<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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0-21426
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(Commission File Number)
CASINO DATA SYSTEMS
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(Exact Name of Registrant as Specified in its Charter)
NEVADA
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(State or Other Jurisdiction of Incorporation or
Organization)
88-0261839
------------------------------------
(I.R.S. Employer Identification
Number)
3300 BIRTCHER DRIVE, LAS VEGAS, NEVADA 89118
--------------------------------------------------------------
(Address of Principal Executive Offices)
(702) 269-5000
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 18,388,696 SHARES OF COMMON
STOCK OUTSTANDING AS OF NOVEMBER 9, 1999.
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<PAGE>
CASINO DATA SYSTEMS
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet
September 30, 1999 and December 31, 1998 (audited).............................. 3-4
Unaudited Condensed Consolidated Statement of Operations
For the nine months ended September 30, 1999 and 1998........................... 5
Unaudited Condensed Consolidated Statement of Operations
For the three months ended September 30, 1999 and 1998.......................... 6
Unaudited Condensed Consolidated Statement of Cash Flows
For the nine months ended September 30, 1999 and 1998........................... 7
Notes to Unaudited Condensed Consolidated Financial Statements.................. 8-11
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations....................................................... 11-16
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...................... 16-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 17-18
Item 6. Exhibits and Reports on Form 8-K................................................ 18
Signatures ................................................................................ 19
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 3,831 $ 5,141
Restricted cash and cash equivalents 8,231 8,111
Investment securities 1,254 1,691
Restricted investment securities 1,463 959
Accounts receivable, net of allowance for doubtful
accounts of $2,204 and $3,516, respectively 21,859 13,421
Current portion of notes receivable 5,600 2,284
Inventories 24,358 19,147
Prepaid expenses and other current assets 2,277 2,984
------------ -----------
Total current assets 68,873 53,738
------------ -----------
Property and equipment, net of accumulated
depreciation of $7,483 and $5,349, respectively 18,368 19,828
Restricted investment securities 14,347 14,623
Notes receivable, excluding current portion 625 1,137
Intangible assets, net of accumulated amortization of
$4,103 and $2,795, respectively 3,400 4,649
Software development costs, net of accumulated
amortization of $1,726 and $626, respectively 2,704 3,804
Other assets 1,225 1,231
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Total non-current assets 40,669 45,272
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Total assets $ 109,542 $ 99,010
============ ===========
</TABLE>
(Continued)
See accompanying Notes to Condensed Consolidated Financial Statements
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<PAGE>
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 27 $ 211
Accounts payable 5,013 3,687
Accrued expenses and customer deposits 11,059 8,026
Accrued slot liability 1,893 2,107
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Total current liabilities 17,992 14,031
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Non-current Liabilities
Accrued slot liability 20,502 18,839
----------- ----------
Total non-current liabilities 20,502 18,839
----------- ----------
Shareholders' Equity
Common stock, no par value. Authorized
100,000,000 shares; issued and outstanding
18,368,982 and 18,065,897 at September 30, 1999
and December 31, 1998, respectively 84,747 83,790
Accumulated deficit (13,699) (17,650)
----------- ----------
Total shareholders' equity 71,048 66,140
----------- ----------
Total liabilities and shareholders' equity $ 109,542 $ 99,010
=========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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<PAGE>
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue
Systems and services $ 22,372 $ 17,282
Gaming devices 24,283 10,226
Recurring revenue 5,839 7,217
Signs 4,323 3,252
TurboPower 1,700 1,446
----------- ----------
Total revenue 58,517 39,423
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Cost of goods sold 31,507 20,960
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Gross margin 27,010 18,463
----------- ----------
Operating expenses
Selling, general and administrative 14,945 13,052
Research and development 3,820 2,628
Loss from shareholder suit -- 1,000
Depreciation and amortization 3,136 1,893
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Total operating expenses 21,901 18,573
----------- ----------
Income (loss) from operations 5,109 (110)
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Other income (expense)
Interest and other income, net 1,008 1,358
Interest expense (38) (129)
------------ ----------
Total other income, net 970 1,229
----------- ----------
Income before income taxes 6,079 1,119
Income tax expense 2,128 387
----------- ----------
Net income $ 3,951 $ 732
=========== ==========
Basic net income per share $ .22 $ .04
=========== ==========
Diluted net income per share $ .21 $ .04
=========== ==========
Basic weighted average shares outstanding 18,182 18,066
=========== =========
Diluted weighted average shares outstanding 18,580 18,073
=========== =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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<PAGE>
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Revenue
Systems and services $ 7,289 $ 6,307
Gaming devices 8,848 4,911
Recurring revenue 1,687 2,316
Signs 1,667 1,068
TurboPower 521 437
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Total revenue 20,012 15,039
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Cost of goods sold 9,976 8,225
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Gross margin 10,036 6,814
