FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| /x/ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 |
| / / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO |
Commission File No. 0-21426
CASINO DATA SYSTEMS
(Exact Name of Registrant as Specified in its Charter)
| Nevada (State or other jurisdiction of incorporation or organization) | 88-0261839 (I.R.S. Employer Identification No.) | |
3300 Birtcher Drive Las Vegas, Nevada (Address of principal executive offices) | 89118 (Zip Code) |
(702) 269-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:Common Stock, no par value
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. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes /x/ No / /
As of March 15, 2001, 18,572,871 shares of the Registrant's Common Stock were outstanding. The aggregate market value of the Common Stock held by non-affiliates of the Registrant on such date, based upon the last sale price of the Common Stock as reported on the NASDAQ National Market on March 15, 2001, was $141,603,481. For purposes of this computation, affiliates of the Registrant are deemed only to be the Registrant's executive officers and directors.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instruction G(3), the definitive proxy statement relating to the Registrant's Annual Meeting of Stockholders is incorporated by reference in Part III to the extent described therein.
| | | Page | ||
|---|---|---|---|---|
| Part I | ||||
| Item 1. | Business | 3 | ||
Item 2. | Description of Properties | 24 | ||
Item 3. | Legal Proceedings | 24 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 25 | ||
Part II | ||||
Item 5. | Market for Registrant's Common Stock and Related Stockholder Matters | 26 | ||
Item 6. | Selected Financial Data | 27 | ||
Item 7. | Management's Discussion and Analysis of Financial Condition and Results Of Operations | 27 | ||
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 32 | ||
Item 8. | Consolidated Financial Statements and Supplementary Data | 33 | ||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 54 | ||
Part III | ||||
Item 10. | Directors and Executive Officers of the Registrant | 55 | ||
Item 11. | Executive Compensation | 55 | ||
Item 12. | Security Ownership of Certain Beneficial Owners and Management | 55 | ||
Item 13. | Certain Relationships and Related Transactions | 55 | ||
Part IV | ||||
Item 14. | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 56 | ||
Signatures | 58 |
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Item 1. Business
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Casino Data Systems (the "Company" or "CDS") is a designer and manufacturer of innovative technology-driven products for the gaming industry. 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:
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We do not undertake to update our forward looking statement to reflect future events or circumstances.
General
The Company's primary products and services include the (i) design and manufacture of casino management information systems, including the Company's historical core product, the OASIS™II (On-Line Accounting and Slot Information System) System and its successor, OASIS Windows® (Windows is a registered trademark of Microsoft Corporation) (collectively referred to as "OASIS"); (ii) design and manufacture of innovative gaming machines and the operation of multi-site link progressive ("MSP") systems which link gaming machines in different casinos to allow patrons to compete for large, lifestyle-changing progressive jackpots; (iii) design and manufacture of meters, signs and graphics which allow the Company to offer integrated gaming systems with custom designed glass and graphics, progressive meters and customized overhead signage; and (iv) development of advanced software programming tools. The Company provides these products and services through operation of four segments: OASIS systems, games, signs and TurboPower Software (TurboPower).
These segments contributed to consolidated revenue for each of the three years ended December 31, 2000 as follows:
| | Revenues | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Segment | 2000 | 1999 | 1998 | |||||||
| | (Dollars in thousands) | |||||||||
| OASIS Systems | $ | 39,060 | $ | 30,075 | $ | 23,147 | ||||
| Games | 31,203 | 37,533 | 24,155 | |||||||
| Signs | 5,407 | 5,702 | 4,031 | |||||||
| TurboPower | 2,973 | 2,220 | 1,847 | |||||||
| Total | $ | 78,643 | $ | 75,530 | $ | 53,180 | ||||
Founded in 1990 by Steven Weiss, the Company's Chairman and Chief Executive Officer, the Company grew rapidly by developing and marketing technologically advanced products, including its DOS based OASIS casino management information systems and its Cool Millions™ MSP system, and through strategic acquisitions of businesses and technology to complement the Company's core products. The Company's OASIS system is installed in over 145,000 gaming machines in approximately 138 casinos throughout North America. Through the marketing and enhancement of its OASIS systems, the Company has developed relationships with many major casinos in North America, which the Company believes provides it with a competitive advantage in marketing its other products and systems. In 1993, the Company developed progressive meter technology and has since expanded and diversified its operations through the acquisition of graphics, signs and software businesses. In 1994, the Company launched its Cool Millions MSP system in Mississippi and was licensed by Nevada as a manufacturer and distributor of gaming devices. The Company's gaming devices product portfolio is comprised of proprietary video poker and video slot games along with traditional reel spinning slot machines.
Business Strategy
The Company's objective is to become the leading designer and manufacturer of innovative technology-driven products and services to meet the gaming industry's evolving needs. To meet this goal, the Company intends to continue to enhance and refine its existing products and systems, develop new and entertaining interactive gaming devices and continue its research and development efforts to maintain its ability to offer technologically advanced products in each of its businesses and further
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integrate its operations to provide the best possible products and services to its customers. The Company has also continually reviewed all components of its business for possible improvement of future profitability and shareholder value through acquisition, divestiture, reengineering or restructuring. The key elements of the Company's strategy are described below in relation to the Company's lines of business.
Subsequent Event
On January 17, 2001, the Company entered into a definitive agreement with Aristocrat Leisure Limited, an Australian company ("Aristocrat"), under which Aristocrat would acquire CDS in a cash-for-stock merger transaction.
Under the agreement an indirect wholly owned subsidiary of Aristocrat will merge with and into CDS, with the result that CDS would become a wholly owned indirect subsidiary of Aristocrat. In the merger, each holder of the Company's capital stock will have the right to receive $9.25 per share in cash. In addition, Steven A. Weiss, Chairman and Chief Executive Officer of the Company, and Michael D. Rumbolz, Vice Chairman of the Company, have entered into agreements under which they have agreed to vote certain of their shares in favor of the merger.
Closing of the merger is subject to a number of customary conditions, including the approval of the merger by the shareholders of the Company and receipt of all necessary regulatory approvals. The merger is anticipated to close in the second half of 2001.
OASIS Systems
Casino Management Information Systems
In order to maintain its position as a technological leader, the Company continues to expand the functionality of its casino management systems. The Company believes that innovative and reliable information systems will be a key element in the continued growth and success of the gaming industry. The Company's player tracking and gaming machine accounting systems traditionally have been used by casinos to monitor player activity and to collect, integrate and analyze data from electronic gaming devices. The Company has been evolving its player tracking and gaming machine accounting systems into a casino-wide management information system by using its technological expertise to develop software modules that allow the OASIS™ system to support additional marketing, accounting, security and maintenance functions for many areas of casino operations. The Company has completed development of two versions of a Windows™ NT compatible platform for OASIS software. The development of these system enhancements enables OASIS to expand data analysis, improve communications, and include data exchange with other casino management information systems. OASIS products recently introduced into the Windows product line include PitBOSS™ cage, credit and table games accounting; Diagnostic Monitor floor analysis and Universal Gateway system interface. In addition, the Company has wireless radio frequency communication capability on its OASIS platforms. Casinos with OASIS systems have the ability to customize their casino management information system operations by adding new modules and features to their existing OASIS systems as expansions or upgrades.
OASIS, the Company's on-line gaming machine accounting and player tracking system, forms the core of the Company's information management system. The Company's casino management systems are comprised of modular software applications designed to deliver real-time solutions to the gaming industry. The system uses advanced electronic monitoring equipment to collect, integrate, analyze and report data from traditional slot machines, multi-site progressive link machines, video poker and other
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electronic gaming devices. By linking on-line accounting and player tracking information, the OASIS system allows casinos to perform sophisticated and customized data analysis in real-time.
The Windows compatible version utilizes Microsoft® NT operating software and incorporates Microsoft SQL Server 7.0 relational database and third party report generators. The OASIS/Windows version was completed and approved for field trial in Nevada in April 1998. By November 1998, the OASIS/Windows field trial was completed and the product was available for general sale in Nevada. The Windows compatible version was approved for general sale in Gaming Laboratories International, Inc. ("GLI" is an independent gaming consultant that many jurisdictions utilize to approve electronic gaming devices, systems and associated equipment) territories in October 1998.
BlackBart™, the on-line gaming machine accounting module of the OASIS system, consolidates all funds that enter, exit, or are retained by each electronic gaming machine, records all jackpot and fill transactions, and calculates coin and currency drop values. This information is rapidly and continuously communicated to generate instant or "on-line" accounting of revenues for all types of electronic gaming machines. Machine statistics and net win analysis provide comprehensive revenue profiles for individual machines and the entire casino floor. An automated jackpot and fill program provides comprehensive jackpot accounting, security and control, including support for the Company's ProTURBO line of progressive jackpot meters. Redemption of machine-generated tickets is integrated into BlackBart from the Company's Quickets™ application.
The ticketing system, Quickets, provides a tool to redeem, monitor, and expire cash out tickets. Tickets are cashable, machine-generated slips of paper that print when a player presses the cash out button on a gaming device. Players are able to redeem tickets by inserting them into a machine bill validator (just like paper currency) or by taking them to a workstation location (e.g., cashier). Casinos are installing ticketing systems to enhance their player service, decrease machine down-time, and increase their employee efficiency.
The ProTURBO progressive system central controller provides cost and operational advantages by eliminating individual progressive controllers for each meter and by enabling casinos to control all meters from one central workstation, allowing casinos to reset meters without manually configuring each meter on the casino floor. This feature provides the casino flexibility to design the gaming floor to highlight specific areas within the casino to stimulate player activity.
The PersonalBanker or EFT (Electronic Funds Transfer) feature is an optional component of the OASIS system. Its primary purpose is to allow players to electronically transfer credits between gaming machines and to their player account. The system can be configured to allow players to transfer credits from their accounts to machines, from machines to their accounts, or both. Regardless of how a system is configured, only machines that are technically capable of handling EFT transactions can be used for PersonalBanker. Both cashable and promotional (non-cashable) credits are supported.
Super-PlayMate™, the player tracking and marketing database functionality within the OASIS system, allows casino operators to collect and access real-time player marketing information. Casino marketing departments use OASIS data to engage in target marketing, measure customer response to marketing efforts, award "comps" to good customers and measure the cost effectiveness of various "comp" and marketing programs by comparing the expenditures with revenues generated by a player or group. To collect player information, casinos issue coded and individualized "player club" cards to customers, which are inserted into a card reader mounted on or in the gaming machines. The OASIS system records the length of play, amount wagered and casino win on each machine played, enabling the casino to keep a record of gaming activity for each customer. In addition, the OASIS system integrates manually entered table game data with gaming machine data to produce comprehensive player ratings.
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The OASIS system features OmniVIEW, a dynamic, real-time graphic representation of the electronic gaming floor, which provides a display of all gaming activity as it occurs. By moving a cursor around the floor plan, the user can obtain detailed current information about any gaming machine and any player. Real-time information includes hopper level analysis, carded and cardless player headcounts and maintenance event detail.
The Surveillance Monitor module is designed to assist security and surveillance personnel by flagging certain types of transactions with distinctive message or alarm attributes. These messages are displayed on screen and may be printed on a security log. The Diagnostic Monitor™ module provides a history of maintenance problems and procedures performed for each gaming machine and can be programmed to automatically page maintenance personnel and initiate work orders when failure codes are entered via keypad at the gaming machine.
The Universal Gateway application enables the casino management system to interface with third party systems such as hotel systems or point of sale systems, through customizable messages and communication protocols. With a point of sale interface, this program allows players to accumulate points with purchases throughout the resort in addition to gaming activities. Additionally, with a swipe of the player's club card, players may use their points throughout the resort to pay for meals, hotel rooms, or resort services. Other interfaces include links to other revenue centers in the casino: Keno, Bingo, and Race and Sports Book systems.
PitBOSS is the cage, credit, and table games accounting application that ties the table games area into the OASIS casino management suite of products. Marketing data is shared between OASIS and PitBOSS applications to provide comprehensive player analysis for multiple locations of gaming activity. Full accounting is provided for all cage transactions including checks, markers, deposits, withdrawals and payments, and for all table games transactions including fills, credits, and table inventory.
The Currency Transaction Reporting (CTR) feature allows the casinos to electronically maintain a Multiple Transaction Log (MTL) and generate Currency Transaction Reports (CTRs), as required by law. Title 31 and Regulation 6A (Reg 6A) laws require casinos to maintain logs and submit reports for cash transactions that were conducted in gaming areas, and that exceed a certain amount during a single 24-hour period. Cash transactions are separated into Cash In (currency received) and Cash Out (currency disbursed). They include front money and safekeeping deposits and withdrawals, marker and personal check payments, player bets that involve cash, and cash jackpot winnings. This module records information from Super-PlayMate, PitBOSS and the Jackpot-Fill program.
The Company continues to invest in its OASIS casino information management systems to pursue its objective of technological leadership. The Company will continue to enhance existing modules and will focus on developing new modules in the future in an effort to increase the OASIS systems' functionality.
Games
Video Interactive Gaming Machines
The Company has developed a proprietary video interactive gaming machine platform which supports high-speed, high resolution video displays and CD-quality stereophonic sound with advanced memory and graphics capabilities. The Company continues to develop additional interactive video gaming machines based on this platform and to develop more advanced platforms that will support additional graphics, animation, and other secondary game features designed to increase the entertainment value and interactivity of video gaming.
The Company believes that its success in the video gaming business will be dependent upon its development and marketing of state-of-the-art interactive video gaming machines which will add entertainment value and encourage social interaction among players to enhance the gaming experience.
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To that end, the Company has developed various video poker and video slot games along with traditional and deluxe reel spinning slot machines that are currently licensed in various jurisdictions. In addition, the Company intends to develop new interactive video gaming devices with enhancements in production value, computer graphics and entertainment-focused secondary game features.
Recurring Revenue
MSP systems electronically link a number of gaming machines in various casinos to a central computer that allocates a portion of each wager made to one or more progressive jackpots. By linking the machines together, larger life-style changing progressive jackpots can be awarded more frequently than with stand alone machines due to the increased number of wagers contributing to the jackpot on the link. The Company had 417 games participating on its five MSP system links as of December 31, 2000.
Signs
The Company develops complete interior sign and display solutions for customers. The Company believes that integrated product installations offer customers a cost-effective solution and are the most efficient marketing strategy for its meter and sign products. The Company promotes complete display and merchandising packages that include overhead signage, in-machine and overhead progressive meters. The signs and meters product lines are complimentary to the Company's Games and Systems businesses.
The Company has developed a full line of progressive meters, controllers and progressive systems. A meter is a graphics display device for progressive jackpots, which displays current jackpot size to gaming patrons. The Company's ProVIEW™ family of meters offers in-machine and overhead text messaging, odometer jackpot effects and graphic animation sequences. The meters are available in various sizes, configurations and resolutions. A controller is a data transmission device that links gaming machines and meters into a progressive system. The Company's ProLINK™ line of controllers allows operation of proprietary progressive systems within one or more of a casino operator's properties. A progressive system is comprised of meters and controllers that link together slot machines, allocates a portion of each wager to a progressive jackpot and displays the current jackpot size via overhead or in-machine displays. The Company's ProSOLO one-machine progressive system enables a single slot machine to offer a progressive jackpot. The Company's ProTURBO progressive system links the ProLINK progressive technology with the OASIS II system to create a single, highly-flexible controller that manages both progressive communications and player tracking/slot accounting data collection. The ProTURBO system allows the casino operator to customize or change any of the meter-linked signs from a single networked work station, compared with competing meter-linked signs that must be changed one at a time from the casino floor.
The Company has recently developed a new product called ProLINK Plasma System. This system is a unique display network that allows the operator to customize marketing messages on up to 128 plasma displays throughout the property using one Central Studio Workstation.
