UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to __________ 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 Number)
3300 BIRTCHER DRIVE, LAS VEGAS, NEVADA 89118
--------------------------------------------------------------
(Address of Principal Executive Offices)
(702) 269-5000
--------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 18,529,253 shares of common
stock outstanding as of November 7, 2000.
CASINO DATA SYSTEMS
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999........................................ 3
Unaudited Condensed Consolidated Statements of Income
For the three months ended September 30, 2000 and 1999.......................... 5
Unaudited Condensed Consolidated Statements of Income
For the nine months ended September 30, 2000 and 1999........................... 6
Unaudited Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2000 and 1999........................... 7
Notes to Unaudited Condensed Consolidated Financial Statements.................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 11
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 15
Item 6. Exhibits and Reports on Form 8-K................................................ 16
Signatures ................................................................................ 17
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
ASSETS
Current Assets
Cash and cash equivalents $ 15,967 $ 6,866
Restricted cash and cash equivalents 2,134 2,389
Investment securities 2,097 1,272
Restricted investment securities 1,223 1,309
Accounts receivable, net of allowance for doubtful
accounts of $1,752 and $1,886, respectively 26,867 21,121
Current portion of notes receivable 2,315 4,324
Inventories, net 23,262 25,600
Prepaid expenses and other current assets 1,981 2,143
------------- ------------
Total current assets 75,846 65,024
------------- ------------
Property and equipment, net of accumulated
depreciation of $9,765 and $7,517, respectively 16,879 17,762
Restricted investment securities 12,470 14,517
Deferred tax assets 10,172 10,172
Software development costs, net of accumulated
amortization of $2,772 and $1,746, respectively 1,335 2,362
Other assets 855 1,050
------------- ------------
Total non-current assets 41,711 45,863
------------- ------------
Total assets $ 117,557 $ 110,887
============= ============
(Continued)
-3-
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
(Dollars and share data in thousands)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ -- $ 214
Accounts payable 2,946 1,427
Accrued expenses and customer deposits 9,268 8,567
Accrued slot liability 290 252
------------- ------------
Total current liabilities 12,504 10,460
------------- ------------
Non-current Liabilities
Accrued slot liability 14,436 17,901
------------- ------------
Total non-current liabilities 14,436 17,901
------------- ------------
Shareholders' Equity
Common stock, no par value. Authorized 100,000 shares; issued and
outstanding 18,510 and 18,401 at September 30, 2000 and December 31,
1999, respectively 85,244 84,964
Retained earnings (accumulated deficit) 5,373 (2,438)
------------- ------------
Total shareholders' equity 90,617 82,526
------------- ------------
Total liabilities and shareholders' equity $ 117,557 $ 110,887
============= ============
See accompanying Notes to Condensed Consolidated Financial Statements
-4-
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(Amounts in thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2000 1999
------------ -----------
Revenue
OASIS(TM) systems $ 11,859 $ 7,289
Games 6,537 10,535
Signs 1,362 1,667
TurboPower 792 521
------------ -----------
Total revenue 20,550 20,012
Cost of goods sold 8,487 9,885
------------ -----------
Gross margin 12,063 10,127
------------ -----------
Operating expenses
Selling, general and administrative 4,611 4,917
Research and development 2,141 1,623
Depreciation and amortization 980 1,036
------------ -----------
Total operating expenses 7,732 7,576
------------ -----------
Income from operations 4,331 2,551
------------ -----------
Other income (expense)
Interest and other income, net 251 243
Interest expense -- (10)
------------ -----------
Total other income, net 251 233
------------ -----------
Income before income taxes 4,582 2,784
Income tax expense 1,512 975
------------ -----------
Net income $ 3,070 $ 1,809
============ ===========
Basic net income per share $ 0.17 $ 0.10
============ ===========
Diluted net income per share $ 0.16 $ 0.10
============ ===========
Basic weighted average shares outstanding 18,488 18,334
============ ===========
Diluted weighted average shares outstanding 18,897 18,840
============ ===========
See accompanying Notes to Condensed Consolidated Financial Statements
-5-
