UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to ________________
0-21426
-------
(Commission file number)
CASINO DATA SYSTEMS
-------------------
(Exact Name of Registrant as
Specified in its Charter)
NEVADA
--------------------------------------------------------------
(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 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: 18,035,897 SHARES OF COMMON
STOCK OUTSTANDING AS OF JULY 29, 1997
Page 1 of 16
CASINO DATA SYSTEMS
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Unaudited Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 3-4
Unaudited Consolidated Statements of Operations
For the six months ended June 30, 1997 and 1996 5
Unaudited Consolidated Statements of Operations
For the three months ended June 30, 1997 and 1996 6
Unaudited Consolidated Statements of Cash Flows
For the six months ended June 30 1997 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
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASINO DATA SYSTEMS
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
ASSETS
Current Assets:
Cash and cash equivalents including restricted amounts
of approximately $14,078,000 and $12,000,000,
respectively $ 21,493,515 $ 21,482,173
Investment securities including restricted amounts of
$479,820 and $440,000, respectively 479,820 844,303
Accounts receivable, net of allowance for doubtful
accounts of $2,800,000 and $2,400,000,
respectively 16,620,361 20,369,624
Due from related parties, net of allowance for doubtful
accounts of $500,000 and $500,000, respectively 2,659,497 2,512,143
Current portion of notes receivable 2,346,824 3,520,542
Income tax receivable 2,144,943 1,288,561
Inventories, net of reserve of $300,000 and $0,
respectively 16,396,339 15,219,571
Deferred tax asset 2,261,877 2,261,877
Prepaid expenses and other current assets 1,361,427 1,265,601
------------ ------------
Total current assets 65,764,603 68,764,395
------------ ------------
Property and equipment, net 35,147,140 35,435,854
Investment securities, including restricted amounts of
approximately $5,905,000 and $4,474,000, respectively 7,385,127 5,957,956
Notes receivable, excluding current portion 1,755,849 1,280,321
Intangible assets, net 9,320,880 9,539,254
Software development costs, net of accumulated amortization
of $91,336 and $54,736, respectively 5,679,164 2,903,288
Deferred tax asset 1,115,945 1,115,945
Deposits 408,753 425,331
------------ ------------
Total assets $126,577,461 $125,422,344
------------ ------------
------------ ------------
(continued)
3
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1997 1996
-------- ------------
Current liabilities:
Current portion of long-term debt $ 2,202,149 $ 2,032,187
Accounts payable 2,217,601 2,939,888
Accrued expenses and customer deposits 5,372,540 2,691,341
Accrued slot liability 3,562,827 2,874,918
-------------- --------------
Total current liabilities 13,355,117 10,538,334
Noncurrent liabilities:
Long-term debt, excluding current portion 1,268,863 2,450,159
Accrued slot liability 12,599,846 9,257,308
-------------- --------------
Total noncurrent liabilities 13,868,709 11,707,467
Shareholders' equity:
Common stock; authorized 100,000,000 shares,
no par value; 18,035,897 issued and outstanding at
June 30, 1997 and 18,033,647 issued and outstanding
at December 31, 1996 83,633,313 83,624,448
Retained earning 15,720,322 19,552,095
-------------- --------------
Total shareholders' equity 99,353,635 103,176,543
-------------- --------------
Total liabilities and shareholders' equity $ 126,577,461 $ 125,422,344
-------------- --------------
-------------- --------------
See accompanying notes to unaudited consolidated financial statements
4
CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Revenues:
Systems and product sales $19,118,826 $ 23,428,471
Gaming operations 12,147,938 10,703,457
----------- -------------
31,266,764 34,131,928
----------- -------------
Costs and expenses:
Cost of goods sold 19,919,227 16,363,767
Selling, general and administrative 13,029,973 9,128,069
Research and development 1,902,164 1,479,482
Depreciation and amortization 2,614,496 1,233,193
----------- -------------
Total costs and expenses 37,465,860 28,204,511
----------- -------------
(Loss) income from operations (6,199,096) 5,927,417
------------ -------------
Other income (expense):
Interest and other income 663,994 807,490
Interest expense (183,926) (253,163)
------------ -------------
Total other income 480,068 554,327
------------ -------------
(Loss) income before income taxes (5,719,028) 6,481,744
Income tax (benefit) expense (1,887,257) 2,082,407
------------ -------------
Net (loss) income ($3,831,771) $ 4,399,337
------------ -------------
------------ -------------
Net (loss) income per common and equivalent share $ (0.21) $ 0.27
------------ -------------
------------ -------------
Weighted average shares outstanding 18,036,000 16,483,000
