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 April 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-20820
SHUFFLE MASTER, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1448495
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
10901 Valley View Road, Eden Prairie MN 55344
(Address of Principal Executive Offices) (State) (Zip Code)
Registrant's Telephone Number, Including Area Code: (612) 943-1951
Indicate by check mark 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.
Yes __X__ No _____
As of May 31, 1996, there were 11,130,666 shares of the Company's $.01 par value
common stock outstanding.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS) APRIL 30, OCTOBER 31,
-------- --------
ASSETS 1996 1995
-------- --------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,569 $ 1,896
Investments 19,422 18,932
Accounts receivable, net of allowance for
doubtful accounts of $100 at April 30 and 2,304 2,420
$96 at October 31
Inventories 1,659 2,303
Other 1,760 398
-------- --------
Total current assets 30,714 25,949
SYSTEMS LEASED PURSUANT TO OPERATING LEASES, NET,
AND SYSTEMS HELD FOR LEASE 7,164 6,571
PROPERTY AND EQUIPMENT, NET 1,549 1,033
OTHER ASSETS:
Notes receivable, net of current portion 428 3,428
Other 956 770
-------- --------
Total other assets 1,384 4,198
-------- --------
$ 40,811 $ 37,751
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 785 $ 674
Accrued liabilities:
Compensation 455 414
Expenses 182 71
Customer deposits 960 634
Tournament jackpot liability 1,741 644
Income taxes payable 559 215
-------- --------
Total current liabilities 4,682 2,652
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 30,000 shares
authorized, 11,107 and 11,048 shares issued and
outstanding 111 110
Additional paid-in capital 36,356 35,740
Accumulated deficit (336) (784)
Unrealized investment (loss) gain (2) 33
-------- --------
Total shareholders' equity 36,129 35,099
-------- --------
$ 40,811 $ 37,751
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(IN THOUSANDS, EXCEPT PER THREE MONTHS ENDED SIX MONTHS ENDED
SHARE AMOUNTS) APRIL 30, APRIL 30,
----------------- -----------------
REVENUE: 1996 1995 1996 1995
------- ------- ------- -------
Let It Ride(R)The Tournament(TM) $ 6,491 $ -- $12,499 $ --
Lease 2,305 1,379 4,494 2,398
Sales 870 208 1,640 523
Other 249 116 391 248
------- ------- ------- -------
9,915 1,703 19,024 3,169
COSTS AND EXPENSES:
Let It Ride(R)The Tournament(TM) 4,835 -- 9,580 --
Cost of leases, sales and 1,367 611 2,559 1,200
other
Selling, general and 1,652 854 3,060 1,555
administrative
Research and development 307 137 543 251
------- ------- ------- -------
8,161 1,602 15,742 3,006
------- ------- ------- -------
INCOME FROM OPERATIONS 1,754 101 3,282 163
OTHER INCOME (EXPENSE):
Loss on notes receivable -- -- (3,370) --
Interest and other income 341 118 711 208
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,095 219 623 371
Provision for income taxes 550 -- 175 2
------- ------- ------- -------
INCOME FROM CONTINUING
OPERATIONS 1,545 219 448 369
Discontinued operations, net -- 89 -- 66
------- ------- ------- -------
NET INCOME $ 1,545 $ 308 $ 448 $ 435
======= ======= ======= =======
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 11,242 9,243 11,281 9,243
======= ======= ======= =======
NET INCOME PER SHARE $ .14 $ .03 $ .04 $ .05
======= ======= ======= =======
See Notes to Consolidated Financial Statements
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
APRIL 30,
--------------------
(IN THOUSANDS) 1996 1995
-------- --------
OPERATING ACTIVITIES:
Net income $ 448 $ 435
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 1,144 537
Amortization of investment discount (279) --
Loss on notes receivable 3,300 --
Deferred income taxes (375) --
Changes in operating assets and liabilities:
Receivables 116 (523)
Inventories 644 (838)
Other (1,287) (461)
Tournament jackpot liability 1,097 926
Income taxes payable 344 --
Accounts payable 111 165
Accrued liabilities 152 50
Customer deposits 326 325
-------- --------
Net cash provided by operating activities 5,741 616
-------- --------
INVESTING ACTIVITIES:
Purchases of investments (13,911) (9,656)
Proceeds from the sale of investments 13,700 14,183
Additions to systems leased to customers, and
systems held for lease (1,488) (1,595)
Additions to property and equipment (704) (198)
Other (282) (493)
-------- --------
Net cash (used) provided by investing activities (2,685) 1,971
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 617 3
-------- --------
Net cash provided by financing activities 617 3
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,673 2,590
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,896 8
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,569 $ 2,598
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 268 $ 2
======== ========
See Notes to Consolidated Financial Statements
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements:
The financial statements as of April 30, 1996, and for the three and
six month periods ended April 30, 1996 and 1995, are unaudited, but in
the opinion of management include all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair presentation of the
financial results for the interim periods. The results of operations
for the three and six months ended April 30, 1996, are not necessarily
indicative of the results to be expected for the year ended October 31,
1996. These interim statements should be read in conjunction with the
Company's October 31, 1995, financial statements and notes thereto
included in its Form 10-K.
