<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: MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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0-21426
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(Commission file number)
CASINO DATA SYSTEMS
(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 No.)
3300 BIRTCHER DRIVE, LAS VEGAS, NEVADA 89118
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(Address of Principal Executive Offices) (Zip Code)
(702) 269-5000
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(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 18,065,897 SHARES OF COMMON
STOCK OUTSTANDING AS OF APRIL 28, 1999.
Page 1 of 21
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CASINO DATA SYSTEMS
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 (audited) 3-4
Unaudited Condensed Consolidated Statements of Operations
For the three months ended March 31, 1999 and 1998 5
Unaudited Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 1999 and 1998 6
Notes to Condensed Unaudited Consolidated Financial
Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Items 1- 6 19-20
Signatures 21
</TABLE>
2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(UNAUDITED)
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................. $ 4,497 $ 5,141
Restricted cash and cash equivalents .................. 7,754 8,111
Investment securities ................................. 1,716 1,691
Restricted investment securities ...................... 1,426 959
Accounts receivable, net of allowance for doubtful
accounts of $2,922 and $3,516, respectively ......... 15,261 13,421
Current portion of notes receivable ................... 2,228 2,284
Income tax receivable ................................. 642 642
Inventories .......................................... 20,914 19,147
Deferred tax asset .................................... 1,176 1,176
Assets held for sale .................................. 922 922
Prepaid expenses and other current assets ............. 213 244
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Total current assets ................................ 56,749 53,738
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Property and equipment, net of accumulated depreciation
of $6,002 and $5,349 respectively .......................... 19,546 19,828
Restricted investment securities ........................... 14,196 14,623
Notes receivable, excluding current portion ................ 1,119 1,137
Intangible assets, net of accumulated amortization of $3,213
and $2,795, respectively .............................. 4,264 4,649
Software development costs, net of accumulated amortization
of $1,004 and $626, respectively ...................... 3,426 3,804
Deposits ................................................... 408 391
Deferred tax asset ......................................... 840 840
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Total non-current assets ............................ 43,799 45,272
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Total assets ............................................... $100,548 $ 99,010
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</TABLE>
(continued)
See accompanying notes to condensed unaudited consolidated financial statements
3
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LIABILITIES AND SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(UNAUDITED)
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<S> <C> <C>
Current liabilities:
Current portion of long-term debt ......... $ 78 $ 211
Accounts payable .......................... 3,499 3,687
Accrued expenses and customer deposits ......... 9,140 8,026
Accrued slot liability .................... 2,080 2,107
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Total current liabilities ............... 14,797 14,031
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Non-current liabilities:
Accrued slot liability .................... 19,419 18,839
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Total non-current liabilities ........... 19,419 18,839
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Shareholders' equity:
Common stock, no par value. Authorized
100,000,000 shares; issued and outstanding
18,065,897 shares at March 31, 1999 and
December 31, 1998 ........................ 83,790 83,790
Accumulated deficit ....................... (17,458) (17,650)
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Total shareholders' equity .............. 66,332 66,140
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Total liabilities and shareholders' equity ..... $100,548 $99,010
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</TABLE>
See accompanying notes to condensed unaudited consolidated financial statements
4
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CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Revenues:
Systems and services ................... $ 6,896 $ 5,373
Games .................................. 4,694 2,621
Gaming operations ...................... 2,200 2,811
Signs .................................. 1,207 1,338
TurboPower ............................. 740 554
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15,737 12,697
Cost of goods sold .................... 8,768 6,772
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Gross Margin .......................... 6,969 5,925
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Operating expenses:
Selling, general and administrative .... 4,419 4,358
Research and development ............... 1,316 804
Depreciation and amortization .......... 1,051 654
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Total operating expenses ............. 6,786 5,816
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Income from operations ...................... 183 109
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Other income (expense):
Interest and other income (expense), net 152 459
Interest expense ....................... (40) (83)
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Total other income, net .............. 112 376
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Income before income taxes ................. 295 485
Income tax expense .......................... 103 165
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Net income .................................. $ 192 $ 320
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Basic net income per share .................. $ 0.01 $ 0.02
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Diluted net income per share ................ $ 0.01 $ 0.02