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(Amounts in thousands, except per share data)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2000 1999
------------ -----------
Revenue
OASIS(TM) systems $ 28,129 $ 22,372
Games 23,482 30,122
Signs 3,693 4,323
TurboPower 2,248 1,700
------------ -----------
Total revenue 57,552 58,517
Cost of goods sold 24,145 31,248
------------ -----------
Gross margin 33,407 27,269
------------ -----------
Operating expenses
Selling, general and administrative 13,654 14,178
Research and development 5,886 4,846
Depreciation and amortization 2,880 3,136
------------ -----------
Total operating expenses 22,420 22,160
------------ -----------
Income from operations 10,987 5,109
------------ -----------
Other income (expense)
Interest and other income, net 892 1,008
Interest expense (3) (38)
------------ -----------
Total other income, net 889 970
------------ -----------
Income before income taxes 11,876 6,079
Income tax expense 4,065 2,128
------------ -----------
Net income $ 7,811 $ 3,951
============ ===========
Basic net income per share $ 0.42 $ 0.22
============ ===========
Diluted net income per share $ 0.41 $ 0.21
============ ===========
Basic weighted average shares outstanding 18,454 18,182
============ ===========
Diluted weighted average shares outstanding 18,856 18,580
============ ===========
See accompanying Notes to Condensed Consolidated Financial Statements
-6-
CASINO DATA SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(Dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2000 1999
------------ -----------
Cash Flows From Operating Activities:
Net income $ 7,811 $ 3,951
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,880 3,136
Depreciation and amortization included in COGS 554 1,525
Loss on disposal of assets 67 47
Write-off of net book value of assets -- (101)
Provision for accounts receivable (134) (1,230)
Provision for inventory obsolescence 1,290 700
Changes in assets and liabilities:
Restricted cash and cash equivalents 255 (120)
Accounts and notes receivable (3,421) (9,370)
Income tax receivable 581 --
Inventories 1,048 (5,911)
Other assets and deposits (464) 54
Accounts payable 1,519 1,326
Accrued expenses, customer deposits and slot liability (2,726) 4,482
------------ -----------
Net cash provided by (used in) operating activities 9,260 (1,511)
------------ -----------
Cash Flows From Investing Activities:
Purchases of unrestricted investment securities (6,047) (63)
Proceeds from sale of unrestricted investment securities 4,000 500
Purchases of investment securities to fund liabilities to jackpot winners (725) (1,346)
Proceeds from sale of investment securities to fund liabilities
to jackpot winners 4,082 1,118
Purchase of intangible assets (47) (58)
Proceeds from sale of assets held for sale 30 72
Purchase of property and equipment (1,749) (813)
Proceeds from sale of property and equipment 231 18
------------ -----------
Net cash used in investing activities (225) (572)
------------ -----------
Cash Flows From Financing Activities:
Repayment of notes payable (214) (184)
Proceeds from the issuance of stock 280 957
------------ -----------
Net cash provided by financing activities 66 773
------------ -----------
Net increase (decrease) in cash and cash equivalents 9,101 (1,310)
Cash and cash equivalents at beginning of period 6,866 5,141
------------ -----------
Cash and cash equivalents at end of period $ 15,967 $ 3,831
============ ===========
See accompanying Notes to Condensed Consolidated Financial Statements
-7-
CASINO DATA SYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Description of Business and Summary of Significant Accounting Policies
Casino Data Systems, a Nevada corporation, was incorporated in June 1990. Each
of the following corporations are wholly owned subsidiaries of Casino Data
Systems: CDS Services Company; CDS Graphics and Imaging Company; CDS Signs,
Inc.; TurboPower Software Company, and CDS Gaming Company (collectively the
"Company"). The Company's operations consist principally of: (i) the
development, licensing and sale of casino management information systems (the
OASIS(TM) System); (ii) the design, manufacture and licensing of video
interactive gaming machines and 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 and for use by the Company's own software
engineers. The Company provides these products through operation of four
segments: OASIS systems, games, signs and software development tools
(TurboPower).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Casino Data
Systems and all of the subsidiaries mentioned above. All significant
intercompany balances and transactions have been eliminated in consolidation.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform to the current
year presentation.