TurboPower
The Company's TurboPower Software subsidiary (TurboPower) develops advanced software programming tools used by software professionals to develop applications for business and industry. Located in Colorado Springs, Colorado, TurboPower has a diverse library of programming tools and provides encryption and debugging tools for professional software developers.
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Technology and Certain Other Business Risks
Risks of New and Expanding Businesses; Rapidly Changing Technology
The Company is continuing to expand and diversify its business by developing and introducing new products that complement and enhance the Company's existing businesses. The Company faces the risks, expenses and difficulties frequently encountered by new and rapidly expanding businesses, including, but not limited to, fluctuating cash flow, initial high development costs of new products without corresponding sales, pending receipt of regulatory approvals, market introduction and acceptance of new products. Of course, there is no assurance that the Company's new products will be accepted in the marketplace or that regulatory approvals will be obtained. Furthermore, in each area of the Company's business, the Company will need to manage the transition to higher volume operations, entry into new markets, control of overhead expense and the addition, training and management of qualified personnel.
The Company's development as a gaming machine manufacturer and supplier is dependent upon numerous factors, including its ability to design, manufacture, market and service gaming machines that achieve player and casino acceptance while maintaining product quality and acceptable margins. The Company must compete against gaming machine suppliers with greater financial resources, name recognition, established service networks and customer relationships. The Company believes that it will need to develop gaming machines that offer technological advantages or unique entertainment features in order for the Company to be able to compete effectively in the gaming machine market.
Time to Market
Each area of the Company's business is characterized by rapidly changing technology and frequent new product introductions and enhancements. The Company's success will depend in part on its ability to continue to enhance its existing products and to introduce in a timely manner new products that meet evolving customer requirements and achieve market acceptance. There can be no assurance that the Company will be successful in identifying, developing and marketing new products or enhancing its existing products. The Company's business will be adversely affected if the Company experiences delays in developing new products or enhancements or if such products or enhancements do not gain customer acceptance.
Factors Affecting Profitability and Growth
Substantially all of the Company's revenues and profits are derived from the gaming industry. The continued profitability and growth of the Company's business is substantially dependent upon factors that are beyond the control of the Company, including, among others, the pace of development, expansion and renovation of casinos, the legalization of MSP systems and other forms of casino gaming in new jurisdictions, the continued popularity of casino gaming as a leisure activity and increased demand by gaming customers for progressive jackpot games and game variations providing increased payout opportunities. The expansion of the gaming industry has slowed in recent years and the continued expansion of gaming markets is dependent upon political, legal and other factors which are beyond the control of the Company. As a result of these and other factors, there is no assurance of the Company's continued growth or profitability.
Reliance on Key Customers
The Company has historically maintained strong business relationships with several key casino customers including, but not limited to, Boyd Gaming; Mandalay Resort Group; Harrah's Entertainment; Park Place Entertainment Corporation; MGM-Mirage; Coast Resorts and Station Casinos which have, in certain periods, accounted for a material amount of the Company's sales. Combined, these entities accounted for approximately 23%, 27% and 25% of the Company's total sales
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during the fiscal years ended December 31, 2000, 1999 and 1998, respectively. While each sale of casino management information systems and other large product contracts are negotiated independently and do not occur with specific frequency, the loss or reduction of a major customer could have a material adverse impact on the financial results of the Company. There can be no assurance that the Company will maintain strong business relationships with its key customers in the future.
Competition
The market for casino management information systems, MSP systems, gaming machines and each of the Company's other products are difficult markets in which to compete and there are a number of established, well-financed and well-known companies that compete with each of the products and services offered by the Company. International Game Technology in particular enjoys a significant domestic and international market position in the Company's primary markets, including casino management information systems, gaming machines and MSP systems.
The Company also competes with several other companies in one or more areas of the Company's markets, including, but not limited to, Alliance Gaming (Bally Gaming International), Anchor Gaming, Sigma Gaming, Universal Distributing, Mikohn, WMS Gaming, Acres Gaming, Silicon Gaming, Aristocrat, Atronic, Unidesa, Gaming Systems International, Lodging Systems, Inc. and Yesco. The development of a successful new product or product design by a competitor could adversely affect sales of the Company's products and, although the Company would endeavor to respond quickly with its own competing products, no assurance can be made that a significant new product designed by a competitor would not have a material adverse effect on the Company's results of operations.
Marketing and Sales
The Company has approximately 48 full time sales and marketing staff focusing on the sales of OASIS casino management information systems, games, signs and meters. The Company's TurboPower Software subsidiary sells its products primarily by telephone and the Internet. In addition to its corporate headquarters in Las Vegas, Nevada, the Company maintains regional sales and support offices in Sparks, Nevada; Gulfport, Mississippi; Atlantic City, New Jersey and Plymouth, Minnesota.
Intellectual Property Rights
The Company's business is dependent upon its ability to protect its proprietary software, hardware and other intellectual property. The Company relies primarily on a combination of non-disclosure agreements with its key employees and other third parties, license agreements and nondisclosure agreements with its customers and suppliers and trade secret protection to protect such intellectual property. Despite the Company's precautions, it may be possible for unauthorized parties to copy or to possibly reverse engineer certain portions of the Company's products or to obtain and use information that the Company believes is proprietary. Therefore, there is no assurance that precautionary steps taken by the Company in this regard will be adequate to deter misappropriation of its intellectual property or independent third party development of functionally equivalent products or that the Company can meaningfully protect its rights to such proprietary intellectual property. The Company has applied for patents covering certain aspects of its MSP systems and gaming devices. There is no assurance that such patents will be issued, or, if issued, will offer meaningful protection of such intellectual property. In addition, whether or not such patents are issued, others may hold or receive patents which contain claims having a scope that covers products developed by the Company. Furthermore, there can be no assurance that others have not developed or will not develop similar products or technology, duplicate any of the Company's products or technology, or design around any patents licensed or granted to the Company, or any patents that may be issued in the future to the Company.
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Employees
As of December 31, 2000, the Company had approximately 429 full-time employees, approximately 105 of whom were software or hardware engineers. The majority of the remaining employees are engaged in technical support and customer service, production, field installation and support, sales and marketing and administration. The Company also uses a temporary agency to provide skilled workers for light manufacturing and assembly during high-demand manufacturing periods. The Company is not currently subject to a collective bargaining agreement and believes that its employee relations are good.
Regulation
Overview
The Company is subject to regulation in jurisdictions in which it operates MSP systems and in most jurisdictions in which its products are sold or are used by persons or entities licensed to conduct gaming activities. Such gaming regulations vary from jurisdiction to jurisdiction and the classification and level of the regulatory licensing, approvals and compliance to which the Company and its products must conform also vary by jurisdiction. In certain jurisdictions, the Company or its subsidiaries may be operating pursuant to temporary waivers or approvals. There can be no assurance that such temporary waivers or approvals will be maintained or become permanent. Failure by the Company or its subsidiaries to obtain, or the loss or suspension of, any necessary licenses, approvals or suitability findings would prevent or restrict the Company or its subsidiaries from operating, selling or distributing its products in most jurisdictions, which would have a material adverse effect on the Company. In the event gaming authorities determine that an officer, director, key employee, stockholder or other person of the Company is unsuitable to act in such a capacity, the Company will be required to terminate its relationship with such person, which termination could have a material adverse effect on the Company. Although the Company has the right to redeem shares of an unsuitable stockholder under certain circumstances, such a finding of unsuitability could in any event have a material adverse effect on the Company. There can be no assurance that the Company or its subsidiaries will obtain all the necessary licenses and approvals or that its officers, directors, key employees, their affiliates and certain other stockholders will satisfy the suitability requirements in each jurisdiction in which the Company or its subsidiaries seeks to operate MSP systems or in which its products are sold or used by persons licensed to conduct gaming activities. The failure to obtain such licenses and approvals in one jurisdiction may affect the Company's licensure and/or approvals in other jurisdictions. In addition, a significant delay in obtaining such licenses and approvals could have a material adverse effect on the business prospects of the Company.
The Company's OASIS casino information management systems and related meters, controllers and progressive systems are generally classified as "associated equipment." "Associated equipment" is equipment that is not classified as a "gaming device," but which has such an integral relationship to the conduct of licensed gaming that regulatory authorities have discretion to require suppliers of such systems to meet licensing suitability requirements prior to or concurrent with the use of such equipment in the respective jurisdiction. Associated equipment generally must be approved in advance by the regulatory authorities for its use at licensed locations within the jurisdiction. The Company or its distributor has complied in all material respects with the associated equipment approval process in each jurisdiction in which it has sold OASIS systems.
The gaming machines that may be developed by the Company are defined as "gaming devices" in many jurisdictions. Although gaming device and equipment regulations vary among jurisdictions, each jurisdiction requires various licenses, approvals or permits to be held by companies and their key personnel in connection with the manufacture and distribution of gaming devices and equipment. The Company or one of its subsidiaries is licensed as a manufacturer, distributor and/or supplier of gaming devices in numerous domestic and foreign jurisdictions, and has applied to be licensed in several other
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jurisdictions. The Company has operated pursuant to transactional waivers or as a supplier of associated equipment in jurisdictions in which the Company's license applications are pending. The Company will be required to apply for additional transactional waivers in the event it seeks to make sales to additional casinos in such jurisdictions prior to licensing. The Company will be required to apply for licensing as a manufacturer, distributor and/or supplier of gaming devices or associated equipment prior to making sales in each new jurisdiction.
As an operator of MSP systems, the Company, certain of its officers, directors, key employees, stockholders and other affiliates are subject to mandatory operator licensing and approval requirements, operator suitability requirements and ongoing regulatory oversight in each jurisdiction in which it operates MSP systems. On October 28, 1994, CDS Gaming received a gaming operator license from the Mississippi Gaming Commission. On December 21, 1995, CDS Gaming was licensed by the Nevada Gaming Commission as an operator of an inter-casino linked system ("OILS"). The OILS license permits the Company to operate MSP systems without being licensed to conduct gaming at each Nevada casino participating in the MSP system. There can be no assurance that the Company or its subsidiaries will obtain all of the necessary licenses and approvals or that their officers, directors, key employees, other affiliates and certain other stockholders will satisfy the suitability requirements in one or more jurisdictions, or that such licenses, approvals and suitability findings, if obtained, will not be revoked or not be renewed in the future. The laws, regulations and procedures pertaining to gaming are subject to the interpretation of the Regulatory Authorities and may be amended. Any changes in such laws, regulations, or their interpretations could have a material adverse effect on the Company.
General Regulation of Stockholders of Publicly Traded Corporations
In most jurisdictions, any beneficial owner of the Company's Common Stock is subject on a discretionary basis to being required to file applications with gaming regulatory authorities, be investigated and found suitable or qualified as such. In addition, stockholders whose holdings of Common Stock exceed certain designated percentages are subject to certain reporting and qualification requirements imposed by state and federal gaming regulators and, any stockholder, if found to be unsuitable, may be required to immediately dispose of its holdings of Common Stock. See "—New Jersey Regulatory Matters," "—Nevada Regulatory Matters" and "—Mississippi Regulatory Matters." The Company's Articles of Incorporation authorize the Company to redeem at fair market value Common Stock held by any person whose status as a shareholder may jeopardize the Company's gaming licenses or approvals.
Nevada Regulatory Matters
The manufacture, sale and distribution of gaming devices for use or play in Nevada or for distribution outside of Nevada, the manufacture and distribution of associated equipment for use in Nevada, and the operation of inter-casino linked systems in Nevada are subject to: (i) The Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the "Nevada Act"); and (ii) various local ordinances and regulations. Such activities are subject to the licensing and regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming Control Board ("Nevada Board"), and various local, city and county regulatory agencies (collectively referred to as the "Nevada Gaming Authorities").
The Company is registered by the Nevada Commission as a publicly traded corporation (a "Registered Corporation") and has also been licensed as a manufacturer and distributor of gaming devices. The Company has also been found suitable to own the stock of CDS Gaming (the "Nevada Subsidiary") which is licensed as an operator of an inter-casino linked system. As a Registered Corporation, the Company is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may required. The Company and the Nevada Subsidiary have obtained from the Nevada Gaming
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Authorities the various registrations, findings or suitability, approvals, permits and licenses in order to engage in manufacturing, distribution and inter-casino linked system activities in Nevada.
All gaming devices that are manufactured, sold or distributed for use or play in Nevada, or for distribution outside of Nevada, must be manufactured by licensed manufacturers and distributed or sold by licensed distributors. All gaming devices manufactured for use or play in Nevada must be approved by the Nevada Commission before distribution or exposure for play. The approval process for gaming devices includes rigorous testing by the Nevada Board, a field trial and a determination as to whether the gaming device meets strict technical standards that are set forth in the regulations of the Nevada Commission. Associated equipment must be administratively approved by the Chairman of the Nevada Board before it is distributed for use in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or the Nevada Subsidiary in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. No person or legal entity may acquire control of the Company without the prior approval of the Nevada Commission. Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability determined as a beneficial holder of the Company's voting securities if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of more than 5% of a Registered Corporation's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of a Registered Corporation's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of the Registered Corporation's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Registered Corporation, any change in the Registered Corporation's corporate charter, bylaws, management, policies or operations of the Registered Corporation, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Registered Corporation's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholder; (ii) making financial and other inquiries of management of the type normally made by securities analysts for information purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the voting securities of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The
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Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or its subsidiaries, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) failed to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction.
The Company and the Nevada Subsidiary are required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company will also be required to render maximum assistance in determining the identity of the beneficial owner.
The Company may not make a public offering of its securities, such as the Common Stock, without the prior approval of the Nevada Commission if the securities or proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes.
Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environmental for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's board of directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation.
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Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if it knowingly violates any laws of the foreign jurisdiction pertaining of the foreign gaming operation, fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engages in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employs a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the grounds of personal unsuitability.
The loss or restriction of the Company's gaming licenses in Nevada would have a material adverse effect on its business and could require the Company to cease its manufacturing, distribution and inter-casino linked system activities in Nevada.
New Jersey Regulatory Matters
Casino gaming in New Jersey is regulated by the New Jersey Casino Control Commission and regulations promulgated thereunder (the "NJCCA"). The NJCCA created the New Jersey Casino Control Commission ("NJCCC"), which is authorized to decide all license applications and other matters and to promulgate regulations, and created the New Jersey Division of Gaming Enforcement (the "NJDGE"), which is authorized to investigate all license applications, make recommendations to the NJCCC, and prosecute violations of the NJCCA. Under the NJCCA, any enterprise providing goods or services to a casino must register with or be licensed by the NJCCC.
Business enterprises providing goods and services not directly related to casino gaming or simulcast wagering must be registered with the NJCCC within 20 days of commencing business with the casinos and must be licensed by the NJCCC if they conduct business with casinos on a regular or continuing basis. The NJCCC will consider various factors, including the amount of business transacted. Currently, any enterprise which transacts more than $75,000 in business with any one casino in any one 12-month period or more than $225,000 with all casinos of Atlantic City within any one 12-month period or more than $30,000 with one casino within each of three consecutive 12-month periods or more than $100,000 with the casinos of Atlantic City within each of three consecutive 12-month periods must be licensed.
Business enterprises providing goods or services directly related to casino gaming or simulcast wagering must be licensed as a gaming related Casino Service Industry ("CSI") prior to conducting business with New Jersey casino licensees or must have filed a complete application for CSI licensure with the NJCCC and received the permission of the NJCCC for each business transaction.
