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: MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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0-21426
(Commission file number)
CASINO DATA SYSTEMS
(Exact Name of Registrant as
Specified in its Charter)
NEVADA
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(State or other Jurisdiction of Incorporation or Organization)
88-0261839
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(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: 18,065,897 SHARES OF COMMON
STOCK OUTSTANDING AS OF MAY 5, 1998.
Page 1 of 15
CASINO DATA SYSTEMS
INDEX
Page No.
PART I. FINANCIAL INFORMATION --------
Item 1. Financial Statements:
Unaudited Consolidated Balance Sheet
March 31, 1998 and December 31, 1997 (audited) 3-4
Unaudited Consolidated Statements of Operations
For the three months ended March 31, 1998 and 1997 5
Unaudited Consolidated Statements of Cash Flows
For the three months ended March 31 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
PART II. OTHER INFORMATION
Items 1-6 14
Signatures 15
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASINO DATA SYSTEMS
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
1998 1997
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ASSETS
- ------
(DOLLARS IN THOUSANDS)
Current Assets:
Cash and cash equivalents including restricted amounts
of approximately $16,342 and $15,600, respectively $ 27,095 $ 27,873
Investment securities including restricted amounts of
$455 and $11 respectively 455 11
Accounts receivable, net of allowance for doubtful
accounts of $5,422 and $5,390, respectively 8,239 9,683
Due from related parties -- 144
Current portion of notes receivable 1,517 1,392
Income tax receivable 4,000 4,000
Inventories, net of reserve of $1,585 and
$1,125, respectively 14,671 14,192
Deferred tax asset 195 360
Assets held for sale 880 880
Prepaid expenses and other current assets 463 1,244
---------- ----------
Total current assets 57,515 59,779
Property and equipment, net of accumulated depreciation
of $3,622 and $3,077, respectively 17,293 17,736
Investment securities, including restricted amounts of
approximately $6,822 and $6,601, respectively 8,462 8,080
Notes receivable, excluding current portion 1,531 1,627
Intangible assets, net 5,844 6,256
Software development costs, net of accumulated amortization
of $146 and $128 respectively 2,686 1,954
Deferred tax asset 1,140 1,140
Deposits 1,210 384
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Total assets $ 95,681 $ 96,956
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---------- ----------
(continued)
3
LIABILITIES AND SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
March 31, December 31,
1998 1997
---------- ----------
Current liabilities:
Current portion of long-term debt $ 1,830 $ 2,187
Accounts payable 2,568 3,911
Accrued expenses and customer deposits 7,838 7,444
Accrued slot liability 4,005 4,723
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Total current liabilities 16,241 18,265
Noncurrent liabilities:
Long-term debt, excluding current portion 88 267
Accrued slot liability 15,405 14,797
---------- ----------
Total noncurrent liabilities 15,493 15,064
Shareholders' equity:
Common stock; authorized 100,000,000 shares,
no par value; 18,605,897 issued and outstanding
at March 31, 1998 and 18,065,897 issued and
outstanding at December 31, 1997 83,790 83,790
Retained deficit (19,843) (20,163)
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Total shareholders' equity 63,947 63,627
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Total liabilities and shareholders' equity $ 95,681 $ 96,956
---------- ----------
---------- ----------
See accompanying notes to unaudited consolidated financial statements
4
CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1998 1997
------------ -----------
Revenues:
Systems and product sales $ 9,886 $ 7,076
Gaming operations 2,811 6,134
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12,697 13,210
Cost of goods sold 6,772 9,518
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Gross margin 5,925 3,692
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Costs and expenses:
Selling, general and administrative 4,358 6,680
Research and development 804 822
Depreciation and amortization 654 1,281
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Total costs and expenses 5,816 8,783
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Income (Loss) from operations 109 (5,091)
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Other income (expense):
Interest and other income 459 284
Interest expense (83) (100)
------------ -----------
Total other income 376 184
------------ -----------
Income (loss) before income taxes 485 (4,907)
Income tax expense (benefit) 165 (1,619)
------------ -----------
Net income (loss) $ 320 ($3,288)
------------ -----------
------------ -----------
Basic net income (loss) per share $ 0.02 $ (0.18)
------------ -----------
------------ -----------
Diluted net income (loss) per share $ 0.02 $ (0.18)
------------ -----------
------------ -----------