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Basic weighted average shares outstanding ... 18,066 18,066
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Diluted weighted average shares outstanding . 18,386 18,117
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</TABLE>
See accompanying notes to condensed unaudited consolidated financial statements
<PAGE>
CASINO DATA SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 192 $ 320
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,051 654
Amortization of intangible assets 337 337
Amortization of software development 102 --
Loss on disposal of assets 100 --
Provision for doubtful accounts -- 32
Net decrease in deferred tax asset -- 165
Changes in assets and liabilities:
Decrease (increase) in restricted cash 357 (742)
(Increase) decrease in accounts receivable and
notes receivable (1,766) 1,527
Increase in inventories (1,767) (479)
Decrease (increase) in prepaid expenses, other current
assets and deposits 14 (45)
Decrease in accounts payable (188) (1,343)
Increase in accrued liabilities, customer deposits and
slot liability 1,667 284
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Net cash provided by operating activities 99 710
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Cash flows from investing activities:
Increase in investment securities - Current (25) --
Increase in restricted investment securities - Current (467) (444)
Increase in investment securities - Noncurrent -- (161)
Decrease (increase) in restricted investment securities - 427 (221)
Noncurrent
Increase in intangible assets (33) (17)
Increase in software development -- (750)
Increase in property and equipment (512) (101)
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Net cash used in investing activities (610) (1,694)
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Cash flows from financing activities:
Repayment of notes payable (133) (536)
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Net cash used in financing activities (133) (536)
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Net decrease in cash and cash equivalents (644) (1,520)
Cash and cash equivalents at beginning of the period 5,141 12,273
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Cash and cash equivalents at end of the period $ 4,497 $ 10,753
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</TABLE>
See accompanying notes to condensed unaudited consolidated financial statements
6
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Casino Data Systems, a Nevada corporation, was incorporated in June
1990. Each of the following corporations are wholly owned subsidiaries of Casino
Data Systems: CDS Services Company; CDS Graphics and Imaging Company; CDS Signs,
Inc.; TurboPower Software Company, and CDS Gaming Company (collectively the
"Company"). The Company's operations consist principally of: (i) the
development, licensing and sale of casino management information systems (the
Oasis(TM) II System); (ii) the operation of multi-site link progressive (MSP)
systems; (iii) the design and manufacture of video interactive gaming machines,
and (iv) the design and manufacture of casino meters, signs and graphics. The
Company also creates software development tools for sale to outside software
professionals and for use by the Company's own software engineers. The Company
provides these products through operation of five segments: systems and
services, games, recurring revenue products, signs and software development
tools (TurboPower).
The consolidated financial statements include the accounts of Casino
Data Systems and all of the subsidiaries mentioned above. All significant
inter-company balances and transactions have been eliminated in
consolidation. Certain items for prior periods have been reclassified to
conform with the current presentation. These reclassifications had no effect
on net income as previously reported.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
annual report as filed on Form 10-K.
The accompanying condensed unaudited consolidated financial statements
contain all adjustments which are, in the opinion of management, necessary for a
fair statement of the results of the interim periods presented. The results of
operations for any interim period are not necessarily indicative of the results
of operations that will be achieved for the entire year.
7
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(2) BUSINESS SEGMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No 131, "Disclosures About Segments of an Enterprise and
Related Information" for financial statements for periods ending after December
15, 1997. This statement supersedes Statement No. 14 and provides accounting
guidance for reporting information about operating segments in annual financial
statements and requires public business enterprises to report selected
information about operating segments in interim financial reports. Following is
the disclosure of the above items that management utilizes in measuring the
profit or loss of each of the Company's segments. Note that the dollar amounts
are in thousands.
<TABLE>
<CAPTION>
REVENUES
--------
Three Months Ended March 31,
<S> <C> <C>
1999 1998
---- ----
Systems and Services..................................... $ 6,896 $ 5,373
Games.................................................... 4,694 2,621
Recurring Revenue........................................ 2,200 2,811
Signs.................................................... 1,207 1,338
TurboPower............................................... 740 554
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Total.................................................. $ 15,737 $ 12,697
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</TABLE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM OPERATIONS
-----------------------------
Three Months Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Systems and Services..................................... $2,739 $589
Games.................................................... (2,268) (1,016)
Recurring Revenue........................................ (361) 140
Signs.................................................... (239) 267
TurboPower............................................... 312 129
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Total.................................................. $ 183 $ 109
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</TABLE>
Corporate expenses have been allocated to each segment based on management's
estimate of each segment's utilization of corporate resources.