----------- ----------
Operating expenses
Selling, general and administrative 5,189 4,399
Research and development 1,260 1,115
Loss from shareholder suit -- 1,000
Depreciation and amortization 1,036 640
----------- ----------
Total operating expenses 7,485 7,154
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Income (loss) from operations 2,551 (340)
----------- -----------
Other income (expense)
Interest and other income, net 243 395
Interest expense (10) 19
------------ ----------
Total other income, net 233 414
----------- ----------
Income before income taxes 2,784 74
Income tax expense 975 26
----------- ----------
Net income $ 1,809 $ 48
=========== ==========
Basic net income per share $ .10 $ .00
=========== ==========
Diluted net income per share $ .10 $ .00
=========== ==========
Basic weighted average shares outstanding 18,334 18,066
=========== ==========
Diluted weighted average shares outstanding 18,840 18,066
=========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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<PAGE>
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 3,951 $ 732
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,344 1,890
Amortization of intangible assets 1,011 1,011
Amortization of software development costs 306 34
Loss (gain) on disposal of assets 44 (25)
Changes in assets and liabilities:
(Increase) decrease in restricted cash (120) 5,121
Increase in accounts and notes receivable (10,600) (5,030)
Decrease in income tax receivable -- 4,000
Increase in inventories (5,211) (2,306)
Decrease in prepaid expenses, other
current assets and deposits 54 836
Increase in accounts payable 1,326 68
Increase in accrued liabilities, customer deposits and
slot liability 4,483 2,871
----------- ----------
Net cash (used) provided by operating activities (1,412) 9,202
------------ ----------
Cash Flows From Investing Activities:
Decrease (increase) in investment securities - current 437 (1,674)
Increase in restricted investment securities - current (504) (1,431)
Increase in investment securities - non current -- 1,479
Decrease (increase) in restricted investment securities - non current 276 (2,888)
Increase in intangible assets (59) (50)
Increase in software development -- (2,348)
Increase in property and equipment (838) (3,646)
Decrease (increase) in assets held for sale 17 (303)
----------- -----------
Net cash used in investing activities (671) (10,861)
----------- ----------
Cash Flows From Financing Activities:
Repayment of notes payable (184) (1,680)
Proceeds from the issuance of stock 957 --
----------- ----------
Net cash provided (used) in financing activities 773 (1,680)
----------- ----------
Net decrease in cash and cash equivalents (1,310) (3,339)
Cash and cash equivalents at beginning of period 5,141 12,273
----------- ----------
Cash and cash equivalents at end of period $ 3,831 $ 8,934
=========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
-7-
<PAGE>
CASINO DATA SYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Description of Business and Summary of Significant Accounting Policies
Casino Data Systems, a Nevada corporation, was incorporated in June 1990. Each
of the following corporations are wholly owned subsidiaries of Casino Data
Systems: CDS Services Company; CDS Graphics and Imaging Company; CDS Signs,
Inc.; TurboPower Software Company, and CDS Gaming Company (collectively the
"Company"). The Company's operations consist principally of: (i) the
development, licensing and sale of casino management information systems (the
Oasis(TM) System); (ii) the operation of multi-site link progressive (MSP)
systems; (iii) the design and manufacture of video interactive gaming machines,
and (iv) the design and manufacture of casino meters, signs and graphics. The
Company also creates software development tools for sale to outside software
professionals and for use by the Company's own software engineers. The Company
provides these products through operation of five segments: systems and
services, games, recurring revenue products, signs and software development
tools (TurboPower).
The consolidated financial statements include the accounts of Casino Data
Systems and all of the subsidiaries mentioned above. All significant
inter-company balances and transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's annual report as filed on
Form 10-K.
The accompanying condensed unaudited consolidated financial statements contain
all adjustments which, in the opinion of management, are necessary for a fair
statement of the results of the interim periods presented. The results of
operations for any interim period are not necessarily indicative of the results
of operations that will be achieved for an entire year.
(2) Business Segments
Financial Accounting Standards Board Statement of Financial Accounting Standards
No 131, "Disclosures About Segments of an Enterprise and Related Information"
provides accounting guidance for reporting information about operating segments
in annual financial statements and requires public business enterprises to
report selected information about operating segments in interim financial
reports. Following is the disclosure of the above items that management utilizes
in measuring the profit or loss of each of the Company's segments.
<TABLE>
<CAPTION>
Revenues
--------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Systems and Services $ 7,289 $ 6,307 $22,372 $17,282
Gaming Devices 8,848 4,911 24,283 10,226
Recurring Revenue 1,687 2,316 5,839 7,217
Signs 1,667 1,068 4,323 3,252
TurboPower 521 437 1,700 1,446
------- ------- ------- -------
Total $20,012 $15,039 $58,517 $39,423
======= ======= ======= =======
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Income (Loss) From Operations
--------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Systems and Services $3,278 $ 2,023 $ 9,177 $ 3,806
Gaming Devices (985) (2,111) (4,170) (4,109)
Recurring Revenue 140 (393) (288) (423)
Signs 33 143 (19) 480
TurboPower 85 (2) 409 136
------ ------- ------- -------
Total $2,551 $ (340) $ 5,109 $ (110)
====== ======= ======= =======
</TABLE>
Corporate expenses have been allocated to each segment based on an estimate of
each segment's utilization of corporate resources.