------------ -------------
------------ -------------
See accompanying notes to unaudited consolidated financial statements
5
CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Revenues:
Systems and product sales $12,042,664 $ 13,138,946
Gaming operations 6,013,881 6,119,463
----------- -------------
18,056,545 19,258,409
----------- -------------
Costs and expenses:
Cost of goods sold 10,401,630 9,400,306
Selling, general and administrative 6,350,407 4,979,301
Research and development 1,079,763 749,482
Depreciation and amortization 1,333,326 664,024
----------- -------------
Total costs and expenses 19,165,126 15,793,113
----------- -------------
(Loss) Income from operations (1,108,581) 3,465,296
----------- -------------
Other income (expense):
Interest and other income 379,969 594,023
Interest expense (84,271) (140,951)
----------- -------------
Total other income 295,698 453,072
----------- -------------
(Loss) income before income taxes (812,883) 3,918,368
Income tax (benefit) expense (268,341) 1,193,358
----------- -------------
Net (loss) income ($544,542) $ 2,725,010
----------- -------------
----------- -------------
Net (loss) income per common and equivalent share $ (0.03) $ 0.15
----------- -------------
----------- -------------
Weighted average shares outstanding 18,036,000 18,375,000
----------- -------------
----------- -------------
See accompanying notes to unaudited consolidated financial statements
6
CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ (3,831,771) $ 4,399,337
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,614,496 1,233,193
Provision for doubtful accounts 418,408 --
Net increase in deferred tax asset (1,294,448)
Changes in assets and liabilities
Decrease (increase) in accounts receivable, notes
receivable and due from related parties 3,881,691 (10,011,405)
Increase in inventories (1,176,768) (7,137,435)
Decrease in prepaid expenses, other current
assets and deposits (79,247) (749,159)
Decrease in accounts payable (722,287) (407,731)
Increase in slot liability, accrued liabilities and
customer deposits 5,855,264 5,299,814
-------------- ------------
Net cash provided by (used in) operating activities 6,959,786 (8,667,834)
-------------- ------------
Cash flows used in investment activities:
Net increase in investment securities (1,062,688) (6,167,538)
Acquisitions of property and equipment (2,015,614) (8,046,587)
Investment in software development (2,812,476) --
Increase in intangible assets (55,197) (3,342,958)
-------------- ------------
Net cash used in investment activities (5,945,975) (17,557,083)
-------------- ------------
Cash flows (used in) from financing activities:
Repayment of debt (1,011,334) (927,354)
Proceeds from issuance of notes -- 2,080,186
Net proceeds from issuance of common stock 8,865 45,955,277
-------------- ------------
Net cash provided by financing activities (1,002,469) 47,108,109
-------------- ------------
Net increase in cash and cash equivalents 11,342 20,883,192
Cash and cash equivalents at beginning of period 21,482,173 13,156,998
-------------- ------------
Cash and cash equivalents at end of period $ 21,493,515 $ 34,040,190
-------------- ------------
-------------- ------------
See accompanying notes to unaudited consolidated financial statements
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Casino Data Systems, a Nevada corporation, was incorporated in June
1990. Each of the following corporations are wholly owned subsidiaries of the
Company: CDS Services Company; CDS Graphics and Imaging Company; CDS Signs,
Inc.; TurboPower Software Company, and CDS Gaming Company (collectively the
"Company"). The Company currently operates in one line of business whose
operations consist principally of: (i) the development, licensing and sale 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. The Company currently operates solely in the U.S.
The consolidated financial statements include the accounts of Casino
Data Systems and all of the subsidiaries mentioned above. All significant
inter-company balances and transactions have been eliminated in consolidation.
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 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 interim periods presented. The results of
operations for the interim periods are not necessarily indicative of the
results of operations for an entire year.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 Earnings Per Share,
(SFAS 128) which establishes standards for computing and presenting earnings
per share (EPS), replaces the presentation of primary and fully diluted EPS
with a presentation of basic and diluted EPS. SFAS 128 is effective for
financial statements for both interim and annual periods ending after
December 15, 1997. Earlier application is not permitted. After adoption, all
prior period EPS data should be restated to conform to SFAS 128.
