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: September 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: 18,010,872 shares of common
stock outstanding as of October 25, 1996
1 of 18
CASINO DATA SYSTEMS
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Unaudited Consolidated Balance Sheets -
December 31, 1995 and September 30, 1996 3
Unaudited Consolidated Statements of Operations
For the three months ended September 30, 1995 and 1996 4
Unaudited Consolidated Statements of Operations
For the nine months ended September 30, 1995 and 1996 5
Unaudited Consolidated Statements of Shareholders' Equity
For the year ended December 31, 1995 and the
nine months ended September 30, 1996 6
Unaudited Consolidated Statements of Cash Flows
For the nine months ended September 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 12-16
PART II OTHER INFORMATION
Items 1-6 17
Signatures 18
2
ITEM 1. FINANCIAL STATEMENTS
CASINO DATA SYSTEMS
CONSOLIDATED BALANCE SHEETS
(Unaudited)
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 13,156,998 $ 34,666,010
Investment securities (note 2) - 1,500,000
Accounts receivable, net (note 8) 7,857,816 21,358,235
Notes receivable (note 8) 1,827,878 2,795,896
Inventories (note 5) 5,314,410 14,858,138
Deferred tax asset 581,549 282,360
Other current assets 1,378,790 2,976,886
----------- ------------
Total current assets 30,117,441 78,437,525
----------- ------------
Property and equipment, net (note 3) 21,742,425 31,421,843
Investment securities (note 2) - 3,450,471
Notes receivable (note 8) 2,114,343 481,471
Intangible assets, net (note 4) 4,667,357 8,913,581
Software development costs (note 6) 641,629 1,714,959
Deferred tax asset - 2,136,233
Deposits 1,023,824 966,690
---------- ------------
Total assets $ 60,307,019 $127,522,773
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Customer deposits $ 678,327 $ 42,887
Accounts payable 2,511,556 3,907,118
Current portion long term debt 1,282,233 2,009,308
term debt (note 7)
Sales tax payable 392,585 136,584
Income tax payable 529,855 1,556,325
Accrued expenses 203,471 1,016,929
Accrued slot liability 1,383,052 2,220,057
---------- ----------
Total current liabilities 6,981,079 10,889,208
Noncurrent liabilities:
Long term debt (note 7) 3,021,771 2,964,206
Accrued slot liability 2,161,178 7,608,163
Deferred tax liability 75,468 -
---------- ----------
Total noncurrent liabilities 5,258,417 10,572,369
Shareholders' equity:
Common stock; authorized 100,000,000
shares, no par value; 17,950,503 issued
at September 30, 1996 and 13,737,490
issued and outstanding at
December 31, 1995 33,330,010 81,913,553
Retained earnings 14,737,513 24,147,643
Total shareholders' equity 48,067,523 106,061,196
Total liabilities and
shareholders' equity $ 60,307,019 $ 127,522,773
============ ============
See accompanying notes to unaudited financial statements
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
1995 1996
--------- ----------
Systems and product sales $ 6,046,436 $ 14,190,846
Gaming operations 2,361,167 7,063,675
------------ ----------
Total revenues 8,407,603 21,254,521
------------ ----------
Costs and expenses:
Cost of goods sold 3,561,218 11,315,080
Selling, general and
administrative 2,548,659 5,047,594
Research and development 782,417 734,998
Depreciation and amortization 291,594 783,664
------------ ----------
Total costs and expenses 7,183,888 17,881,336
------------ ----------
Income from operations 1,223,715 3,373,185
------------ ----------
Other income (expense):
Interest income 257,646 4,279,634
Interest expense (18,407) (116,358)
------------ ----------
Total other income 239,239 4,163,276
------------ ----------
Income before income taxes 1,462,954 7,536,461
Income taxes 406,343 2,525,668
------------ ----------
Net income $ 1,056,611 $ 5,010,793
============ ==========
Net income per common
and equivalent share $ 0.08 $ 0.27
============ ==========
Weighted average shares outstanding 14,047,875 18,430,000
============ ==========
See accompanying notes to unaudited consolidated financial statements
4
CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
1995 1996
----------- ----------
Systems and product sales $17,272,109 37,619,317
Gaming operations 4,745,659 17,767,132
----------- ----------
Total revenues 22,017,768 55,386,449
Costs and expenses:
Cost of goods sold 9,013,583 27,678,847
Selling, general
and administrative 5,621,139 14,175,663
Research and development 2,030,698 2,214,480
Depreciation and amortization 720,566 2,016,857
----------- ----------
Total costs and expenses 17,385,986 46,085,847