Basic weighted average shares outstanding 18,066,000 18,035,000
------------ -----------
------------ -----------
Diluted weighted average shares outstanding 18,117,000 18,035,000
------------ -----------
------------ -----------
See accompanying notes to unaudited consolidated financial statements
5
CASINO DATA SYSTEMS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1998 1997
------------ -----------
Cash flows from operating activities:
Net income (loss) $ 320 $ (3,288)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 654 1,281
Provision for doubtful accounts 32 1
Net decrease in deferred tax asset 165 (1,619)
Changes in assets and liabilities
Decrease in accounts receivable, notes
receivable and due from related parties 1,527 4,725
Increase in inventories (479) (2,264)
Increase (decrease) in prepaid expenses, other current
assets and deposits (45) 115
Decrease in accounts payable (1,343) (654)
Increase in slot liability, accrued expenses and
customer deposits 283 5,254
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Net cash provided by operating activities 1,114 3,551
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------------ -----------
Cash flows used in investment activities:
Net increase in investment securities (826) (4)
Acquisitions of property and equipment (101) (1,097)
Investment in software development (750) (1,472)
Change in intangible assets 321 (42)
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Net cash used in investment activities (1,356) (2,615)
------------ -----------
------------ -----------
Cash flows (used in) provided by financing activities:
Repayment of debt (536) (504)
Net proceeds from issuance of common stock -- 9
------------ -----------
Net cash provided by financing activities (536) (495)
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Net increase in cash and cash equivalents (778) 441
Cash and cash equivalents at beginning of period
including restricted amounts 27,873 21,482
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Cash and cash equivalents at end of period
including restricted amounts $ 27,095 $ 21,923
------------ -----------
------------ -----------
See accompanying notes to unaudited consolidated financial statements
6
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 (the Oasis-TM- II System); (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), which 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. All prior period
EPS data have been restated to conform to SFAS 128.
In June 1997, the Financial Accounting Standard 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 years beginning after
December 15, 1997. The Company does not believe this statement will have a
material impact on the Company's financial statements.
7
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. Adoption of this statement will have no
material impact on the Company's financial statements.
(2) INVENTORIES:
Inventories consist of the following (in thousands):
March 31, December 31,
1998 1997
--------- ----------
Raw materials $ 11,438 $ 9,786
Work in process 259 187
Finished goods 4,559 5,344
Less reserve for obsolescence (1,585) (1,125)
--------- ----------
$ 14,671 $ 14,192
--------- ----------
--------- ----------
As of March 31, 1998, approximately $2,646,000 of finished goods inventory
represented gaming machines located at various casino sites on a no
obligation trial basis. Such machines will either be purchased by the
respective 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.
(3) LONG-TERM DEBT:
During May 1996, the Company entered into a $20 million 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 March 31, 1998. There
was no amount outstanding or available under the line of credit at March 31,
1998. 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 other 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
(in thousands):
Payments
----------
1998 remaining payments $ 1,740
1999 267
2000 9
----------
Total minimum payments 2,016
Less interest 98
----------
Minimum payments less interest 1,918
Less current portion 1,830
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Long-term portion $ 88
----------
----------
8
(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 pursuant to SFAS 128:
Three months Nine months Six months Three months
ended ended ended ended
-------------------------------------------------------------
March 31, September 30, June 30, March 31,
-------------------------------------------------------------
1998 1997 1997 1997
------------- -------------- ------------- -------------
Numerator for earnings per share $ 320,000 $ (6,179,000) $ (3,832,000) $ (3,287,000)
------------- -------------- ------------- -------------
Denominator:
Denominator for basic earnings per share-
weighted average shares 18,066,000 18,036,000 18,036,000 18,035,000
Effect of dilutive securities
Stock options 51,000 0 0 0
------------- -------------- ------------- -------------
Denominator for diluted earnings per share-
adjusted weighted average shares and assumed
conversions 18,117,000 18,036,000 18,036,000 18,035,000