Adoption of SFAS 128 would have had no impact on net (loss) income per
share for the six and three months ended June 30, 1997.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 129. "Disclosure of Information about Capital Structure" (SFAS No. 129).
SFAS No. 129 establishes standards for disclosing information about an
entity's capital structure. The Company complies with the disclosure
requirements of this statement which is effective for periods ending after
December 15, 1997 and anticipates that implementation will not significantly
impact the Company's financial presentation of its capital structure.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 requires
companies to classify items of other comprehensive income by their nature in
a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity sections of a statement of financial position, and is
effective for financial statements issued for fiscal year beginning after
December 15, 1997. The Company is currently assessing the impact on the
financial statements and, for the three months and six months ended June 30,
1997, the Company believes that SFAS No. 130 will not result in comprehensive
income different from net income reported in the accompanying consolidated
financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure About Segments of an Enterprise and Related Information"
(SFAS No. 131) SFAS No. 131 establishes additional standards for segment
reporting in the financial statements and is effective for fiscal years
beginning after December 15, 1997. The Company is currently assessing the
impact of the financial statements.
(2) INVENTORIES:
Inventories consist of the following:
June 30, December 31,
1997 1996
-------- ------------
Raw materials $ 9,951,296 $ 9,943,220
Work in process 397,058 663,340
Finished goods 6,047,985 4,613,011
----------- -----------
$16,396,339 $15,219,571
----------- -----------
----------- -----------
As of June 30, 1997, approximately $2,647,000 of finished goods
inventory represented gaming machines located at various sites on a
trial basis. Such machines will either be purchased by the casino at the
expiration of the trial period or will be returned to the Company.
Returned games may be sold at a discount, refurbished or returned
to casino sites on new trial periods. Games to be sold at a discount are
adjusted to the lower of cost or market upon return to the Company.
Refurbishment costs are expensed as incurred.
8
(3) LONG-TERM DEBT:
During May 1996, the Company entered into a $20,000,000 revolving line
of credit ("line of credit") with U.S. Bank of Nevada which expires in May
1998. The line of credit is secured by the Company's accounts receivable,
inventory and general intangibles. The line of credit bears interest at a
variable rate equal to the bank's base rate, which was 8.25% at June 30,
1997. There was no amount outstanding under the line of credit at June 30,
1997. Advances under the line are limited to a multiple of the Company's
earnings before interest, taxes, depreciation, and amortization over the past
four quarters and are also subject to maintenance of certain financial
covenants and ratios. The Company has reserved $5 million of this line of
credit to secure an irrevocable letter of credit pursuant to equipment
financing agreements. These equipment financing agreements are
collateralized by the related equipment and contain certain restrictive
covenants, including the requirement for a three year letter of credit
securing payment in the amount of 50% of the outstanding principal balance.
Future minimum payments under equipment financing agreements are as
follows:
Payments
--------
1997 remaining payments $1,164,761
1998 2,315,798
1999 267,173
2000 9,245
----------
Total minimum payments 3,756,977
Less interest 285,965
----------
Minimum payments less interest 3,471,012
Less current portion 2,202,149
----------
Long-term portion $1,268,863
----------
----------
(4) NET (LOSS) INCOME PER COMMON SHARE:
The following is an analysis of the components of the shares used to
compute net income (loss) per share:
Three months ended
------------------
June 30, June 30,
1997 1996
-------- --------
Weighted average shares outstanding 18,036,000 17,737,427
Weighted average shares outstanding related
to the shares granted under the employee stock
option plan 0 637,573
---------- ----------
18,036,000 18,375,000
---------- ----------
---------- ----------
9
(5) RELATED PARTY TRANSACTIONS:
A shareholder and former director of the Company and the spouse of the
Chairman of the Company are majority shareholders in Kiland Distributing
Corporation ("KDC"), a distributor of the Company's products. The Company
made sales to KDC of approximately $169,000 during the six months ended June
30, 1997. The sales, recorded net of distributor discounts, represent less
than 1% of the Company's revenues for the six months ended June 30, 1997.
The Company is engaged in substantive discussion with KDC regarding
settlement of accounts receivable of $3,059,497, which may result in transfer
of cash plus title to certain assets from KDC to the Company.
The Company entered into a business agreement with Best Bet Products
("Best Bet") for the distribution of certain gaming devices pursuant to which
certain shareholders of Best Bet served as employees of the Company from
December 1996 to June 1997. In addition, the Company loaned Best Bet
$100,000, evidenced by a note bearing interest at the prime rate plus 1.5%,
which approximated 9.75% at June 30, 1997. The note, which originally
matured on April 1, 1997, has been extended to July 1, 1997.