(3) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Raw materials $14,611 $ 9,734
Work in process 758 711
Finished goods 10,384 10,139
------- --------
25,753 20,584
Less reserve for obsolescence (1,395) (1,437)
------- --------
$24,358 $ 19,147
======= ========
</TABLE>
(4) Net Income Per Share
The following is an analysis of the components of the shares used to compute net
income per common share pursuant to SFAS 128.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except per share information)
<S> <C> <C> <C> <C>
Numerator for earnings per share
Net income $ 1,809 $ 48 $ 3,951 $ 732
======= ======= ======= =======
Denominator for earnings per share
Weighted average shares
outstanding - basic 18,334 18,066 18,182 18,066
Effect of dilutive securities
Stock options 506 -- 398 7
------- ------- ------- -------
Weighted average shares
outstanding - diluted 18,840 18,066 18,580 18,073
======= ======= ======= =======
Basic earnings per share $ .10 $ .00 $ .22 $ .04
======= ======= ======= =======
Diluted earnings per share $ .10 $ .00 $ .21 $ .04
======= ======= ======= =======
</TABLE>
-9-
<PAGE>
(5) Commitments and Contingencies
In connection with the operation of its MSP Systems, the Company is liable for
progressive jackpots, which are paid as an initial base jackpot component
followed by an annuity (progressive component) paid out over 20 years after the
prize is won. The base jackpot component is charged against income ratably over
the amount of coin play expected to precede payout based on a statistical
analysis. The progressive jackpot component increases based on the number of
coins played. The accrual of these liabilities commensurate with coin play
matches recognition of costs and revenues. The possibility exists that the
winning combination may be hit before the Company has fully accrued the base
jackpot component, at which time any unaccrued portion would be expensed. There
was no unaccrued portion at September 30, 1999. To ensure adequate funds are
available to pay the slot liability and to comply with gaming regulatory
requirements, the Company has established restricted cash and cash equivalent
accounts aggregating $8,231,000 at September 30, 1999. The Company also has
restricted investment securities of $15,810,000 for annuity payments of jackpots
already won.
A patron dispute was filed against the Company in connection with the Company's
Cool Millions dollars progressive slot machine at Splash Casino in Tunica,
Mississippi. The dispute was heard by the Mississippi Gaming Commission, who
decided that the patron had won only $5.00 rather than the jackpot of $1,742,000
as alleged by the patron. The patron appealed the Commission's decision to the
Circuit Court of Tunica County. On January 16, 1998, the Court issued an Order
reversing the Commission's decision and ordered the Company to pay the jackpot
plus interest from April 8, 1995. As a result of the Circuit Court's Order, and
with the consent of the Mississippi Gaming authorities, the Company reduced the
Cool Millions dollar Mississippi jackpot by $1,742,000. The Company appealed the
decision to the Mississippi Supreme Court. The Mississippi Supreme Court ruled
in favor of the Company. Upon receiving the decision of the Mississippi Supreme
Court in favor of the Company, the Company discontinued accruing interest on the
disputed amount and adjusted the previously accrued interest balance of $411,000
to zero. The patron has requested a rehearing by the Mississippi Supreme Court.
Subsequent to September 30, 1999 the court ruled in favor of the Company,
denying the patrons request for a rehearing. Therefore, the claim will not have
a material adverse effect on the Company's consolidated financial statements
taken as a whole.
On May 19, 1998, Acres Gaming Corporation filed an action against the Company,
Mikohn Gaming Corporation, New York New York Hotel & Casino, LLC, and Sunset
Station Hotel & Casino, in the Federal Court for the State of Nevada, alleging
that the Company violated certain patent rights of Acres Gaming. Acres Gaming
also filed a Motion for Preliminary Injunction which it later withdrew. The
Company believes this action is without merit and will continue to vigorously
defend itself. While the outcome of this lawsuit is not presently determinable,
management does not expect the outcome will have a material adverse effect on
the Company's consolidated financial statements taken as a whole.
On November 17, 1998, Acres filed a second lawsuit against the Company alleging
that the Company's Pro Turbo Software module violates certain patent rights of a
second Acres patent. CDS has filed an answer and a counterclaim seeking a
declaration of invalidity, noninfringement and unenforceability of the patent
asserted. The Company has filed additional counterclaims for alleged patent
misuse, spoliation of evidence, antitrust violations and unfair competition. The
Company believes that this action is without merit and will continue to
vigorously defend itself. While the outcome of this lawsuit is not presently
determinable, management does not expect the outcome will have a material
adverse effect on the Company's consolidated financial statements taken as a
whole.
On October 28, 1999, International Game Technology, ("IGT") filed, but did not
serve, a lawsuit against the Company, Williams Gaming, Sigma Gaming, and Silicon
Gaming Company, in the Federal District Court for the State of Nevada, alleging
that the Company violated certain patent rights of IGT relating to the use of
touch screens on video gaming devices. Specifically, the lawsuit alleges that
the Company's Bandit Bingo game and other video poker gaming devices infringe
IGT's patent. The Company is investigating the claims and if the lawsuit is
served, the Company will respond. While the Company believes the allegations
contained in this lawsuit are without merit the claims have not progressed
sufficiently for the Company to estimate a range of possible exposure, if any.
