UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
0-21426
(Commission file number)
CASINO DATA SYSTEMS
(Exact Name of Registrant as
Specified in its Charter)
Nevada
(State or other Jurisdiction of Incorporation or Organization)
88-0261839
(I.R.S. Employer Identification No.)
3300 BIRTCHER DRIVE, LAS VEGAS, NEVADA 89118
(Address of Principal Executive Offices) (Zip Code)
(702) 269-5000
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 17,843,448 shares of common
stock outstanding as of August 1, 1996
1 of 19
CASINO DATA SYSTEMS
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Unaudited Consolidated Balance Sheets -
December 31, 1995 and June 30, 1996 3
Unaudited Consolidated Statements of Operations
For the six months ended June 30, 1995 and 1996 4
Unaudited Consolidated Statements of Operations
For the three months ended June 30, 1995 and 1996 5
Unaudited Consolidated Statements of Shareholders' Equity
For the year ended December 31, 1995 and the
six months ended June 30, 1996 6
Unaudited Consolidated Statements of Cash Flows
For the six months ended June 30, 1995 and 1996 7
Notes to Unaudited Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-17
PART II OTHER INFORMATION
Items 1-6 18
Signatures 19
2
ITEM 1. FINANCIAL STATEMENTS
CASINO DATA SYSTEMS
CONSOLIDATED BALANCE SHEETS
(Unaudited)
DECEMBER 31, JUNE 30,
1995 1996
----------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 13,156,998 $ 34,040,190
Investment securities (note 2) - 1,500,000
Accounts receivable (note 8) 7,857,816 18,320,055
Notes receivable (note 8) 1,827,878 2,620,441
Inventories (note 5) 5,314,410 12,451,845
Deferred tax asset 581,549 1,140,383
Other current assets 1,378,790 2,649,153
----------- ------------
Total current assets 30,117,441 72,722,067
----------- ------------
Property and equipment, net (note 3) 21,742,425 28,779,081
Investment securities (note 2) - 4,667,538
Notes receivable (note 8) 2,114,343 870,946
Intangible assets, net (note 4) 4,667,357 8,861,976
Software development costs (note 6) 641,629 1,198,959
Deferred tax asset - 660,146
Deposits 1,023,824 427,695
---------- ------------
Total assets $ 60,307,019 $118,188,408
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Customer deposits $ 678,327 $ 132,630
Accounts payable 2,511,556 2,103,825
Current portion long term debt 1,282,233 1,887,211
term debt (note 7)
Sales tax payable 392,585 85,640
Income tax payable 529,855 2,342,348
Accrued expenses 203,471 502,371
Accrued slot liability 1,383,052 2,398,637
---------- ----------
Total current liabilities 6,981,079 9,452,662
Noncurrent liabilities:
Long term debt (note 7) 3,021,771 3,569,625
Accrued slot liability 2,161,178 5,186,656
Deferred tax liability 75,468 -
---------- ---------
Total noncurrent liabilities 5,258,417 8,756,281
Shareholders' equity:
Common stock; authorized 100,000,000
shares, no par value; 13,737,490 issued
at December 31, 1995 and 17,790,923
issued and outstanding at June 30, 1996
33,330,010 80,842,615
Retained earnings 14,737,513 19,136,850
Total shareholders' equity 48,067,523 99,979,465
Total liabilities and
shareholders' equity $ 60,307,019 $ 118,188,408
============ ============
See accompanying notes to unaudited financial statements
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
1995 1996
--------- ----------
Systems and product sales $ 11,225,668 $ 23,428,471
Gaming operations 2,384,492 10,703,457
------------ ----------
Total revenues 13,610,160 34,131,928
Costs and expenses:
Cost of goods sold 4,590,891 16,363,767
Selling, general and
administrative 3,943,919 9,128,069
Research and development 1,248,281 1,479,482