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
$39,439 during the six months ended June 30, 1997, for legal services
rendered.
(6) COMMITMENTS & CONTINGENCIES:
In connection with the operation of its MSP Systems, the Company is
liable for progressive jackpots, which are paid as an initial jackpot reset
amount followed by an annuity (progressive component) paid out over 20 years
when the the prize is won. Base jackpots are charged to revenue ratably over
the amount of coin play expected to precede payout based on a statistical
analysis. The progressive jackpot component increases at a rate based on the
number of coins played. The accrual of the liability commensurate with coin
play matches recognition of costs and revenues. The possibility exists that
the winning combination may be hit before the Company has fully accrued the
base jackpot amount, at which time the unaccrued portion would be expensed.
The unaccrued slot liability at June 30, 1997 was approximately $2,380,000.
To ensure adequate funds are available to pay the slot liability, and to
comply with gaming regulatory requirements, the Company has established
segregated cash accounts aggregating approximately $14,078,000 at June 30,
1997. The Company also has approximately $6,385,000 segregated for the
annuity payments of jackpots already won.
On February 5, 1996, the Company entered into a five-year cross-license
and development agreement with CTI, licensee of certain intellectual property
rights for the Caribbean Stud video poker game, to use certain of these
property rights to develop and manufacture gaming machines and to operate MSP
systems using these machines in certain jurisdictions. The agreement
provides for the Company to pay fixed royalties, or, upon receipt of certain
gaming licenses by CTI or the formation and licensing of a joint venture
between the parties, a one-half share of the Company's net
income from such operations. The agreement also provides for the formation
of a joint venture to distribute the gaming machines and operate MSP systems
with these gaming machines in certain jurisdictions. The parties are
currently in dispute concerning the respective performance of the terms of
the agreement which may result in arbitration for settlement of the matter.
In November 1996, the Company entered into an agreement with a third
party requiring that the Company pay $330,000, in monthly installments,
through March 1998 in exchange for the enhancement of certain aesthetic
qualities of existing and future video interactive gaming machines.
10
In December 1996, a class action complaint was filed in the United
States District Court, District of Nevada, by Gary A. Edwards against the
Company and certain present and former Company executives. In May 1997, a
class complaint was filed in the United States District Court of Nevada by
Barry Schwartz and Julian Phelps against the Company and certain present and
former Company executives. The complaints allege that the market price of
the Company's common stock was artificially inflated during the Class Period
due to misrepresentation and omissions in press releases and other statements
made by the Company's executives to the investing public. Management believes
these claims to be without merit and intends to vigorously defend these
actions. While the outcome of the actions described above is not presently
determinable, management does not expect that the outcome will have a
material adverse effect on the Company's results of operations, financial
position or cash flows.
The Company and its subsidiaries are also involved from time to time in
various claims and legal actions arising in the ordinary course of business
including, but not limited to, claims brought by patrons of the Company's MSP
games wherein the patron may allege the winning of jackpot awards or some
multiple thereof. 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 statements taken as a whole.
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 the Consolidated Financial Statements and Notes thereto included in the
Company's annual report on Form 10-K.
SIX MONTHS ENDED JUNE 30, 1997, COMPARED
TO THE SIX MONTHS ENDED JUNE 30, 1996
OVERVIEW
Income from operations and net income decreased from $5,927,417 and
$4,399,337, respectively for the six months ended June 30, 1996, to losses of
($6,199,096) and ($3,831,771), respectively, for the same period in 1997.
This represents a decrease of $12,126,513 in income from operations and a
decrease of $8,231,108 in net income. The decrease in income from operations
and net income is primarily related to an increase in the cost of goods sold
as a percentage of revenues and an increase in selling, general and
administrative costs for the six months ended June 30, 1997 as compared to
the same period in 1996.
REVENUES
Revenues decreased from $34,131,928 for the six months ended June 30,
1996, to $31,266,764 for the same period in 1997, a decrease of $2,865,164 or
9%. The decrease in revenues is primarily attributable to a decrease in
sales of the Company's OASIS-TM- II system for the six month period ended
June 30, 1997, compared to same period in 1996 partially offset by increased
progressive operation revenue and revenue from the sale of gaming machines.
