<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: JUNE 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
0-21426
-----------------------------------
(Commission File Number)
CASINO DATA SYSTEMS
--------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
NEVADA
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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: 18,485,379 shares of common
stock outstanding as of August 7, 2000.
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CASINO DATA SYSTEMS
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page No.
--------
<S> <C>
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999............................................. 3
Unaudited Condensed Consolidated Statements of Income
For the three months ended June 30, 2000 and 1999............................... 5
Unaudited Condensed Consolidated Statements of Income
For the six months ended June 30, 2000 and 1999................................. 6
Unaudited Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2000 and 1999................................. 7
Notes to Unaudited Condensed Consolidated Financial Statements.................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations....................................................... 11
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 15
Item 6. Exhibits and Reports on Form 8-K................................................ 16
Signatures ................................................................................ 17
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 17,130 $ 6,866
Restricted cash and cash equivalents 1,830 2,389
Investment securities 3,304 1,272
Restricted investment securities 1,698 1,309
Accounts receivable, net of allowance for doubtful
accounts of $1,748 and $1,886, respectively 21,775 21,121
Current portion of notes receivable 2,648 4,324
Inventories, net 24,185 25,600
Prepaid expenses and other current assets 2,085 2,143
----------- ----------
Total current assets 74,655 65,024
----------- ----------
Property and equipment, net of accumulated
depreciation of $8,969 and $7,517, respectively 15,877 17,762
Restricted investment securities 14,344 14,517
Deferred tax assets 10,172 10,172
Notes receivable, excluding current portion 348 539
Intangible assets, net of accumulated amortization of
$1,068 and $1,001, respectively 104 122
Software development costs, net of accumulated
amortization of $2,430 and $1,746, respectively 1,693 2,362
Other assets 398 389
----------- ----------
Total non-current assets 42,936 45,863
----------- ----------
Total assets $ 117,591 $ 110,887
=========== ==========
</TABLE>
(Continued)
See accompanying Notes to Condensed Consolidated Financial Statements
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<PAGE>
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
(Dollars and share data in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ -- $ 214
Accounts payable 3,538 1,427
Accrued expenses and customer deposits 8,639 8,567
Accrued slot liability 271 252
----------- ----------
Total current liabilities 12,448 10,460
----------- ----------
Non-current Liabilities
Accrued slot liability 17,730 17,901
----------- ----------
Total non-current liabilities 17,730 17,901
----------- ----------
Shareholders' Equity
Common stock, no par value. Authorized 100,000 shares; issued and
outstanding 18,471 and 18,401 at June 30, 2000 and
December 31, 1999, respectively 85,110 84,964
Accumulated earnings (deficit) 2,303 (2,438)
----------- ----------
Total shareholders' equity 87,413 82,526
----------- ----------
Total liabilities and shareholders' equity $ 117,591 $ 110,887
=========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------
2000 1999
----------- ----------
<S> <C> <C>
Revenue
OASIS-TM- systems $ 8,235 $ 8,187
Gaming devices 8,931 10,741
Recurring revenue 1,029 1,952
Signs 1,333 1,449
TurboPower 678 439
----------- ----------
Total revenue 20,206 22,768
Cost of goods sold 8,637 12,677
----------- ----------
Gross margin 11,569 10,091
----------- ----------
Operating expenses
Selling, general and administrative 4,217 5,084
Research and development 1,988 1,583
Depreciation and amortization 942 1,049
----------- ----------
Total operating expenses 7,147 7,716
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Income from operations 4,422 2,375
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Other income (expense)
Interest and other income, net 416 613
Interest expense -- 12
----------- ----------
Total other income, net 416 625
----------- ----------
Income before income taxes 4,838 3,000
Income tax expense 1,693 1,050
----------- ----------
Net income $ 3,145 $ 1,950
=========== ==========
Basic net income per share $ 0.17 $ 0.11
=========== ==========
Diluted net income per share $ 0.17 $ 0.11
=========== ==========
Basic weighted average shares outstanding 18,458 18,143
=========== =========
Diluted weighted average shares outstanding 18,796 18,498
=========== =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