On November 4, 1996, the Company was granted a CSI License by the NJCCC. In order for this license to be maintained, the Company's officers, directors and key employees and all beneficial owners of more than five percent (5%) of the Company's Common Stock must be found qualified by the NJCCC. In order to be found qualified, the Company, its officers, directors, key employees and five percent (5%) stockholders must demonstrate by clear and convincing evidence their good character, honesty and integrity, their financial stability, integrity and responsibility, and their business ability. Any other stockholder or other person associated with the Company who the NJCCC deems appropriate, in its discretion, is also required to be qualified. If a person is required to and fails to submit to qualification or submits to qualification and is found disqualified by the NJCCC, the NJCCC may prohibit casinos in New Jersey from doing business with the Company. While the investigation by the
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NJDGE is pending, there is no assurance that the Company or any of its directors, officers, key persons or five percent (5%) shareholders will be found qualified or suitable for licensure.
However, "institutional investors" (as defined in the NJCCA) may be granted a waiver of the requirement to be found qualified by the NJCCC. An institutional investor includes any retirement fund administered by a public agency for the exclusive benefit of federal, state or local public employees, investment company registered under the Investment Company Act of 1940, collective investment trust organized by banks under Part Nine of the Rules of the Comptroller of the Currency, closed end investment trust, chartered or licensed life insurance company or property and casualty insurance company, banking and other chartered or licensed lending institution, and investment advisor registered under The Investment Advisors Act of 1940. In the discretion of the NJCCC, a waiver of qualification may be granted to such institutional investors provided the securities are owned for investment purposes only and the institutional investor certifies that it has no intention of influencing or affecting the affairs of the issuer or its holding companies.
A CSI license is issued for an initial period of two (2) years and is thereafter renewable for four (4) year periods. There is no guarantee that, following the issuance of an initial CSI license or any renewal thereof, the Company will continue to be granted renewals of the license. Additionally, upon application of the NJDGE, the NJCCC may at any time review any license issued by it and determine to suspend, revoke or place conditions on such license.
While the NJCCC may deny the CSI application or revoke the license of the Company should any officer, director, principal employee security holder or other person who is required to but fails to be found qualified, the Company's Articles of Incorporation authorize the Company to redeem at fair market value Common Stock held by any person whose status as a shareholder may jeopardize the Company's gaming licenses or approvals. In the discretion of the NJCCC, such divestiture may be deemed sufficient action by the Company to obtain or retain its CSI license. A change in ownership of a controlling interest of a CSI licensee will void the license and the licensee will be required to apply for a new license.
In addition to the required licensure from the NJCCC, the gaming equipment manufactured, distributed or sold by the Company to New Jersey casinos is subject to a technical examination by the NJDGE and approval by the NJCCC for, at a minimum, quality, design, integrity, fairness, honesty and suitability. As part of this approval process, the NJCCC may require that the manufacturer of any component of the gaming equipment which the NJCCC, in its discretion, determines is essential to the gaming operation of the device submit to licensing. Such components would include the computer control circuitry which causes or allows the device to operate as a gambling device. The failure or refusal of such a manufacturer to submit to licensing or the denial of a license by the NJCCC to such manufacturer would result in the inability of the Company to distribute and market that gambling device to New Jersey casinos. While the Company's OASIS II casino information management system products are presently in use in a New Jersey casino pursuant to the transactional waivers granted by the NJCCC to the Company, there can be no assurance that any modifications to such casino information management system or other component parts thereof would be approved by the NJCCC or that any other gaming devices subject to approval by the NJCCC prior to use in New Jersey casinos would receive such approval.
Mississippi Regulatory Matters
The manufacture, sale and distribution of gaming devices and associated equipment for use or play in Mississippi and the operation of inter-casino linked systems in Mississippi are subject to the Mississippi Gaming Control Act and the regulations promulgated thereunder (collectively, "Mississippi Act"). Although not identical, the Mississippi Act is similar to the Nevada Gaming Control Act. Such activities are subject to the licensing and regulatory control of the Mississippi Gaming Commission (the
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"Mississippi Commission") and the Mississippi State Tax Commission (collectively referred to as the "Mississippi Gaming Authorities").
The laws, regulations and supervisory procedures of the Mississippi Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming, or manufacturing or distribution of gaming devices at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Mississippi Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; (v) providing a source of state and local revenues through taxation and licensing fees; and (vi) ensuring that gaming licensees, to the extent practicable, employ Mississippi residents. Change in such laws, regulations and procedures could have an adverse effect on the Company and the Company's Mississippi operations.
The Company is registered by the Mississippi Commission as a publicly traded corporation (a "Registered Corporation") and holding company of CDS Services Company and CDS Gaming Company (separately, a "Mississippi Subsidiary" or collectively, the "Mississippi Subsidiaries"). As a Registered Corporation, the Company is required periodically to submit detailed financial and operating reports to the Mississippi Commission and furnish any other information which the Mississippi Commission may require. No person may become a stockholder of, or receive any percentage of profits from, the Mississippi Subsidiaries without first obtaining licenses and approvals from the Mississippi Gaming Authorities. The Company and the Mississippi Subsidiaries have obtained from the Mississippi Gaming Authorities the various registrations, approvals, permits and licenses in order to engage in manufacturing, distribution and gaming activities as presently conducted in Mississippi.
Manufacturers' and distributors' licenses and gaming licenses are not transferable, are initially issued for a two-year period and must be renewed periodically thereafter.
All gaming devices that are manufactured, sold or distributed for use or play in Mississippi must be manufactured by licensed manufacturers, and distributed or sold by licensed distributors. All gaming devices manufactured for use or play in Mississippi must be approved by the Mississippi Commission before distribution or exposure for play. The approval process for gaming devices includes rigorous testing by the Mississippi Commission, a field trial and a determination as to whether the gaming device meets strict technical standards that are set forth in the regulations of the Mississippi Commission. Associated equipment must be administratively approved by the Executive Director of the Mississippi Commission before it is distributed for use in Mississippi.
The Mississippi Commission may investigate any individual who has a material relationship to, or material involvement with, the Company or the Mississippi Subsidiaries in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Mississippi Subsidiaries are required to file applications with the Mississippi Commission and may be required to be licensed or found suitable by the Mississippi Commission. Officers, directors and key employees of the Company who are actively and directly involved in gaming activities of the Mississippi Subsidiaries may be required to be licensed or found suitable by the Mississippi Commission. The Company believes that findings of suitability with respect to such persons have been applied for or obtained, although the Mississippi Commission in its discretion may require additional persons to file applications for findings of suitability. The Mississippi Commission may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability
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must pay all the costs of the investigation. Changes in licensed positions must be reported to the Mississippi Commission and in addition to its authority to deny an application for a finding of suitability or licensure, the Mississippi Commission has jurisdiction to disapprove a change in a corporate position.
If the Mississippi Commission were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company or the Mississippi Subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Mississippi Commission may require the Company or the Mississippi Subsidiaries to terminate the employment of any person who refuses to file appropriate applications or whom the authorities find unsuitable to act in such capacity. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Mississippi.
The Mississippi Subsidiaries are required to submit detailed financial and operating reports to the Mississippi Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by the Mississippi Subsidiaries are required to be reported to or approved by the Mississippi Commission.
If it were determined that the Mississippi Act was violated by the Mississippi Subsidiaries, the licenses they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, at the discretion of the Mississippi Commission, the Mississippi Subsidiaries, the Company and the persons involved could be subject to substantial fines for each separate violation of the Mississippi Act. Limitation, conditioning or suspension of licenses held by the Mississippi Subsidiaries could (and revocation of any license would) materially adversely affect the Company's manufacturing, distribution and inter-casino linked system operations.
Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability determined as a beneficial holder of the Company's voting securities if the Mississippi Commission has reason to believe that such ownership may be inconsistent with the declared policies of the State of Mississippi. The applicant must reimburse all costs of investigation incurred by the Mississippi Commission in conducting any such investigation.
The Mississippi Act requires any person who acquires beneficial ownership of more than 5% of a Registered Corporation's voting securities to report the acquisition to the Mississippi Commission and such person may be required to be found suitable. The Mississippi Act requires that beneficial owners of more than 10% of a Registered Corporation's voting securities apply to the Mississippi Commission for a finding of suitability. The Mississippi Commission has generally exercised its discretion to require a finding of suitability of any beneficial owner of more than 5% of a Registered Corporation's common stock. Under certain circumstances, an "institutional investor," as defined by Mississippi Commission policy, which acquires more than 3%, but not more than 10%, of the Registered Corporation's voting securities may apply to the Mississippi Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs and fees that the Mississippi Commission incurs in conducting the investigation.
Any person who fails or refuses to apply for a finding of suitability or a license within thirty (30) days after being ordered to do so by the Mississippi Commission or the Executive Director may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of the Company beyond such period of time as may be
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prescribed by the Mississippi Commission may be guilty of a criminal offense. The Company will be subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or the Mississippi Subsidiaries, the Company (i) pays the unsuitable person any dividends or interest upon voting securities of the Company, (ii) recognizes the exercise, directly or indirectly, of any voting rights conferred through securities held by the unsuitable person, (iii) pays the unsuitable person any remuneration in any form for services rendered or otherwise, except in certain limited and specific circumstances or (iv) fails to pursue all lawful efforts to require the unsuitable person to relinquish his voting securities, including, if necessary, the immediate purchase of said voting securities for cash at fair market value.
The Company may be required to disclose to the Mississippi Commission upon request the identities of security holders, including the holders of any debt or equity securities. In addition, the Mississippi Commission under the Mississippi Act may, in its discretion, (i) require holders of debt securities of such Registered Corporations to file applications, (ii) investigate such holders, and (iii) require such holders to be found suitable to own such debt or equity securities. The Mississippi Commission retains the discretion to require the holders of debt or equity securities to be investigated and found suitable for any reason, including but not limited to a default on a debt instrument, or where the holder of the debt instrument or equity security exercises a material influence over the gaming operations of the entity in question. Any holder of debt or equity securities required to apply for a finding of suitability must pay all investigative fees and costs of the Mississippi Commission in connection with such an investigation.
The Mississippi Subsidiaries are required to maintain a current stock ledger in their principal office in Mississippi and the Company must maintain a current list of equity stockholders in the principal office of the Mississippi subsidiaries which must reflect the record ownership of each outstanding share of any class of equity security issued by the Company. The stock holder list may thereafter be maintained by adding reports regarding the ownership of such securities that it receives from the Company's transfer agent. The ledger and stock holder lists must be available for inspection by the Mississippi Commission at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Mississippi Commission. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company will also be required to render maximum assistance to the Mississippi Commission in determining the identity of the beneficial owner. The Mississippi Commission has the power to require the stock certificates of the Company to bear a legend indicating that the securities are subject to the Mississippi Act and the regulations of the Mississippi Commission. The Company has received a waiver from this requirement from the Mississippi Commission. The Mississippi Commission has the power to impose additional restrictions on the holders of the Company's securities at any time.
Substantially all loans, leases, sales of securities and similar financing transactions by a Mississippi Subsidiary must be reported to or approved by the Mississippi Commission. A Mississippi Subsidiary may not make a public offering of its securities, but may pledge or mortgage casino facilities, if it obtains the prior approval of the Mississippi Commission. The Company may not make a public offering of its securities without the approval of the Mississippi Commission if the securities or proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Mississippi, or to retire or extend obligations incurred for such purposes. The Company has received an annual renewal of continuous approval of all public offerings from the Commission and therefore is only required to obtain the Executive Director's approval of an offering of securities. Such approval does not constitute a finding, recommendation or approval by the Mississippi Commission or the Executive Director as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements certain recapitalizations and stock repurchases by the Company,
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or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Mississippi Commission. Entities seeking to acquire control of the Company must satisfy the Mississippi Commission with respect to a variety of stringent standards prior to assuming control of such company. The Mississippi Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.
The Mississippi legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Mississippi corporate gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Mississippi Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Mississippi's gaming industry and to further Mississippi's policy to: (i) assure the financial stability of corporate gaming licensees and their affiliates, (ii) preserve the beneficial aspects of conducting business in the corporate form, and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Mississippi Commission before the Company can make exceptional repurchases of voting securities in excess of the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Mississippi Act and the Mississippi Commission gaming regulations also require prior approval of a plan of recapitalization proposed by the Company's Board of directors in response to a tender offer made directly to the Company's stockholders for the purposes of acquiring control of the Company.
Neither the Company nor any subsidiary may engage in gaming activities in Mississippi while also conducting gaming operations outside of Mississippi without approval of the Mississippi Commission. The Mississippi Commission may require determinations that, among other things, there are means for the Mississippi Commission to have access to information concerning the out-of-state gaming operations of the Company and its affiliates. The current policy of the Mississippi Commission has been to grant a waiver from this approval requirement. CDS Gaming Company has received a waiver from the approval requirement of the Mississippi Commission to operate in Nevada. The Mississippi Commission will need to approve or grant a waiver from the approval requirement for the Company's or it subsidiaries' future gaming operations outside Mississippi or Nevada prior to engaging in such future operations.
If it were determined that the Mississippi Act or a gaming regulations was violated by the Mississippi Subsidiaries, the licenses they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures, which action, if taken, could materially adversely affect the Company's manufacturing, distribution and inter-casino linked system.
Annual license fees are also payable to the State of Mississippi for gaming licenses and manufacturers and distributor's licenses. The foregoing license fees are allowed as a credit against the Company's Mississippi income tax liability for the year paid.
Federal Regulation
The Federal Gambling Devices Act of 1962 (the "Johnson Act") makes it unlawful, in general, for a person to manufacture, deliver, or receive gaming machines, gaming machine type devices and components across state lines or to operate gaming machines unless that person has first registered with the Attorney General of the United States. The Company is required to register and renew its registration annually. The Company has complied with such registration requirements. In addition, various record keeping equipment identification requirements are imposed by the Johnson Act. Violation of the Johnson Act may result in seizure and forfeiture of the equipment, as well as other penalties.
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Native American Gaming
Gaming on Native American lands, including the terms and conditions under which gaming equipment can be sold or leased to Native American tribes, is or may be subject to regulation under tribal ordinances, the terms of compacts between the tribe and the host state, the Indian Gaming Regulatory Act of 1988 ("IGRA"), which is administered by the National Indian Gaming Commission (the "NIGC") and the Secretary of the U.S. Department of the Interior (the "Secretary"), and also may be subject to the provisions of certain statutes relating to contracts with Native American tribes, which are administered by the Secretary. The regulations and guidelines under which the NIGC and the Secretary will administer IGRA are incomplete and evolving. IGRA also is subject to interpretation by the NIGC and the Secretary, and may be subject to judicial and legislative clarification or amendment.
IGRA prohibits substantially all forms of commercial gaming on Native American lands, including gaming involving slot machines and gaming devices, unless (i) the tribe on whose lands the gaming will take place has adopted an ordinance, which has been approved by the NIGC, authorizing and regulating such gaming, and (ii) the state in which the gaming will take place permits such gaming by any person for any purpose. If the commercial gaming involves slot machines and gaming devices, IGRA also requires that the tribe and the state have entered into a written agreement (a "tribal-state compact") that specifically authorizes such types of commercial gaming, and that has been approved by the Secretary, with notice of such approval published in the Federal Register.
Tribal-state compacts vary from state to state. Many require that equipment suppliers meet ongoing registration and licensing requirements of the state and/or the tribe; some establish equipment standards that may limit or prohibit the placement of progressive games on Indian lands; and some impose background check requirements on the officers, directors, and shareholders of gaming equipment suppliers.
In addition to federal and state governmental requirements pertaining to gaming on Native American lands, Native American tribes are sovereign nations with their own courts and governmental systems. Under IGRA, tribes are required to regulate all commercial gaming under ordinances approved by the NIGC. Such ordinances may impose standards and technical requirements on gaming hardware and software, and may impose registration, licensing, and background check requirements on gaming equipment suppliers and their officers, directors, and shareholders.