----------- ----------
Income from operations 4,631,782 9,300,602
----------- ----------
Other income (expense):
Interest income 731,538 5,087,124
Interest expense (47,306) (369,521)
---------- ---------
Total other income (expense) 684,232 4,717,603
----------- ---------
Income before income tax expense 5,316,014 14,018,205
Income taxes 1,661,417 4,608,075
----------- ----------
Net income $ 3,654,597 $ 9,410,130
=========== ==========
Net income per common
and equivalent share $ 0.27 $ 0.55
=========== ==========
Weighted average shares
outstanding 13,740,750 17,132,000
=========== ==========
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 NINE MONTHS ENDED SEPTEMBER 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 Imageworks,
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 291,551 1,324,794 -
Income tax benefits derived
from exercise of stock
options by grantees - 993,055 -
Issuance of common stock
pursuant to purchase of
Telnaes technology 126,462 1,074,923 -
Issuance of common stock 3,795,000 45,190,771 -
------------- ---------- -------
Net income - - -
Balance at September 30, 1996 $ 17,950,503 $81,913,553 $ 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 Imageworks,
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 income - 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 - - 1,324,794
Income tax benefits derived
from exercise of stock
options by grantees - - 993,055
Issuance of common stock
pursuant to purchase of
Telnaes technology - - 1,074,923
Issuance of common stock - - 45,190,771
Net income - 9,410,130 9,410,130
------------- ----------- ----------
Balance at September 30, 1996 $ 0 $24,147,643 $106,061,196
============= =========== ============
See accompanying notes to unaudited consolidated financial statements
6
CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(Unaudited)
1995 1996
---------- ----------
Cash flows from operating activities:
Net income $ 3,654,597 $ 9,410,130
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 720,566 2,113,304
Installment sale discount,
additional capital 25,333 -
Net increase in deferred tax asset - (2,494,061)
Changes in assets and liabilities,
net of effects from purchase of
Paradise Graphics, Inc.:
Increase in accounts receivable (1,969,699) (12,835,565)
Increase in inventories (576,641) (9,543,728)
Increase in other current assets (1,284,242) (1,298,907)
Decrease(increase) in other assets 52,949 (733,836)
Decrease in customer deposits (135,919) (635,440)
Increase in accounts payable 614,513 1,395,562
Increase in
accrued liabilities 1,301,004 8,860,970
----------- -----------
Net cash provided by (used in)
operating activities 2,402,461 (5,761,571)
----------- -----------
Cash flows used in investment activities:
Net increase in marketable
investment securities 5,130,492 (4,950,471)
Payment for purchase of
TurboPower Software Company,
net of cash acquired (600,000) -
Payment for purchase of Fifty Seven
Corporation, net of cash acquired (1,349,700) -
Acquisitions of property and equipment (9,748,517) (11,429,398)
Increase in intangible assets (1,506,236) (3,534,623)
----------- -----------
Net cash used in investment
activities (8,073,961) (19,914,492)
----------- -----------
Cash flows from financing activities:
Repayment of debt (39,099) (1,410,676)
Proceeds from issuance of notes 173,200 2,080,186
Net proceeds from sale of common stock 1,046,725 46,515,565
----------- -----------
Net cash provided by
financing activities 1,180,826 47,185,075
----------- -----------
Net increase (decrease) in cash
and cash equivalents (4,490,674) 21,509,012
Cash and cash equivalents at
beginning of period 14,083,024 13,156,998
----------- -----------
Cash and cash equivalents at
end of period $ 9,592,350 $34,666,010
============ ===========
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Interest $ 47,906 $ 374,082
Income taxes 1,869,000 4,499,107
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; CDS Graphics and
Imaging Company; Imageworks, Inc., CDS Signs, Inc.; 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 CDS Graphics and Imaging Company, (formerly known as Paradise Graphics,
Inc.) The acquisition was accounted for by the purchase method of accounting.
In April 1996, CDS Graphics and Imaging 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. In September 1996, Paradise Graphics, Inc. officially
became CDS Graphics and Imaging Company, a wholly owned subsidiary
of Casino Data Systems.
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
proprietorship. The acquisition was accounted for under the purchase method.