Depreciation and amortization 419,003 1,233,193
------------ ----------
Total costs and expenses 10,202,094 28,204,511
------------ ----------
Income from operations 3,408,066 5,927,417
------------ ----------
Other income (expense):
Rental income 83,149 133,295
Interest income 390,744 674,195
Interest expense (28,899) (253,163)
------------ ----------
Total other income (expense) 444,994 554,327
------------ ----------
Income before income tax expense 3,853,060 6,481,744
Income taxes 1,255,074 2,082,407
------------ ----------
Net income $ 2,597,986 $ 4,399,337
============ ==========
Net income per common
and equivalent share $ 0.19 $ 0.27
============ ==========
Weighted average shares outstanding 13,635,000 16,483,000
============ ==========
See accompanying notes to unaudited consolidated financial statements
4
CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30, 1995 AND 1996
1995 1996
-------- ----------
Systems and product sales $ 6,476,088 13,138,946
Gaming operations 1,425,810 6,119,463
----------- ----------
Total revenues 7,901,898 19,258,409
Costs and expenses:
Cost of goods sold 3,234,633 9,400,306
Selling, general
and administrative 1,625,509 4,979,301
Research and development 758,281 749,482
Depreciation and amortization 180,858 664,024
----------- ----------
Total costs and expenses 5,799,281 15,793,113
----------- ----------
Income from operations 2,102,617 3,465,296
----------- ----------
Other income (expense):
Rental income 35,719 70,410
Interest income 174,907 523,613
Interest expense (14,941) (140,951)
---------- ---------
Total other income (expense) 195,685 453,072
----------- ---------
Income before income tax expense 2,298,302 3,918,368
Income taxes 766,853 1,193,358
----------- ----------
Net income $ 1,531,449 $ 2,725,010
=========== ==========
Net income per common
and equivalent share $ 0.11 $ 0.15
=========== ==========
Weighted average shares
outstanding 13,629,375 18,375,000
=========== ==========
See accompanying notes to unaudited consolidated financial statements
5
CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
THE SIX MONTHS ENDED JUNE 30, 1996
Common Stock Deferred
Shares Amount Discount
-------------- --------- ---------
Balance at December 31, 1994,
as previously reported $13,878,900 $36,056,288 $(25,333)
Adjustments for Imagworks, Inc.
pooling of interests 27,000 24,950 -
------------ ----------- ---------
Balance at December 31, 1994
as restated 13,905,900 36,081,238 (25,333)
Issuance of common stock,
pursuant to employee
stock option plan 236,590 1,162,106 -
Income tax benefits derived
from exercise of stock
options by grantees - 657,240 -
Issuance of common stock,
pursuant to purchase of
TurboPower 112,500 350,000 -
Retirement of shares held in
treasury (517,500) (4,920,574) -
Net income - - -
Deferred discount, earned and
charged to operations - - 25,333
------------ ---------- -------
Balance at December 31, 1995 $ 13,737,490 $33,330,010 $ 0
Issuance of common stock
pursuant to employee
stock option plan 131,971 761,952 -
Income tax benefits derived
from exercise of stock
options by grantees - 482,405 -
Issuance of common stock
pursuant to purchase of
Telnaes technology 126,462 1,074,923 -
Issuance of common stock 3,795,000 45,193,325 -
------------- ---------- ------
Net income - - -
Balance at June 30, 1996 $ 17,790,923 $80,842,615 $ 0
=========== ========== ======
Retained
Treasury Earnings
Stock (Deficit) Total
------------ ----------- ----------
Balance at December 31, 1994,
as previously reported $ (4,920,574) $ 10,147,064 $ 41,257,445
Adjustments for Imagworks, Inc.