Revenues from progressive operations increased from $10,703,457 for the six
months ended June 30, 1996, to $12,147,938 for the same period in 1997, an
increase of $1,444,481, or 14%. The increase in progressive operations is
due primarily to the increased number of linked games in operation for the
six months ended June 30, 1997, as compared to the same period in 1996. The
Company had revenue from the sale of gaming machines of $2,491,000 for the
six months ended June 30, 1997, as compared to no similar revenue during the
same period in 1996.
COSTS AND EXPENSES
Costs and expenses increased from $28,204,511 for the six months ended
June 30, 1996, to $37,465,860 for the same period in 1997, an increase of
$9,261,349, or 33%. Operating costs and expenses, excluding cost of goods
sold, increased as a percentage of revenues from 35% for the six months ended
June 30, 1996, to 56% for the same period in 1997. Cost of goods sold
increased from $16,363,767 for the six months ended June 30, 1996, to
$19,919,227 for the same period in 1997, an increase of $3,555,460. Gross
margins as a percentage of revenues decreased from 52% for the six months
ended June 30, 1996 to 36% for the same period in 1997. The decrease in
gross margin is primarily attributable to the increase in the percentage of
total revenue contributed by MSP and gaming machine operations, which
generally have lower gross margins than the Company's systems business.
12
Selling, general and administrative expenses increased from $9,128,069
for the six months ended June 30, 1996, to $13,029,973 for the same period in
1997, an increase of $3,901,904. The increase is primarily attributable to
increased personnel and associated payroll and marketing expenses.
Research and development expenses increased from $1,479,482 for the six
months ended June 30, 1996, to $1,902,164 for the same period in 1997. Major
expenditures during the six months ended June 30, 1997 primarily included the
development of additional OASIS II system products and video interactive
games. Research and development expenses as a percentage of revenues
increased from 4% for the six months ended June 30, 1996, to 6% for the same
period in 1997.
Depreciation and amortization increased from $1,233,193 for the six
months ended June 30, 1996, to $2,614,496 for the same period in 1997. The
increase is primarily due to depreciation of the increased number of MSP
games in operation.
Other income is comprised of the components of rental, interest and
other forms of income, offset by interest expense, not derived from normal
operations. Other income decreased from $554,327 for the six months ended
June 30, 1996, to $480,068 for the same period in 1997.
NET INCOME (LOSS)
Net income decreased from $4,399,337 for the six months ended June
30, 1996, to a loss of ($3,831,771) for the same period in 1997, a
decrease of $8,231,108. The decrease in net income is due primarily to
the decrease in revenues from the sale of OASIS II systems, the increase
in the sale of products with lower gross margins and the increase in the
Company's fixed overhead costs associated with the start-up of the CDS
Games division. Based on the net loss experienced through the first six
months of 1997, the maturation of OASIS II system sales and the
relatively recent introduction of CDS gaming machines into the market
place, the Company believes it is likely to report a net loss for the year
ended December 31, 1997. While there can be no assurance, the Company
could experience profit in the remaining quarters of 1997 depending on
numerous business factors including, but not limited to, the timing of
system contracts, the volume of game sales, and performance of the
Company's multi-site progressive operations.
QUARTER ENDED JUNE 30, 1997, COMPARED
TO THE QUARTER ENDED JUNE 30, 1996
OVERVIEW
Income from operations and net income decreased from $3,465,296 and
$2,725,010, respectively for the three months ended June 30, 1996, to losses
of ($1,108,581) and ($544,542), respectively, for the same period in 1997.
This represents a decrease of $4,573,877 in income from operations and a
decrease of $3,269,552 in net income. The decrease in income from operations
and net income is primarily related to decreased OASIS-TM- II systems sales
and increased costs associated with the CDS Games division.
REVENUES
Revenues decreased from $19,258,409 for the three months ended June 30,
1996, to $18,056,545 for the same period in 1997, a decrease of $1,201,864,
or 6%. The decrease in revenues is primarily attributable to a decrease in
sales of the Company's OASIS II systems for the three month period ended June
30, 1997, compared to the same period in 1996. This decrease was partially
offset by revenues from the sale of gaming machines for the quarter ended
June 30, 1997, compared with no revenues from the sale of gaming machines in
the quarter ended June 30, 1996.