In September, 1995, the Company purchased 100% of the outstanding common
stock of CDS Signs, Inc. (formerly known as Fifty Seven Corporation). The
acquisition was accounted for under the purchase method. In September 1996,
Fifty Seven Corporation officially became CDS Signs, Inc., a wholly owned
subsidiary of Casino Data Systems.
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 financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's annual report as filed on Form 10-K.
The accompanying unaudited consolidated financial statements contain all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of the
8
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 or credited to operations when incurred.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
December 31, September 30,
1995 1996
------------ -------------
Furniture, fixtures and equipment 6,057,891 9,455,137
Gaming devices 7,693,119 12,603,178
Service vehicles 209,671 376,894
Leasehold improvements 338,426 907,151
Building 7,496,553 9,270,269
Land 1,478,348 2,090,777
------------ ------------
23,274,008 34,703,406
Less accumulated depreciation
and amortization (1,531,583) (3,281,563)
------------ ------------
$ 21,742,425 $ 31,421,843
============ =============
(4) INTANGIBLE ASSETS:
Intangible assets consist of the following:
December 31, September 30,
1995 1996
----------- ------------
Trademarks and licensing costs $ 491,743 $ 826,954
Goodwill resulting from acquisitions 3,065,389 3,065,389
Technology distribution rights 1,437,500 1,437,500
Telnaes patent - 4,274,335
----------- ------------
4,994,632 9,604,178
Less: Accumulated Amortization (327,275) (690,597)
----------- ------------
Net intangible assets $4,667,357 $8,913,581
=========== ============
9
(5) INVENTORIES:
Inventories consist of the following:
December 31, September 30,
1995 1996
----------- ------------
Raw materials $4,246,502 $10,355,255
Work in process 110,000 541,226
Finished goods 957,908 3,961,657
----------- ------------
$5,314,410 $14,858,138
=========== ============
(6) SOFTWARE DEVELOPMENT COSTS:
The Company capitalized $1,073,330 of software development costs during the
nine months ended September 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 $ 603,222
1997 2,361,975
1998 2,315,798
1999 267,173
2000 9,245
----------
Total minimum payments 5,557,413
Less interest 583,899
----------
Present value of net minimum payments 4,973,514
Less current portion 2,009,308
----------
$2,964,206
==========
(8) RELATED PARTY TRANSACTIONS:
At September 30, 1996, the Company had accounts receivable and notes
receivable of $21,358,235 and $3,277,367, respectively, which included certain
amounts due from related parties.
A shareholder and former director of the Company is a majority shareholder in
Kiland Distributing Corporation (KDC) a distributor of the Company's products.
The Company made sales to KDC of approximately $1,719,000 during the three
months ended September 30, 1996. The sales, recorded net of distributor
discounts, represent approximately 8% of the Company's revenues for the three
months ended September 30, 1996. Accounts receivable at September 30, 1996
include $1,630,552 due from KDC, while the September 30, 1996 notes
receivable balance includes $247,662 due from KDC.
10
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 $11,323 during
the three months ended September 30, 1996, for legal services rendered.
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 additional innovative video gaming devices.
The Company has certain non-exclusive rights to use the Telnaes technology.
The Telnaes technology is used in reel spinning slot machines to create the
high odds necessary to allow large jackpots without physically having the
number symbols and reels necessary to create these high odds.
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,
installation of systems, and the delivery of products 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
QUARTER ENDED SEPTEMBER 30, 1996, COMPARED
TO THE QUARTER MONTHS ENDED SEPTEMBER 30, 1995
Overview
Income from operations and net income increased from $1,223,715 and
$1,056,611, respectively, for the three months ended September 30, 1995, to
$3,373,185 and $5,010,793, respectively, for the same period in 1996. This
represents an increase of $2,149,470 in income from operations and an
increase of $3,954,182 in net income.
Revenues
Revenues increased from $8,407,603 for the three months ended September 30,
1995, to $21,254,521 for the same period in 1996, an increase of $12,846,918 or
153%. The increase in revenues is primarily attributable to the expansion of
the Company's MSP operations in Mississippi and Nevada, introduction of MSP
operations into Native American casinos, sale of video poker machines, and
increased sales of the Company's OASIS system during the three months ended
September 30, 1996.