------------- -------------- ------------- -------------
------------- -------------- ------------- -------------
Basic earnings per share $ 0.02 $ (0.34) $ (0.21) $ (0.18)
------------- -------------- ------------- -------------
Diluted earnings per share $ 0.02 $ (0.34) $ (0.21) $ (0.18)
------------- -------------- ------------- -------------
Nine months Six months Three months
ended ended ended
--------------------------------------------
September 30, June 30, March 31,
--------------------------------------------
1996 1996 1996
-------------- ------------ -------------
Numerator for earnings per share $ 9,410,000 $ 4,399,000 $ 1,674,000
-------------- ------------ -------------
Denominator:
Denominator for basic earnings per share-
weighted average shares 16,509,000 15,837,000 13,926,000
Effect of dilutive securities
Stock options 623,000 646,000 692,000
-------------- ------------ -------------
Denominator for diluted earnings per share-
adjusted weighted average shares and assumed
conversions 17,132,000 16,483,000 14,618,000
-------------- ------------ -------------
-------------- ------------ -------------
Basic earnings per share $ 0.57 $ 0.28 $ 0.12
-------------- ------------ -------------
Diluted earnings per share $ 0.55 $ 0.27 $ 0.12
-------------- ------------ -------------
(5) COMMITMENTS & CONTINGENCIES
In connection with the operation of its MSP Systems, the Company is
liable for progressive jackpots, which are paid as an initial base jackpot
component followed by an annuity (progressive component) paid out over 20
years when the prize is won. The base jackpot component is charged against
income ratably over the amount of coin play expected to precede payout based
on a statistical analysis. The progressive jackpot component increases 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 component, at which time any unaccrued portion would be
expensed. There was no unaccrued portion at March 31, 1998. 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 $16,342,000 at March 31, 1998. The
Company also has approximately $7,277,000 segregated for the annuity payments
for jackpots already won.
In August of 1997, Casino Technology Incorporated ("CTI"), filed a
demand for arbitration of certain issues arising out of a Cross-License
Agreement between CTI and the Company pursuant to which the Company marketed
the Caribbean Stud video poker game. CTI alleged that the Company failed to
pay royalty fees due under the agreement. The Company has accrued
approximately $2,000,000 with respect to potential obligations arising out of
this agreement. The Company is contesting this amount because it believes it
has been damaged as a result of certain actions and/or inactions of CTI and
its principal. While the outcome of the arbitration is not presently
determinable, management does not believe the outcome will have a material
effect on the Company's financial statements as a whole.
In November 1996, the Company entered into an agreement with a third
party requiring that the Company pay monthly installments, through March 1998
in exchange for the enhancement of the artistic display qualities of existing
and future video interactive gaming machines. As of December 31, 1997, the
Company discontinued payments pending delivery of acceptable product. The
Company paid $330,000 during the first quarter of 1998 in exchange for
completed product. As of March 31, 1998, the Company has paid all but
$330,000 under the agreement which will be disbursed when the remaining
products are received from the third party.
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. Three additional
purported shareholder class actions were filed in 1997 in connection with the
same drop in stock price following the December 16, 1996 press release. On
May 27, 1997, SCHWARTZ V. CASINO DATA SYSTEMS, was filed in the United States
District Court for the District of Nevada, alleging violations of Sections
10(b) and 20(a) of the 1934 Act and SEC Rule 10b-5 and seeking economic
recovery on behalf of the same alleged class of investors. On December 16,
1997, GRANT V. CASINO DATA SYSTEMS, was filed in the District Court of the
State of Nevada alleging common law fraud and seeking economic recovery on
behalf of the same alleged class of investors. On December 9, 1997,
GIOVANNONI V. CASINO DATA SYSTEMS, was filed in the Superior Court of the
State of California in San Francisco alleging violation of California
Corporations Code Sections 254000 and 25500 and California Business and
Professions Code Sections 17200 and 17500. Management believes these claims
to be without merit, and intends to vigorously defend against them. In
addition, the Company maintains a policy of insurance pursuant to which it
has tendered these claims to the insurance carrier. This insurance policy may
cover all or a portion of the claims. While the outcome of the actions
described above is not presently determinable, management does not expect the
outcome will have a material adverse effect on the Company's consolidated
financial statements taken as a whole.