-5-
<PAGE>
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------
2000 1999
----------- ----------
<S> <C> <C>
Revenue
OASIS-TM- systems $ 16,270 $ 15,083
Gaming devices 14,539 15,435
Recurring revenue 2,406 4,152
Signs 2,331 2,656
TurboPower 1,456 1,179
----------- ----------
Total revenue 37,002 38,505
Cost of goods sold 15,658 21,363
----------- ----------
Gross margin 21,344 17,142
----------- ----------
Operating expenses
Selling, general and administrative 9,043 9,261
Research and development 3,745 3,223
Depreciation and amortization 1,900 2,100
----------- ----------
Total operating expenses 14,688 14,584
----------- ----------
Income from operations 6,656 2,558
----------- ----------
Other income (expense)
Interest and other income, net 641 765
Interest expense (3) (28)
------------ -----------
Total other income, net 638 737
----------- ----------
Income before income taxes 7,294 3,295
Income tax expense 2,553 1,153
----------- ----------
Net income $ 4,741 $ 2,142
=========== ==========
Basic net income per share $ 0.26 $ 0.12
=========== ==========
Diluted net income per share $ 0.25 $ 0.12
=========== ==========
Basic weighted average shares outstanding 18,437 18,105
=========== =========
Diluted weighted average shares outstanding 18,763 18,345
=========== =========
</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 SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
2000 1999
------------ ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 4,741 $ 2,142
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,900 2,100
Depreciation and amortization included in COGS 366 1,016
(Gain) loss on disposal of assets (64) 47
Write-off of net book value of assets -- (101)
Provision for accounts receivable (139) (1,230)
Provision for inventory obsolescence 1,050 699
Changes in assets and liabilities:
Restricted cash and cash equivalents 559 384
Accounts and notes receivable 1,351 (5,297)
Income tax receivable 581 --
Inventories 1,306 (1,589)
Other assets and deposits (546) (4)
Accounts payable 2,110 117
Accrued expenses, customer deposits and slot liability (78) 3,503
------------ ----------
Net cash provided by operating activities 13,137 1,787
----------- ----------
Cash Flows From Investing Activities:
Purchases of unrestricted investment securities (2,032) (45)
Purchases of investment securities to fund liabilities to jackpot winners (462) (994)
Proceeds from sale of investment securities to fund liabilities
to jackpot winners 246 167
Purchase of intangible assets (65) (57)
Proceeds from sale of assets held for sale 30 72
Purchase of property, plant and equipment (751) (1,299)
Proceeds from sale of property, plant and equipment 229 18
----------- ----------
Net cash used in investing activities (2,805) (2,138)
----------- ----------
Cash Flows From Financing Activities:
Repayment of notes payable (214) (157)
Proceeds from the issuance of stock 146 443
----------- ----------
Net cash (used in) provided by financing activities (68) 286
------------ ----------
Net increase (decrease) in cash and cash equivalents 10,264 (65)
Cash and cash equivalents at beginning of period 6,866 5,141
----------- ----------
Cash and cash equivalents at end of period $ 17,130 $ 5,076
=========== ==========
</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: OASIS systems,
gaming devices, recurring revenue products, signs and software development tools
(TurboPower).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Casino Data
Systems and all of the subsidiaries mentioned above. All significant
intercompany balances and transactions have been eliminated in consolidation.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform to the current
year presentation.
BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. These unaudited
condensed 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 for the year ended December 31,
1999.
The accompanying unaudited condensed 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 clarifies existing accounting principles related to revenue recognition in
financial statements. The Company is required to comply with the provisions of
SAB 101 by the fourth quarter of 2000. Due to the nature of the Company's
operations, management does not believe that SAB 101 will have a significant
impact on the Company's financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates used by
the Company include the estimated useful lives for depreciable and amortizable
assets, the estimated allowance for doubtful accounts receivable, the estimated
reserve
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for inventory obsolescence, the estimated valuation allowance for deferred tax
assets, and the estimated cash flows used in assessing the recoverability of
long-lived assets. Actual results could differ from those estimates.
(2) Business Segments
Following is the disclosure of the items that management utilizes in measuring
the profit or loss of each of the Company's segments.