Costs and Expenses
Costs and expenses increased from $7,183,888 for the three months ended
September 30, 1995, to $17,881,336 for the same period in 1996, an increase of
$10,697,448 or 149%. Operating costs and expenses, excluding cost of goods sold,
decreased as a percentage of revenues from 43% for the three months ended
September 30, 1995, to 31% for the same period in 1996. Cost of goods sold
increased from $3,561,218 for the three months ended September 30, 1995, to
$11,315,080 for the same period in 1996, an increase of $7,753,862. Gross
margins as a percentage of total revenues decreased from 58% for the three
months ended September 30, 1995 to 47% for the same period in 1996. The
decrease in gross margin is primarily attributable to the increase in the
percentage of total revenue contributed by MSP operations and the initial sales
of video poker machines. Gross margin from MSP operations and video poker
machine sales is generally lower than the gross margins contributed by its
other products.
Selling, general and administrative expenses increased from $2,548,659 for
the three months ended September 30, 1995, to $5,047,594 for the same period
in 1996, an increase of $2,498,935. The increase is primarily attributable to
increased personnel and associated payroll and marketing expenses related to the
expansion of MSP operations in Nevada and Mississippi, the initial rollout of
MSP operations into Native American casinos and the manufacture and sale of
video poker and reel-spinning slot machines. Selling, general and administrative
expenses as a percentage of revenues decreased from 30% for the three months
ended September 30, 1995, to 24% for the same period in 1996.
Research and development expenses decreased from $782,417 for the three
months ended September 30, 1995, to $734,998 for the same period in 1996. Major
expenditures during the three months ended September 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 software; and (v)
further refinements and enhancements to progressive meter systems. Research and
development expenses as a percentage of revenues decreased from 9% for the three
months ended September 30, 1995, to 4% for the same period in 1996.
13
Depreciation and amortization increased from $291,594 for the three months
ended September 30, 1995, to $783,664 for the same period in 1996. The increase
is primarily due to the depreciation of an increased number of gaming devices in
operation.
Other income is made up of rental income, interest income and other forms
of income that are not the result of normal operations. During the three months
ended September 30, 1996, the Company and International Game Technology
("IGT") entered into a multi-faceted agreement which included a substantial
one-time cash payment by IGT to the Company which is reflected in other income.
Net Income
Net income increased from $1,056,611 for the three months ended September 30,
1995, to $5,010,793 for the same period in 1996, an increase of $3,954,182.
Income from operations increased from $1,223,715 for the three months ended
September 30, 1995, to $3,373,185 for the same period in 1996, an increase of
$2,149,470. Net income increased due to the increase in revenues and the
increase in other income.
NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995
Overview
Income from operations and net income increased from $4,631,782 and
$3,654,597, respectively, for the nine months ended September 30, 1995, to
$9,300,602 and $9,410,130, respectively, for the same period in 1996. This
represents an increase of $4,668,820 in income from operations and an increase
of $5,755,533 in net income.
Revenues
Revenues increased from $22,017,768 for the nine months ended September 30,
1995, to $55,386,449 for the same period in 1996, an increase of $33,368,681
or 152%. 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 (trademark) Quarters and Caribbean Stud Video
Poker, the introduction of MSP operations into Native American casinos, the
sale of video poker machines and an increase in sales of OASIS systems.
Costs and Expenses
Costs and expenses increased from $17,385,986 for the nine months ended
September 30, 1995, to $46,085,847 for the same period in 1996, an increase of
$28,699,861, or 165%. Operating costs and expenses, excluding cost of goods
sold, decreased as a percentage of net revenues from 38% for the nine months
ended September 30, 1995, to 33% for the same period in 1996. Cost of goods sold
increased from $9,013,583 for the nine months ended September 30, 1995, to
$27,678,847 for the same period in 1996, an increase of $18,665,264. Gross
margins as a percentage of revenues decreased from 59% for the nine months
ended September 30, 1995 to 50% for the same period in 1996. The decrease in
gross margin is primarily attributable to an increase in the percentage of
total revenue contributed by MSP operations and the initial sales of
video poker machines. Gross margin from MSP operations and video poker machine
sales 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 certain components.