A patron dispute was filed against the Company which allegedly arose
while a patron played the Company's Cool Millions dollars progressive slot
machine at Splash Casino in Tunica, Mississippi. The dispute was heard by the
Mississippi Gaming Commission, who decided that the patron had won only $5.00
rather than the jackpot of $1,742,000 as alleged by Ms. Freeman. Ms. Freeman
appealed the Commission's decision to the Circuit Court of Tunica County. On
January 16, 1998, the Court issued an Order reversing the Commission and
ordered the Company to pay the jackpot plus interest from April 8, 1995. The
Company contends the ruling is in error and has appealed the decision to the
Mississippi Supreme Court. As a result of the Circuit Court's Order, and with
the consent of the Mississippi Gaming authorities, the Company has reduced
the current Cool Millions dollar Mississippi jackpot by $1,742,000. If
successful on appeal, the Company would return this amount to the Company's
then-existing outstanding jackpot, as directed by the Mississippi Gaming
authorities. The Company has accrued $354,000 of interest expense as of March
31, 1998 toward the judgment in the event the Company loses its appeal. While
the outcome of the action described above is not presently determinable,
management does not expect the outcome will have a material adverse effect on
the Company's consolidated financial statements taken as a whole.
In November of 1997, a customer of the Company filed for protection under
Chapter 11 of the United States Bankruptcy Code. The pre-petition debt owed
the Company is approximately $1,700,000, which amount has been included in a
Proof of Claim filed by the Company in the Bankruptcy action. The Debtor has
submitted a Plan of Reorganization to the Court that has not yet been
approved. Purusant to the Plan of Reorganization, the Company is treated as a
secured creditor in the action. In addition, the Company has obtained
personal guarantees from certain of the principals of the debtor. While the
outcome of the Bankruptcy is not presently determinable, management does not
expect the outcome will have a material adverse effect on the Company's
consolidated financial statements taken as a whole.
9
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, 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,
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
statements taken as a whole.
10
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.
QUARTER ENDED MARCH 31, 1998 COMPARED
TO THE QUARTER ENDED MARCH 31, 1997
OVERVIEW
Income (loss) from operations and net income (loss) increased from losses
of ($5,091,000) and ($3,288,000), respectively for the three months ended
March 31, 1997, to income of $109,000 and $320,000, respectively, for the
same period in 1998. This represents an increase of $5,200,000 in income
from operations and an increase of $3,607,000 in net income. The increase in
income from operations and net income is primarily related to an increase in
gross margin, decreased selling, general and administrative costs, and
decreased depreciation for the quarter ended March 31, 1998, compared to the
same period ended March 31, 1997.
REVENUES
Revenues decreased from $13,210,000 for the three months ended March 31,
1997, to $12,697,000 for the same period in 1998, a decrease of $513,000 or
4%. The decrease in revenues is primarily attributable to a decrease in
revenues from progressive operations of $3,323,000 million partially offset
by increases in system and product sales of $2,810,000 for the three month
period ended March 31, 1998, compared to the same period in 1997. The
decrease in revenues from progressive operations is primarily attributable to
the termination of the Native American Cool Millions link in February 1998
and overall lower levels of play on the Company's other progressive games.
The increase in system and product sales is primarily attributed to increased
sales of gaming machines.
GROSS MARGIN
Cost of goods sold decreased from $9,518,000 for the three months ended
March 31, 1997, to $6,772,000 for the same period in 1998, a decrease of
$2,746,000. Gross margin as a percentage of revenues increased from 28% for
the three months ended March 31, 1997 to 47% for the same period in 1998.
The increase in gross margin is primarily attributable to the increase in the
percentage of total revenue contributed by system sales, which generally have
higher gross margins than other CDS products.
COSTS AND EXPENSES
Costs and expenses decreased from $8,783,000 for the three months ended
March 31, 1997, to $5,816,000 for the same period in 1998, a decrease of
$2,967,000 or 34%. Costs and expenses decreased as a percentage of revenues
from 66% for the three months ended March 31, 1997, to 46% for the same
period in 1998.