Because of their sovereign status, Native American tribes possess sovereign immunity from unconsented suit. The Company intends to seek waivers of such immunity, where appropriate, from tribes with whom the Company does business, but there can be no assurance that such waivers will be obtained. If they are not, the extent of the Company's ability to enforce its agreements with Native American tribes will be severely circumscribed.
Under doctrines enunciated by the Supreme Court of the United States, federal and state courts are obliged, as a matter of law, to defer to the jurisdiction of tribal courts in litigation where tribal interests are substantially involved and where tribal courts may have jurisdiction. In such instances, if a tribal court hears the litigation, its determinations likely will be entitled to great deference in any state or federal court which later might be asked to hear the matter. These facts may affect the ability of the Company to effectively enforce its agreements with Native American tribes.
In addition to the foregoing, two federal statutes may have applicability to commercial gaming contracts with Native American tribes:
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the Secretary or his or her designee. Agreements for services relative to Native American lands which fail to conform with the requirements of this section will be void and unenforceable, and all money or other things of value paid under such void agreements is subject to judicial forfeiture in litigation, which can be brought by any person, in the name of the United States of America. In the Company's opinion, its sales contracts are not for services, and therefore Title 25, section 81, of the United States Code does not apply to the Company's contracts. The Company also believes that its sales of its OASIS II systems are not "relative to Native American lands" because, although the Company's products ultimately may be used on Native American lands, the products themselves are not related to such lands, and give the Company no control over such lands. To date, the Secretary has not asserted that agreements for the sale of goods to Indian tribes require his approval under Title 25, Section 81, United States Code.
Application of Future or Additional Regulatory Requirements
In the future, the Company intends to seek the necessary registrations, licenses, approvals and findings of suitability for the Company, its products and its personnel in other jurisdictions throughout the world where significant sales are anticipated to be made. However, there can be no assurance that such registrations, licenses, approvals or findings of suitability will be obtained and will not be revoked, suspended or conditioned or that the Company will be able to obtain the necessary approvals for its future products as they are developed in a timely manner, or at all. If a registration, license, approval or finding of suitability is required by a regulatory authority and the Company fails to seek or does not receive the necessary registration, license, approval or finding of suitability, the Company may be prohibited from selling its products for use in the respective jurisdiction or may be required to sell its products through other licensed entities at a reduced profit to the Company.
Nevada Legislation
Two of the Nevada general corporation provisions, the "Acquisition of Controlling Interest" and the "Combination with Interested Stockholders" statutes, may have the effect of delaying or making it more difficult to effect a change in control of the Company in certain circumstances.
Generally, the Acquisition of Controlling Interest statutes prohibit an acquiror, under certain circumstances, from voting shares of a target corporation's stock after crossing certain threshold ownership percentages, unless the acquiror obtains the approval of the target corporation's disinterested stockholders. There are three thresholds: one-fifth or more but less than one-third, one-third or more but less than a majority, and a majority or more, of the outstanding voting power. Once an acquiror crosses one of the above thresholds, those shares which an acquiring person or a person acting in association with an acquiring person acquire or offer to acquire in an acquisition, and acquire within 90 days after becoming an acquiring person become "control shares" and such control shares are deprived of the right to vote until disinterested stockholders restore the right. The Acquisition of Controlling Interest statutes also provide that in the event control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of all voting power, any
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stockholder of record, other than an acquiring person, who did not vote in favor of authorizing voting rights to the control shares is entitled to demand payment for the fair value of his or her shares. The Board of Directors must notify the dissenting stockholders, within 20 days after the vote of the stockholders authorizing voting rights for the control shares, that they have the right to receive the fair value of their shares in accordance with statutory procedures established generally for dissenters' rights.
In summary and subject to certain circumstances where they do not apply, the Combination with Interested Stockholders statutes prevent a "resident domestic corporation" from entering into a "combination" with an "interested stockholder" unless certain conditions are met. A "resident domestic corporation" (hereafter the "corporation") means any Nevada corporation that has 200 or more stockholders. A "combination" is broadly defined and includes, among other things, any merger or consolidation with an "interested stockholder," or an affiliate or associate of the "interested stockholder," or any sale, lease, exchange, mortgage, pledge, transfer or other disposition, in one transaction or a series of transactions with an "interested stockholder," or any affiliate or associate of an "interested stockholder," of assets of the resident domestic corporation, or any subsidiary of a resident domestic corporation: (a) having an aggregate market value equal to 5% or more of the aggregate market value of all the assets of the corporation, (b) having an aggregate market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, or (c) representing 10% or more of the earning power or net income of the corporation. "Interested stockholder" means the beneficial owner, directly or indirectly, of 10% or more of the voting power of the corporation, or an affiliate or associate of the corporation that, at any time within three years immediately before the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the corporation.
Effective October 1, 1993, the corporation may not engage in a combination with an interested stockholder after the expiration of three years after the interested stockholder acquired his shares, unless the combination or purchase of shares by the interested stockholder is approved by the corporation's board of directors before the interested stockholder acquired his shares. If such board of directors' approval is not obtained, the combination may be approved by a majority of the disinterested stockholders no earlier than three years following the date of the interested stockholder's acquisition of the shares. A combination engaged in with an interested stockholder of the corporation more than three years after the date that the stockholder acquired his shares may be permissible if (a) the consideration to be received by all of the disinterested holders of outstanding common shares of the corporation is at least equal to the higher of (i) the highest price per share paid by the interested stockholder within three years immediately preceding the date of the announcement of the combination, or within three years immediately before, or in, the transaction in which he became an interested stockholder, whichever is higher, plus interest compounded annually, less dividends paid, but no more may be subtracted than the amount of interest or (ii) the market value per common share on the date of the announcement of the combination or the interested stockholder's acquiring shares, plus interest compounded annually, less dividends paid, but no more may be subtracted than the amount of interest, or (b) if, in the case of shares other than common shares, the consideration to be received by all of the disinterested holders of outstanding shares other than common shares of the corporation is at least equal to the highest of (i) the highest price per share paid by the interested stockholder at a time when he was the beneficial owner of 5% or more of the outstanding voting shares of the corporation, for any shares of that class or series of shares acquired by him within three years immediately preceding the date of the announcement of the combination, or within three years immediately before, or in, the transaction in which he became an interested stockholder, whichever is higher, plus interest compounded annually, less dividends paid, but no more may be subtracted than the amount of interest, (ii) the highest preferential amount to which the holders of the class or series are entitled in the event of the voluntary liquidation of the corporation or (iii) the market value per share of the class or series of shares on the date of the announcement of the combination or the interested stockholder's acquiring
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shares, plus interest compounded annually, less dividends paid, but no more may be subtracted than the amount of interest.
The "Acquisition of Controlling Interest" and "Combination with Interested Stockholders" provisions described above will not impede or otherwise delay the proposed sale of the Company to Aristocrat Leisure Limited. Merger transactions are specifically exempted from application of the Acquisition of Controlling Interest statutes. The Combination with Interested Stockholders statutes are similarly inapplicable to the proposed merger because, among other reasons, Aristocrat Leisure Limited is not an "Interested Stockholder" under Nevada law.
Item 2. Description of Properties
The Company owns a 140,000 square foot office, production, warehouse and distribution facility in Las Vegas, Nevada where it houses its administrative, sales, engineering, research and development and Nevada MSP system support staff. The Company also owns one building adjacent to its main facility which is approximately 8,450 square feet, and leases an adjacent 45,000 square foot facility which houses its sign business. The Company also leases approximately 6,500 square feet of office space in Las Vegas for a portion of its research and development staff.
The Company leases regional sales and technical support offices in Atlantic City, New Jersey; Plymouth, Minnesota; Sparks, Nevada and Gulfport, Mississippi. The Company also leases an approximately 4,500 square foot office in Colorado Springs, Colorado for the TurboPower Software subsidiary.
Item 3. Legal Proceedings
The previously disclosed litigation, filed by Acres Gaming Corporation ("Acres") against the Company on May 19, 1998, and a second related action filed by Acres against the Company on November 17, 1998, have been settled, with the Company receiving a cash payment from Acres and certain covenants not to sue from Acres.
On October 20, 1999, International Game Technology ("IGT") filed but did not serve, a complaint against the Company and three other slot machine manufacturers alleging that CDS and others infringed a patent owned by IGT through the Company's use of gaming devices containing touch screens with redundant play buttons that control game outcome features. The Company believes that substantial prior art exists that renders the IGT patent invalid. On February 25, 2000, IGT dismissed the lawsuit against the Company, retaining its right to refile the lawsuit in the future. Management does not expect the outcome of this matter to have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity.
On January 23, 2001, Dwayne Alberts, allegedly a shareholder of the Company, filed a purported class action complaint against the Company and the Company's Board of Directors in the District Court of Clark County in the State of Nevada, Case No. A429714 IX, alleging a claim of breach of fiduciary duty arising out of the announced transaction between the Company and Aristocrat Leisure Limited. In the action, Mr. Alberts has alleged, generally, that the Board of Directors "breached its fiduciary duties by taking actions designed to deter higher offers from other potential acquirors so as to ensure Casino Data insiders receive personal benefits at the expense of Casino Data shareholders", "timed the announcement of the merger to place an artificial cap on the price for Casino Data's stock to enable [Aristocrat] to acquire the stock at the lowest possible price" and "timed the announcement [of the merger agreement] to come within days before they would disclose Casino Data's fourth quarter results." Mr. Alberts is seeking class certification, declaratory relief, injunctive relief preventing the consummation of the merger and directing the defendants to exercise their fiduciary duties in the manner described by plaintiffs, attorney fees and costs, and such other and further relief as the court
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deems just and proper. The Company and the Board of Directors deny all of Mr. Alberts' charging allegations. It is the position of the Board of Directors that they did not breach any fiduciary duties and that they took reasonable steps under the circumstances to maximize the value for the stockholders of the Company, evaluated and allowed for the possibility of entering into a merger or similar agreement with companies other than Aristocrat, solicited bids from at least two other companies, took reasonable steps to allow other potential bids to be made, and that they have in fact obtained the maximum value for the Company's shareholders under the circumstances. The Company and the Board of Directors filed an answer to the complaint on March 8, 2001 and intend to vigorously defend themselves against the allegations.
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 one patron dispute that it has won on every level of review, however the patron has continued to appeal the decision. The dispute has been appealed by the patron to the Supreme Court of the State of Nevada and the patron alleges a claim for over $8 million dollars. 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 the party making such claim is remote and that the ultimate outcome of this matter will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security-holders during the fourth quarter of the fiscal year ended December 31, 2000.
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Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's common stock has been traded on the NASDAQ National Market under the symbol CSDS since April 5, 1993. The following table sets forth, for the fiscal quarters indicated, the high and low sale prices per share for the common stock, as reported on the NASDAQ National Market.
| | High | Low | |||||
|---|---|---|---|---|---|---|---|
| 1999 | |||||||
| First Quarter | $ | 3.81 | $ | 1.56 | |||
| Second Quarter | 5.06 | 2.91 | |||||
| Third Quarter | 7.50 | 4.00 | |||||
| Fourth Quarter | 5.25 | 2.88 | |||||
2000 | |||||||
| First Quarter | $ | 5.69 | $ | 3.50 | |||
| Second Quarter | 6.50 | 3.88 | |||||
| Third Quarter | 7.50 | 5.38 | |||||
| Fourth Quarter | 7.03 | 5.19 | |||||
On March 15, 2001 the last reported sale price of the common stock was $8.75. As of March 15, 2001, the Company had approximately 260 holders of record.
The Company has never declared or paid any cash dividends on its common stock and the Board of Directors intends to retain all earnings, if any, for the use in the Company's business for the foreseeable future. Any future determination as to declaration and payment of dividends will be made at the discretion of the Board of Directors.
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Item 6. Selected Financial Data (Amounts in thousands except per share data)
The selected data presented below should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K, and in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K. The selected data presented below under the captions "Consolidated Statement of Operations Data" for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 and "Consolidated Balance Sheet Data" as of the end of each of the years in the five-year period ended December 31, 2000 are derived from the audited consolidated financial statements of the Company and its subsidiaries. The consolidated financial statements as of December 31, 2000 and 1999, and for each of the years in the three-year period ended December 31, 2000 and the reports thereon, are included elsewhere in this Form 10-K.
| | Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | 1997 | 1996 | ||||||||||||
| | Amounts in thousands, except per share data | ||||||||||||||||
| Consolidated Statement of Operations Data: | |||||||||||||||||
| Total revenues | $ | 78,643 | $ | 75,530 | $ | 53,180 | $ | 54,504 | $ | 70,871 | |||||||
| Total costs and expenses | 64,895 | 68,541 | 53,934 | 96,790 | 68,901 | ||||||||||||
| Income (loss) from operations | 13,748 | 6,989 | (754 | ) | (42,286 | ) | 1,970 | ||||||||||
| Total other income (expense) | 1,203 | 1,022 | 1,620 | (499 | ) | 5,077 | |||||||||||
| Income (loss) before income taxes | 14,951 | 8,011 | 866 | (42,785 | ) | 7,047 | |||||||||||
| Income tax expense (benefit) | 4,818 | (7,201 | ) | (1,647 | ) | (3,070 | ) | 2,232 | |||||||||
| Net income (loss) | $ | 10,133 | $ | 15,212 | $ | 2,513 | $ | (39,715 | ) | $ | 4,815 | ||||||
| Basic net income (loss) per common share(1) | $ | 0.55 | $ | 0.83 | $ | 0.14 | $ | (2.20 | ) | $ | 0.29 | ||||||
| Diluted net income (loss) per common share(1) | $ | 0.53 | $ | 0.82 | $ | 0.14 | $ | (2.20 | ) | $ | 0.28 | ||||||
| Shares used in basic per share calculation(1) | 18,479 | 18,234 | 18,066 | 18,043 | 16,892 | ||||||||||||
| Shares used in diluted per share calculation(1) | 18,956 | 18,628 | 18,105 | 18,043 | 17,485 | ||||||||||||
| | December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | 1997 | 1996 | |||||||||||
| Consolidated Balance Sheet Data: | ||||||||||||||||
| Cash and cash equivalents | $ | 16,532 | $ | 9,255 | $ | 13,268 | $ | 27,873 | $ | 21,482 | ||||||
| Working capital | 67,500 | 54,564 | 39,707 | 41,514 | 58,226 | |||||||||||
| Total assets | 120,239 | 110,887 | 99,010 | 96,956 | 125,422 | |||||||||||
| Total liabilities | 27,023 | 28,361 | 32,870 | 33,329 | 22,246 | |||||||||||
| Total long-term debt, including current portion | — | 214 | 211 | 2,454 | 4,482 | |||||||||||
| Total shareholders' equity | 93,216 | 82,526 | 66,140 | 63,627 | 103,177 | |||||||||||
Item 7. 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 Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.
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Year Ended December 31, 2000 Compared with the Year Ended December 31, 1999
Total revenue was $78,643,000 compared with $75,530,000 for the twelve months ended December 31, 2000 and 1999, respectively, an increase of $3,113,000 or 4%. This increase is primarily due to a 30% revenue increase from the sale of OASIS systems, offset by a decrease of 17% in revenue from games.