8
<PAGE>
(3) NET INCOME PER SHARE:
(IN THOUSANDS EXCEPT PER SHARE DATA)
The following is an analysis of the components of the shares used to compute net
income per common share pursuant to SFAS 128:
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31,
1999 1998
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<S> <C> <C>
Numerator for earnings per share -net
Income $ 192 $ 320
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Denominator:
Denominator for basic earnings per share-
weighted average shares
18,066 18,066
Effect of dilutive securities
Stock options 320 51
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Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
issuances 18,386 18,117
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Denominator for diluted earnings per share -
Basic earnings per share $ 0.01 $ 0.02
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Diluted earnings per share $ 0.01 $ 0.02
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</TABLE>
(4) COMMITMENTS & CONTINGENCIES
In connection with the operation of its MSP Systems, the Company is
liable for progressive jackpots, which are paid as an initial base jackpot
component followed by an annuity (progressive component) paid out over 20 years
after the prize is won. The base jackpot component is charged against income
ratably over the amount of coin play expected to precede payout based on a
statistical analysis. The progressive jackpot component increases based on the
number of coins played. The accrual of these liabilities commensurate with coin
play matches recognition of costs and revenues. The possibility exists that the
winning combination may be hit before the Company has fully accrued the base
jackpot component, at which time any unaccrued portion would be expensed. There
was no unaccrued portion at March 31, 1999. To ensure adequate funds are
available to pay the slot liability and to comply with gaming regulatory
requirements, the Company has established restricted cash accounts aggregating
$7,754,000 at March 31, 1999. The Company also has restricted investment
securities of $15,622,000 for the annuity payments for jackpots already won.
In December, 1996, a class action complaint was filed in the United
States District Court, District of Nevada, by Gary A. Edwards against the
Company and certain present and former Company executives. Three additional
purported shareholder class actions were filed in 1997 in connection with the
same drop in stock price following the December 16, 1996 press release. The
Company won a motion to dismiss the First Amended Complaint filed by Edwards.
The court, however, granted Edwards leave to amend his Complaint. On July 13,
1998, Edwards filed a Second Amended Complaint. Pending
9
<PAGE>
settlement, the parties stipulated to stay the Company's response to this
complaint. On May 29, 1997, SCHWARTZ V. CASINO DATA SYSTEMS, was filed in the
United States District Court for the District of Nevada, alleging violations of
Sections 10(b) and 20(a) of the 1934 ACT and SEC Rule 10b-5 and seeking economic
recovery on behalf of the same alleged class of investors. On December 16, 1997,
GRANT V. CASINO DATA SYSTEMS, was filed in the District Court of the State of
Nevada alleging common law fraud and seeking economic recovery on behalf of the
same alleged class of investors. On December 9, 1997, GIOVANNONI V. CASINO DATA
SYSTEMS, was filed in the Superior Court of the State of California in San
Francisco alleging violation of California Corporations Code Sections 25400 and
25500 and California Business and Professions Code Sections 17200 and 17500.
Management believes these claims were without merit, and would have continued to
vigorously defend against them. However, due to the inherent risks and ongoing
expense of maintaining litigation, management determined it to be in the best
interests of the Company to settle the claims. Subject to court approval, the
parties have agreed to a settlement of all four related lawsuits, pursuant to
which the Company paid $1 million in November 1998. The settlement is proceeding
through the court. Notice of the lawsuit proposed settlement has been sent to
class members. The related charge was reflected as loss from shareholder suit in
the consolidated statement of operations for the year ended December 31, 1998.
A patron dispute was filed against the Company in connection with
the Company's Cool Millions dollars progressive slot machine at Splash Casino
in Tunica, Mississippi. The dispute was heard by the Mississippi Gaming
Commission, who decided that the patron had won only $5.00 rather than the
jackpot of $1,742,000 as alleged by the patron. The patron appealed the
Commission's decision to the Circuit Court of Tunica County. On January 16,
1998, the Court issued an Order reversing the Commission's decision and
ordered the Company to pay the jackpot plus interest from April 8, 1995. The
Company contends the ruling is in error and has appealed the decision to the
Mississippi Supreme Court. As a result of the Circuit Court's Order, and with
the consent of the Mississippi Gaming authorities, the Company reduced the
Cool Millions dollar Mississippi jackpot by $1,742,000. If successful on
appeal, the Company would return this amount to the Company's then-existing
outstanding multi-site progressive system jackpot, as directed by the
Mississippi Gaming authorities. The Company has accrued the entire jackpot
and continues to accrue interest in the event the Company loses its appeal.
The Company has accrued $391,021 of interest expense as of March 31, 1999.
CDS has filed an appeal brief with, and has had oral argument in front of,
the Mississippi Supreme Court. The parties await a decision from the count.