pooling of interests - (141,245) (116,295)
------------ ----------- -----------
Balance at December 31, 1994
as restated (4,920,574) 10,005,819 41,141,150
Issuance of common stock,
pursuant to employee
stock option plan - - 1,162,106
Income tax benefits derived
from exercise of stock
options by grantees - - 657,240
Issuance of common stock,
pursuant to purchase of
TurboPower - - 350,000
Retirement of shares held in
treasury 4,920,574 - -
Net incom - 4,731,694 4,731,694
Deferred discount, earned and
charged to operations - - 25,333
------------- ----------- -----------
Balance at December 31, 1995 $ 0 $14,737,513 $48,067,523
Issue of common stock
pursuant to employee
stock option plan - - 761,952
Income tax benefits derived
from exercise of stock
options by grantees - - 482,405
Issuance of common stock
pursuant to purchase of
Telnaes technology - - 1,074,923
Issuance of common stock - - 45,193,325
Net income - 4,399,337 4,399,337
------------- ----------- -----------
Balance at June 30, 1996 $ 0 $19,136,850 $99,979,465
============= =========== ===========
See accompanying notes to unaudited consolidated financial statements
6
CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
1995 1996
---------- ----------
Cash flows from operating activities:
Net income $ 2,597,986 $ 4,399,337
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 419,003 1,233,193
Installment sale discount,
additional capital 25,333 -
Net increase in deferred tax asset - (1,294,448)
Changes in assets and liabilities,
net of effects from purchase of
Paradise Graphics, Inc.:
Increase in accounts receivable (1,224,962) (10,011,405)
Increase in inventories (906,651) (7,137,435)
Increase in other current assets (736,664) (787,958)
Decrease in other assets (30,851) 38,799
Decrease in customer deposits (204,639) (545,697)
Increase (decrease) in
accounts payable 2,051,002 (407,731)
Increase in
accrued liabilities 1,201,217 5,845,511
----------- -----------
Net cash provided by (used in)
operating activities 3,190,774 (8,667,834)
----------- -----------
Cash flows used in investment activities:
Net increase in marketable
investment securities (1,717,071) (6,167,538)
Payment for purchase of
TurboPower Software Company,
net of cash acquired (600,000) -
Acquisitions of property and equipment (5,739,885) (8,046,587)
Increase in intangible assets (1,372,529) (3,342,958)
----------- -----------
Net cash used in investment
activities (9,429,485) (17,557,083)
----------- -----------
Cash flows from financing activities:
Repayment of debt (36,621) (927,354)
Proceeds from issuance of notes 113,010 2,080,186
Net proceeds from sale of common stock 32,000 45,955,277
----------- -----------
Net cash provided by (used in)
financing activities 108,389 47,108,109
----------- -----------
Net increase (decrease) in cash
and cash equivalents (6,130,322) 20,883,192
Cash and cash equivalents at
beginning of period 14,083,024 13,156,998
----------- -----------
Cash and cash equivalents at
end of period $ 7,952,702 $34,040,190
============ ==========
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Interest $ - $ 257,723
Income taxes 800,000 1,080,000
Supplemental disclosure of non-cash financing
activities:
Common stock issued in exchange for - 1,074,923
intangible asset
See accompanying notes to unaudited consolidated financial statements
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Casino Data Systems (trademark)(the "Company"), a Nevada Corporation,
was incorporated in June 1990. Each of the following corporations are wholly-
owned subsidiaries of the Company: CDS Services Company; Paradise Graphics,
Inc., Imageworks, Inc., Fifty Seven Corporation; TurboPower Software Company,
and CDS Gaming Company. The primary businesses of the Company are: (i) the
development, licensing and sales of casino management information systems;
(ii) the operation of multi-site link progressive ("MSP") systems; (iii) the
design and manufacture of video interactive gaming machines, and (iv) the
design and manufacture of casino meters, signs and graphics. The Company also
creates software development tools for sale to outside software professionals
and for use by the Company's own software engineers.
CDS Services Company was incorporated in June 1993, to provide direct
sales and support to customers in certain gaming jurisdictions where
publicly-traded corporations must do business through a subsidiary.
In January 1994, the Company acquired 100% of the outstanding common
stock of Paradise Graphics, Inc. The acquisition was accounted for by the
purchase method of accounting.
CDS Gaming Company was incorporated in March 1994, to develop and operate
MSP systems. The Company derives revenues from the operation of these systems.
In January 1995, the Company, through TurboPower Software Company, purchased
substantially all of the assets of TurboPower Software, a Colorado sole
propietorship. The acquisition was accounted for under the purchase method.
On September 21, 1995, the Company purchased 100% of the outstanding common
stock of Fifty Seven Corporation. The acquisition was accounted for under the
purchase method.