<TABLE>
<CAPTION>
REVENUES
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OASIS Systems $ 8,235 $ 8,187 $ 16,270 $ 15,083
Gaming Devices 8,931 10,741 14,539 15,435
Recurring Revenue 1,029 1,952 2,406 4,152
Signs 1,333 1,449 2,331 2,656
TurboPower 678 439 1,456 1,179
--------- ---------- --------- ---------
Total $ 20,206 $ 22,768 $ 37,002 $ 38,505
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM OPERATIONS
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OASIS Systems $ 3,956 $ 3,240 $ 7,187 $ 6,054
Gaming Devices 584 (804) (378) (2,860)
Recurring Revenue 14 (249) 109 (831)
Signs (222) 162 (547) (202)
TurboPower 90 26 285 397
--------- ---------- --------- ---------
Total $ 4,422 $ 2,375 $ 6,656 $ 2,558
========== ========== ========== ==========
</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>
June 30, December 31,
2000 1999
----------- ----------
<S> <C> <C>
Raw materials $ 15,680 $ 15,710
Work in process 1,126 292
Finished goods 10,199 11,368
----------- ----------
27,005 27,370
Less reserve for obsolescence (2,820) (1,770)
---------- ----------
$ 24,185 $ 25,600
============ ==========
</TABLE>
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<PAGE>
(4) Net Income Per Share
The following is an analysis of the components of the shares used to compute net
income per common share.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
JUNE 30 JUNE 30,
------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- --------- -----------
(In thousands, except per share information)
<S> <C> <C> <C> <C>
Numerator for earnings per share
Net income $ 3,145 $ 1,950 $ 4,741 $ 2,142
========== ========== ========= ==========
Denominator for earnings per share
Weighted average shares
outstanding - basic 18,458 18,143 18,437 18,105
Effect of dilutive securities
Stock options 338 355 326 240
---------- ---------- ---------- ----------
Weighted average shares
outstanding - diluted 18,796 18,498 18,763 18,345
========== ========== ========= ==========
Basic earnings per share $ 0.17 $ 0.11 $ 0.26 $ 0.12
========== ========== ========= ==========
Diluted earnings per share $ 0.17 $ 0.11 $ 0.25 $ 0.12
========== ========== ========= ==========
</TABLE>
(5) Related Party
Pursuant to an agreement effective June 1, 2000, the Company is paying Michael
D. Rumbolz, a director of the Company, $8,333 per month for consulting services.
(6) Commitments and Contingencies
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's ProTurbo Software module violated certain patent rights of
Acres Gaming. Acres Gaming also filed a Motion for Preliminary Injunction, which
was later withdrawn by Acres. The Company has answered the lawsuit asserting
defenses and counterclaims seeking a declaration of invalidity, noninfringement
and unenforceability of the patent asserted. 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 position, results of operations or liquidity.
On November 17, 1998, Acres filed a second lawsuit against the Company alleging
that the Company's ProTurbo Software module violates certain patent rights of a
second Acres patent. The Company 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. For example, the
Company is currently litigating two patron disputes that it has
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<PAGE>
won on every level of review, however the patrons have continued to appeal the
decisions. One dispute has been appealed by the patron to the Supreme Court of
the State of Mississippi, and the patron alleges a claim for two identical
jackpots of over $2.7 million each. A second dispute has been appealed by a
patron to the Supreme Court of the State of Nevada, who alleges a claim for over
$8 million. In either case, if the patron were to win, the Company would be
liable to pay $1 million immediately (plus interest) with the remainder to be
paid in installments over twenty years in an annuity. 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 position, results of operations
or liquidity.
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.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1999
OVERVIEW
Income from operations was $4,422,000 for the three months ended June 30, 2000
compared with $2,375,000 for the three months ended June 30, 1999, an increase
of $2,047,000 or 86%. Net income increased from $1,950,000 for the three months
ended June 30, 1999 to $3,145,000 for the same period in 2000, an improvement of
$1,195,000.
Total revenue for the three months ended June 30, 2000 was $20,206,000 compared
with $22,768,000 for the same period in 1999, a decrease of $2,562,000 or 11%.
This decrease is primarily due to lower sales of gaming devices and a decrease
in recurring revenue.
OASIS systems revenue was $8,235,000 and $8,187,000 for the three months ended
June 30, 2000 and 1999, respectively, an increase of $48,000. This slight
increase reflects continued strong 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 $716,000 from $3,240,000 to $3,956,000 for the three
months ended June 30, 1999 and 2000, respectively. This increase is primarily
the result of a higher gross margin based on the sales mix between software and
hardware products, combined with lower corporate expenses.