While the outcome of the action described above is not presently
determinable, management does not expect the outcome will have a material
adverse effect on the Company's consolidated financial statements taken as a
whole.
On May 19, 1998, Acres Gaming Corporation filed an action against the
Company, Mikohn Gaming Corporation, New York New York Hotel & Casino, LLC, and
Sunset Station Hotel & Casino, in the Federal Court for the State of Nevada,
alleging that the Company violated certain patent rights of Acres Gaming. Acres
Gaming also filed a Motion for Preliminary Injunction. The Company filed its
Response to the Motion for Preliminary Injunction ("Response") along with its
own Motion for Summary Judgment ("MSJ") requesting dismissal of Acres' claims.
After reviewing the Company's Response and Motion for Summary Judgment, Acres
withdrew their Motion for Preliminary Injunction. The Company's Motion for
Summary Judgment remains on file, awaiting a hearing date to be set by the
court. The Company believes this action is without merit and will continue to
vigorously defend itself. While the outcome of this lawsuit is not presently
determinable, management does not expect the outcome will have a material
adverse effect on the Company's consolidated financial statements taken as a
whole.
10
<PAGE>
On November 17, 1998, Acres filed a second lawsuit against the Company
alleging that the Company's Pro Turbo Software module violates certain patent
rights of a second Acres patent. CDS has filed an answer and a counterclaim
seeking a declaration of invalidity, noninfringement and unenforceability of the
patent asserted. The Company has filed additional counterclaims for alleged
patent misuse, spoliation of evidence, antitrust violations and unfair
competition. The Company believes that this action is without merit and will
continue to vigorously defend itself. While the outcome of this lawsuit is not
presently determinable, management does not expect the outcome will have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
The Company and its subsidiaries are also involved from time to time
in other various claims and legal actions arising in the ordinary course of
business including, but not limited to, administrative claims and legal
actions brought in state and federal courts by patrons of the Company's MSP
games, wherein the patron may allege the winning of jackpot awards or some
multiple thereof. Because of the size of the jackpots that a patron may play
for, related patron disputes often involve sizable claims. The loss of a
sizable patron dispute claim could have a material adverse effect on the
Company. However, management believes that the likelihood of success by those
making such claims is remote and that the ultimate outcome of these matters
will not have a material adverse effect on the Company's consolidated
financial statements taken as a whole.
11
<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.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED
TO THE THREE MONTHS ENDED MARCH 31, 1998
OVERVIEW
Income from operations increased from $109,000 and for the three months
ended March 31, 1998 to $183,000 for the same period in 1999, an increase of
$74,000 or 68%. Net income decreased from $320,000 for the three months ended
March 31, 1998 to $192,000 for the same period in 1999, a decrease of $128,000
or 40%. The increase in income from operations is primarily attributable to an
increase in sales from the Oasis Windows* based product which became available
for sale late in the fourth quarter of 1998 and increased sales of Bandit(TM)
Bingo games. In addition to increasing revenues, the Company reduced costs and
increased production efficiencies relative to the same period in 1998. The
decrease in net income is primarily due to a decrease in other income which is
attributable to a loss on disposal of assets combined with a decrease of
interest income due to lower investment balances.
REVENUES
Total revenues increased from $12,697,000 for the three months ended
March 31, 1998 to $15,737,000 for the same period in 1999, an increase of
$3,040,000 or 24%. This increase is primarily attributable to increased system
and services sales of $1,523,000 and increased game sales of $2,073,000,
partially offset by a decrease in revenue from recurring revenue products of
$611,000.
System and services revenues increased from $5,373,000 for the three
months ended March 31, 1998 to $6,896,000 for the same period in 1999, an
increase of $1,523,000 or 28%. The increase in systems and services revenues is
primarily attributable to sales of the Company's Windows based Oasis product
which was introduced into the market for sale late in the fourth quarter of
1998.
Revenues from game sales increased from $2,621,000 for the three months
ended March 31, 1998 to $4,694,000 for the same period in 1999, an increase of
$2,073,000 or 79%. This increase is primarily attributable to the increased
portfolio of games available for sale. The most notable new addition and
contributor to the increased sales is the Bandit(TM) Bingo game.
Revenues from the recurring revenue segment decreased from $2,811,000 for
the three months ended March 31, 1998 to $2,200,000 for the same period in 1999,
a decrease of $611,000 or 22%. This decrease is primarily attributable to a
decrease in the number of operating units and lower level of play on the
Company's Cool Millions products for the three months ended March 31, 1999 as
compared to the same period in 1998.