Revenue from OASIS systems was $39,060,000 for the year ended December 31, 2000 compared with $30,075,000 in 1999. This increase of $8,985,000 or 30%, is primarily due to sales of the Company's Windows™ based OASIS product to the California market, which legalized gaming in March 2000. Among the key factors affecting new OASIS systems orders are the rate of growth in the gaming industry and replacement of existing systems. Although the Company believes that the market for its system is strong, the continued existence and expansion of gaming markets is dependent upon political, legal and other factors which are beyond the control of the Company. Notable quarterly variations in revenue and income may occur since casino management information systems constitute a primary source of revenue. Operating income from this segment increased $4,970,000 from $12,593,000 to $17,563,000 for the twelve months ended December 31, 1999 and 2000, respectively. This increase is primarily the result of the higher revenue partially offset by increased commissions on the higher revenue and higher research and development costs for engineers and consultants.
Revenue from games decreased $6,330,000 from $37,533,000 for the twelve month period ended December 31, 1999 to $31,203,000 for the same fiscal 2000 period. This decrease is primarily attributable to decreased unit sales in 2000 compared with 1999 due to strong sales of the Bandit Bingo™ product in 1999, with no similar strong selling product in 2000. Another contributing factor was a reduction in the number of MSP operating units on the Cool Millions™ and Xtreme™ MSP links due to the maturation of these products. Partly offsetting the decline in MSP operating units was the launch of a new link in Nevada in the third quarter of 2000, Jackpot Bingo™. This segment's operating loss of $2,903,000 for the twelve months ended December 31, 2000 was $3,204,000 lower than the same prior year period, primarily due to an improved gross margin and reduced operating expenses. The gross margin improvement is the result of manufacturing efficiencies combined with benefits of $914,000 derived from one-time lump-sum payments to settle certain jackpot liabilities.
Signs revenue decreased slightly from $5,702,000 to $5,407,000 for the twelve months ended December 31, 2000 compared with 1999. This decrease is primarily the result of lower sales of games-related signage. The operating loss from signs was $1,235,000 and $116,000 for the twelve months ended December 31, 2000 and 1999, respectively. The increased operating loss was primarily due to lower revenues and a lower gross margin.
Revenue from the sale of software development tools was $2,973,000 in 2000, an increase of $753,000 or 34% from 1999, principally attributable to new product releases in 2000. Operating income from this segment decreased $296,000 for the twelve months ended December 31, 2000 compared with the same prior year period, primarily attributable to increased operating expenses related to increased engineering headcount.
Gross Margin
Total cost of goods sold decreased from $41,029,000 for the twelve months ended December 31, 1999, to $32,624,000 for the same period in 2000, a decrease of $8,405,000 or 20%. Consolidated gross margin increased from $34,501,000 for the twelve months ended December 31, 1999 to $46,019,000 for the same period in 2000. The increase in gross margin is primarily the result of a sales mix favoring the higher margin systems business combined with manufacturing efficiencies, primarily in the production of gaming devices. Consolidated gross margin as a percentage of revenue increased from 46% for the twelve months ended December 31, 1999 to 59% for the same period in 2000. The increase in gross margin as a percentage of revenue is primarily due to the change in revenue mix in 2000, which
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reflected an increase in revenue from OASIS systems as a percentage of total revenue, combined with the manufacturing efficiencies in the production of gaming devices.
Operating Expenses
Operating expenses increased from $27,512,000 for the twelve months ended December 31, 1999, to $32,271,000 for the same period in 2000, an increase of $4,759,000 or 17%. The 1999 costs are net of a $1,852,000 net benefit related to the terminated slot liability associated with the Mississippi Cool Millions links, partially offset by the write-off of related impaired intangible assets. Excluding this item, operating expenses increased as a percentage of revenues from 39% for the twelve months ended December 31, 1999, to 41% for the same period in 2000, primarily the result of increased research and development expenses in 2000.
Selling, general and administrative expenses increased from $18,666,000 for the twelve months ended December 31, 1999, to $19,364,000 for the same period in 2000, an increase of $698,000 or 4%. Selling, general and administrative expenses as a percentage of revenue remained even at 25% for the twelve months ended December 31, 2000 and 1999.
Research and development expenses increased from $6,525,000 for the twelve months ended December 31, 1999, to $8,316,000 for the same period in 2000, an increase of $1,791,000 or 27%. This increase is primarily attributable to increased engineering headcount and prototype expense. Research and development expenses as a percentage of revenues increased from 9% for the twelve months ended December 31, 1999 to 11% for the same period in 2000.
Depreciation and amortization decreased slightly from $4,173,000 for the twelve months ended December 31, 1999, to $3,991,000 for the same period in 2000. The decrease 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, increased from $1,022,000 for the twelve months ended December 31, 1999, to $1,203,000 for the same period in 2000. This increase is primarily due to higher interest income attributable to higher cash balances partially offset by the reversal of approximately $411,000 of interest expense related to a favorable lawsuit decision by a court of law, in the second quarter of 1999.
Income Tax Expense
Income tax expense was $4,818,000 for the twelve months ended December 31, 2000 compared with a benefit of $7,201,000 for the same 1999 period. The benefit in 1999 was primarily attributable to the elimination of a $9,600,000 valuation allowance against deferred tax assets that was established in 1997.
Year Ended December 31, 1999 Compared with the Year Ended December 31, 1998
Total revenue was $75,530,000 compared with $53,180,000 for the twelve months ended December 31, 1999 and 1998, respectively, an increase of $22,350,000 or 42%. This increase is primarily due to increased revenues from games of $13,378,000, and OASIS systems sales of $6,928,000.
Revenue from OASIS systems was $30,075,000 for the year ended December 31, 1999 compared with $23,147,000 in 1998. This increase of $6,928,000 or 30%, is primarily due to sales of the Company's Windows™ based OASIS product, which was introduced late in the fourth quarter of 1998. Among the key factors affecting new OASIS systems orders are the rate of growth in the gaming industry and replacement of existing systems. Although the Company believes that the market for its
29
system is strong, the continued existence and expansion of gaming markets is dependent upon political, legal and other factors which are beyond the control of the Company. Notable quarterly variations in revenue and income may occur since casino management information systems constitute a primary source of revenue.
Revenue from games increased 55% from the prior year revenue of $24,155,000 to $37,533,000 for the twelve months ended December 31, 1999. This increase is primarily attributable to the sale of machines on the Company's high-end multimedia Bandit™ platform in 1999, specifically Bandit Bingo™, which was launched in late 1998. Partially offsetting this increase was a decline in the number of recurring revenue units in service and reduced levels of play due to the maturation of the MSP models deployed.
Signs revenue increased $1,671,000 to $5,702,000 for the twelve months ended December 31, 1999 compared with 1998. This increase is primarily the result of increased effectiveness of marketing and sales efforts in 1999.
Revenue from the sale of software development tools was $2,220,000 in 1999, an increase of $373,000 or 20% from 1998, principally attributable to new product releases in 1999.
Gross Margin
Total cost of goods sold increased from $28,090,000 for the twelve months ended December 31, 1998, to $41,029,000 for the same period in 1999, an increase of $12,939,000 or 46%. Consolidated gross margin increased from $25,090,000 for the twelve months ended December 31, 1998 to $34,501,000 for the same period in 1999. The increase in gross margin is primarily attributable to the increase in revenue from games and OASIS systems. Consolidated gross margin as a percentage of revenue decreased from 47% for the twelve months ended December 31, 1998 to 46% for the same period in 1999. The decrease in gross margin as a percentage of revenue is primarily due to the change in revenue mix in 1999, which reflected an increase in revenue from gaming devices as a percentage of total revenue.
Operating Expenses
Operating expenses increased from $25,844,000 for the twelve months ended December 31, 1998, to $27,512,000 for the same period in 1999, an increase of $1,668,000 or 6%. These costs include a $1,000,000 charge for the loss from shareholders suit in 1998, and a $1,852,000 net benefit from the terminated slot liability associated with the Mississippi Cool Millions links, partially offset by the write-off of related impaired intangible assets in 1999. Excluding these items, operating expenses decreased as a percentage of revenues from 47% for the twelve months ended December 31, 1998, to 39% for the same period in 1999, the result of a greater revenue increase relative to expenses.
Selling, general and administrative expenses increased from $16,761,000 for the twelve months ended December 31, 1998, to $18,666,000 for the same period in 1999, an increase of $1,905,000 or 11%. This increase is primarily due to increased legal costs along with increased sales commission expense in 1999 related to higher revenues. Selling, general and administrative expenses as a percentage of revenue increased from 32% for the twelve months ended December 31, 1998, to 25% for the same period in 1999.
Research and development expenses increased from $5,096,000 for the twelve months ended December 31, 1998, to $6,525,000 for the same period in 1999, an increase of $1,429,000 or 28%. This increase is primarily attributable to increased engineering headcount and prototype expense. Research and development expenses as a percentage of revenues decreased slightly from 10% for the twelve months ended December 31, 1998 to 9% for the same 1999 period.
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Depreciation and amortization increased from $2,987,000 for the twelve months ended December 31, 1998, to $4,173,000 for the same period in 1999. The increase is primarily due to a full year of depreciation expense in 1999 related to the Xtreme MSP link which began operation in the second quarter of 1998, combined with amortization of software development costs related to the Bandit platform, which began in the fourth quarter of 1998.
Other Income, Net
Other income, net, is primarily comprised of interest income, interest expense and gains and losses on disposal of assets. Other income, net, decreased from $1,620,000 for the twelve months ended December 31, 1998, to $1,022,000 for the same period in 1999. This decrease is primarily due to lower interest income partially offset by the reversal of approximately $411,000 of interest expense related to a favorable lawsuit decision by a court of law, in the second quarter of 1999.
Income Tax Benefit
Income tax benefit increased from a benefit of $1,647,000 for the twelve months ended December 31, 1998 to a benefit of $7,201,000 for the same period in 1999. Although the Company recorded income before taxes for the year ended December 31, 1999, it recorded an income tax benefit of $7,201,000 for the twelve months ended December 31, 1999. This increase is primarily attributable to the elimination of a $9,600,000 valuation allowance against deferred tax assets that was established in 1997. Based on the Company's financial results in 1999, combined with expected financial results in future periods, management believes it is more likely than not that the net deferred tax asset will be realized; therefore, the valuation allowance was eliminated.
Liquidity and Capital Resources
The Company to date has financed its operating and capital expenditures through cash flows from its operations and cash from proceeds from its equity offerings, investment activities and borrowings. For the twelve months ended December 31, 2000, cash provided by operating and financing activities was $7,426,000 and $343,000, respectively, and cash used in investing activities was $809,000. The Company had cash and cash equivalents of $16,532,000 and $9,255,000 at December 31, 2000 and 1999, respectively, including restricted amounts of $2,706,000 and $2,389,000, respectively.
Certain jurisdictions in which MSP systems operate require that the Company maintain allocated funds or instruments to guarantee payment of jackpot prizes. The amount of funds required is dependent upon several factors such as the type and denomination of games and the local regulatory requirements. At December 31, 2000, the Company's accrued slot liability for its MSP systems aggregated approximately $14,075,000, and there was no unaccrued slot liability (the unaccrued slot liability is the amount of the initial primary jackpots that have not been fully accrued). In connection with these slot liabilities and in accordance with gaming requirements, the Company has restricted cash accounts aggregating approximately $2,706,000 as of December 31, 2000 to ensure availability of adequate funds to pay this liability. In addition, the Company also has approximately $11,090,000 of restricted investment securities as of December 31, 2000, for the payment of jackpots already won. Although statistically remote, a possibility exists that multiple jackpots may hit prior to the time period over which game play has generated sufficient revenue to accrue each jackpot reset 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 5.6 to 1 at December 31, 2000, and the Company has no long-term debt. The Company expects to continue to finance its operations and capital expenditures through cash flow from operations; however, based on its financial position, management believes additional long-term financing could be obtained in 2001 for growth resulting in
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working capital requirements that exceed available cash, cash equivalents and cash to be provided by operations. The Company entered into a loan agreement in 1999 with a financial institution, secured by property, that enables the Company to borrow up to $6,975,000, all of which is available at December 31, 2000. However, there can be no assurance that the Company will be able to obtain additional sources of capital during 2001 if needed.
Subsequent Event
On January 17, 2001, the Company entered into a definitive agreement with Aristocrat Leisure Limited, an Australian company ("Aristocrat"), under which Aristocrat would acquire CDS in a cash-for-stock merger transaction.
Under the agreement an indirect wholly owned subsidiary of Aristocrat will merge with and into CDS, with the result that CDS would become a wholly owned indirect subsidiary of Aristocrat. In the merger, each holder of the Company's capital stock will have the right to receive $9.25 per share in cash. In addition, Steven A. Weiss, Chairman and Chief Executive Officer of the Company, and Michael D. Rumbolz, Vice Chairman of the Company, have entered into agreements under which they have agreed to vote certain of their shares in favor of the merger.
Closing of the merger is subject to a number of customary conditions, including the approval of the merger by the shareholders of the Company and receipt of all necessary regulatory approvals. The merger is anticipated to close in the second half of 2001.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) which establishes accounting and reporting standards for derivative instruments and hedging activities. This statement, as amended, shall be in effect for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure instruments at fair value. SFAS 133 is not expected to have a material effect on the Company's financial position or results of operations.
The Company adopted the provisions of Staff Accounting Bulletin ("SAB") No. 101,Revenue Recognition in Financial Statements, issued by the Securities and Exchange Commission, as of October 1, 2000. SAB No. 101 clarifies existing accounting principles related to revenue recognition in financial statements. The adoption of SAB No. 101 did not have a significant impact on the Company's financial position and results of operations.
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.
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Item 8. Consolidated Financial Statements and Supplemental Data
| | Page | |
|---|---|---|
| Independent Auditors' Reports | 34 | |
Consolidated Balance Sheets as of December 31, 2000 and 1999 | 36 | |
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 | 37 | |
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 | 38 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 | 39 | |
Notes to Consolidated Financial Statements | 40 |
FINANCIAL STATEMENT SCHEDULES AND SUPPLEMENTARY DATA
Schedule II, Valuation and Qualifying Accounts, for the years 2000, 1999 and 1998 has been submitted in Item 14. Part IV, hereof where the schedule is listed. All other schedules have been omitted since they are either not required, are not applicable, or the required information is shown in the consolidated financial statements and related notes.