Imageworks, Inc., was incorporated in Nevada in July 1994, to design and
produce digital prepress materials. In April 1996, the Company purchased 100%
of the outstanding common stock of Imageworks, Inc. for 27,000 restricted shares
of the Company's common stock. The purchase was accounted for as a pooling of
interests combination, and accordingly, the consolidated financial statements
for periods prior to the combination have been restated to include the results
of operations of Imageworks, Inc. The restated financial statements have not
been audited.
8
Casino Data
Systems Imageworks Combined
----------- ---------- --------
Three months ended
March 31, 1996
Net sales $14,561,244 $312,275 $14,873,519
Net income (loss) 1,704,051 (29,724) 1,674,327
For the year ended
December 31, 1995
Net sales 31,583,986 1,316,228 32,900,214
Net income (loss) 4,728,084 2,669 4,730,753
For the year ended
December 31, 1994
Net sales 27,046,944 250,316 27,297,260
Net income (loss) 6,676,400 (141,244) 6,535,156
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in Casino Data Systems' annual report as
filed on Form 10-K.
The accompanying unaudited consolidated financial statements contain all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods presented. The results of
operations for the interim periods are not indicative of the results of
operations for an entire year.
Certain prior period balances have been reclassified to conform to the
current period presentation.
(2) MARKETABLE INVESTMENT SECURITIES:
Effective December 31, 1993 the Company adopted Statement of Financial
Accounting Standard No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. Statement 115 requires that, except for debt securities
classified as "held to maturity" securities, investments in debt and equity
securities should be reported at fair market value. The Company has designated
its debt securities as being held to maturity, as it has the positive intent and
ability to hold until maturity. Those debt securities which have maturities
greater than one year are classified in the noncurrent assets section of the
balance sheet. These securities are carried at amortized cost. Securities are
designated as being held to maturity at the time of their purchase. Gains or
losses on sales of securities are determined using the specific identification
method and charged to operations when incurred.
9
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
December 31, June 30,
1995 1996
------------ --------
Furniture, fixtures and equipment 6,057,891 8,588,541
Gaming devices 7,693,119 11,456,073
Service vehicles 209,671 292,750
Leasehold improvements 338,426 870,564
Building 7,496,553 8,634,318
Land 1,478,348 1,478,348
------------ ---------
23,274,008 31,320,594
Less accumulated depreciation
and amortization (1,531,583) (2,541,513)
------------ ---------
$ 21,742,425 $ 28,779,081
============ ===========
(4) INTANGIBLE ASSETS:
Intangible assets consist of the following:
December 31, June 30,
1995 1996
----------- ---------
Trademarks $ 31,200 $ 31,200
Licensing Costs 458,543 632,089
Goodwill resulting from the acquisition
of Paradise Graphics 909,391 909,391
Goodwill resulting from the acquisition
of TurboPower Software 815,000 815,000
Goodwill resulting from the acquisition of
Southwestern Sign Service 1,340,998 1,340,998
Organization costs 2,000 2,000
Technology distribution rights 1,437,500 1,437,500
Telnaes patent - 4,244,335
----------- ---------
4,994,632 9,412,513
Less: Accumulated Amortization (327,275) (550,537)
----------- ---------
Net intangible assets $4,667,357 $8,861,976
=========== ==========
(5) INVENTORIES:
Inventories consist of the following:
December 31, June 30,
1995 1996
----------- ----------
Raw materials 4,246,502 8,394,358
Work in process 110,000 332,656
Finished goods 957,908 3,724,831
----------- ----------
$5,314,410 $12,451,845
=========== ==========
10
(6) SOFTWARE DEVELOPMENT COSTS:
The Company capitalized $557,330 of software development costs during the
six months ended June 30, 1996. Research and development costs incurred to
establish technological feasibility have been expensed when incurred.
Amortization of software development costs will begin when the product is
ready for general release.
(7) LONG TERM OBLIGATIONS:
The Company has financed certain equipment under financing agreements.
Equipment financings are secured by the related equipment and contain
certain restrictive covenants, including a three year letter of credit
guaranteeing payment, in the amount of 50% of the unamortized principal
balance.