BASIS OF PRESENTATION
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. These unaudited
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's annual report as filed on Form 10-K for the year ended December 31,
1999.
The accompanying unaudited condensed consolidated financial statements contain
all adjustments which, in the opinion of management, are necessary for a fair
statement of the results of the interim periods presented. The results of
operations for any interim period are not necessarily indicative of the results
of operations that will be achieved for an entire year.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 clarifies existing accounting principles related to revenue recognition in
financial statements. The Company is required to comply with the provisions of
SAB 101 by the fourth quarter of 2000. Due to the nature of the Company's
operations, management does not believe that SAB 101 will have a significant
impact on the Company's financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates used by
the Company include the estimated useful lives for depreciable and amortizable
assets, the estimated allowance for doubtful accounts receivable, the estimated
reserve for inventory obsolescence, the estimated valuation allowance for
deferred tax assets, and the estimated cash flows used in assessing the
recoverability of long-lived assets. Actual results could differ from those
estimates.
-8-
(2) Business Segments
Following is the disclosure of the items that management utilizes in measuring
the profit or loss of each of the Company's segments.
REVENUES
------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(In thousands)
OASIS Systems $ 11,859 $ 7,289 $ 28,129 $ 22,372
Games 6,537 10,535 23,482 30,122
Signs 1,362 1,667 3,693 4,323
TurboPower 792 521 2,248 1,700
----------- ----------- ----------- -----------
Total $ 20,550 $ 20,012 $ 57,552 $ 58,517
=========== =========== =========== ===========
INCOME (LOSS) FROM OPERATIONS
------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(In thousands)
OASIS Systems $ 5,663 $ 3,303 $ 12,850 $ 9,358
Games (825) (889) (1,094) (4,581)
Signs (549) 21 (1,096) (181)
TurboPower 42 116 327 513
----------- ----------- ----------- -----------
Total $ 4,331 $ 2,551 $ 10,987 $ 5,109
=========== =========== =========== ===========
Corporate expenses have been allocated to each segment based on an estimate of
each segment's utilization of corporate resources.
(3) Inventories
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -----------
(In thousands)
Raw materials $ 16,494 $ 15,710
Work in process 1,384 292
Finished goods 8,444 11,368
------------- -----------
26,322 27,370
Less reserve for obsolescence (3,060) (1,770)
------------- -----------
$ 23,262 $ 25,600
============= ===========
-9-
(4) Net Income Per Share
The following is an analysis of the components of the shares used to compute net
income per common share.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30,
------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- --------- -----------
(In thousands, except per share information)