Selling, general and administrative expenses decreased from $6,680,000
for the three months ended March 31, 1997, to $4,358,000 for the same period
in 1998, a decrease of $2,322,000. Selling, general and administrative
expenses as a percentage of revenues decreased from 51% for the three months
ended March 31, 1997, to 34% for the same period in 1998. Selling, general
and administrative expenses decreased as a percentage of revenue due to
overall cost reductions during the three months ended March 31, 1998 as
compared to the same period in 1997.
11
Research and development expenses decreased from $822,000 for the three
months ended March 31, 1997, to $804,000 for the same period in 1998. Major
expenditures during the three months ended March 31, 1998 primarily included
the development of additional video interactive games. The expenditures
during the same period in 1997 included development of video interactive
games plus some development of additional OASIS II system products. Research
and development expenses as a percentage of revenues remained the same at 6%
for the three months ended March 31, 1997, and 1998.
Depreciation and amortization decreased from $1,281,000 for the three
months ended March 31, 1997, to $654,000 for the same period in 1998. The
decrease is primarily due to the decreased fixed asset balance as a result of
the restructuring and impairment charges in the fourth quarter of 1997.
Other income is comprised of rental, interest and other forms of income,
offset by interest expense, that are not the result of normal operations.
Other income increased from $184,000 for the three months ended March 31,
1997, to $376,000 for the same period in 1998. The increase is primarily due
to increased interest income during the three months ended March 31, 1998.
NET (LOSS) INCOME
Net income (loss) increased from a loss of ($3,288,000) for the three
months ended March 31, 1997, to income of $320,000 for the same period in
1998, an increase of $3,607,000. The increase in net income is due primarily
to the increase in revenue from the sale of systems, overall decreased costs
associated with the restructuring in the fourth quarter of 1997 and
intensified cost containment efforts.
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
$27,095,000 at March 31, 1998, as compared to $27,873,000 at December 31,
1997 of which $16,342,000 and $15,600,000, respectively, are restricted for
payment of slot liabilities. The Company generated cash from operations of
$1,114,000 during the three months ended March 31, 1998. The most
significant factor contributing to this cash generation was collection
activity resulting in a net decrease of accounts receivable of $1,527,000 for
the three months ended March 31, 1998.
The Company used $1,356,000 in investing activities for the three months
ended March 31, 1998 primarily related to $750,000 invested in software
development; $101,000 in equipment to be used in operations and $826,000
invested in held-to-maturity securities.
The Company used $536,000 in financing activities for payments made on
outstanding debt for the three months ended March 31, 1998.
Certain jurisdictions in which MSP systems operate require that the
Company 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 the games and the regulatory requirements. At March 31,
1998, the Company's accrued slot liability for its MSP systems aggregated
approximately $19,410,000. There was no unaccrued slot liability. In
connection with these slot liabilities and in accordance with gaming
requirements, the Company established segregated cash accounts aggregating
approximately $16,342,000 at March 31, 1998 to ensure availability of
adequate funds to pay this liability. The Company also has investment
securities approximating $7,277,000 segregated as of
12
March 31, 1998 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 base jackpot 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 $1,918,000. 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 million 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 March 31, 1998. There
was no amount outstanding or available under the line of credit at March 31,
1998. 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. The 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.
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,
those relating to developing 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. There are possible
adverse effects upon revenues if the Company experiences delays in developing
or obtaining regulatory approval of new products. There may be negative
effects on revenues if new products or enhancements do not gain customer
acceptance. There may be adverse effects on revenues due to the difficulty
in competing with well established competitors in markets for the Company's
products including without limitation, casino management information systems,
MSP products and gaming machines. There may be adverse effects on revenues
due to the risks associated with 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 opportunity for sales of its
products. The Company's ability to protect the intellectual property upon
which it relies can never be guaranteed even though the Company takes
precautions to protect its intellectual property.