The Company plans to vigorously defend itself.
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<PAGE>
The Company and its subsidiaries are also involved from time to time in other
various claims and legal actions arising in the ordinary course of business
including, but not limited to, administrative claims and legal actions brought
in state and federal courts by patrons of the Company's MSP games, wherein the
patron may allege the winning of jackpot awards or some multiple thereof.
Because of the size of the jackpots that a patron may play for, related patron
disputes often involve sizable claims. The loss of a sizable patron dispute
claim could have a material adverse effect on the Company. However, management
believes that the likelihood of success by those making such claims is remote
and that the ultimate outcome of these matters will not have a material adverse
effect on the Company's consolidated financial statements taken as a whole.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Unaudited Condensed
Consolidated Financial Statements and Notes thereto included elsewhere in this
document and the Consolidated Financial Statements and Notes thereto included in
the Company's annual report on Form 10-K.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
OVERVIEW
Income from operations was $5,109,000 for the nine months ended September 30,
1999 compared with a loss of $110,000 for the nine months ended September 30,
1998, an increase of $5,219,000. Net income increased from $732,000 for the nine
months ended September 30, 1998 to $3,951,000 for the same period in 1999, an
improvement of $3,219,000.
Total revenue for the nine months ended September 30, 1999 was $58,517,000
compared with $39,423,000 for the same period in 1998, an increase of
$19,094,000 or 48%. This increase is primarily due to higher revenue from the
sales of gaming devices and systems and services.
Systems and services revenue was $22,372,000 and $17,282,000 for the nine months
ended September 30, 1999 and 1998, respectively, an increase of $5,090,000 or
29%. This increase is primarily attributable to sales of the Company's Windows
(Windows is a registered trademark of Microsoft Corporation) based Oasis
product, which was introduced into the market late in the fourth quarter of
1998. Operating income from this segment increased $5,371,000 from $3,806,000 to
$9,177,000 for the nine months ended September 30, 1998 and 1999, respectively.
This increase is primarily the result of increased revenue and a slightly
improved gross margin percentage, offset in part by higher corporate expenses.
Revenue from the sale of gaming devices increased $14,057,000 from $10,226,000
for the nine month period ended September 30, 1998 to $24,283,000 for the same
1999 period. This increase in revenue is primarily attributable to sales of the
Bandit-TM- Bingo game, which comprised 58% of the units sold in the nine months
ended September 30, 1999. Bingo, the first of a series of games designed on the
Company's proprietary Bandit platform was introduced for sale late in the fourth
quarter of 1998. This segment's operating loss of $4,170,000 for the nine months
ended September 30, 1999 was $61,000 higher than the same prior year period,
primarily due to increased operating expenses, including research and
development and corporate expenses, offset in part by an improved gross margin
and higher revenue.
Revenue from the recurring revenue segment was $5,839,000 and $7,217,000 for
the nine months ended September 30, 1999 and 1998, respectively, a decrease
of 19% or $1,378,000. This revenue decline is primarily the result of a
reduction in the number of Cool Millions-TM- operating units in service from
271 linked units at September 30, 1998 to 50 linked units at September 30,
1999. This decrease in units combined with lower levels of play on the
recurring revenue products was partially offset by revenues from the
Xtreme-TM- link which began operation in the third quarter of 1998. This
segment's operating loss for the nine months ended September 30, 1999 was
$135,000 lower than prior year due to an improved gross margin partially
offset by lower revenues and higher operating costs.
Signs revenue increased from $3,252,000 for the nine months ended September 30,
1998 to $4,323,000 for the same period in 1999, an increase of $1,071,000 or
33%. This increase is primarily due to higher sales of games related
- 11 -
<PAGE>
signage. Operating income from signs decreased from $480,000 to a loss of
$19,000 for the nine months ended September 30, 1998 and 1999, respectively,
primarily due to lower margins and higher operating expenses.
Revenue of $1,700,000 from TurboPower Software was $254,000, or 18%, higher for
the nine months ended September 30, 1999 compared with the same prior year
period, primarily due to new product releases. Operating income from this
segment increased $273,000 for the nine months primarily attributable to the
increase in revenues.
GROSS MARGIN
The gross margin percentage was 46% for the nine months ended September 30, 1999
compared with 47% for the same period in 1998. This slight decrease is primarily
due to a revenue mix more heavily weighted toward game sales. Revenue from games
represented 41% of total revenue for the nine months ended September 30, 1999
compared with 26% of total revenue for the same period in the prior year.
OPERATING EXPENSES
Operating expenses were $21,901,000 and $18,573,000 for the nine months ended
September 30, 1999 and 1998, respectively, an increase of $3,328,000 or 18%.
Operating expenses decreased as a percentage of revenues from 47% for the nine
months ended September 30, 1998, to 37% for the same period in 1999.