Revenues from TurboPower Software increased from $554,000 for the three
months ended March 31, 1998 to $740,000 for the same period in 1999, an increase
of $186,000 or 34%. This increase is primarily attributable to sales of a new
product released in the first quarter of 1999.
12
<PAGE>
Revenues from sign sales decreased from $1,338,000 for the three months
ended March 31, 1998 to $1,207,000 for the same period in 1999, a decrease of
$131,000 or 10%.
GROSS MARGIN
Total gross margin increased from $5,925,000 for the three months ended
March 31, 1998, to $6,969,000 for the same period in 1999, an increase of
$1,044,000 or 18%. Gross margin as a percentage of revenues decreased from 47%
for the three months ended March 31, 1998 to 44% for the same period in 1999.
The decrease in gross margin is primarily attributable to the sales mix, which
was more heavily weighted toward game sales which generally have a lower gross
margin than the Company's other products.
Systems and services gross margin increased from $3,228,000 for the three
months ended March 31, 1998 to $5,314,000 for the same period in 1999, and
increase of $2,086,000 or 65%. This increase is attributable to increased sales
combined with a sales mix more heavily weighted toward software sales which
generally have higher gross margins than other systems and services products.
Gross margin contributed by game sales decreased from $122,000 for the
three months ended March 31, 1998 to a loss of $141,000 for the same period in
1999, a decrease of $263,000 or 216%. This decrease is primarily attributable
inefficiencies related to the initial production of the Bandit Bingo games.
Gross margin contributed by recurring revenue products decreased from
$1,273,000 for the three months ended March 31, 1998 to $779,000 for the same
period in 1999, a decrease of $494,000 or 39%. This decrease is primarily
attributable to decreased revenues and to one-time rollout expenses associated
with the Company's Xtreme Link products.
Gross margin from TurboPower Software increased from $559,000 for the
three months ended March 31, 1998 to $739,000 for the same period in 1999, an
increase of $180,000 or 32%. This increase is due primarily to increased sales.
Gross margin from sign sales decreased from $744,000 for the three months
ended March 31, 1998 to $278,000 for the same period in 1999, a decrease of
$466,000 or 63%. This decrease is primarily attributable to fixed charges spread
over fewer sales.
OPERATING EXPENSES
Operating expenses increased from $5,816,000 for the three months ended
March 31, 1998, to $6,786,000 for the same period in 1999, an increase of
$970,000 or 17%. Operating expenses decreased as a percentage of revenues from
46% for the three months ended March 31, 1998, to 43% for the same period in
1999.
Selling, general and administrative expenses increased from $4,358,000
for the three months ended March 31, 1998, to $4,419,000 for the same period in
1999, an increase of $61,000 or 1%. Selling, general and administrative expenses
as a percentage of revenues decreased from 34% for the three months ended March
31, 1998, to 28% for the same period in 1999. This increase in selling,
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general and administrative expenses is primarily attributable to higher
commissions and travel and related expenses as a result of the higher revenues.
Research and development expenses increased from $804,000 for the three
months ended March 31, 1998, to $1,316,000 for the same period in 1999, an
increase of $512,000 or 64%. Research and development expenses as a percentage
of revenues increased from 6% for the three months ended March 31, 1998 to 8%
for the same period in 1999. The increase is primarily attributable to an
increase in personnel.
Depreciation and amortization increased from $654,000 for the three
months ended March 31, 1998, to $1,051,000 for the same period in 1999 an
increase of $397,000 or 61%. The increase in depreciation and amortization is
primarily due to an increased number of units on the Xtreme link.
OTHER INCOME, NET
Other income is comprised of rental, interest, gain on disposal of
assets, and other forms of income, offset by interest expense, loss on disposal
of assets, and other transactions that are not the result of normal operations.
Other income decreased from $376,000 for the three months ended March 31, 1998,
to $112,000 for the same period in 1999, a decrease of $264,000 or 70%. The
decrease is primarily due to a loss on disposal of assets of $100,000 and
decreased interest income due to lower investment balances.
NET INCOME
Net income decreased from $320,000 for the three months ended March 31,
1998, to $192,000 for the same period in 1999, a decrease of $128,000 or 40%.
The decrease in net income is the result of the matters discussed above.
14
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LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operating and capital expenditures
primarily through cash flows from its operations and cash from proceeds of its
equity offerings. The Company had cash and cash equivalents of $12,251,000 at
March 31, 1999, as compared to $13,252,000 at December 31, 1998, of which
$7,754,000 and $8,111,000, respectively, were restricted for payment of slot
liabilities. The Company generated cash from operations of $99,000 during the
three months ended March 31, 1999.