Future minimum payments under equipment financing agreements are as follows:
Payments
--------
1996 $1,206,443
1997 2,361,975
1998 2,315,798
1999 267,173
2000 9,245
----------
Total minimum payments 6,160,634
Less interest 703,798
----------
Present value of net minimum payments 5,456,836
Less current portion 1,887,211
----------
$3,569,625
==========
(8) RELATED PARTY TRANSACTIONS:
As of June 30, 1996, the Company had an accounts receivable balance of
$18,320,055, of which certain amounts were due from related parties.
As of June 30, 1996, the Company had notes receivable balance of
$3,491,381, of which certain amounts were due from related parties.
A director/principal shareholder of the Company is a majority shareholder in
Kiland Distributing Corporation (KDC) a distributor of the Company's products,
primarily to Native American casinos. The Company made sales to KDC of
approximately $20,000 during the three months ended June 30, 1996. The sales,
recorded net of distributor discounts, represent less than 1% of the Company's
total revenues for the three months ended June 30, 1996. Accounts receivable at
June 30, 1996, includes $690,125 due from KDC, and a note receivable of $281,768
at June 30, 1996, related to such sales. In addition, during September 1995, the
Company loaned KDC $120,000, evidenced by a note bearing interest at a
commercial bank's base rate plus 25 basis points, which approximated 8.75% at
June 30, 1996, annually.
A director of the Company is associated with a law firm that has rendered
various legal services to the Company. The Company paid the firm $155,046 during
the three months ended June 30, 1996, for legal services primarily related to
the secondary public offering of March 15, 1996.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Unaudited Consolidated
Financial Statements and Notes thereto included elsewhere in this document and
Consolidated Financial Statements and Notes thereto included in the Company's
annual report on Form 10-K.
GENERAL
Casino Data Systems is a leading designer and manufacturer of
technology-driven products for the gaming industry. The Company was founded in
1990 to develop and manufacture casino slot accounting systems. Since 1990, the
Company has expanded its original slot accounting system into a casino-wide
management information system. In 1992, the Company developed its first
generation of MSP systems technology. In 1993 and 1994, the Company developed
the next generation of MSP systems technology capable of supporting a large
capacity state-wide MSP system, and designed the Cool Millions (trademark) MSP
system, which it launched in Mississippi in November 1994. The Company also
expanded and diversified its business and augmented its ability to design,
manufacture and customize gaming machines and MSP systems by acquiring graphics,
signs and software businesses in 1994 and 1995. In 1995, the Company introduced
its Cool Millions MSP system in Nevada on a test basis in May and commenced
state-wide rollout in August. The Company also established its Video
Interactive Gaming Division in 1995, which, in conjunction with
Casino Technology Inc. ("CTI"), developed the Caribbean Stud (registered
trademark) video poker machine, and is developing additional innovative video
gaming devices. In January 1996, the Company entered into a series of
agreements to obtain certain non-exclusive rights to use the Telnaes technology.
The Telnaes technology can be used in reel spinning slot machines to create
the high odds necessary to allow large progressive jackpots and is intended
to be used by the Company in its MSP systems.
The Company sells OASIS (trademark) systems, meters, signs and graphics on
a cash basis, on normal credit terms (90 days or less), and over longer term
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.
The Company's revenue and income may vary substantially from quarter.
Financial results in any quarter are dependent on receipt of orders and
installation of systems in that quarter. Although the Company believes that
gaming markets will continue to expand, the rate of growth is dependent upon
several factors, including political, legal, and other factors which are
beyond the influence of the Company. The Company intends to expand its
operations and resulting revenues from MSP systems, graphics, and meters
which will create a more continuous revenue stream. The possibility exists
that while the Company still depends on systems sales as one of its primary
sources of revenues, notable variations in revenue and income may occur.