Selling, general and administrative expenses increased from $13,052,000 for the
nine months ended September 30, 1998, to $14,945,000 for the same period in
1999, an increase of $1,893,000 or 15%. Selling, general and administrative
expenses as a percentage of revenues decreased from 33% for the nine months
ended September 30, 1998, to 26% for the same period in 1999. The increase in
selling, general and administrative expenses is primarily attributable to
increased legal costs and higher commissions related to the higher revenue. The
change in selling, general and administrative expenses as a percentage of
revenue is partly due to the fixed nature of some expenses which do not
fluctuate with revenue.
Research and development expenses increased from $2,628,000 for the nine
months ended September 30, 1998, to $3,820,000 for the same period in 1999,
an increase of $1,192,000 or 45%. Research and development expenses as a
percentage of revenues remained at 7% for the nine months ended September 30,
1999 and 1998.
Depreciation and amortization expense increased from $1,893,000 for the nine
months ended September 30, 1998, to $3,136,000 for the same period in 1999,
an increase of $1,243,000 or 66%. The increase in depreciation and
amortization is primarily due to nine months of expense in 1999 related to
the Xtreme link which began operation in the second quarter of 1998, combined
with amortization of software development costs related to the Bandit
platform, which began in the fourth quarter of 1998.
OTHER INCOME, NET
Other income, net, is comprised of interest income, interest expense, gains and
losses on disposal of assets and other transactions that are not the result of
normal operations. Other income, net, decreased from $1,229,000 for the nine
months ended September 30, 1998, to $970,000 for the same period in 1999, a
decrease of $259,000 or 21%. This decrease is primarily due to lower interest
income partially offset by the reversal of approximately $411,000 of interest
expense related to a favorable lawsuit decision by a court of law, in the second
quarter of 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
OVERVIEW
Income from operations was $2,551,000 for the three months ended September 30,
1999, compared with a loss of $340,000 for the same prior year period, an
increase of $2,891,000. Net income increased from $48,000 for the three months
ended September 30, 1998 to $1,809,000 for the same period in 1999, an
improvement of $1,761,000.
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<PAGE>
Total revenue for the three months ended September 30, 1999 was $20,012,000
compared with $15,039,000 for the same prior year period. This is an increase
of $4,973,000, or 33%, due primarily to higher sales of systems and services
products and gaming devices.
Systems and services revenue was $7,289,000 for the third quarter of 1999
compared with $6,307,000 for the third quarter of 1998, an increase of $982,000
or 16%. This increase is primarily due to sales of the Oasis Windows product,
which was introduced for sale late in the fourth quarter of 1998. Operating
income from this segment was $3,278,000 for the current quarter compared with
$2,023,000 for the same quarter in the prior year, an increase of $1,255,000.
This increase is primarily due to the increased revenue partially offset by
increase operating and corporate expenses.
Revenue from the sale of gaming devices increased from $4,911,000 for the three
months ended September 30, 1998 to $8,848,000 for the three months ended
September 30, 1999, an improvement of $3,937,000. Sales of the Bandit Bingo
game, which began late in the fourth quarter of 1998, were the primary reason
for the increase. This segment's operating loss decreased from $2,111,000 for
the third quarter of 1998 to $985,000 for the same 1999 period due primarily to
increased revenue and gross margin percentage, partially offset by higher
operating and corporate expenses.
The recurring revenue segment experienced a 27% decline in revenue for the third
quarter of 1999 compared with the same prior year period. Revenue was $1,687,000
for the three months ended September 30, 1999 compared with $2,316,000 for the
prior year. This decline in revenue was primarily attributable to fewer machines
on the Cool Millions links combined with lower levels of play. The total number
of linked units decreased 41% between September 30, 1998 and September 30, 1999,
primarily due to the closing of the Mississippi link in February 1999 combined
with a reduction in linked machines in Nevada. The number of Cool Millions
linked units decreased 221 units, from 271 at September 30, 1998 to 50 at
September 30, 1999. Operating income for this segment for the three months ended
September 30, 1999 was $140,000 compared with a loss of $393,000 for the same
three month period of 1998. This increase is principally attributable to an
increased gross margin percentage offset in part by the lower revenue.
Revenue from signs was $1,667,000, an increase of 56%, or $599,000, for the
three months ended September 30, 1999 compared with the same 1998 period. This
increase is primarily attributable to the increased sales of games related
signage. Operating income for this segment decreased from $143,000 to $33,000
for the third quarter of 1999 compared with 1998, primarily due to a lower gross
margin percentage on higher revenue combined with higher operating expenses.
TurboPower revenue increased 19%, from $437,000 for the three months ended
September 30, 1998 to $521,000 for the same period in 1999. This segment's
operating income increased $87,000, from a loss of $2,000 for the third quarter
of 1998 to a profit of $85,000 for the same 1999 period primarily due to the
increased revenue.
GROSS MARGIN
The gross margin percentage increased from 45% for the three months ended
September 30, 1998 to 50% for the same three month period in 1999. This increase
is primarily attributable to the positive effect of manufacturing and purchasing
efficiencies realized in the third quarter of 1999. These efficiencies were
partially offset by a revenue mix that was more heavily weighted toward the
lower margin games sales. Revenue from games represented 44% of total revenue
for the three months ended September 30, 1999 compared with 33% of total revenue
for the same quarter in prior year. The amount of systems and services revenue
as a percentage of total revenue declined from 42% for the quarter ended
September 30, 1998 to 36% for the same quarter in 1999.