Revenue from the sale of gaming devices decreased $1,810,000 from $10,741,000
for the three month period ended June 30, 1999 to $8,931,000 for the same
fiscal 2000 period. This decrease in revenue is primarily attributable to
decreased unit sales in the second quarter of 2000 compared with 1999 due to
strong sales of the Bandit Bingo-TM- product in 1999, with no similar strong
selling product in 2000. Despite the lower revenue base, this segment
reported an operating profit of $584,000 for the three months ended June 30,
2000 compared with an operating loss of $804,000 for the same prior year
period, primarily due to an improved gross margin due to manufacturing
efficiencies, and lower corporate expenses.
Revenue from the recurring revenue segment was $1,029,000 and $1,952,000 for
the three months ended June 30, 2000 and 1999, respectively, a decrease of
47% or $923,000. This revenue decline is primarily the result of a more than
50% reduction in the number of Cool Millions-TM- and Xtreme-TM- operating
units in service from June 30, 1999 to June 30, 2000, due to the maturation
of these products. Operating income for the three months ended June 30, 2000
was $14,000, an improvement of $263,000 from the loss of $249,000 for the
same period of the prior year. This improvement is primarily attributable to
a higher gross margin percentage combined with lower operating costs and
lower corporate expenses, offset in part by lower revenues.
Signs revenue decreased $116,000, or 8%, from $1,449,000 for the three months
ended June 30, 1999 to $1,333,000 for the same period in 2000. This decrease is
primarily due to lower sales of game related signage. The operating loss of
$222,000 from signs decreased from a profit of $162,000 for the three months
ended June 30, 2000 and 1999, respectively, primarily due to a lower revenue and
a lower gross margin the result of manufacturing inefficiencies.
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<PAGE>
Revenue of $678,000 from TurboPower Software was $239,000, or 54%, higher for
the three months ended June 30, 2000 compared with the same prior year period.
Operating income from this segment increased $64,000 for the three months ended
June 30, 2000 compared with the same prior year period, primarily attributable
to the increase in revenue, offset in part by increased operating expenses.
GROSS MARGIN
The gross margin percentage was 57% for the three months ended June 30, 2000
compared with 44% for the same period in 1999. This increase is attributable to
manufacturing efficiencies, primarily in the production of gaming devices.
OPERATING EXPENSES
Operating expenses were $7,147,000 and $7,716,000 for the three months ended
June 30, 2000 and 1999, respectively, a decrease of $569,000 or 7%. Operating
expenses increased slightly as a percentage of revenue from 34% for the three
months ended June 30, 1999, to 35% for the same period in 2000.
Selling, general and administrative expenses decreased from $5,084,000 for the
three months ended June 30, 1999, to $4,217,000 for the same period in 2000, a
decrease of $867,000 or 17%. Selling, general and administrative expenses as a
percentage of revenues decreased slightly from 22% for the three months ended
June 30, 1999, to 21% for the same period in 2000. The decrease in selling,
general and administrative expenses is primarily attributable to decreased legal
costs related to litigation and lower commission expense on the lower revenue
base.
Research and development expenses increased from $1,583,000 for the three months
ended June 30, 1999, to $1,988,000 for the same period in 2000, an increase of
$405,000 or 26%. Research and development expenses as a percentage of revenues
were 10% for the three months ended June 30, 2000 and 7% for the same period in
1999. The increase in expense is primarily due to increased headcount in the
engineering departments primarily responsible for the ongoing design and
development of new products for the Company.
Depreciation and amortization expense decreased from $1,049,000 for the three
months ended June 30, 1999, to $942,000 for the same period in 2000, a decrease
of $107,000 or 10%. The decrease in depreciation and amortization is primarily
due to decreased amortization of royalties and software development costs.
OTHER INCOME, NET
Other income, net, is primarily comprised of interest income, interest expense
and gains and losses on disposal of assets. Other income, net, decreased from
$625,000 for the three months ended June 30, 1999, to $416,000 for the same
period in 2000, a decrease of $209,000 or 33%. This decrease is primarily due to
the one-time reversal of approximately $411,000 of interest expense due to a
favorable lawsuit settlement in the second quarter of 1999 which did not occur
in 2000, partially offset by an increase in interest income due to higher cash
balances in 2000.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1999
OVERVIEW
Income from operations was $6,656,000 for the six months ended June 30, 2000
compared with $2,558,000 for the six months ended June 30, 1999, an increase of
$4,098,000 or 160%. Net income increased from $2,142,000 for the six months
ended June 30, 1999 to $4,741,000 for the same period in 2000, an improvement of
$2,599,000.