12
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's condensed
consolidated statements of operations as a percentage of net revenues for the
periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1995 1996 1995 1996
---- ---- ---- ----
Net Revenues 100% 100% 100% 100%
Costs and expenses:
Systems costs 41 49 34 48
Selling, general and
administrative 21 26 29 27
Research and development 9 4 9 4
Depreciation and amortization 2 3 3 4
--- --- --- ---
Total costs and expenses 73 82 75 83
--- --- --- ---
Income from operations 27 18 25 17
Other income 2 2 3 2
--- --- --- ---
Income before income tax expense 29 20 28 19
Income taxes 10 6 9 6
--- --- --- ---
Net income 19% 14% 19% 13%
===== ===== ===== =====
QUARTER ENDED JUNE 30, 1996, COMPARED
TO THE QUARTER MONTHS ENDED JUNE 30, 1995
Overview
Income from operations and net income increased from $2,102,617 and
$1,531,449 for the three months ended June 30, 1995, respectively, to $3,465,296
and $2,725,010, respectively, for the same period in 1996. This represents an
increase of $1,362,679 in income from operations and an increase of $1,193,561
in net income. The increases in income from operations and net income are
primarily attributable to the increase in revenues from $7,901,898 for the
three months ended June 30, 1995, to $19,258,409 for the same period in 1996.
The increase in operating costs and expenses as a percentage of revenues
resulted in an overall decrease in the income from operations margin from 27%
for the three months ended June 30, 1995, to 18% for the same period in 1996
and a decrease in the net income margin from 19% for the three months ended
June 30, 1995, to 14% for the same period in 1996.
Revenues
Revenues increased from $7,901,898 for the three months ended June 30,
1995, to $19,258,409 for the same period in 1996, an increase of $11,356,511 or
144%. The increase in revenues is primarily attributable to the expansion of
the Company's MSP operations in Mississippi and Nevada, increased sales of the
Company's OASIS system and additional revenues generated by the sale of signs
and meters during the three months ended June 30, 1996.
Costs and Expenses
Costs and expenses increased from $5,799,281 for the three months ended June
30, 1995, to $15,793,113 for the same period in 1996, an increase of $9,993,832
or 172%. Operating costs and expenses, excluding cost of goods sold,
increased as a percentage of revenues from 32% for the three months ended
June 30, 1995, to 33% for the same period in 1996. Cost of goods sold increased
from $3,234,633 for the three months ended June 30, 1995, to $9,400,306 for the
same period in 1996, an increase of $6,165,673. Gross margins as a percentage of
13
total revenues decreased from 59% for the three months ended June 30, 1995 to
51% for the same period in 1996. The decrease in gross margin is primarily
attributable to the increase in revenue contributed by the Company's MSP system
operations in relation to total revenues. Gross margin from the Company's MSP
systems operations is generally lower than the gross margins contributed by its
other products. Gross margin from OASIS revenue was also affected by an
increase in the cost of new components in the system.
Selling, general and administrative expenses increased from $1,625,509 for
the three months ended June 30, 1995, to $4,979,301 for the same period in 1996,
an increase of $3,353,792. The increase is primarily attributable to increased
personnel and associated payroll and occupancy expenses and the additional
selling, general and administrative expenses of the sign business that was not
in operation during the three months ended June 30, 1995. Selling, general and
administrative expenses as a percentage of net revenues increased from 21% for
the three months ended June 30, 1995, to 26% for the same period in 1996.
Research and development expenses decreased from $758,281 for the three
months ended June 30, 1995, to $749,482 for the same period in 1996, a decrease
of $8,799. Major expenditures during the three months ended June 30, 1996
included the development of (i) additional OASIS system products; (ii) the
PitBOSS pit, cage, and credit system; (iii) the VIG-I (trademark) Signature
Series and development of other video interactive games; (iv) the multi-game MSP
system software and (v) further refinements and enhancements to its progressive
meter systems. Research and development expenses as a percentage of revenues
decreased from 9% for the three months ended June 30, 1995, to 4% for the same
period in 1996.
Depreciation and amortization increased from $180,858 for the three months
ended June 30, 1995, to $664,024 for the same period in 1996, and increase of
$483,166. The increase is primarily due to the depreciation of the increased
number of gaming devices in operation and the new Las Vegas building.
Depreciation as a percentage of total revenues increased from 2% for the three
months ended June 30, 1995, to 3% for the same period in 1996.