OPERATING EXPENSES
Operating expenses increased slightly from $7,154,000 for the three months ended
September 30, 1998, to $7,485,000 for the same period in 1999, an increase of
$331,000 or 5%. Operating expenses decreased as a percentage of revenues from
48% for the three months ended September 30, 1998, to 37% for the same period in
1999.
- 13 -
<PAGE>
Selling, general and administrative expenses increased from $4,399,000 for
the three months ended September 30, 1998, to $5,189,000 for the same period
in 1999, an increase of $790,000 or 18%. Selling, general and administrative
expenses as a percentage of revenues decreased slightly from 29% for the
three months ended September 30, 1998, to 26% for the same period in 1999.
The increase in selling, general and administrative expenses is primarily
attributable to higher legal costs and increased commissions related to the
higher level of sales for the current quarter. The change in selling, general
and administrative expenses as a percentage of revenue is partly due to the
fixed nature of some expenses which do not fluctuate with revenue.
Research and development expenses were $1,260,000 for the third quarter of
1999 compared with $1,115,000 for the same quarter in 1998, an increase of
$145,000 or 13%. Research and development expenses as a percentage of
revenues decreased from 7% for the three months ended September 30, 1998 to
6% for the same period in 1999. The increase is principally due to increases
in headcount.
Depreciation and amortization expense increased from $640,000 to $1,036,000
for the three months ended September 30, 1998 compared with the same period
in 1999. This increase is primarily attributable to an increase in the
average number of units on the Xtreme link for the third quarter of 1999 of
319 units compared with 295 units for the third quarter of 1998. Also
contributing to the increase was amortization of software development costs,
related to the Bandit platform, which began in the fourth quarter of 1998.
OTHER INCOME, NET
Other income, net, is comprised of interest income, interest expense, gains and
losses on disposal of assets and other transactions that are not the result of
normal operations. Other income, net, decreased from $414,000 for the three
months ended September 30, 1998, to $233,000 for the same period in 1999, a
decrease of $181,000 or 44%. This decrease is primarily due to lower interest
income in 1999 compared with 1998.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operating and capital expenditures
primarily through cash flows from its operations and cash from proceeds of its
equity offerings. The Company had cash and cash equivalents of $12,062,000 at
September 30, 1999, compared with $13,252,000 at December 31, 1998, of which
$8,231,000 and $8,111,000, respectively, were restricted for payment of slot
liabilities.
Certain jurisdictions in which MSP systems operate require that the Company
maintain restricted funds for the payment of jackpot prizes. At September 30,
1999, the Company's accrued slot liability for its MSP systems aggregated
$22,395,000. There was no unaccrued slot liability. In connection with these
slot liabilities and in accordance with gaming requirements, the Company
established restricted cash accounts aggregating approximately $8,231,000 at
September 30, 1999 to ensure availability of adequate funds to pay for future
jackpot liabilities. The Company also has restricted investment securities
approximating $15,810,000 as of September 30, 1999 for the payment of
jackpots already won. Although statistically unlikely, a possibility exists
that multiple jackpots may be awarded prior to the time period over which
game play has generated sufficient revenue to accrue each base jackpot
amount. Such occurrences could have a material adverse impact on the
Company's results of operations in the reporting period in which the jackpots
hit.
The Company's ratio of current assets to current liabilities is 3.8 to 1 at
September 30, 1999, while the noncurrent liabilities to equity ratio is .29 to
1. Based on this financial position, the Company believes it could obtain
additional long-term financing for growth. However, there can be no assurance
that the Company will be able to obtain additional sources of capital.
YEAR 2000
The year 2000 issue is the result of computer programs written using two digits
(rather than four) to define years. Computers or other equipment with
date-sensitive software may recognize "00" as 1900 rather than 2000. This could
result in system failures or miscalculations. If the Company, or its customers,
suppliers or other third parties fail to correct year 2000 issues, the Company's
operations may be adversely affected.
- 14 -
<PAGE>
Over the last year, the Company has assessed the impact of year 2000 issues on
its internal processing systems and on the products produced and sold by the
Company. In September 1998, the Company formed an internal committee comprised
of management from every operational and functional department of the Company.
This committee is responsible for identifying and testing systems that may be
subject to year 2000 issues and for formulating contingency plans if the Company
experiences year 2000 issues.
The Company's internal information system, put into operation in the second
quarter of 1998, has been certified by the vendor as year 2000 compliant. The
operating system that this software uses has also been certified as year 2000
compliant by the third party manufacturer. The Company has tested certain
attributes of this system by processing test information in the year 2000
format. The results of those tests confirmed that the tested attributes are year
2000 compliant. Additional testing will be performed on the remaining
attributes. Management expects to be completed with this testing in November
1999. Based on the vendor assurances, and the results of the preliminary
testing, the Company believes that it will not experience any disruption in
daily operations with this system related to year 2000 issues; however, if such
disruption should occur, the Company believes that it could maintain ongoing
operations through manual record keeping procedures until the computerized
system functionality is reestablished.