13
COSTS AND EXPENSES
Costs and expenses increased from $15,793,113 for the three months ended
June 30, 1996, to $19,165,126 for the same period in 1997, an increase of
$3,372,013, or 21%. Operating costs and expenses, excluding cost of goods
sold, increased as a percentage of revenues from 33% for the three months
ended June 30, 1996, to 49% for the same period in 1997. Cost of goods sold
increased from $9,400,306 for the three months ended June 30, 1996, to
$10,401,630 for the same period in 1997, an increase of $1,001,324. Gross
margins as a percentage of revenues decreased from 51% for the three months
ended June 30, 1996 to 42% for the same period in 1997. The decrease in
gross margin is primarily attributable to the increase in the percentage of
total revenue contributed by sale of gaming machines, which generally have a
lower gross margin than other CDS products.
Selling, general and administrative expenses increased from $4,979,301
for the three months ended June 30, 1996, to $6,350,407 for the same period
in 1997, an increase of $1,371,106. Selling, general and administrative
expenses as a percentage of revenues increased from 26% for the three months
ended June 30, 1996, to 35% for the same period in 1997. The increase is
primarily attributable to an increase in payroll, consulting and professional
fees and to an increase in the allowance for doubtful accounts.
Research and development expenses increased from $749,482 for the three
months ended June 30, 1996, to $1,079,763 for the same period in 1997. Major
expenditures during the three months ended June 30, 1997 primarily included
the development of additional video interactive games. Research and
development expenses as a percentage of revenues increased from 3% for the
three months ended June 30, 1996, to 7% for the same period in 1997.
Depreciation and amortization increased from $664,024 for the three
months ended June 30, 1996, to $1,333,326 for the same period in 1997. The
increase is primarily due to depreciation of an increased number of MSP games
in operation.
Other income is comprised of the components of rental, interest and
other forms of income, offset by interest expense, that are not the result of
normal operations. Other income decreased from $453,072 for the three months
ended June 30, 1996, to $295,698 for the same period in 1997.
NET INCOME (LOSS)
Net income decreased from $2,725,010 for the three months ended June 30,
1996, to a loss of ($554,542) for the same period in 1997, a decrease of
$3,279,552. The decrease in net income is due primarily to the decrease in
revenues from the sale of OASIS II systems, the increase in the sale of
products with a lower gross margin, and the increase in the Company's fixed
overhead costs primarily associated with the start-up of the CDS Games
division. Based on the net loss experienced through the first six months of
1997, the maturation of OASIS II system sales and the relatively recent
introduction of CDS gaming machines into the market place, the Company
believes it is likely to report a net loss for the year ended December 31,
1997. While there can be no assurance, the Company could experience profit in
the remaining quarters of 1997 depending on numerous business factors
including, but not limited to, the timing of system contracts, the volume of
game sales, and performance of the Company's MSP operations.
14
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operating and capital expenditures
primarily through cash flows from its operations and cash from proceeds of
its equity offerings. The Company had cash and cash equivalents of
$21,493,515 at June 30, 1997, as compared to $21,482,173 at December 31,
1996. The Company generated cash from operations of $6,959,786 during the
six months ended June 30, 1997. The most significant factor contributing to
this cash generation was collection activity resulting in a net decrease of
accounts receivable of $3,881,691 for the six months ended June 30, 1997.
The Company used $5,945,975 in investing activities for the six months
ended June 30, 1997. These investmenting activities included: $2,812,476
investment in software development; $2,015,614 in equipment to be used in
operations; $55,197 for the purchase of intangible assets and $1,062,688
invested in held-to-maturity securities.
The Company used $1,002,469 in financing activities for the six months
ended June 30, 1997. The Company received proceeds from the sale of common
stock related to the employee stock option plan of $8,865 and made payments
on outstanding debt of $1,011,334.
Certain jurisdictions in which MSP systems are operated require the
Company to maintain segregated funds for the payment of jackpot prizes. The
amount of funds required is dependent on several factors, including the type
and denomination of games and regulatory requirements. At June 30, 1997, the
Company's accrued slot liability for its MSP systems aggregated approximately
$16,163,000 and the unaccrued slot liability was approximately $2,380,000.
The unaccrued slot liability is the amount of the initial primary jackpots
that has not been fully accrued. In connection with these slot liabilities
and in accordance with gaming requirements, the Company established
segregated cash accounts aggregating approximately $14,078,000 at June 30,
1997 to ensure availability of adequate funds to pay this liability. The
Company also has investment securities approximating $6,385,000 segregated as
of June 30, 1997 for the payment of 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 accrue each jackpot reset amount. Such occurrences
could have a material adverse impact on the Company's results of operations
in the reporting period in which the jackpots are hit.