Net Income
Net income increased from $1,531,449 for the three months ended June 30,
1995, to $2,725,010 for the same period in 1996, an increase of $1,193,561. The
increase in net income is primarily attributable to the increase in revenues
from its MSP operations in both Mississippi and Nevada, and increased sales of
the Company's OASIS systems for the three months ended June 30, 1996,
compared to the same period in 1995. Net income as a percentage of net revenues
decreased from 19% for the three months ended June 30, 1995, to 14% for the same
period in 1996. The decrease in net income as a percentage of net revenues is
primarily attributable to increased revenues from lower gross margin MSP system
operations, and the increase in the costs of the OASIS system.
14
SIX MONTHS ENDED JUNE 30, 1996, COMPARED
TO THE SIX MONTHS ENDED JUNE 30, 1995
Overview
Income from operations and net income increased from $3,408,066 and
$2,597,986 for the six months ended June 30, 1995, respectively, to $5,927,417
and $4,399,337, respectively, for the same period in 1996. This represents an
increase of $2,519,351 in income from operations and an increase of $1,801,352
in net income. The increases in income from operations and net income are
primarily attributable to the increase in revenues from $13,610,160 for
the six months ended June 30, 1995, to $34,131,928 for the same period in 1996.
The increase in operating costs and expenses as a percentage of revenues
resulted in an overall decrease in the income from operations margin from 25%
for the six months ended June 30, 1995, to 17% for the same period in 1996 and
a decrease in the net income margin from 19% for the six months ended June 30,
1995, to 13% for the same period in 1996.
Revenues
Revenues increased from $13,610,160 for the six months ended June 30,
1995, to $34,131,928 for the same period in 1996, an increase of $20,521,768 or
151%. The increase in revenues is primarily attributable to the expansion of
the Company's MSP operations in Mississippi and Nevada, including the
introduction of Cool Millions Quarters and Caribbean Stud Video Poker
into the market place, and an increase in sales of the Company's OASIS system
during the six months ended June 30, 1996.
Costs and Expenses
Costs and expenses increased from $10,202,094 for the six months ended June
30, 1995, to $28,204,511 for the same period in 1996, an increase of $18,002,417
or 176%. Operating costs and expenses, excluding cost of goods sold,
decreased as a percentage of net revenues from 41% for the six months ended June
30, 1995, to 35% for the same period in 1996. Cost of goods sold increased from
$4,590,891 for the six months ended June 30, 1995, to $16,363,767 for the same
period in 1996, an increase of $11,772,876. Gross margins as a percentage of
revenues decreased from 66% for the six months ended June 30, 1995 to 52%
for the same period in 1996. The decrease in gross margin is primarily
attributable to the increase in revenue contributed by the Company's MSP system
operations in relation to total revenues. Gross margin from the Company's MSP
systems operations is generally lower than the gross margins contributed by its
other products. Gross margin from the sale of OASIS systems also decreased
because of an increase in the costs of new components.
Selling, general and administrative expenses increased from $3,943,919 for
the six months ended June 30, 1995, to $9,128,069 for the same period in 1996,
an increase of $5,184,150. The increase is primarily attributable to increased
personnel and associated payroll and occupancy expenses, and the additional
selling, general and administrative expenses of the sign business that was not
in operation during the six months ended June 30, 1995. Selling, general and
administrative expenses as a percentage of revenues decreased from 29% for the
six months ended June 30, 1995, to 27% for the same period in 1996.
Research and development expenses increased from $1,248,281 for the six
months ended June 30, 1995, to $1,479,482 for the same period in 1996, an
increase of $231,201. Major expenditures during the six months ended June 30,
1996 included the development of (i) additional OASIS system products; (ii)
the PitBOSS (trademark) pit, cage, and credit system; (iii) the VIG-I
15
Signature Series and development of other video interactive games; (iv) the
multi-game MSP system software and; (v) further refinements and enhancements to
its progressive meter systems. Research and development expenses as a percentage
of revenues decreased from 9% for the six months ended June 30, 1995, to 4% for
the same period in 1996.