Total revenue for the six months ended June 30, 2000 was $37,002,000 compared
with $38,505,000 for the same period in 1999, a decrease of $1,503,000 or 4%.
This decrease is primarily due to lower sales of gaming devices and a decrease
in recurring revenue.
OASIS systems revenue was $16,270,000 and $15,083,000 for the six months ended
June 30, 2000 and 1999, respectively, an increase of $1,187,000 or 8%. This
increase is primarily attributable to continued strong sales of the
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<PAGE>
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 $1,133,000 from
$6,054,000 to $7,187,000 for the six months ended June 30, 1999 and 2000,
respectively. This increase is primarily the result of higher revenue, offset in
part by a higher portion of corporate expenses
Revenue from the sale of gaming devices decreased $896,000 from $15,435,000
for the six month period ended June 30, 1999 to $14,539,000 for the same
fiscal 2000 period. This decrease in revenue is primarily attributable to
decreased unit sales in the second quarter of 2000 compared with 1999 due to
strong sales of the Bandit Bingo-TM- product in 1999, with no similar strong
selling product in 2000. This segment's operating loss of $378,000 for the
six months ended June 30, 2000 was $2,482,000 lower than the same prior year
period, primarily due to an improved gross margin due to manufacturing
efficiencies and reduced operating expenses offset in part by lower revenue
and an increased portion of corporate expenses.
Revenue from the recurring revenue segment was $2,406,000 and $4,152,000 for
the six months ended June 30, 2000 and 1999, respectively, a decrease of 42%
or $1,746,000. This revenue decline is primarily the result of a reduction by
more than 50% in the number of Cool Millions-TM- and Xtreme-TM- operating
units in service due to the maturation of these products. Operating income
for the six months ended June 30, 2000 was $109,000, an improvement of
$940,000 from the loss of $831,000 in the prior year. This improvement is
primarily attributable to a higher gross margin, lower operating costs and a
lower portion of corporate expenses, partially offset by reduced revenues.
Signs revenue decreased from $2,656,000 for the six months ended June 30, 1999
to $2,331,000 for the same period in 2000, a decrease of $325,000 or 12%. This
decrease is primarily due to lower sales of games' related signage. The
operating loss from signs increased from $202,000 to $547,000 for the six months
ended June 30, 1999 and 2000, respectively, primarily due to lower revenues and
a lower gross margin due to manufacturing inefficiencies, offset in part by a
reduced portion of corporate expenses.
Revenue of $1,456,000 from TurboPower Software was $277,000, or 23%, higher for
the six months ended June 30, 2000 compared with the same prior year period,
primarily the result of new product releases in 2000. Operating income from this
segment decreased $112,000 for the six months ended June 30, 2000 compared with
the same prior year period, primarily attributable to increased operating
expenses related to increased engineering headcount.
GROSS MARGIN
The gross margin percentage was 58% for the six months ended June 30, 2000
compared with 45% for the same period in 1999. This increase is mainly the
result of manufacturing efficiencies, primarily in the production of gaming
devices.
OPERATING EXPENSES
Operating expenses were $14,688,000 and $14,584,000 for the six months ended
June 30, 2000 and 1999, respectively, an increase of $104,000. Operating
expenses increased slightly as a percentage of revenue from 38% for the six
months ended June 30, 1999, to 40% for the same period in 2000.
Selling, general and administrative expenses decreased from $9,261,000 for the
six months ended June 30, 1999, to $9,043,000 for the same period in 2000, a
decrease of $218,000. Selling, general and administrative expenses as a
percentage of revenues remained consistent at 24% for the six months ended June
30, 2000 and 1999. The decrease in selling, general and administrative expenses
is primarily attributable to lower legal costs related to litigation.
Research and development expenses increased from $3,223,000 for the six months
ended June 30, 1999, to $3,745,000 for the same period in 2000, an increase of
$522,000 or 16%. Research and development expenses as a percentage of revenues
were 10% for the six months ended June 30, 2000 and 8% for the same 1999 period.
The increase is primarily due to increased headcount in the departments
responsible for the design and development of new products for the Company.