The Company is also in the process of testing and upgrading all desktop
computers and their associated software for year 2000 compliance. This testing
is expected to be complete by November 1999. The total cost of upgrading
non-compliant personal computers and software is expected to be $225,000.
Through September 30, 1999 approximately $214,000 has been spent on year 2000
compliant software upgrades.
The Company operates its MSP systems using its own proprietary software which
utilizes a third party operating system which was not year 2000 compliant. The
Company upgraded the operating system to a certified year 2000 compliant version
at an approximate cost of $10,000. With this upgrade, the Company does not
believe it will experience any disruption of MSP operations; however, the MSP
technology is dependent upon third party phone service as well as computerized
information systems and electricity at the various casino sites where the MSP
equipment is deployed. Disruption in any of these areas could render MSP
operations inoperable until service is reestablished.
The Company continues to review the impact of year 2000 issues concerning the
Company's production facility. No concerns have been identified. Therefore, at
this time, the Company believes that there will not be any material adverse
affect on its production capabilities resulting from year 2000 issues related to
the Company's production processes.
The Company also sells proprietary software to third parties. The Company has
year 2000 compliant versions of this software; however, a portion of the
Company's customer base uses a version of the software that includes certain
modules which are not year 2000 compliant. The Company has notified all of these
customers that they require an upgrade to become year 2000 compliant. The
Company has completed approximately 90% of customer upgrades and plans to
complete all such upgrades on customers covered by purchased maintenance
agreements in calendar year 1999 at an estimated cumulative cost of
approximately $100,000. Through September 30, 1999 approximately $92,000 has
been spent. The Company has also planned the resources necessary to complete the
upgrades for customers that are not under maintenance agreements; however,
performing these upgrades is contingent upon these customers contracting for a
fee with the Company to purchase an upgrade.
A portion of the gaming devices sold by the Company to third parties are not
year 2000 compliant. The Company plans to provide an upgrade on these units
prior to December 31, 1999 at an estimated cumulative cost of approximately
$10,000.
The Company has sent written questionnaires to its significant manufacturing
materials suppliers, banks, telecommunications suppliers, utility providers and
payroll service to assess their year 2000 readiness and the effect these third
parties could have on the Company. No concerns have been identified. The Company
plans to maintain communication with significant suppliers and vendors with
respect to this issue.
Based on current assessments and testing, the Company does not expect year 2000
issues to have a material adverse effect on the Company's financial position,
results of operations or cash flows. However, risk exists regarding
non-
-15-
<PAGE>
compliance of third parties with operational importance to the Company, such
as key suppliers and customers, utilities, telecommunication providers, or
financial institutions, which could result in lost production, sales, or
administrative difficulties on the part of the Company. Year 2000 issues, if
severe, could have a material effect on the Company. Pending completion of the
year 2000 assessment, the Company will finalize a contingency plan to address
possible risks of year 2000 noncompliance on the Company's financial position.
Though assessment and testing will be ongoing throughout 1999, the Company
expects to have its assessment, testing and contingency planning completed by
November 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and the changes in
the market values of its investments.
The Company's interest rate exposure relates primarily to the Company's
investment portfolio. The Company has not used derivative financial instruments
in its investment portfolio. The Company invests its excess cash primarily in
debt instruments of the U.S. Government and its agencies and state and other
municipal government agencies. By policy, the Company limits the amount of
credit exposure to any one issuer. The Company protects and preserves its
invested funds by limiting default, market and reinvestment risk.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. The Company may suffer
losses in principal if forced to sell securities which have declined in market
value due to changes in interest rates.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take advantage of
the "safe harbor" provisions of the PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 for any forward-looking statement made by, or on behalf of, the Company.
The factors identified in this cautionary statement are important factors (but
not necessarily all the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made by,
or on behalf of, the Company. Where any such forward-looking statement includes
a statement of the assumptions or bases underlying such forward-looking
statement, the Company cautions that, while it believes such assumptions or
bases to be reasonable and makes them in good faith, assumed facts or bases
almost always vary from actual results, and the differences between assumed
facts or bases and actual results can be material, depending on the
circumstances. Where, in any forward-looking statement, the Company, or its
Management, expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished. Taking into
account the foregoing, the following are identified as important risk factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company:
- - Risks associated with developing gaming machines that offer technological
advantages or unique entertainment features to enable the Company to
effectively compete in the gaming machine market.
- - Possible adverse effects upon revenues if the Company experiences delays in
developing or obtaining regulatory approval of new products, including the
possible adverse effects resulting from the time delay associated with
modifying products to meet regulation changes, such as the proposed
amendments to Nevada Regulation 14.
- - Possible adverse effects on revenues if new products or enhancements do not
gain customer acceptance.
- - Possible adverse effects on revenues due to the difficulty in competing with
well-established competitors in markets for the Company's products,
including without limitation, casino management information systems, MSP
products and gaming machines.
- - Possible adverse effects on revenues associated with the dependence upon
Steven A. Weiss, a key employee of the Company.