Certain jurisdictions in which MSP systems operate require that the
Company maintain restricted funds for the payment of jackpot prizes. The amount
of funds required is dependent on several factors including the type and
denomination of the games and the regulatory requirements. At March 31, 1999,
the Company's accrued slot liability for its MSP systems aggregated $21,499,000.
There was no unaccrued slot liability. In connection with these slot liabilities
and in accordance with gaming requirements, the Company established restricted
cash accounts aggregating approximately $7,754,000 at March 31, 1999 to ensure
availability of adequate funds to pay for future jackpot liabilities. The
Company also has restricted investment securities approximating $15,622,000 as
of March 31, 1999 for the payment of jackpots already won. Although
statistically remote, a possibility exists that multiple jackpots may be awarded
prior to the time period over which game play has generated sufficient revenue
to accrue each base jackpot amount. Such occurrences could have a material
adverse impact on the Company's results of operations in the reporting period in
which the jackpots are hit.
The Company's ratio of current assets to current liabilities is 3.8 to 1
at March 31, 1999, while the noncurrent liabilities to equity ratio is .29 to 1.
Based on this financial position, the Company believes it could obtain
additional long-term financing for growth that may result in working capital
additions that exceed available cash and cash equivalents to be provided by
operations. However, there can be no assurance that the Company will be able to
obtain additional sources of capital.
15
<PAGE>
YEAR 2000
The year 2000 issue is the result of computer programs written using
two digits (rather than four) to define years. Computers or other equipment with
date-sensitive software may recognize "00" as 1900 rather than 2000. This could
result in system failures or miscalculations. If the Company, or its customers,
suppliers or other third parties fail to correct year 2000 issues, businesses
operations will be affected.
The Company is in the process of assessing the impact of the year
2000 issues on its internal processing systems and on the products produced and
sold by the Company. In September 1998, the Company formed an internal committee
comprised of management from every operational and functional department of the
Company. This committee is responsible for identifying and testing systems that
may be subject to year 2000 issues. This committee is also responsible for
formulating contingency plans if the Company experiences year 2000 issues.
The Company's internal information system, put into operation in the
second quarter of 1998, has been certified by the vendor as year 2000 compliant.
The operating system that this software uses has also been certified as year
2000 compliant by the third party manufacturer. The Company has tested certain
attributes of this system by processing test information in the year 2000
format. The results of those tests confirmed that the tested attributes are year
2000 compliant. Additional testing will be performed on the remaining
attributes. Management expects to be completed with this testing in September
1999. Based on the vendor assurances, and the results of the preliminary
testing, the Company believes that it will not experience any disruption in
daily operations with this system related to year 2000 issues; however, if such
disruption should occur, the Company believes that it could maintain ongoing
operations through manual record keeping procedures until computerized system
functionality is reestablished.
The Company is also in the process of testing all desktop computers and
their associated software for year 2000 compliance. This testing is expected to
be completed by September 1999. The cost of upgrading non-compliant personal
computers and software is expected to be $225,000.
The Company operates its MSP systems using its own proprietary software
which utilizes a third party operating system which is not year 2000 compliant.
The Company is in the process of upgrading the operating system to a certified
year 2000 compliant version and will modify its proprietary software as
necessary. This upgrade will be completed in calendar year 1999 and the cost of
completing this upgrade is expected to be $10,000. With this upgrade, the
Company does not believe it will experience any disruption of MSP operations;
however, the MSP technology is dependent upon third party phone service as well
as computerized information systems and electricity at the various casino sites
where the MSP equipment is deployed. Disruption in any of these areas would
render MSP operations inoperable until service is reestablished.
The Company continues to review the impact of year 2000 issues
concerning the Company's production facility. No concerns have been
identified. Therefore, at this time, the Company believes that there will not
be any material adverse affect on its production capabilities resulting from
year 2000 issues related to the Company's production processes.
16
<PAGE>
The Company also sells proprietary software to third parties. The
Company has year 2000 compliant versions of this software; however, the majority
of the Company's customer base uses a version of the software that includes
certain modules which are not year 2000 compliant. The Company has notified all
of these customers that they require an upgrade to become year 2000 compliant.
The Company plans to complete all such upgrades on customers covered by
purchased maintenance agreements in calendar year 1999 at an estimated
cumulative cost of approximately $100,000. The Company has also planned the
resources necessary to complete the upgrades for customers that are not under
maintenance agreements; however, performing these upgrades is contingent upon
these customers contracting for a fee with the Company to purchase an upgrade.