Numerator for earnings per share
Net income $ 3,070 $ 1,809 $ 7,811 $ 3,951
========== ========== ========= ==========
Denominator for earnings per share
Weighted average shares
outstanding - basic 18,488 18,334 18,454 18,182
Effect of dilutive securities
Stock options 409 506 402 398
---------- ---------- --------- ----------
Weighted average shares
outstanding - diluted 18,897 18,840 18,856 18,580
========== ========== ========= ==========
Basic earnings per share $ 0.17 $ 0.10 $ 0.42 $ 0.22
========== ========== ========= ==========
Diluted earnings per share $ 0.16 $ 0.10 $ 0.41 $ 0.21
========== ========== ========= ==========
(5) Related Party
Pursuant to an agreement effective June 1, 2000, the Company is paying Michael
D. Rumbolz, a director of the Company, $8,333 per month for consulting services.
(6) Commitments and Contingencies
On May 19, 1998, Acres Gaming Corporation filed an action against the Company,
Mikohn Gaming Corporation, New York New York Hotel & Casino, LLC, and Sunset
Station Hotel & Casino, in the Federal Court for the State of Nevada, alleging
that the Company's ProTurbo Software module violated certain patent rights of
Acres Gaming. Acres Gaming also filed a Motion for Preliminary Injunction, which
was later withdrawn by Acres. The Company has answered the lawsuit asserting
defenses and counterclaims seeking a declaration of invalidity, noninfringement
and unenforceability of the patent asserted. The Company believes this action is
without merit and will continue to vigorously defend itself. While the outcome
of this lawsuit is not presently determinable, management does not expect the
outcome will have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
On November 17, 1998, Acres filed a second lawsuit against the Company alleging
that the Company's ProTurbo Software module violates certain patent rights of a
second Acres patent. The Company has filed an answer and a counterclaim seeking
a declaration of invalidity, noninfringement and unenforceability of the patent
asserted. The Company has filed additional counterclaims for alleged patent
misuse, spoliation of evidence, antitrust violations and unfair competition. The
Company believes that this action is without merit and will continue to
vigorously defend itself. While the outcome of this lawsuit is not presently
determinable, management does not expect the outcome will have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
The Company and its subsidiaries are also involved from time to time in other
various claims and legal actions arising in the ordinary course of business
including, but not limited to, administrative claims and legal actions brought
in state and federal courts by patrons of the Company's MSP games, wherein the
patron may allege the winning of jackpot awards or some multiple thereof.
Because of the size of the jackpots that a patron may play for, related patron
disputes often involve sizable claims. The loss of a sizable patron dispute
claim could have a material adverse effect on the Company. For example, the
Company is currently litigating two patron disputes that it has
-10-
won on every level of review, however the patrons have continued to appeal the
decisions. One dispute has been appealed by the patron to the Supreme Court of
the State of Mississippi, and the patron alleges a claim for two identical
jackpots of over $2.7 million each. A second dispute has been appealed by a
patron to the Supreme Court of the State of Nevada, who alleges a claim for over
$8 million. In either case, if the patron were to win, the Company would be
liable to pay $1 million immediately (plus interest) with the remainder to be
paid in installments over twenty years in an annuity. However, management
believes that the likelihood of success by those making such claims is remote
and that the ultimate outcome of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Unaudited Condensed
Consolidated Financial Statements and Notes thereto included elsewhere in this
document and the Consolidated Financial Statements and Notes thereto included in
the Company's annual report on Form 10-K.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
OVERVIEW
Income from operations was $4,331,000 for the three months ended September 30,
2000 compared with $2,551,000 for the three months ended September 30, 1999, an
increase of $1,780,000 or 70%. Net income increased from $1,809,000 for the
three months ended September 30, 1999 to $3,070,000 for the same period in 2000,
an improvement of $1,261,000.
Total revenue for the three months ended September 30, 2000 was $20,550,000
compared with $20,012,000 for the same period in 1999, an increase of $538,000
or 3%. This increase is primarily due to higher systems sales, partially offset
by lower revenue from games.
OASIS systems revenue was $11,859,000 and $7,289,000 for the three months ended
September 30, 2000 and 1999, respectively, an increase of $4,570,000. This
increase reflects continued strong sales of the Company's Windows (Windows is a
registered trademark of Microsoft Corporation) based OASIS product, which was
introduced into the market late in the fourth quarter of 1998. Operating income
from this segment increased $2,360,000 from $3,303,000 to $5,663,000 for the
three months ended September 30, 1999 and 2000, respectively. This increase is
primarily the result of a higher sales, partly offset by a slightly lower gross
margin and higher research and development costs.
Revenue from games decreased $3,998,000 from $10,535,000 for the three month
period ended September 30, 1999 to $6,537,000 for the same fiscal 2000
period. This decrease in revenue is primarily attributable to decreased unit
sales in the third quarter of 2000 compared with 1999 due to strong sales of
the Bandit Bingo(TM) product in 1999, combined with reduced numbers of Cool
Millions(TM) and Xtreme(TM) operating units in service due to the maturation
of these products. During the third quarter of 2000 a new link, Jackpot
Bingo(TM), was launched in Nevada, which partly offset the decline in the
existing links. The operating loss of $889,000 for the three months ended
September 30, 2000 was $64,000 higher than the operating loss of $825,000 for
the same prior year period. This increase was primarily due to lower revenue,
partially offset by lower commission expense and a slightly higher gross
margin percentage, primarily the result of benefits derived from one-time
lump-sum payments to certain jackpot winners.