- - The general profitability of the gaming industry at large can substantially
affect the Company's revenues.
-16-
<PAGE>
- - Even though the Company seeks to protect its intellectual property upon
which it relies to sell its products, there is the possibility of adverse
affects on revenue generation if such intellectual property were not
protected or available for use due to patents issued to competitors.
- - Possible adverse affects related to any negative outcome of pending or
threatened litigation.
- - The Year 2000 Project and the date on which the Company believes it will be
completed are based on Management's best estimates, which are derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no assurance that there will be no delay in,
or no increased costs associated with, the implementation of the Year 2000
Project. Specific factors that might cause differences between the estimates
and actual results include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, timely responses by third-parties and
suppliers, and similar uncertainties. The Company's inability to implement
Year 2000 changes could have an adverse effect on future results of
operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A patron dispute was filed against the Company in connection with the Company's
Cool Millions dollars progressive slot machine at Splash Casino in Tunica,
Mississippi. The dispute was heard by the Mississippi Gaming Commission, who
decided that the patron had won only $5.00 rather than the jackpot of $1,742,000
as alleged by the patron. The patron appealed the Commission's decision to the
Circuit Court of Tunica County. On January 16, 1998, the Court issued an Order
reversing the Commission's decision and ordered the Company to pay the jackpot
plus interest from April 8, 1995. As a result of the Circuit Court's Order, and
with the consent of the Mississippi Gaming authorities, the Company reduced the
Cool Millions dollar Mississippi jackpot by $1,742,000. The Company appealed the
decision to the Mississippi Supreme Court. The Mississippi Supreme Court ruled
in favor of the Company. Upon receiving the decision of the Mississippi Supreme
Court in favor of the Company, the Company discontinued accruing interest on the
disputed amount and adjusted the previously accrued interest balance of $411,000
to zero. The patron has requested a rehearing by the Mississippi Supreme Court.
Subsequent to September 30, 1999 the court ruled in favor of the Company,
denying the patrons request for a rehearing. Therefore, the claim will not have
a material adverse effect on the Company's consolidated financial statements
taken as a whole.
On May 19, 1998, Acres Gaming Corporation filed an action against the Company,
Mikohn Gaming Corporation, New York New York Hotel & Casino, LLC, and Sunset
Station Hotel & Casino, in the Federal Court for the State of Nevada, alleging
that the Company violated certain patent rights of Acres Gaming. Acres Gaming
also filed a Motion for Preliminary Injunction which it later withdrew. The
Company believes this action is without merit and will continue to vigorously
defend itself. While the outcome of this lawsuit is not presently determinable,
management does not expect the outcome will have a material adverse effect on
the Company's consolidated financial statements taken as a whole.
On November 17, 1998, Acres filed a second lawsuit against the Company alleging
that the Company's Pro Turbo Software module violates certain patent rights of a
second Acres patent. CDS has filed an answer and a counterclaim seeking a
declaration of invalidity, noninfringement and unenforceability of the patent
asserted. The Company has filed additional counterclaims for alleged patent
misuse, spoliation of evidence, antitrust violations and unfair competition. The
Company believes that this action is without merit and will continue to
vigorously defend itself. While the outcome of this lawsuit is not presently
determinable, management does not expect the outcome will have a material
adverse effect on the Company's consolidated financial statements taken as a
whole.
On October 28, 1999, International Game Technology, ("IGT") filed, but did not
serve, a lawsuit against the Company, Williams Gaming, Sigma Gaming, and Silicon
Gaming Company, in the Federal District Court for the State of Nevada, alleging
that the Company violated certain patent rights of IGT relating to the use of
touch screens on video gaming devices. Specifically, the lawsuit alleges that
the Company's Bingo game and other video poker gaming devices infringe IGT's
patent. The Company is investigating the claims and if the lawsuit is served,
the Company will respond. While the Company believes the allegations contained
in this lawsuit are without merit the
-17-
<PAGE>
claims have not progressed sufficiently for the Company to estimate a range
of possible exposure, if any. The Company plans to vigorously defend itself.
The Company and its subsidiaries are also involved from time to time in other
various claims and legal actions arising in the ordinary course of business
including, but not limited to, administrative claims and legal actions brought
in state and federal courts by patrons of the Company's MSP games, wherein the
patron may allege the winning of jackpot awards or some multiple thereof.
Because of the size of the jackpots that a patron may play for, related patron
disputes often involve sizable claims. The loss of a sizable patron dispute
claim could have a material adverse effect on the Company. However, management
believes that the likelihood of success by those making such claims is remote
and that the ultimate outcome of these matters will not have a material adverse
effect on the Company's consolidated financial statements taken as a whole.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit 27.1 Financial Data Schedule
There were no reports filed on Form 8-K for the nine month period ended
September 30, 1999.
-18-
<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 12, 1999 /s/ Steven A. Weiss
--------------------------- --------------------------------
Steven A. Weiss
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: November 12, 1999 /s/ Lee Lemas
--------------------------- --------------------------------
Lee Lemas
Chief Operating and
Financial Officer
(Principal Financial and
Accounting Officer)
-19-
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