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The Board of Directors and Shareholders of
Casino Data Systems and Subsidiaries
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Casino Data Systems and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
February 21, 2001
34
The Shareholders and Board of Directors
Casino Data Systems:
We have audited the accompanying consolidated statements of income, shareholders' equity, and cash flows of Casino Data Systems and subsidiaries for the year ended December 31, 1998. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedule for the year ended December 31, 1998. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Casino Data Systems and subsidiaries for the year ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Las Vegas, Nevada
February 23, 1999
35
CASINO DATA SYSTEMS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(Dollars and share data in thousands)
| | December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | |||||||
| ASSETS | |||||||||
| Current assets | |||||||||
| Cash and cash equivalents | $ | 13,826 | $ | 6,866 | |||||
| Restricted cash and cash equivalents | 2,706 | 2,389 | |||||||
| Short-term investment securities, including restricted amounts of $1,001 and $1,309 in 2000 and 1999, respectively | 4,384 | 2,581 | |||||||
| Accounts receivable, net of allowance for doubtful accounts of $2,348 and $1,886 in 2000 and 1999, respectively | 31,003 | 21,121 | |||||||
| Current portion of notes receivable | 2,334 | 4,324 | |||||||
| Inventories, net | 25,194 | 25,600 | |||||||
| Prepaid expenses and other current assets | 2,577 | 2,143 | |||||||
| Total current assets | 82,024 | 65,024 | |||||||
| Property and equipment, net | 17,026 | 17,762 | |||||||
| Restricted investment securities | 10,089 | 14,517 | |||||||
| Deferred tax asset | 7,891 | 10,172 | |||||||
| Software development costs, net of accumulated amortization of $3,115 and $1,746 in 2000 and 1999, respectively | 1,743 | 2,362 | |||||||
| Notes receivable, excluding current portion | 371 | 539 | |||||||
| Other non-current assets | 1,095 | 511 | |||||||
| Total non-current assets | 38,215 | 45,863 | |||||||
| Total assets | $ | 120,239 | $ | 110,887 | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||
| Current liabilities | |||||||||
| Current portion of long-term debt | $ | — | $ | 214 | |||||
| Accounts payable | 4,128 | 1,427 | |||||||
| Accrued slot liability | 1,576 | 1,766 | |||||||
| Accrued compensation | 2,232 | 1,112 | |||||||
| Income tax payable | 3,082 | 3,122 | |||||||
| Other accrued expenses | 3,506 | 4,333 | |||||||
| Total current liabilities | 14,524 | 11,974 | |||||||
| Non-current liabilities | |||||||||
| Accrued slot liability | 12,499 | 16,387 | |||||||
| Total liabilities | 27,023 | 28,361 | |||||||
| Commitments and contingencies (Note 13) | |||||||||
| Shareholders' equity | |||||||||
| Common stock, no par value. Authorized 100,000; issued and outstanding 18,562 and 18,401 at December 31, 2000 and 1999, respectively | 85,521 | 84,964 | |||||||
| Retained earnings (accumulated deficit) | 7,695 | (2,438 | ) | ||||||
| Total shareholders' equity | 93,216 | 82,526 | |||||||
| Total liabilities and shareholders' equity | $ | 120,239 | $ | 110,887 | |||||
See accompanying Notes to Consolidated Financial Statements
36
CASINO DATA SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
(Amounts in thousands except per share data)
| | Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | |||||||||
| Revenue | ||||||||||||
| OASIS Systems | $ | 39,060 | $ | 30,075 | $ | 23,147 | ||||||
| Games | 31,203 | 37,533 | 24,155 | |||||||||
| Signs | 5,407 | 5,702 | 4,031 | |||||||||
| TurboPower | 2,973 | 2,220 | 1,847 | |||||||||
| Total revenue | 78,643 | 75,530 | 53,180 | |||||||||
| Cost of goods sold | 32,624 | 41,029 | 28,090 | |||||||||
| Gross margin | 46,019 | 34,501 | 25,090 | |||||||||
Operating expenses | ||||||||||||
| Selling, general and administrative | 19,364 | 18,666 | 16,761 | |||||||||
| Provision for doubtful accounts | 600 | — | — | |||||||||
| Research and development | 8,316 | 6,525 | 5,096 | |||||||||
| Other operating, net | — | (1,852 | ) | 1,000 | ||||||||
| Depreciation and amortization | 3,991 | 4,173 | 2,987 | |||||||||
| Total operating expenses | 32,271 | 27,512 | 25,844 | |||||||||
| Income (loss) from operations | 13,748 | 6,989 | (754 | ) | ||||||||
| Other income | ||||||||||||
| Interest and other income, net | 1,329 | 1,072 | 1,863 | |||||||||
| Loss on disposal of assets | (119 | ) | (9 | ) | (60 | ) | ||||||
| Interest expense | (7 | ) | (41 | ) | (183 | ) | ||||||
| Total other income | 1,203 | 1,022 | 1,620 | |||||||||
| Income before income taxes | 14,951 | 8,011 | 866 | |||||||||
| Income tax expense (benefit) | 4,818 | (7,201 | ) | (1,647 | ) | |||||||
| Net income | $ | 10,133 | $ | 15,212 | $ | 2,513 | ||||||
| Basic net income per common share | $ | 0.55 | $ | 0.83 | $ | 0.14 | ||||||
| Diluted net income per common share | $ | 0.53 | $ | 0.82 | $ | 0.14 | ||||||
| Basic weighted average shares outstanding | 18,479 | 18,234 | 18,066 | |||||||||
| Diluted weighted average shares outstanding | 18,956 | 18,628 | 18,105 | |||||||||
See accompanying Notes to Consolidated Financial Statements
37
CASINO DATA SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
(Amounts in thousands)
| | Common Stock | Retained Earnings (Accumulated deficit) | | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Shares | Amount | Total | ||||||||
| Balance at January 1, 1998 | 18,066 | $ | 83,790 | $ | (20,163 | ) | $ | 63,627 | |||
| Net income | — | — | 2,513 | 2,513 | |||||||
| Balance at December 31, 1998 | 18,066 | 83,790 | (17,650 | ) | 66,140 | ||||||
| Exercise of stock options | 269 | 1,031 | — | 1,031 | |||||||
| Employee stock purchase plan | 66 | 143 | — | 143 | |||||||
| Net income | — | — | 15,212 | 15,212 | |||||||
| Balance at December 31, 1999 | 18,401 | 84,964 | (2,438 | ) | 82,526 | ||||||
| Exercise of stock options | 118 | 408 | — | 408 | |||||||
| Employee stock purchase plan | 43 | 149 | — | 149 | |||||||
| Net income | — | — | 10,133 | 10,133 | |||||||
| Balance at December 31, 2000 | 18,562 | $ | 85,521 | $ | 7,695 | $ | 93,216 | ||||
See accompanying Notes to Consolidated Financial Statements
38
CASINO DATA SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
(Dollars in thousands)
| | Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | ||||||||||
| Cash flows from operating activities: | |||||||||||||
| Net income | $ | 10,133 | $ | 15,212 | $ | 2,513 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||||
| Depreciation and amortization | 3,991 | 4,173 | 2,987 | ||||||||||
| Depreciation and amortization included in COGS | 659 | 1,756 | 1,480 | ||||||||||
| Deferred income taxes | 1,538 | (9,421 | ) | (516 | ) | ||||||||
| Loss on disposal of assets | 119 | 9 | 60 | ||||||||||
| Write-off of net book value of assets | 51 | 509 | 701 | ||||||||||
| Loss on impairment of intangibles | — | 2,837 | — | ||||||||||
| Provision for doubtful accounts | 600 | — | — | ||||||||||
| Provision for inventory obsolescence | 1,440 | 2,222 | 966 | ||||||||||
| Changes in assets and liabilities: | |||||||||||||
| Restricted cash and cash equivalents | (317 | ) | 5,738 | 7,489 | |||||||||
| Accounts receivable, notes receivable and due from related party | (8,324 | ) | (9,142 | ) | (3,996 | ) | |||||||
| Inventories | (1,034 | ) | (8,675 | ) | (5,921 | ) | |||||||
| Other assets and deposits | (306 | ) | 50 | 4,352 | |||||||||
| Accounts payable | 2,701 | (2,260 | ) | (223 | ) | ||||||||
| Accrued slot liability | (4,078 | ) | (2,793 | ) | (1,426 | ) | |||||||
| Other accrued expenses | 253 | 541 | 3,434 | ||||||||||
| Net cash provided by operating activities | 7,426 | 756 | 11,900 | ||||||||||
| Cash flows from investing activities: | |||||||||||||
| Purchases of unrestricted investment securities | (2,111 | ) | (81 | ) | (84 | ) | |||||||
| Proceeds from sale of unrestricted investment securities | — | 552 | — | ||||||||||
| Purchases of investment securities to fund liabilities to jackpot winners | (2,422 | ) | (1,588 | ) | (9,728 | ) | |||||||
| Proceeds from sale of investment securities to fund liabilities to jackpot winners | 7,158 | 1,276 | 629 | ||||||||||
| Purchases of intangible assets | (100 | ) | (59 | ) | (67 | ) | |||||||
| Proceeds from sale of assets held for sale | 30 | 425 | — | ||||||||||
| Purchases of property and equipment | (2,845 | ) | (973 | ) | (5,191 | ) | |||||||
| Investment in software development | (750 | ) | — | (2,348 | ) | ||||||||
| Proceeds from sale of property and equipment | 231 | 240 | — | ||||||||||
| Net cash used in investing activities | (809 | ) | (208 | ) | (16,789 | ) | |||||||
| Cash flows from financing activities: | |||||||||||||
| Borrowings from operating bank loan | — | 204 | — | ||||||||||
| Repayment of notes payable | (214 | ) | (201 | ) | (2,243 | ) | |||||||
| Net proceeds from issuance of common stock | 557 | 1,174 | — | ||||||||||
| Net cash provided by (used in) financing activities | 343 | 1,177 | (2,243 | ) | |||||||||
| Net increase (decrease) in cash and cash equivalents | 6,960 | 1,725 | (7,132 | ) | |||||||||
| Cash and cash equivalents at beginning of year | 6,866 | 5,141 | 12,273 | ||||||||||
| Cash and cash equivalents at end of year | $ | 13,826 | $ | 6,866 | $ | 5,141 | |||||||
See accompanying Notes to Consolidated Financial Statements
39
CASINO DATA SYSTEMS AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Description of Business and Summary of Significant Accounting Policies
Casino Data Systems, a Nevada corporation, was incorporated in June 1990. Each of the following corporations are wholly owned subsidiaries of the Company: CDS Services Company, CDS Signs, Inc., TurboPower Software Company and CDS Gaming Company. The primary businesses of the Company are (i) the development, licensing and sale of casino management information systems; (ii) the design and manufacture of video interactive gaming machines and the operation of multi-site link progressive (MSP) systems; and (iii) the design and manufacture of casino meters, signs and graphics. The Company also creates software development tools for sale to outside software professionals. The Company provides these products through operation of four segments: OASIS systems, games, signs and TurboPower.
The consolidated financial statements include the accounts of Casino Data Systems and its subsidiaries (collectively, the "Company"). All significant inter-company balances and transactions have been eliminated in consolidation.
The Company sells Oasis systems, gaming machines, signs, meters, and graphics products on normal credit terms (90 days or less) and installment contracts (generally, less than one year). Revenue from OASIS system sales is recorded in proportion to work completed using a method that approximates the percentage-of-completion method, or if the contract does not provide for the Company's installation of the system, the sale is recorded upon shipment. Contracts for OASIS system sales generally specify that the price is to be paid in three or four installments as progress is made toward completion and that final payment under the contract is not made until the expiration of an acceptance period during which time the customer and applicable regulatory authorities may test and approve the Company's OASIS system.
Revenue on the sale of signs, meters and graphics is generally recognized upon delivery. The sale of gaming machines is recognized upon delivery for a standard sale. When games are placed on a trial basis, revenue is recognized upon notice from the customer of their decision to purchase the games. In the gaming industry, it is traditionally required that game manufacturers allow casinos to try new games on the floor for a period of time before purchasing them. These games are considered to be games on trial and remain on the Company's books until the decision to purchase is made. Used games that return to the Company after unsuccessful trial periods are generally sold at discounted prices that exceed cost. Games revenue also consists of revenues relating to the operations of the multi-site linked progressive systems and a share of the coins wagered on machines at customer locations. Revenue is recognized based on the Company's share of the coins wagered.
The Company adopted the provisions of Staff Accounting Bulletin ("SAB") No. 101,Revenue Recognition in Financial Statements, issued by the Securities and Exchange Commission, as of October 1, 2000. SAB No. 101 clarifies existing accounting principles related to revenue recognition in financial statements. The adoption of SAB No. 101 did not have a significant impact on the Company's financial position and results of operations.
40
Cash equivalents consist of money market funds and short term debt securities with original maturities of less than 90 days. These investments are stated at cost, which approximates fair value. The Company maintains restricted amounts to ensure availability of funds to pay jackpot liabilities.
Investments consist principally of U.S. Government securities. The Company accounts for its short-term investments in accordance with the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under SFAS 115, the Company currently classifies its securities as held-to-maturity. Held-to-maturity securities are those investments in which the Company has the ability and intent to hold the security until maturity. Held-to-maturity securities are recorded at amortized cost, which approximates market value. Dividend and interest income are recognized in the period earned.
SFAS No. 107Disclosure About Fair Value of Financial Instruments requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. SFAS 107 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. At December 31, 2000 and 1999, the carrying value of all financial instruments (cash and cash equivalents, accounts receivable, notes receivable, accounts payable, accrued expenses and customer deposits and long-term debt) approximates fair value due to the short term nature of the instruments or interest rates are comparable with current rates. See Note (3) for fair value regarding investment securities.
Inventories are recorded at the lower of cost or market. Cost is determined principally on the first-in first-out method. Inventories consist of computer components and other hardware used in OASIS systems, gaming machines, meters, signs, and graphics production.
Assets held for sale are carried at the lower of net book or fair value less anticipated costs to sell. Depreciation is discontinued when assets are transferred to "held for sale" status. At December 31, 2000 and 1999, assets held for sale of $24,000 and $40,000, respectively, are included in "Other non-current assets" in the Consolidated Balance Sheets.
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the following estimated useful lives:
| Buildings | 40 years | |
| Furniture, fixtures and equipment | 3 to 10 years | |
| Gaming devices | 2 to 3 years | |
| Service vehicles | 5 to 7 years |
Leasehold improvements are amortized over the shorter of the lease term (including expected renewals) or the useful life of the assets.
Normal repairs and maintenance are charged to expense when incurred. Betterments and expenditures which materially extend the useful life of the asset are capitalized.
41
Intangible assets consist of costs associated with the establishment of trademarks and gaming licenses in various jurisdictions, all of which are capitalized and amortized using the straight-line method over a period of 5 to 15 years. Intangible assets are included in "Other non-current assets" in the Consolidated Balance Sheets.
The Company capitalizes software development costs paid to third parties after technological feasibility is established and ceases when the product is ready for release. Software development costs are amortized over the greater of the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or the straight line method over the remaining estimated economic life of the product including the current period reported on. Amortization of software development costs begins when the products are ready for general release.
The Company capitalized $750,000 for software development for the year ended December 31, 2000. The Company capitalized no costs for software development in 1999. The Company capitalized $2,348,000 of software development costs for the year ended December 31, 1998. The Company recorded software amortization of $1,369,000, $1,442,000 and $498,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Research and development costs incurred to establish technological feasibility have been expensed when incurred.
Research and development costs related to designing, developing and testing products are charged to expense as incurred. The Company accounts for research and development tax credits as a reduction of the provision for income taxes in the year in which the credits are realized.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In connection with the operation of its MSP Systems, the Company is liable for progressive jackpots, which are paid as an initial reset amount (the base component) followed by either an annuity (the progressive component) paid out over 19 or 20 years after the winning combination is hit or a lump- sum amount equal to the present value of the progressive component. Base jackpots are charged to cost of goods sold ratably with the level of play expected to precede payout based on a statistical analysis. The progressive component increases at a rate based on the number of coins played. The accrual of the liability and the associated charge to cost of goods sold as the amount of the jackpot increases results in recognition of liabilities and matching costs with revenues. The possibility exists that the winning combination may be hit before the Company has fully accrued the base component amount at which time any unaccrued portion would be expensed.
42
In the fourth quarter of 1999, the Company recognized a benefit of $4,689,000 related to the termination of slot liabilities associated with its Cool Millions MSP links in Mississippi and Nevada. The Mississippi portion is $4,137,000 and represents an unawarded jackpot. Its related benefit was recognized upon notification from that state's gaming regulatory authority that the unawarded jackpot funds could be retained by the Company. The Nevada portion is $552,000 and represents a jackpot accrual related to a jackpot prize that will not be awarded. In the fourth quarter of 1999, management notified its customers of its plan to terminate the Nevada Cool Millions MSP link after the next jackpot prize is awarded. The $552,000 represents the jackpot accrual amount beyond that required to pay the current jackpot liability. The $4,689,000, partially offset by the write-off of related impaired intangible assets (see Note 7), is reported as "Other operating, net" in the Consolidated Statement of Income for the year ended December 31, 1999.