The Company has financed certain equipment under agreements for an
aggregate amount of $3,471,012. These equipment agreements are
collateralized by the related equipment and contain certain restrictive
covenants, including the requirement for a three-year letter of credit
securing payment in the amount of 50% of the current principal balance.
During May 1996, the Company entered into a $20,000,000 revolving line
of credit ("line of credit") with U.S. Bank of Nevada which expires in May
1998. The line of credit is secured by the Company's accounts receivable,
inventory and general intangibles. The line of credit bears interest at a
variable rate equal to the bank's base rate, which was 8.25% at June 30,
1997. There was no amount outstanding under the line of credit at June 31,
1997. Advances under the line are limited to a multiple of the Company's
earnings before interest, taxes, depreciation, and amortization over the past
four quarters and are also subject to maintenance of certain financial
covenants and ratios. The Company has reserved $5 million of this line of
credit to secure an irrevocable letter of credit pursuant to equipment
financing agreements. These equipment agreements are collateralized by the
related equipment and contain certain
15
restrictive covenants, including the requirement for a three year letter of
credit securing payment in the amount of 50% of the outstanding principal
balance.
The Company's ratio of current assets to current liabilities was 5.1 to
1 at March 31, 1997, while the noncurrent liabilities to equity ratio was .13
to 1. Based on this financial position, the Company believes it could obtain
additional long-term financing for anticipated growth that may result in
working capital additions that exceed available cash and cash equivalents,
cash to be provided by operations and funds available under its line of
credit. However, there can be no assurance that the Company will be able to
obtain additional sources of capital during 1997.
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 that are forward-looking, such
as 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 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,
the ability of the Company to develop gaming machines that offer
technological advantages or unique entertainment features in order for
the Company to be able to effectively compete in the gaming machine
market; possible adverse affects if the Company experiences delays in
developing or obtaining regulatory approval of new products or
enhancements or such products do not gain customer acceptance; the
difficulty in competing with well established competitors in markets for
the Company's products, including without limitation, casino management
information systems and gaming machines; the dependence upon Steven
Weiss a key employee of the Company; the general profitability of the
gaming industry at large substantially affects the Company's opportuity
for sales of its products; and the Company's ability to protect the
intellectual property upon which it relies can never be guarenteed even
though the Company takes precautions to protect such intellectual
property.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1996, a class action complaint was filed in the United
States District Court, District of Nevada, by Gary A. Edwards against the
Company and certain present and former Company executives. In May 1997, a
class complaint was filed in the United States District Court of Nevada by
Barry Schwartz and Julian Phelps against the Company and certain present and
former Company executives. The complaints allege that the market price of
the Company's common stock was artificially inflated during the Class Period
due to misrepresentation and omissions in press releases and other statements
made by the Company's executives to the investing public. Management believes
these claims to be without merit and intends to vigorously defend these
actions. While the outcome of the actions described above is not presently
determinable, management does not expect that the outcome will have a
material adverse effect on the Company's results of operations, financial
position or cash flows.
The Company and its subsidiaries are also involved from time to time in
various claims and legal actions arising in the ordinary course of business
including, but not limited to, claims brought by patrons of the Company's MSP
games wherein the patron may allege the winning of jackpot awards or some
multiple thereof. 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 statements taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 22,
1997.
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 -- 16,361,895 -- 303,822
Diana L. Bennett -- 16,359,632 -- 306,085
Russell C. Mix -- 16,368,569 -- 297,148
William M. Mower -- 16,366,219 -- 299,498
Phil Bryan -- 16,348,311 -- 317,406
Daniel N. Copp -- 16,366,219 -- 298,945
The descriptions provided above of the matter considered at the 1997
Annual Meeting of Shareholders are qualified in their entirety by
reference to the Commpany's Proxy Statement related to such meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: Exhibit 27. Financial Data Schedule
There were no reports filed on Form 8-K for the three month period
ended March 31, 1997.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CASINO DATA SYSTEMS
Registrant
Date: August 11, 1997 s/Diana L. Bennett
----------------- ----------------------------
Diana L. Bennett
President, Chief Operating
Officer, and Director
Date: August 11, 1997 s/Ronald M. Rowan
----------------- ----------------------------
Ronald M. Rowan
Corporate Controller
(Principal Accounting Officer)
18