The Company has sent written questionnaires to its significant
manufacturing materials suppliers, banks, telecommunications suppliers,
utility providers and payroll service to assess their year 2000 readiness and
the effect these third parties could have on the Company. The Company plans
to maintain communication with significant suppliers and vendors with respect
to this issue.
Based on current assessments and testing, the Company does not
expect year 2000 issues to have a material adverse effect on the Company's
financial position, results of operations or cash flows. However, risk exists
regarding non-compliance of third parties with operational importance to the
Company, such as key suppliers and customers, utilities, telecommunication
providers, or financial institutions, which could result in lost production,
sales, or administrative difficulties on the part of the Company. Year 2000
issues, if severe, could have a material effect on the Company. Pending
completion of the year 2000 assessment, the Company will finalize a
contingency plan to address possible risks of year 2000 noncompliance on the
Company's financial position. Though assessment and testing will be ongoing
throughout 1999, the Company expects to have its assessment, testing and
contingency planning completed by September 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and
the changes in the market values of its investments.
The Company's exposure to market rate risk for changes in interest
rates relates primarily to the Company's investment portfolio. The Company
has not used derivative financial instruments in its investment portfolio.
The Company invests its excess cash primarily in debt instruments of the U.S.
Government and its agencies and state and other municipal government
agencies. By policy, the Company limits the amount of credit exposure to any
one issuer. The Company protects and preserves its invested funds by limiting
default, market and reinvestment risk.
Investments in fixed rate interest earning instruments carry a
degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates. The Company
may suffer losses in principal if forced to sell securities which have
declined in market value due to changes in interest rates.
17
<PAGE>
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take advantage of
the "safe harbor" provisions of the PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 for any forward-looking statement made by, or on behalf of, the Company.
The factors identified in this cautionary statement are important factors (but
not necessarily all the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made by,
or on behalf of, the Company. Where any such forward-looking statement includes
a statement of the assumptions or bases underlying such forward-looking
statement, the Company cautions that, while it believes such assumptions or
bases to be reasonable and makes them in good faith, assumed facts or bases
almost always vary from actual results, and the differences between assumed
facts or bases and actual results can be material, depending on the
circumstances. Where, in any forward-looking statement, the Company, or its
Management, expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished. Taking into
account the foregoing, the following are identified as important risk factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company:
- - Risks associated with developing gaming machines that offer technological
advantages or unique entertainment features to enable the Company to
effectively compete in the gaming machine market.
- - Possible adverse effects upon revenues if the Company experiences delays in
developing or obtaining regulatory approval of new products.
- - Possible adverse effects on revenues if new products or enhancements do not
gain customer acceptance.
- - Possible adverse effects on revenues due to the difficulty in competing with
well-established competitors in markets for the Company's products,
including without limitation, casino management information systems, MSP
products and gaming machines.
- - Possible adverse effects on revenues associated with the dependence upon
Steven A. Weiss, a key employee of the Company.
- - The general profitability of the gaming industry at large can substantially
affect the Company's revenues.
- - Even though the Company seeks to protect its intellectual property upon
which it relies to sell its products, there is the possibility of adverse
affects on revenue generation if such intellectual property were not
protected or available for use due to patents issued to competitors.
- - Possible adverse affects related to any negative outcome of pending or
threatened litigation.
- - The Year 2000 Project and the date on which the Company believes it will be
completed are based on Management's best estimates, which are derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no assurance that there will be no delay in,
or no increased costs associated with, the implementation of the Year 2000
Project. Specific factors that might cause differences between the estimates
and actual results include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, timely responses by third-parties and
suppliers, and similar uncertainties. The Company's inability to implement
Year 2000 changes could have an adverse effect on future results of
operations.
18
<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. Pending settlement, the parties
stipulated to stay the Company's response to this complaint. On May 29, 1997,
SCHWARTZ V. CASINO DATA SYSTEMS, was filed in the United States District Court
for the District of Nevada, alleging violations of Sections 10(b) and 20(a) of
the 1934 ACT and SEC Rule 10b-5 and seeking economic recovery on behalf of the
same alleged class of investors. On December 16, 1997, GRANT V. CASINO DATA
SYSTEMS, was filed in the District Court of the State of Nevada alleging common
law fraud and seeking economic recovery on behalf of the same alleged class of
investors. On December 9, 1997, GIOVANNONI V. CASINO DATA SYSTEMS, was filed in
the Superior Court of the State of California in San Francisco alleging
violation of California Corporations Code Sections 25400 and 25500 and
California Business and Professions Code Sections 17200 and 17500. Management
believes these claims were without merit, and would have continued to vigorously
defend against them. However, due to the inherent risks and ongoing expense of
maintaining litigation, management determined it to be in the best interests of
the Company to settle the claims. Subject to court approval, the parties have
agreed to a settlement of all four related lawsuits, pursuant to which the
Company paid $1 million in November 1998. The settlement is proceeding through
the court. Notice of the lawsuit proposed settlement has been sent to class
members. The related charge was reflected as loss from shareholder suit in the
consolidated statement of operations for the year ended December 31, 1998.