Signs revenue decreased $305,000, or 18%, from $1,667,000 for the three months
ended September 30, 1999 to $1,362,000 for the same period in 2000. This
decrease is primarily due to lower sales of game related signage. The operating
loss from signs was $549,000 compared with a profit of $21,000 for the three
months ended September 30, 2000 and 1999, respectively, a decrease of $570,000.
This decrease is primarily due to lower revenue and a lower gross margin.
Revenue of $792,000 from TurboPower Software was $271,000, or 52%, higher for
the three months ended September 30, 2000 compared with the same prior year
period. Operating income from this segment decreased
-11-
$74,000 for the three months ended September 30, 2000 compared with the same
prior year period, primarily attributable to increased operating expenses,
including headcount increases, offset in part by the increase in revenue.
GROSS MARGIN
The gross margin percentage was 59% for the three months ended September 30,
2000 compared with 51% for the same period in 1999. This increase is primarily
attributable to a sales mix favoring the higher-margin systems line of business
combined with manufacturing efficiencies, primarily in the production of gaming
devices.
OPERATING EXPENSES
Operating expenses were $7,732,000 and $7,576,000 for the three months ended
September 30, 2000 and 1999, respectively, an increase of $156,000 or 2%.
Operating expenses as a percentage of revenue remained consistent at 38% for the
three months ended September 30, 2000 and 1999.
Selling, general and administrative expenses decreased from $4,917,000 for the
three months ended September 30, 1999, to $4,611,000 for the same period in
2000, a decrease of $306,000 or 6%. Selling, general and administrative expenses
as a percentage of revenues decreased slightly from 25% for the three months
ended September 30, 1999, to 22% for the same period in 2000. The decrease in
selling, general and administrative expenses is primarily attributable to
decreased legal costs related to litigation and lower advertising costs due to
the timing of tradeshows in 2000 vs 1999.
Research and development expenses increased from $1,623,000 for the three months
ended September 30, 1999, to $2,141,000 for the same period in 2000, an increase
of $518,000 or 32%. Research and development expenses as a percentage of
revenues were 10% for the three months ended September 30, 2000 and 8% for the
same period in 1999. The increase in expense is primarily due to increased
headcount and consulting costs in the engineering departments primarily
responsible for the ongoing design and development of new products for the
Company.
Depreciation and amortization expense decreased from $1,036,000 for the three
months ended September 30, 1999, to $980,000 for the same period in 2000, a
decrease of $56,000 or 5%. The decrease in depreciation and amortization is
primarily due to decreased amortization of royalties and software development
costs.
OTHER INCOME, NET
Other income, net, is primarily comprised of interest income, interest expense
and gains and losses on disposal of assets. Other income, net, increased
slightly from $233,000 for the three months ended September 30, 1999, to
$251,000 for the same period in 2000, an increase of $18,000 or 8%. This
increase is primarily due to an increase in interest income due to higher cash
balances in 2000.
INCOME TAX EXPENSE
The effective tax rate was 33.0% and 35.0% for the three months ended September
30, 2000 and 1999, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
OVERVIEW
Income from operations was $10,987,000 for the nine months ended September 30,
2000 compared with $5,109,000 for the nine months ended September 30, 1999, an
increase of $5,878,000 or 115%. Net income increased from $3,951,000 for the
nine months ended September 30, 1999 to $7,811,000 for the same period in 2000,
an improvement of $3,860,000.
Total revenue for the nine months ended September 30, 2000 was $57,552,000
compared with $58,517,000 for the same period in 1999, a decrease of $965,000 or
2%. This decrease is primarily due to lower revenue from games, partially offset
by increased sales from OASIS systems.
