- -------------------------------
Lee Lemas
Chief Financial Officer
and Vice President Finance
19
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