A patron dispute was filed against the Company in connection with
the Company's Cool Millions dollars progressive slot machine at Splash Casino
in Tunica, Mississippi. The dispute was heard by the Mississippi Gaming
Commission, who decided that the patron had won only $5.00 rather than the
jackpot of $1,742,000 as alleged by the patron. The patron appealed the
Commission's decision to the Circuit Court of Tunica County. On January 16,
1998, the Court issued an Order reversing the Commission's decision and
ordered the Company to pay the jackpot plus interest from April 8, 1995. The
Company contends the ruling is in error and has appealed the decision to the
Mississippi Supreme Court. As a result of the Circuit Court's Order, and with
the consent of the Mississippi Gaming authorities, the Company reduced the
Cool Millions dollar Mississippi jackpot by $1,742,000. The Company has
accrued the entire jackpot amount plus $391,021 of interest expense as of
March 31, 1999 toward the judgment in the event the Company loses its appeal.
CDS has filed an appeal brief with, and has had oral argument in front of,
the Mississippi Supreme Court. The parties await a decision from the court.
While the outcome of the action described above is not presently
determinable, management does not expect the outcome will have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
On May 19, 1998, Acres Gaming Corporation filed an action against the
Company, Mikohn Gaming Corporation, New York New York Hotel & Casino, LLC, and
Sunset Station Hotel & Casino, in the Federal Court for the State of Nevada,
alleging that the Company violated certain patent rights of Acres Gaming. Acres
Gaming also filed a Motion for Preliminary Injunction.
19
<PAGE>
The Company filed its Response to the Motion for Preliminary Injunction
("Response") along with its own Motion for Summary Judgment ("MSJ") requesting
dismissal of Acres' claims. After reviewing the Company's Response and Motion
for Summary Judgment, Acres withdrew their Motion for Preliminary Injunction.
The Company's Motion for Summary Judgment remains on file, awaiting a hearing
date to be set by the court. The Company believes this action is without merit
and will continue to vigorously defend itself. While the outcome of this lawsuit
is not presently determinable, management does not expect the outcome will have
a material adverse effect on the Company's consolidated financial statements
taken as a whole.
On November 17, 1998, Acres filed a second lawsuit against the Company
alleging that the Company's Pro Turbo Software module violates certain patent
rights of a second Acres patent. CDS has filed an answer and a counterclaim
seeking a declaration of invalidity, noninfringement and unenforceability of the
patent asserted. The Company has filed additional counterclaims for alleged
patent misuse, spoliation of evidence, antitrust violations and unfair
competition. The Company believes that this action is without merit and will
continue to vigorously defend itself. While the outcome of this lawsuit is not
presently determinable, management does not expect the outcome will have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
The Company and its subsidiaries are also involved from time to time in
other various claims and legal actions arising in the ordinary course of
business including, but not limited to, administrative claims and legal actions
brought in state and federal courts by patrons of the Company's MSP games,
wherein the patron may allege the winning of jackpot awards or some multiple
thereof. Because of the size of the jackpots that a patron may play for, related
patron disputes often involve sizable claims. The loss of a sizable patron
dispute claim could have a material adverse effect on the Company. However,
management believes that the likelihood of success by those making such claims
is remote and that the ultimate outcome of these matters will not have a
material adverse effect on the Company's consolidated financial statements taken
as a whole.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: Exhibit 27.1 Financial Data Schedule
There were no reports filed on Form 8-K for the three month period ended
March 31, 1999.
20
<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: MAY 15, 1999 /S/ STEVEN A. WEISS
--------------------------- ------------------------------------
Steven A. Weiss
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: MAY 15, 1999 /S/ LEE LEMAS
--------------------------- ------------------------------------
Lee Lemas
Chief Financial Officer
and Chief Operating Officer
(Principal Financial and Accounting
Officer)
21
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