-12-
OASIS systems revenue was $28,129,000 and $22,372,000 for the nine months ended
September 30, 2000 and 1999, respectively, an increase of $5,757,000 or 26%.
This increase is primarily attributable to continued strong sales of the
Company's Windows (Windows is a registered trademark of Microsoft Corporation)
based OASIS product, which was introduced into the market late in the fourth
quarter of 1998. Operating income from this segment increased $3,492,000 from
$9,358,000 to $12,850,000 for the nine months ended September 30, 1999 and 2000,
respectively. This increase is primarily the result of higher revenue and a
slightly higher gross margin, offset in part by higher commissions on the higher
revenue base and higher research and development costs for engineers and
consultants.
Revenue from games decreased $6,640,000 from $30,122,000 for the nine month
period ended September 30, 1999 to $23,482,000 for the same fiscal 2000
period. This decrease in revenue is primarily attributable to decreased unit
sales in 2000 compared with 1999 due to strong sales of the Bandit Bingo(TM)
product in 1999, with no similar strong selling product in 2000 and a
reduction in the number of Cool Millions(TM) and Xtreme(TM) operating units
in service due to the maturation of these products. Partly offsetting the
decline in the existing links was the launch of a new link in Nevada in the
third quarter of 2000, Jackpot Bingo(TM). This segment's operating loss of
$1,094,000 for the nine months ended September 30, 2000 was $3,487,000 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 derived from one-time
lump-sum payments to certain jackpot winners.
Signs revenue decreased from $4,323,000 for the nine months ended September 30,
1999 to $3,693,000 for the same period in 2000, a decrease of $630,000 or 15%.
This decrease is primarily due to lower sales of games' related signage. The
operating loss from signs increased from $181,000 to $1,096,000 for the nine
months ended September 30, 1999 and 2000, respectively, primarily due to lower
revenues and a lower gross margin.
Revenue of $2,248,000 from TurboPower Software was $548,000, or 32%, higher for
the nine months ended September 30, 2000 compared with the same prior year
period, primarily the result of new product releases in 2000. Operating income
from this segment decreased $186,000 for the nine months ended September 30,
2000 compared with the same prior year period, primarily attributable to
increased operating expenses related to increased engineering headcount.
GROSS MARGIN
The gross margin percentage was 58% for the nine months ended September 30, 2000
compared with 47% for the same period in 1999. This increase is mainly the
result of a sales mix favoring the higher margin systems business combined with
manufacturing efficiencies, primarily in the production of gaming devices.
OPERATING EXPENSES
Operating expenses were $22,420,000 and $22,160,000 for the nine months ended
September 30, 2000 and 1999, respectively, an increase of $260,000. Operating
expenses increased slightly as a percentage of revenue from 38% for the nine
months ended September 30, 1999, to 39% for the same period in 2000.
Selling, general and administrative expenses decreased from $14,178,000 for the
nine months ended September 30, 1999, to $13,654,000 for the same period in
2000, a decrease of $524,000. Selling, general and administrative expenses as a
percentage of revenues remained consistent at 24% for the nine months ended
September 30, 2000 and 1999. The decrease in selling, general and administrative
expenses is primarily attributable to lower legal costs related to litigation.
Research and development expenses increased from $4,846,000 for the nine months
ended September 30, 1999, to $5,886,000 for the same period in 2000, an increase
of $1,040,000 or 21%. Research and development expenses as a percentage of
revenues were 10% for the nine months ended September 30, 2000 and 8% for the
same 1999 period. The increase is primarily due to increased headcount in the
departments responsible for the design and development of new products for the
Company.
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Depreciation and amortization expense decreased from $3,136,000 for the nine
months ended September 30, 1999, to $2,880,000 for the same period in 2000, a
decrease of $256,000 or 8%. The decrease in depreciation and amortization is
primarily due to decreased amortization of royalties and software development
costs.