In the fourth quarter of 1999, the Company recognized a benefit of $4,689,000 related to the termination of slot liabilities associated with its Cool Millions MSP links in Mississippi and Nevada (see Note 1 (n)). Also in the fourth quarter of 1999, the Company wrote off the net book values of its technology release agreement (TRA) and Telnaes patent in the amounts of $927,000 and $1,910,000, respectively (see Note 7). The $4,689,000, partially offset by the write-off of related impaired intangible assets, is reported as "Other operating, net" in the Consolidated Statement of Income for the year ended December 31, 1999.
In November 1998, the Company settled four shareholder lawsuits for $1,000,000, which is reflected in "Other operating, net" in the Consolidated Statement of Income for the year ended December 31, 1998.
Basic and diluted net income per share were computed in accordance with SFAS No. 128Earnings Per Share.
Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25),Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123,Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123 (see Note 9).
The Company warrants its products for a period ranging from three to six months from the date of delivery, provided the products are used under normal operating conditions. The Company accrues a reserve for product warranty at the time of sale.
43
The Company reviews its long-lived assets and intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual amounts could differ from these estimates.
Certain prior year balances have been reclassified to conform to the current year presentation.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) which establishes accounting and reporting standards for derivative instruments and hedging activities. This statement, as amended, shall be in effect for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure instruments at fair value. SFAS 133 is not expected to have a material effect on the Company's financial position or results of operations.
The Company adopted the provisions of Staff Accounting Bulletin ("SAB") No. 101,Revenue Recognition in Financial Statements, issued by the Securities and Exchange Commission, as of October 1, 2000. SAB No. 101 clarifies existing accounting principles related to revenue recognition in financial statements. The adoption of SAB No. 101 did not have a significant impact on the Company's financial position and results of operations.
(2) Business Segments
The items that management utilizes in measuring the profit or loss of each of the Company's segments are as follows:
| | Property and Equipment, Net | ||||||
|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | ||||||
| | 2000 | 1999 | |||||
| | (Dollars in thousands) | ||||||
| OASIS Systems | $ | 1,560 | $ | 1,837 | |||
| Games | 3,411 | 3,324 | |||||
| Signs | 627 | 716 | |||||
| TurboPower | 84 | 216 | |||||
| Corporate | 11,344 | 11,669 | |||||
| Total | $ | 17,026 | $ | 17,762 | |||
44
| | Revenues | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | |||||||||
| | 2000 | 1999 | 1998 | |||||||
| | (Dollars in thousands) | |||||||||
| OASIS Systems | $ | 39,060 | $ | 30,075 | $ | 23,147 | ||||
| Games | 31,203 | 37,533 | 24,155 | |||||||
| Signs | 5,407 | 5,702 | 4,031 | |||||||
| TurboPower | 2,973 | 2,220 | 1,847 | |||||||
| Total | $ | 78,643 | $ | 75,530 | $ | 53,180 | ||||
| | Depreciation and Amortization | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | |||||||||
| | 2000 | 1999 | 1998 | |||||||
| | (Dollars in thousands) | |||||||||
| OASIS Systems | $ | 894 | $ | 1,035 | $ | 873 | ||||
| Games | 2,174 | 2,277 | 1,411 | |||||||
| Signs | 184 | 180 | 181 | |||||||
| TurboPower | 66 | 54 | — | |||||||
| Corporate | 673 | 627 | 522 | |||||||
| Total | $ | 3,991 | $ | 4,173 | $ | 2,987 | ||||
TurboPower assets were held for sale during 1998; therefore, there was no depreciation or amortization expense for that segment in 1998. In 1999, TurboPower assets were reclassified from assets held for sale to active status, since no suitable purchase offers were made and the financial position of TurboPower improved. Corporate depreciation and amortization is related to assets utilized in the corporate administration of the consolidated Company as a whole.
| | Income (Loss) from Operations | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year Ended December 31, | ||||||||||
| | 2000 | 1999 | 1998 | ||||||||
| | (Dollars in thousands) | ||||||||||
| OASIS Systems | $ | 17,563 | $ | 12,593 | $ | 5,122 | |||||
| Games | (2,903 | ) | (6,107 | ) | (6,547 | ) | |||||
| Signs | (1,235 | ) | (116 | ) | 523 | ||||||
| TurboPower | 323 | 619 | 148 | ||||||||
| Total | $ | 13,748 | $ | 6,989 | $ | (754 | ) | ||||
Corporate expenses have been allocated to each segment based on management's estimate of each segment's utilization of corporate resources.
(3) Investment Securities
The amortized cost, gross unrealized holding losses, and fair value for held-to-maturity securities by major security type and class of security at December 31, 2000 and 1999 are as follows:
| | December 31, 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | Amortized Costs | Unrealized Gain/(Loss) | Fair Value | ||||||
| | (Dollars in thousands) | ||||||||
| Securities to be held to maturity: | |||||||||
| U.S. Government securities | $ | 11,090 | $ | (33 | ) | $ | 11,057 | ||
45
| | December 31, 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | Amortized Costs | Unrealized Gain/(Loss) | Fair Value | ||||||
| | (Dollars in thousands) | ||||||||
| Securities to be held to maturity: | |||||||||
| U.S. Government securities | $ | 15,826 | $ | (1,437 | ) | $ | 14,389 | ||
The approximate fair values of held-to-maturity securities at December 31, 2000 by contractual maturity, are as follows:
| | December 31, 2000 | ||
|---|---|---|---|
| | (Dollars in thousands) | ||
| Due in less than one year | $ | 1,053 | |
| Due in one to five years | 4,255 | ||
| Due in six to ten years | 3,222 | ||
| Due in eleven to fifteen years | 2,236 | ||
| Due in sixteen to twenty years | 291 | ||
| $ | 11,057 | ||
(4) Notes Receivable
The Company has granted customers extended payment terms under contracts of sale evidenced by notes. These notes are generally for terms of one to two years, with interest recognized at prevailing rates, and are secured by the related equipment sold.
(5) Inventories
Inventories consist of the following:
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | |||||
| | (Dollars in thousands) | ||||||
| Raw materials | $ | 17,916 | $ | 15,710 | |||
| Work in process | 1,492 | 292 | |||||
| Finished goods | 8,996 | 11,368 | |||||
| 28,404 | 27,370 | ||||||
| Less reserve for obsolescence | (3,210 | ) | (1,770 | ) | |||
| $ | 25,194 | $ | 25,600 | ||||
Finished goods inventory includes gaming machines on trial at various casino sites of $1,207,000 and $1,826,000 at December 31, 2000 and December 31, 1999, respectively.
46
(6) Property and Equipment
Property and equipment consists of the following:
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | |||||
| | (Dollars in thousands) | ||||||
| Furniture, fixtures and equipment | $ | 9,696 | $ | 9,082 | |||
| Gaming devices | 5,741 | 4,110 | |||||
| Service vehicles | 653 | 572 | |||||
| Leasehold improvements | 669 | 744 | |||||
| Buildings | 9,281 | 9,162 | |||||
| Land | 1,609 | 1,609 | |||||
| 27,649 | 25,279 | ||||||
| Less accumulated depreciation and amortization | (10,623 | ) | (7,517 | ) | |||
| $ | 17,026 | $ | 17,762 | ||||
(7) Intangible Assets
Intangible assets were $108,000 and $122,000 at December 31, 2000 and 1999, respectively, net of accumulated amortization of $23,000 and $1,001,000, respectively. These net amounts are included in "Other non-current assets" in the Consolidated Balance Sheets at December 31, 2000 and 1999, respectively.
In the fourth quarter of 1999, the Company wrote off the net book values of its technology release agreement (TRA) and Telnaes patent in the amount of $927,000. The TRA was related to the Company's Nevada MSP links and the Telnaes patent utilized in certain gaming devices that operate mechanical reel spinning formats. Performance of those products significantly declined throughout that quarter and management adopted a plan to terminate the related products upon the next jackpot hit.
The effects of these write-offs are included in "Other operating, net" in the Consolidated Statement of Income for the year ended December 31, 1999 (See Note 1(o)).
(8) Long-Term Debt
At December 31, 2000 the Company had no long-term debt outstanding, and $214,000 classified as current portion of long-term debt at December 31, 1999.
Long-term debt at December 31, 1999 includes a $10,000 note payable, with an interest rate of 11.12%, secured by personal property. There was no outstanding balance for this note at December 31, 2000.
In November 1999, the Company entered into a loan agreement with a financial institution, whereby up to $6,975,000 can be borrowed on a draw-down basis. This agreement expires in June 2001, is secured by personal property, and has a variable interest rate equal to the lender's prime rate plus 1%. There were no borrowings under this agreement at December 31, 2000 and at December 31, 1999, the Company had borrowed $204,000 under this facility.
(9) Shareholders' Equity
On March 16, 1998, the Board of Directors of the Company adopted the 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan"), which was approved by the Company's stockholders in July 1998. Under the terms of the 1998 Purchase Plan, employees may acquire shares of the Company's stock at a 15 percent discount from their fair market value. In addition, the 1998 Purchase Plan provides a mechanism whereby employees may pay for their
47
share purchases with periodic deductions from their payroll. The 1998 Purchase Plan authorizes the issuance of up to 500,000 shares of common stock to eligible participants. In 2000 and 1999, 43,413 and 66,414 shares of the Company's common stock were purchased under this plan, respectively.
In January 1993, the Company adopted the 1993 Stock Option and Compensation Plan (the "Plan"), pursuant to which options and other awards to acquire an aggregate of 1,012,500 shares of Common Stock may be granted. The number of shares issuable under the Plan was increased to an aggregate 1,350,000 shares in June 1994, 2,025,000 shares in July 1996, and 2,775,000 in July 1998. In 1994, the Company adopted the 1994 Nonemployee Director Stock Option Plan pursuant to which 225,000 shares are issuable.
The following table provides additional information regarding stock options:
| | Options | Weighted Average Exercise Price | |||
|---|---|---|---|---|---|
| Outstanding at January 1, 1998 | 1,362,490 | $ | 4.75 | ||
Granted | 1,167,520 | 2.50 | |||
| Exercised | — | — | |||
| Canceled | (954,375 | ) | 5.28 | ||
| Outstanding at December 31, 1998 | 1,575,635 | 3.37 | |||
Granted | 275,262 | 3.76 | |||
| Exercised | (127,322 | ) | 3.70 | ||
| Canceled | (704,711 | ) | 3.54 | ||
| Outstanding at December 31, 1999 | 1,018,864 | 3.32 | |||
Granted | 1,026,938 | 4.51 | |||
| Exercised | (117,545 | ) | 3.08 | ||
| Canceled | (204,750 | ) | 2.84 | ||
| Outstanding at December 31, 2000 | 1,723,507 | $ | 4.09 | ||
Exercisable at December 31, 2000 | 511,842 | $ | 4.00 | ||
The per share weighted average fair value of stock options granted during 2000, 1999, and 1998 was $1.08, $1.58 and $1.31, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions for 2000, 1999 and 1998: expected dividend yield of 0% for all three years; risk free interest rate of 5.25% for all three years, volatility of 50%, and
48
expected lives varying from one month to three years. The following table summarizes information about stock options outstanding at December 31, 2000.
| Range of exercise price | Number outstanding | Weighted average remaining contractual life | Weighted average exercise price | Number exercisable | Weighted average exercise price | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| $ | 1.41—1.81 | 236,051 | 7.6 years | $ | 1.81 | 113,536 | $ | 1.81 | |||||
| 1.82—3.00 | 222,443 | 4.0 years | 2.85 | 129,227 | 2.86 | ||||||||
| 3.01—4.88 | 969,776 | 8.7 years | 4.22 | 149,557 | 3.77 | ||||||||
| 4.89—6.75 | 221,450 | 7.3 years | 5.20 | 82,810 | 5.17 | ||||||||
| 6.76—16.00 | 73,787 | 5.9 years | 10.10 | 36,712 | 13.03 | ||||||||
| $ | 1.41—16.00 | 1,723,507 | 7.6 years | $ | 4.09 | 511,842 | $ | 4.00 | |||||
The Company applies APB Opinion No. 25 in accounting for its Plan and no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
| | Income from Operations Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | |||||||
| | (Dollars in thousands, except per share data) | |||||||||
| Net income: | ||||||||||
| As reported | $ | 10,133 | $ | 15,212 | $ | 2,513 | ||||
| Pro forma | $ | 8,579 | $ | 13,653 | $ | 1,836 | ||||
| Basic net income per common share: | ||||||||||
| As reported | $ | 0.55 | $ | 0.83 | $ | 0.14 | ||||
| Pro forma | $ | 0.46 | $ | 0.75 | $ | 0.10 | ||||
| Diluted net income per common share: | ||||||||||
| As reported | $ | 0.53 | $ | 0.82 | $ | 0.14 | ||||
| Pro forma | $ | 0.45 | $ | 0.73 | $ | 0.10 | ||||
The following is an analysis of the components of the shares used to compute net income per common share:
| | December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | ||||||
| | (Amounts in thousands, except per share data) | ||||||||
| Numerator for basic and diluted earnings per share—income available to common stockholders | $ | 10,133 | $ | 15,212 | $ | 2,513 | |||
| Denominator: | |||||||||
| Denominator for basic earnings per share—weighted average shares | 18,479 | 18,234 | 18,066 | ||||||
| Effect of dilutive securities—stock options | 477 | 394 | 39 | ||||||
| Denominator for diluted earnings per share—adjusted weighted average shares and assumed conversions | 18,956 | 18,628 | 18,105 | ||||||
| Basic earnings per share | $ | 0.55 | $ | 0.83 | $ | 0.14 | |||
| Diluted earnings per share | $ | 0.53 | $ | 0.82 | $ | 0.14 | |||
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(10) Income Taxes
Income tax (benefit) expense attributable to income from continuing operations consists of:
| | Current | Deferred | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | (Dollars in thousands) | ||||||||||
| Year ended December 31, 2000: | |||||||||||
| U.S. Federal | $ | 3,073 | $ | 1,552 | $ | 4,625 | |||||
| State | 207 | (14 | ) | 193 | |||||||
| $ | 3,280 | $ | 1,538 | $ | 4,818 | ||||||
Year ended December 31, 1999: | |||||||||||
| U.S. Federal | $ | 2,042 | $ | (9,043 | ) | $ | (7,001 | ) | |||
| State | 178 | (378 | ) | (200 | ) | ||||||
| $ | 2,220 | $ | (9,421 | ) | $ | (7,201 | ) | ||||
Year ended December 31, 1998: | |||||||||||
| U.S. Federal | $ | (1,211 | ) | $ | (516 | ) | $ | (1,727 | ) | ||
| State | 80 | — | 80 | ||||||||
| $ | (1,131 | ) | $ | (516 | ) | $ | (1,647 | ) | |||
The effective income tax rate differs from the U.S. federal statutory rate of 35% for the years ended December 31, 2000, 1999 and 1998, respectively, as follows:
| | 2000 | 1999 | 1998 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | (Dollars in thousands) | |||||||||
| Computed "expected" income tax expense | $ | 5,233 | $ | 2,804 | $ | 294 | ||||
| Tax exempt interest income | (128 | ) | — | (28 | ) | |||||
| State taxes, net of federal income tax expense (benefit) | 126 | (130 | ) | 53 | ||||||
| Tax credits | (1,058 | ) | (275 | ) | (1,604 | ) | ||||
| Tax rate difference | (82 | ) | (11 | ) | (307 | ) | ||||
| Change in valuation allowance | — | (10,006 | ) | — | ||||||
| Other, net | 727 | 417 | (55 | ) | ||||||
| $ | 4,818 | $ | (7,201 | ) | $ | (1,647 | ) | |||
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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2000 and 1999 are as follows:
| | 2000 | Change in Deferred Taxes | 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | (Dollars in thousands) | ||||||||||
| Deferred tax assets: | |||||||||||
| Accrued jackpot liability | $ | 5,158 | $ | (1,479 | ) | $ | 6,637 | ||||
| Accrued expenses | 314 | (326 | ) | 640 | |||||||
| Allowance for doubtful accounts | 572 | 469 | 103 | ||||||||
| Intangible assets | 594 | (4,268 | ) | 4,862 | |||||||
| Inventory | 1,188 | 541 | 647 | ||||||||
| Tax credits | 2,800 | 92 | 2,708 | ||||||||
| Net deferred tax assets | 10,626 | (4,971 | ) | 15,597 | |||||||
Deferred tax liabilities: | |||||||||||
| Depreciation of property and equipment | 554 | (3,458 | ) | 4,012 | |||||||
| Deferred rent and prepaid expenses | 173 | 25 | 148 | ||||||||
| Total gross deferred tax liabilities | 727 | (3,433 | ) | 4,160 | |||||||
| Net deferred tax asset | $ | 9,899 | $ | (1,538 | ) | $ | 11,437 | ||||
In 1997, a valuation allowance was established to offset the Company's net deferred tax assets. In 1999, in accordance with SFAS 109, management believed it was more likely than not that the net deferred tax assets would be realized based upon the Company estimates of future taxable income. As a result, a tax benefit of $9,600,000 related to the elimination of a valuation allowance was recognized in the fourth quarter of 1999. Deferred tax assets are composed, for the most part, of alternative minimum tax and general business credits. At December 31, 2000, the Company has alternative minimum tax and general business tax credit carryforwards of $989,000 and $1,811,000, respectively, that may be carried forward indefinitely as a credit against regular tax.