Depreciation and amortization increased from $419,003 for the six months
ended June 30, 1995, to $1,233,193 for the same period in 1996, an increase of
$814,190. The increase is primarily due to the depreciation of the increased
number of gaming devices in operation.
Net Income
Net income increased from $2,597,985 for the six months ended June 30, 1995,
to $4,399,337 for the same period in 1996, an increase of $1,801,352. The
increase in net income is primarily attributable to the increase in revenues
from its MSP operations in both Mississippi and Nevada, and increased sales of
the Company's OASIS systems for the six months ended June 30, 1996, compared
to the same period in 1995. Net income as a percentage of revenues decreased
from 19% for the six months ended June 30, 1995, to 13% for the same period in
1996. The decrease in net income as a percentage of revenues is primarily
attributable to increased revenues from lower gross margin MSP system
operations, and the increase in the costs of the OASIS system.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow used in operations was $8,667,834 during the six
months ended June 30, 1996 as compared to $3,165,258 of cash provided by
operations during the same period of 1995. The Company had cash and cash
equivalents of $34,040,190 at June 30, 1996, compared to $13,156,998 at
December 31, 1995. The net increase is $20,883,192, the major components of
which are as follows: cash used in operations for the six months ended June 30,
1996, of $8,667,834 includes cash to be used to increase inventory stock and
accounts receivable, net of increases in accrued expenses and accrued slot
liability; cash invested in marketable investment securities of $6,167,538;
cash used for the acquisition of equipment and leasehold improvements of
$8,046,587; cash used in the purchase of intangible assets of $3,342,958, of
which $2,569,412 was for Telnaes technology; cash used for the repayment of
debt of $927,319; net proceeds from the issuance of notes payable of
$2,080,151; net proceeds from the sale of common stock of $45,955,277.
The Company has developed and operates the Company's MSP System. In general,
an MSP System links a number of slot machines in multiple casinos to generate a
collective jackpot. A percentage of each coin wagered is added to one or more
increasing collective jackpots. In some jurisdictions the Company may be
required by regulators to maintain a minimum bankroll requirement in the future.
The amount of funds required in the future is dependent on several factors, such
as the type and denomination of games the Company wishes to operate and the
applicable regulatory requirements.
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Certain jurisdictions in which MSP systems are operated require the Company
to maintain allocated funds or instruments to guarantee payment of jackpot
prizes. The amount of funds required is dependent on several factors, such as
the type and denomination of games the Company operates and the local regulatory
requirements. In accordance with gaming requirements, the Company established
segregated cash accounts aggregating approximately $10,300,000 at June 30, 1996
to ensure availability of adequate funds to pay this liability. Although
statistically remote, a possibility exists that multiple jackpots may be hit
prior to the time period in which game play has generated sufficient revenue to
accrue each jackpot reset amount, which may have a material adverse impact on
the Company's results of operations in the reporting period in which the
jackpots are hit.
The Company has financed certain equipment under financing agreements for an
aggregate of $5,456,836. Equipment financings are collateralized by the related
equipment and contain certain restrictive covenants, including a three year
letter of credit securing payment in the amount of 50% of the principal balance
which decreases in proportion to the amortization schedule.
The Company believes that existing cash and cash equivalents and cash to be
provided by operations, and funds available under the line of credit will be
sufficient to cover anticipated, normal operating cash requirements in the
foreseeable future, as well as ongoing research and development expenditures.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are forward-looking, such as statements relating to
plans for future expansion and other business development activities as well as
other capital spending, financial sources and the effects of regulation and
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, such results may differ from those expressed in any forward-
looking statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating to development
and construction activities, dependence on existing management, domestic or
global economic conditions and changes in federal or state laws or the
administration of such laws.
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PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
Refer to the Company's annual report as filed on Form 10-K for the year
ended December 31, 1995, for a description of legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
(REGISTRANT) CASINO DATA SYSTEMS
BY (SIGNATURE) /s/ Diana L. Bennett
(NAME AND TITLE) Diana L. Bennett, President and Chief Operating Officer
(Principal Finance and Accounting Officer)
(DATE) July 29, 1996
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