OTHER INCOME, NET
Other income, net, is primarily comprised of interest income, interest expense
and gains and losses on disposal of assets. Other income, net, decreased from
$970,000 for the nine months ended September 30, 1999, to $889,000 for the same
period in 2000, a decrease of $81,000 or 8%. This decrease is primarily due to
the one-time reversal of approximately $411,000 in interest expense due to a
favorable lawsuit settlement in the second quarter of 1999 which did not occur
in 2000, partially offset by increased interest income due to higher cash
balances in 2000.
INCOME TAX EXPENSE
The effective tax rate was 34.2% and 35.0% for the nine months ended September
30, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operating and capital expenditures
primarily through cash flows from its operations and cash from proceeds of its
equity offerings. The Company had unrestricted cash and cash equivalents of
$15,967,000 at September 30, 2000, compared with $6,866,000 at December 31,
1999. Cash provided by operating activities was $9,260,000 for the nine-months
ended September 30, 2000 compared with cash used by operating activities of
$1,511,000 for the same prior year period. The increase is primarily due to
increased net income and less fluctuation in accounts receivable and inventory.
Cash used in investing activities was $225,000 and $572,000 for the nine months
ended September 30, 2000 and 1999, respectively. The decrease was primarily due
to higher proceeds from the sale of unrestricted investment securities and from
the sale of investment securities used to fund liabilities to jackpot winners,
partially offset by higher purchases of property and equipment and purchases of
unrestricted investment securities.
Certain jurisdictions in which MSP systems operate require that the Company
maintain restricted funds for the payment of jackpot prizes. At September 30,
2000, the Company's accrued slot liability for its MSP systems aggregated
$14,436,000. In connection with these slot liabilities and in accordance with
regulatory requirements, the Company established restricted cash account and
cash equivalent accounts aggregating approximately $2,134,000 and $2,389,000 at
September 30, 2000 and 1999, respectively, to ensure availability of adequate
funds to pay for jackpot liabilities associated with jackpot prizes offered but
yet to be awarded. The Company also has restricted investment securities
approximating $13,693,000 as of September 30, 2000 for annuity payments related
to jackpots already won. Although statistically remote, a possibility exists
that multiple jackpots may be awarded prior to the time period over which game
play has generated sufficient revenue to fully accrue each jackpot amount. Such
occurrences could have a material adverse impact on the Company's results of
operations in the reporting period in which such jackpots would hit.
The Company's ratio of current assets to current liabilities is 6.1 to 1 at
September 30, 2000, while the noncurrent liabilities to equity ratio is .16 to
1. Based on this financial position, the Company believes it could obtain
additional long-term financing for growth. However, there can be no assurance
that the Company will be able to obtain additional sources of capital.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and the changes in
the market values of its investments.
The Company's interest rate exposure relates primarily to the Company's
investment portfolio. The Company has not used derivative financial instruments
in its investment portfolio. The Company invests its excess cash primarily in
debt instruments of the U.S. Government and its agencies and state and other
municipal government agencies. By
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policy, the Company limits the amount of credit exposure to any one issuer. The
Company protects and preserves its invested funds by limiting default, market
and reinvestment risk.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. The Company may suffer
losses in principal if forced to sell securities which have declined in market
value due to changes in interest rates.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take advantage of
the "safe harbor" provisions of the PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 for any forward-looking statement made by, or on behalf of, the Company.
The factors identified in this cautionary statement are important factors (but
not necessarily all the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made by,
or on behalf of, the Company. Where any such forward-looking statement includes
a statement of the assumptions or bases underlying such forward-looking
statement, the Company cautions that, while it believes such assumptions or
bases to be reasonable and makes them in good faith, assumed facts or bases
almost always vary from actual results, and the differences between assumed
facts or bases and actual results can be material, depending on the
circumstances. Where, in any forward-looking statement, the Company, or its
management, expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished. Taking into
account the foregoing, the following are identified as important risk factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company:
- - A decline in demand for, or appeal of, the Company's products, or a decline
in the rate of growth of new and existing markets for the Company's
products.