14
Selling, general and administrative expenses increased from $5,621,139 for
the nine months ended September 30, 1995, to $14,175,663 for the same period in
1996, an increase of $8,554,524. The increase is primarily attributable to
increased personnel and associated payroll and marketing expenses related to
the expansion of MSP operations in Nevada and Mississippi, the introduction of
Cool Millions Quarters and Caribbean Stud Video Poker, the initial rollout of
MSP operations into Native American casinos, and the manufacture and sale of
video poker and reel-spinning slot machines during the nine months ended
September 30, 1996. Selling, general and administrative expenses as a percentage
of revenues increased from 25% for the nine months ended September 30, 1995,
to 26% for the same period in 1996.
Research and development expenses increased from $2,030,698 for the nine
months ended September 30, 1995, to $2,214,480 for the same period in 1996, an
increase of $183,782. Major expenditures during the nine months ended
September 30, 1996 included the development of (i) additional OASIS system
products; (ii) the PitBOSS pit, cage, and credit system; (iii) the VIG-I
Signature Series and development of other video interactive games; (iv) the
multi-game MSP software and; (v) further refinements and enhancements to
progressive meter systems. Research and development expenses as a percentage
of revenues decreased from 9% for the nine months ended September 30, 1995, to
4% for the same period in 1996.
Depreciation and amortization increased from $720,566 for the nine months
ended September 30, 1995, to $2,016,857 for the same period in 1996, an increase
of $1,296,291. The increase is primarily due to depreciation of an increased
number of gaming devices in operation.
Other income is made up of rental income, interest income and other forms
of income that are not the result of normal operations. The Company and
International Game Technology ("IGT") entered into a multi-faceted agreement
which included a substantial one-time cash payment by IGT to the Company which
is reflected in other income.
Net Income
Net income increased from $3,654,597 for the nine months ended September 30,
1995, to $9,410,130 for the same period in 1996, an increase of $5,755,533.
Net income as a percentage of revenues remained at 17% for the nine months
ended September 30, 1995 and 1996. Net income increased due to the increase in
revenues and the increase in other income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow used in operations was $5,761,571 during the nine
months ended September 30, 1996, as compared to $2,402,461 provided by
operations during the same period of 1995. The Company had cash and cash
equivalents of $34,666,010 at September 30, 1996, compared to $13,156,998 at
December 31, 1995. The major components of the net increase of $21,509,012 are:
cash used in operations for the nine months ended September 30, 1996, of
$5,761,571 includes cash 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 $4,950,471;
cash used for the acquisition of equipment and leasehold improvements of
$11,429,398; cash used in the purchase of intangible assets of $3,534,623, of
which $2,599,412 was for Telnaes technology; cash used for the repayment of
debt of $1,410,676; net proceeds from the issuance of notes payable of
$2,080,186; and net proceeds from the sale of common stock of $46,515,565.
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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, including
the type and denomination of games and regulatory requirements. In accordance
with gaming requirements, the Company established segregated cash accounts
aggregating approximately $13,930,000 at September 30, 1996 to ensure
availability of adequate funds to pay this liability. Although
statistically remote, a possibility exists that multiple jackpots may be awarded
prior to the time required for game play to generate sufficient revenue to
accrue multiple jackpot amounts. Such an occurrence may have a material adverse
impact on the Company's results of operations in the reporting period in which
multiple unaccrued jackpots are awarded.
The Company has financed certain equipment under financing agreements for an
aggregate amount of $4,973,514. 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 current
principal balance.
The Company believes that existing cash and cash equivalents, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on July 11, 1996.
The following members were elected to the Company's Board of Directors to
hold office for the ensuing year:
Withheld
Nominee In Favor Authority
------- -------- --------
Steven A. Weiss 15,862,986 548,305
G. Jack Kiland 15,862,462 548,829
Diana L. Bennett 15,857,036 554,255
Russell C. Mix 15,861,536 548,755
William M. Mower 15,861,236 550,055
Phil Bryan 15,862,311 548,980
Karl K. Hoagland III 15,874,774 536,517
Daniel N. Copp 15,879,586 531,705
The results of the voting on the following additional item was as
follows:
To approve and adopt an amendment to the Company's 1993 Stock Option
and Compensation Plan to increase the number of shares of Common Stock
reserved for issuance thereunder by 675,000 shares.
In Favor Opposed Abstained Broker Non-Vote
-------- ------- --------- ---------------
13,873,015 2,411,576 75,700 51,000
The descriptions provided above of the matter considered at the 1996
Annual Meeting of Shareholders are qualified in their entirety by
reference to the Company's Proxy Statement related to such meeting.
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) November 12, 1996
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