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Depreciation and amortization expense decreased from $2,100,000 for the six
months ended June 30, 1999, to $1,900,000 for the same period in 2000, a
decrease of $200,000 or 10%. The decrease in depreciation and amortization is
primarily due to decreased amortization of royalties and software development
costs.
OTHER INCOME, NET
Other income, net, is primarily comprised of interest income, interest expense
and gains and losses on disposal of assets. Other income, net, decreased from
$737,000 for the six months ended June 30, 1999, to $638,000 for the same period
in 2000, a decrease of $99,000 or 13%. This decrease is primarily due to the
one-time reversal of approximately $411,000 in interest expense due to a
favorable lawsuit settlement in the second quarter of 1999 which did not occur
in 2000, partially offset by increased interest income due to higher cash
balances in 2000.
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 $18,960,000 at
June 30, 2000, compared with $9,255,000 at December 31, 1999, of which
$1,830,000 and $2,389,000, 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 June 30, 2000,
the Company's accrued slot liability for its MSP systems aggregated $17,730,000.
In connection with these slot liabilities and in accordance with regulatory
requirements, the Company established restricted cash accounts aggregating
approximately $1,830,000 at June 30, 2000 to ensure availability of adequate
funds to pay for jackpot liabilities associated with jackpot prizes offered but
yet to be awarded. The Company also has restricted investment securities
approximating $16,042,000 as of June 30, 2000 for annuity payments related to
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 fully accrue each jackpot amount. Such
occurrences could have a material adverse impact on the Company's results of
operations in the reporting period in which such jackpots would hit.
The Company's ratio of current assets to current liabilities is 6.0 to 1 at June
30, 2000, while the noncurrent liabilities to equity ratio is .20 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.
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,
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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:
- A decline in demand for, or appeal of, the Company's products, or a
decline in the rate of growth of new and existing markets for the
Company's products.
- The inability of the Company to develop new competitive products in a
timely fashion.
- An increase in popularity of competitor's products.
- The entry into the market by new competitors and competition with more
well established manufacturers and distributors.
- The loss or retirement of our key executives.
- Approval of competitor's patent applications resulting in an inability
to use intellectual property upon which the Company relies to
manufacture and sell its products or denial of approval of the
Company's patent applications.
- Unfavorable public referendums or anti-gaming legislation.
- Unfavorable legislation affecting or directed at manufacturers or
operators of gaming products and systems.
- The effect of regulatory and governmental actions including, without
limitations, delays in regulatory approval for the Company's products,
or the limitation, conditioning, suspension or revocation of any of the
Company's licenses.
- Unfavorable determination of suitability by gaming regulatory
authorities with respect to our officers, directors, key employees or
business partners.
- With respect to legal actions pending against the Company, the
discovery of facts not presently known to the Company or determination
by judges, juries or other finders of fact which do not accord with the
Company's evaluation of the possible liability or outcome of existing
litigation.
We do not undertake to update our forward looking statement to reflect future
events or circumstances.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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's ProTurbo Software module violated certain patent rights of
Acres Gaming. Acres Gaming also filed a Motion for Preliminary Injunction, which
was later withdrawn by Acres. The Company has answered the lawsuit asserting
defenses and counterclaims seeking a declaration of invalidity, noninfringement
and unenforceability of the patent asserted. 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 position, results of operations or liquidity.
On November 17, 1998, Acres filed a second lawsuit against the Company alleging
that the Company's ProTurbo 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
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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. For example, the
Company is currently litigating two patron disputes that it has won on every
level of review, however the patrons have continued to appeal the decisions. One
dispute has been appealed by the patron to the Supreme Court of the State of
Mississippi, and the patron alleges a claim for two identical jackpots of over
$2.7 million dollars each. A second dispute has been appealed by a patron to the
Supreme Court of the State of Nevada, who alleges a claim for over $8 million
dollars. In either case, if the patron were to win, the Company would be liable
to pay $1 million dollars immediately (plus interest) with the remainder to be
paid in installments over twenty years in an annuity. 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 position, results of operations
or liquidity.
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 June
30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CASINO DATA SYSTEMS
-------------------
Registrant
Date: August 10, 2000 /s/ Steven A. Weiss
--------------------------- ----------------------------------
Steven A. Weiss
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: August 10, 2000 /s/ Ron Rowan
--------------------------- ----------------------------------
Ron Rowan
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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