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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. Three additional
purported shareholder class actions were filed in 1997 in connection with the
same drop in stock price following the December 16, 1996 press release. On
May 27, 1997, SCHWARTZ V. CASINO DATA SYSTEMS, was filed in the United States
District Court for the District of Nevada, alleging violations of Sections
10(b) and 20(a) of the 1934 Act and SEC Rule 10b-5 and seeking economic
recovery on behalf of the same alleged class of investors. On December 16,
1997, GRANT V. CASINO DATA SYSTEMS, was filed in the District Court of the
State of Nevada alleging common law fraud and seeking economic recovery on
behalf of the same alleged class of investors. On December 9, 1997,
GIOVANNONI V. CASINO DATA SYSTEMS, was filed in the Superior Court of the
State of California in San Francisco alleging violation of California
Corporations Code Sections 254000 and 25500 and California Business and
Professions Code Sections 17200 and 17500. Management believes these claims
to be without merit, and intends to vigorously defend against them. In
addition, the Company maintains a policy of insurance pursuant to which it
has tendered these claims to the insurance carrier. This insurance policy may
cover all or a portion of the claims. While the outcome of the actions
described above is not presently determinable, management does not expect the
outcome will have a material adverse effect on the Company's consolidated
financial statements taken as a whole.
A patron dispute was filed against the Company which allegedly arose
while a patron played the Compnay's Cool Millions dollars progressive slot
machine at Splash Casino in Tunica, Mississippi. The dispute was heard by the
Mississippi Gaming Commission, who decided that the patron had won only $5.00
rather than the jackpot of $1,742,000 as alleged by Ms. Freeman. Ms. Freeman
appealed the Commission's decision to the Circuit Court of Tunica County. On
January 16, 1998, the Court issued an Order reversing the Commission and
ordered the Company to pay the jackpot plus interest from April 8, 1995. The
Company contends the ruling is in error and has appealed the decision to the
Mississippi Supreme Court. As a result of the Circuit Court's Order, and with
the consent of the Mississippi Gaming authorities, the Company has reduced
the current Cool Millions dollar Mississippi jackpot by $1,742,000. If
successful on appeal, the Company would return this amount to the Company's
then-existing outstanding jackpot, as directed by the Mississippi Gaming
authorities. The Company has accrued $354,000 of interest expense as of March
31, 1998 toward the judgment in the event the Company loses its appeal. While
the outcome of the action described above is not presently determinable,
management does not expect the outcome will have a material adverse effect on
the Company's consolidated financial statements taken as a whole.
In November of 1997, a customer of the Company filed for protection under
Chapter 11 of the United States Bankruptcy Code. The pre-petition debt owed
the Company is approximately $1,700,000, which amount has been included in a
Proof of Claim filed by the Company in the Bankruptcy action. The Debtor has
submitted a Plan of Reorganization to the Court that has not yet been
approved. Purusant to the Plan of Reorganization, the Company is treated as a
secured creditor in the action. In addition, the Company has obtained
personal guarantees from certain of the principals of the debtor. While the
outcome of the Bankruptcy is not presently determinable, management does not
expect the outcome will have a material adverse effect on the Company's
consolidated financial statements taken as a whole.
In August of 1997, Casino Technology Incorporated ("CTI"), filed a
demand for arbitration of certain issues arising out of a Cross-License
Agreement between CTI and the Company pursuant to which the Company marketed
the Caribbean Stud video poker game. CTI alleged that the Company failed to
pay royalty fees due under the agreement. The Company has accrued
approximately $2,000,000 with respect to potential obligations arising out of
this agreement. The Company is contesting this amount because it believes it
has been damaged as a result of certain actions and/or inactions of CTI and
its principal. While the outcome of the arbitration is not presently
determinable, management does not believe the outcome will have a material
effect on the Company's financial statements as a whole.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: Exhibit 27.1 Financial Data Schedule
Exhibit 27.2 Financial Data Schedule
Exhibit 27.3 Financial Data Schedule
There were no reports filed on Form 8-K for the three month period ended
March 31, 1998.
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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: May 15, 1998
----------------------------- -----------------------------
Diana L. Bennett
President and Chief Operating
Officer
Date: May 15, 1998
----------------------------- -----------------------------
Michael Perez
Senior Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
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