- - The inability of the Company to develop new competitive products in a timely
fashion.
- - An increase in popularity of competitor's products.
- - The entry into the market by new competitors and competition with more well
established manufacturers and distributors.
- - The loss or retirement of our key executives.
- - Approval of competitor's patent applications resulting in an inability to
use intellectual property upon which the Company relies to manufacture and
sell its products or denial of approval of the Company's patent
applications.
- - Unfavorable public referendums or anti-gaming legislation.
- - Unfavorable legislation affecting or directed at manufacturers or operators
of gaming products and systems.
- - The effect of regulatory and governmental actions including, without
limitations, delays in regulatory approval for the Company's products, or
the limitation, conditioning, suspension or revocation of any of the
Company's licenses.
- - Unfavorable determination of suitability by gaming regulatory authorities
with respect to our officers, directors, key employees or business partners.
- - With respect to legal actions pending against the Company, the discovery of
facts not presently known to the Company or determination by judges, juries
or other finders of fact which do not accord with the Company's evaluation
of the possible liability or outcome of existing litigation.
- - The inability of the Company to consummate potential acquisitions after
announcement.
We do not undertake to update our forward looking statement to reflect future
events or circumstances.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 19, 1998, Acres Gaming Corporation filed an action against the Company,
Mikohn Gaming Corporation, New York New York Hotel & Casino, LLC, and Sunset
Station Hotel & Casino, in the Federal Court for the State of Nevada, alleging
that the Company's ProTurbo Software module violated certain patent rights of
Acres Gaming.
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Acres Gaming also filed a Motion for Preliminary Injunction, which was later
withdrawn by Acres. The Company has answered the lawsuit asserting defenses and
counterclaims seeking a declaration of invalidity, noninfringement and
unenforceability of the patent asserted. The Company believes this action is
without merit and will continue to vigorously defend itself. While the outcome
of this lawsuit is not presently determinable, management does not expect the
outcome will have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
On November 17, 1998, Acres filed a second lawsuit against the Company alleging
that the Company's ProTurbo Software module violates certain patent rights of a
second Acres patent. CDS has filed an answer and a counterclaim seeking a
declaration of invalidity, noninfringement and unenforceability of the patent
asserted. The Company has filed additional counterclaims for alleged patent
misuse, spoliation of evidence, antitrust violations and unfair competition. The
Company believes that this action is without merit and will continue to
vigorously defend itself. While the outcome of this lawsuit is not presently
determinable, management does not expect the outcome will have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
The Company and its subsidiaries are also involved from time to time in other
various claims and legal actions arising in the ordinary course of business
including, but not limited to, administrative claims and legal actions brought
in state and federal courts by patrons of the Company's MSP games, wherein the
patron may allege the winning of jackpot awards or some multiple thereof.
Because of the size of the jackpots that a patron may play for, related patron
disputes often involve sizable claims. The loss of a sizable patron dispute
claim could have a material adverse effect on the Company. For example, the
Company is currently litigating two patron disputes that it has won on every
level of review, however the patrons have continued to appeal the decisions. One
dispute has been appealed by the patron to the Supreme Court of the State of
Mississippi, and the patron alleges a claim for two identical jackpots of over
$2.7 million dollars each. A second dispute has been appealed by a patron to the
Supreme Court of the State of Nevada, who alleges a claim for over $8 million
dollars. In either case, if the patron were to win, the Company would be liable
to pay $1 million dollars immediately (plus interest) with the remainder to be
paid in installments over twenty years in an annuity. However, management
believes that the likelihood of success by those making such claims is remote
and that the ultimate outcome of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit 27.1 Financial Data Schedule
There were no reports filed on Form 8-K for the three month period ended
September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CASINO DATA SYSTEMS
Registrant
Date: NOVEMBER 14, 2000 /s/ STEVEN A. WEISS
---------------------- ---------------------------------
Steven A. Weiss
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: NOVEMBER 14, 2000 /s/ RONALD ROWAN
---------------------- ---------------------------------
Ronald Rowan
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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