(11) Operating Leases
The Company has non-cancelable operating leases, primarily for office and warehouse space, that expire over the next five years. Rent expense under operating leases was $667,000, $609,000 and $836,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Future minimum lease payments under non-cancelable building operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2000 are as follow:
| | Payments | |||
|---|---|---|---|---|
| | (Dollars in thousands) | |||
| Year ending December 31: | ||||
| 2001 | $ | 967 | ||
| 2002 | 926 | |||
| 2003 | 640 | |||
| 2004 | 596 | |||
| Thereafter | 534 | |||
| Total minimum lease payments | $ | 3,663 | ||
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(12) Employee Benefit Plan
Effective January 1, 1996, the Company adopted a qualified 401(k) Plan (the "Plan"). Eligible employees of the Company who have satisfied the Plan's eligibility requirements may participate in the Plan. Eligible employees may elect to contribute up to 15% of their compensation up to a maximum $10,500 in 2000. The Company may elect to make contributions to the Plan. The Company did not elect to make a contribution to the Plan during 2000, 1999 or 1998.
(13) Related Party Transactions
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.
(14) Commitments and Contingencies
The previously disclosed litigation, filed by Acres Gaming Corporation ("Acres") against the Company on May 19, 1998, and a second related action filed by Acres against the Company on November 17, 1998, have been settled, with the Company receiving a cash payment from Acres and certain covenants not to sue from Acres.
On October 20, 1999, International Game Technology ("IGT") filed but did not serve, a complaint against the Company and three other slot machine manufacturers alleging that CDS and others infringed a patent owned by IGT through the Company's use of gaming devices containing touch screens with redundant play buttons that control game outcome features. The Company believes that substantial prior art exists that renders the IGT patent invalid. On February 25, 2000, IGT dismissed the lawsuit against the Company, retaining its right to refile the lawsuit in the future. Management does not expect the outcome of this matter to have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity.
On January 23, 2001, Dwayne Alberts, allegedly a shareholder of the Company, filed a purported class action complaint against and the Company and the Company's Board of Directors in the District Court of Clark County in the State of Nevada, Case No. A429714 IX, alleging a claim of breach of fiduciary duty arising out of the announced transaction between the Company and Aristocrat Leisure Limited. In the action, Mr. Alberts has alleged, generally, that the Board of Directors "breached its fiduciary duties by taking actions designed to deter higher offers from other potential acquirors so as to ensure Casino Data insiders receive personal benefits at the expense of Casino Data shareholders," "timed the announcement of the merger to place an artificial cap on the price for Casino Data's stock to enable [Aristocrat] to acquire the stock at the lowest possible price" and "timed the announcement [of the merger agreement] to come within days before they would disclose Casino Data's fourth quarter results." Mr. Alberts is seeking class certification, declatory relief, injunctive relief preventing the consummation of the merger and directing the defendants to exercise their fiduciary duties in the manner described by plaintiffs, attorney fees and costs, and such other and further relief as the court deems just and proper. The Company and the Board of Directors deny all of Mr. Alberts' charging allegations. It is the position of the Board of Directors that they did not breach any fiduciary duties and that they took reasonable steps under the circumstances to maximize the value for the stockholders of the Company, evaluated and allowed for the possibility of entering into a merger or similar agreement with companies other than Aristocrat, solicited bids from at least two other companies, took reasonable steps to allow other potential bids to be made, and that they have in fact obtained the maximum value for the Company's shareholders under the circumstances. The Company and the Board of Directors filed an answer to the complaint on March 8, 2001 and intend to vigorously defend themselves against the allegations.
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
52
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 one patron dispute that it has won on every level of review, however the patron has continued to appeal the decision. The dispute has been appealed by the patron to the Supreme Court of the State of Nevada and the patron alleges a claim for over $8 million dollars. 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 the party making such claims is remote and that the ultimate outcome of this matter will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
(15) Supplemental Financial Information
Cash Flow Information
Payments for interest expense for the years ended December 31, 2000, 1999 and 1998 were approximately $4,000, $50,000 and $183,000, respectively.
Payments for income taxes for the year ended December 31, 2000 and 1999 were approximately $3,383,000 and $770,000, respectively. There were no payments for income taxes for the year ended December 31, 1998.
(16) Subsequent Event
On January 17, 2001, the Company entered into a definitive agreement with Aristocrat Leisure Limited, an Australian company ("Aristocrat"), under which Aristocrat would acquire CDS in a cash-for-stock merger transaction.
Under the agreement an indirect wholly owned subsidiary of Aristocrat will merger with and into CDS, with the result that CDS would become a wholly owned indirect subsidiary of Aristocrat. In the merger, each holder of the Company's capital stock will have the right to receive $9.25 per share in cash. In addition, Steven A. Weiss, Chairman and Chief Executive Officer of the Company, and Michael D. Rumbolz, Vice Chairman of the Company, have entered into agreements under which they have agreed to vote certain of their shares in favor of the merger.
Closing of the merger is subject to a number of customary conditions, including the approval of the merger by the shareholders of the Company and receipt of all necessary regulatory approvals. The merger is anticipated to close in the second half of 2001.
53
Quarterly Financial Data (Unaudited)
| | Quarter | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 1st | 2nd | 3rd | 4th | Total | ||||||||||||
| | (Dollars in thousands, except per share data) | ||||||||||||||||
| Year Ended December 31, 2000 | |||||||||||||||||
| Total revenues | $ | 16,796 | $ | 20,206 | $ | 20,550 | $ | 21,091 | $ | 78,643 | |||||||
| Income from operations | 2,234 | 4,422 | 4,331 | 2,761 | 13,748 | ||||||||||||
| Net income | 1,596 | 3,145 | 3,070 | 2,322 | 10,133 | ||||||||||||
| Basic net income per common share (1) | 0.09 | 0.17 | 0.17 | 0.12 | 0.55 | ||||||||||||
| Diluted net income per common share (1) | 0.09 | 0.17 | 0.16 | 0.12 | 0.53 | ||||||||||||
| Year Ended December 31, 1999 | |||||||||||||||||
| Total revenues | $ | 15,737 | $ | 22,768 | $ | 20,012 | $ | 17,013 | $ | 75,530 | |||||||
| Income from operations | 183 | 2,375 | 2,551 | 1,880 | 6,989 | ||||||||||||
| Net income | 192 | 1,950 | 1,809 | 11,261 | 15,212 | ||||||||||||
| Basic net income per common share (1) | 0.01 | 0.11 | 0.10 | 0.61 | 0.83 | ||||||||||||
| Diluted net income per common share (1) | 0.01 | 0.11 | 0.10 | 0.60 | 0.82 | ||||||||||||
| Year Ended December 31, 1998 | |||||||||||||||||
| Total revenues | $ | 12,697 | $ | 11,687 | $ | 15,039 | $ | 13,757 | $ | 53,180 | |||||||
| Income (loss) from operations | 109 | 121 | (340 | ) | (644 | ) | (754 | ) | |||||||||
| Net income | 320 | 364 | 48 | 1,781 | 2,513 | ||||||||||||
| Basic net income per common share (1) | 0.02 | 0.02 | 0.00 | 0.10 | 0.14 | ||||||||||||
| Diluted net income per common share (1) | 0.02 | 0.02 | 0.00 | 0.10 | 0.14 | ||||||||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Effective November 23, 1999 the Company dismissed KPMG LLP ("KPMG"). The decision to change accountants was approved by the Audit Committee and the Board of Directors of the Company.
The report of KPMG on the Company's consolidated balance sheet as of December 31, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year ended December 31, 1998, did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles.
During the two most recent fiscal years and the interim periods subsequent to December 31, 1998 through November 23, 1999, there were no disputes between the Company and KPMG as to matters of accounting principles or practices, financial statement disclosure, or audit scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused it to make a reference to the subject matter of the disagreement in connection with its report on the financial statements for such period. KPMG has furnished the Company with a letter addressed to the Commission stating that it agrees with the above statements. A copy of this letter was included as an exhibit to the Report on Form 8-K.
The Company has engaged the firm of Deloitte & Touche LLP as independent accountants for the Company's fiscal year ending December 31, 1999 to replace KPMG. The Company's Board of Directors approved the selection of Deloitte & Touche LLP as independent accountants upon recommendation of the Company's Audit Committee.
54
Item 10. Directors and Executive Officers of the Registrant
The information beginning immediately following the caption "Election of Directors" to, but not including, the caption "Executive Compensation" in the Company's Proxy Statement, to be filed with the Securities and Exchange Commission within 120 days of the close of the Company's year ended December 31, 2000 and forwarded to stockholders prior to the Company's 2001 Annual Meeting of Stockholders (the "2001 Proxy Statement"), is incorporated herein by reference.
Item 11. Executive Compensation
The information in the 2001 Proxy Statement beginning immediately following the caption "Executive Compensation" to, but not including, the caption "Compensation Committee Interlocks and Insider Participation" is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information in the 2001 Proxy Statement beginning immediately following the caption "Voting Securities and Principal Holders Thereof" to, but not including, the caption "Election of Directors" is incorporated herein by reference. See also Item 1, "Business—Subsequent Event."
Item 13. Certain Relationships and Related Transactions
The information in the 2001 Proxy Statement under the caption "Certain Transactions" is incorporated herein by reference.
55
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a)(1) These documents are listed in the Index to Consolidated Financial Statements and Supplementary Data in Item 8 of this report
(a)(2) Schedules
See Schedule attached.
(a)(3) EXHIBITS
| Exhibit | Description | |
|---|---|---|
| 2.1 | Agreement and Plan of Merger dated as of January 17, 2001, among Aristocrat Leisure Ltd., Cedar Aquisition Corp. and Casino Data Systems (incorporated herein by reference to Exhibit 2.1 of the Company's Form 8-K as filed on January 18, 2001). | |
| 3.1 | Articles of Incorporation, as amended (incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement on Form SB-2 (File No. 33-59148LA)). | |
| 3.2 | By-laws (incorporated herein by reference to Exhibit 3.2 of the Company's Registrations Statement on Form SB-2 (File No. 33-59148LA)). | |
| 3.2 | (a) | Amendment to Bylaws dated June 18, 1999 (incorporated herein by reference to Exhibit 3.2(b) of the Company's Form 10-Q as filed on June 30, 1999). |
| 10.1 | 1993 Employee Stock Option and Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.9 of the Company's Registration Statement on Form SB-2 (File No. 33-59148LA)).† | |
| 10.2 | 1994 Non-Employee Director Option Plan (incorporated by reference to Exhibit A of the Company's Proxy Statement as filed on June 13, 1995).† | |
| 10.3 | Cross-License and Development Agreement dated as of February 5, 1996.* | |
| 10.4 | Mr. Steven A. Weiss is employed by the Company pursuant to an oral agreement which provides for a minimum base salary of $350,000 per year and a base annual bonus of 50 percent of his base salary as a percentage of the base annual bonus amount equal to the percentage of the annual EBITDA target as established by the board of directors achieved by CDS, if the annual EBITDA equals or exceeds 90% of the EBITDA target. No bonus is paid if the Company fails to achieve at least 90% of the EBITDA target. Mr. Weiss' agreement does not provide for provisions relating to severance or non-competition and non-disclosure of confidential information.† | |
| 10.5 | Consulting agreement dated as of June 1, 2000 between Michael D. Rumbolz and Casino Data Systems.† | |
| 10.6 | Employment agreement dated as of November 17, 2000 between Ronald M. Rowan and Casino Data Systems.† | |
| 21 | Subsidiaries of the Registrant. | |
| 23.1 | Consent of KPMG LLP. | |
| 23.2 | Consent of Deloitte & Touche LLP. |
56
FORM 10-K
CASINO DATA SYSTEMS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2000, 1999 and 1998
| | Balance at Beginning of the Year | Charged to Cost and Expenses | Charged to Other Accounts | Deductions | Balance at End of the Year | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended December 31, 2000: | |||||||||||||||
| Allowance for doubtful accounts | $ | 1,886,000 | $ | 600,000 | $ | — | $ | 138,000 | $ | 2,348,000 | |||||
| Allowance for obsolescence | $ | 1,770,000 | $ | 1,440,000 | $ | — | $ | — | $ | 3,210,000 | |||||
Year ended December 31, 1999: | |||||||||||||||
| Allowance for doubtful accounts | $ | 3,516,000 | $ | — | $ | — | $ | 1,630,000 | $ | 1,886,000 | |||||
| Allowance for obsolescence | $ | 1,437,000 | $ | 2,222,000 | $ | — | $ | 1,889,000 | $ | 1,770,000 | |||||
Year ended December 31, 1998: | |||||||||||||||
| Allowance for doubtful accounts | $ | 5,390,000 | $ | — | $ | — | $ | 1,874,000 | $ | 3,516,000 | |||||
| Allowance for obsolescence | $ | 1,125,000 | $ | 966,000 | $ | — | $ | 654,000 | $ | 1,437,000 | |||||
See accompanying independent auditors' consent and report on schedule
57
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Casino Data Systems has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
| CASINO DATA SYSTEMS | |||
(Registrant) | |||
By: | /s/ STEVEN A. WEISS Steven A. Weiss Chief Executive Officer and Chairman of the Board (Principal Executive Officer) | ||
Date: March 30, 2001 | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| Signature | Title | Date | ||
|---|---|---|---|---|
| /s/ STEVEN A. WEISS Steven A. Weiss | Chief Executive Officer and Chairman of the Board (Principal Executive Officer) | March 30, 2001 | ||
/s/ RONALD M. ROWAN Ronald M. Rowan | Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) | March 30, 2001 | ||
/s/ MICHAEL RUMBOLZ Michael Rumbolz | Vice Chairman of the Board | March 30, 2001 | ||
/s/ PHIL E. BRYAN Phil E. Bryan | Director | March 30, 2001 | ||
/s/ HOWARD W. YENKE Howard W. Yenke | Director | March 30, 2001 | ||
/s/ THOMAS E. GARDNER Thomas E. Gardner | Director | March 30, 2001 | ||
/s/ JOHN F. HARVEY John F. Harvey | Director | March 30, 2001 |
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