2. Inventories:
DESCRIPTION APRIL 30, 1996 OCTOBER 31, 1995
-------------------------- -------------- ----------------
Raw materials $ 863 $ 1,357
Work-in-progress 370 638
Finished goods 426 308
-------------- --------------
Total $ 1,659 $ 2,303
============== ==============
3. Systems Leased and Held for Lease:
Systems leased and held for lease includes the various models of
shufflers and Let It Ride(R) table equipment and video machines.
DESCRIPTION APRIL 30, 1996 OCTOBER 31, 1995
------------------------------ -------------- ----------------
Systems leased, net $ 4,326 $ 4,665
Systems held for lease:
Shufflers 1,878 1,489
Let It Ride(R) 960 417
------------ -----------
Total $ 7,164 $ 6,571
============ ===========
4. Common Stock:
The financial statements for the three and six months ended April 30,
1995, have been restated to reflect a 3-for-2 stock split in the form
of a 50% stock dividend effective July 10, 1995.
In the current year second quarter, the Board of Directors authorized
the repurchase of up to $5,000,000 of the Company's shares in the open
market or privately negotiated transactions. No shares have been
repurchased as of June 10, 1996.
5. Loss on Notes Receivable:
In the first quarter of fiscal 1996, the Company provided $3,370,000 to
recognize a loss on two loans advanced to an unrelated company
("receiving company"). The loans were collateralized by 68% of the
stock of a company related to the receiving company. The Company's
management evaluated alternatives for recovery of the loans, including
exercising its right against the collateral. Results of this evaluation
indicated the receiving company would require significant additional
funding and management effort to effectively continue its operations.
The Company did not believe that recovery of the original loans and the
additional funding was likely after a detailed review of the receiving
company's current financial position, operations and prospects for
future growth.
6. Contingency:
On January 22, 1995, the Company filed a declaratory judgment action
against D&D Gaming Patents, Inc. ("D&D Gaming"). The Company filed such
action due to allegations by D&D Gaming that the Company's Let It
Ride(R) The Tournament(TM) game infringed on patents held by D&D
Gaming. Such action seeks a declaratory judgment that: (1) D&D Gaming's
patents are invalid and unenforceable; and (2) to the extent that such
patents are determined to be valid and enforceable, such patents are
not infringed by Let It Ride(R) The Tournament(TM).
On March 2, 1995, D&D Gaming filed suit against the Company, the
Company's Chairman, John Breeding, and the eight casinos that were
participating in the field test of Let It Ride(R) The Tournament(TM),
alleging willful patent infringement and demanding that each defendant
be preliminarily and permanently enjoined from infringing the two
patents which are the subject of the litigation, and that each
defendant be required to account to D&D Gaming for damages suffered
resulting from the infringement and that such damages be trebled
because of the claimed willful nature of the alleged infringement. On
March 9, 1995, the Company served its declaratory judgment action on
D&D Gaming and subsequently served its answer to the infringement
action. The two actions have been consolidated.
The parties to the lawsuits have begun the discovery process which, to
date, has taken the form of interrogatories, requests for admission,
requests for production of documents, and depositions. In addition, on
April 16, 1996, the Court entered an order, which among other things
denied D&D Gaming's motion for partial summary judgment on Shuffle
Master's counter claims that D&D's patents are invalid and
unenforceable. D&D Gaming assigned all of its patents at issue in the
litigation to Progressive Games, Inc., and the Court has allowed
Progressive Games, Inc. to be substituted as a party for D&D Gaming.
The Company believes that Progressive Games, Inc.'s patents (formerly
D&D Gaming's patents) are invalid and if they are held to be valid,
that Let It Ride(R) The Tournament(TM) does not infringe Progressive
Games, Inc.'s patents. The Company has agreed to defend and indemnify
all licensees of the Tournament against liability resulting from any
such claim or suit brought against the Licensee for infringement of
proprietary rights or patent rights arising out of or relating to Let
It Ride(R) The Tournament(TM). Further, if Progressive Games, Inc.
should prevail in its suit, management does not expect the action will
have a material adverse effect on the Company's results of operations
or financial position.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth selected financial information derived from the
Company's Consolidated Statements of Operations:
THREE MONTHS SIX MONTHS
-------------- ---------------
PERIOD ENDED APRIL 30, 1996 1995 1996 1995
- ----------------------------------- ----- ----- ----- -----
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of products 62.6 35.9 63.8 37.9
----- ----- ----- -----
Gross margin 37.4 64.1 36.2 62.1
Selling, general and administrative 16.7 50.1 16.1 49.1
Research and development 3.0 8.0 2.8 7.9
----- ----- ----- -----
Income from operations 17.7 6.0 17.3 5.1
Other income (expense), net 3.4 6.9 (14.0) 6.5
----- ----- ----- -----
Income before income taxes 21.1 12.9 3.3 11.6
Provision for income taxes 5.5 -- .9 --
----- ----- ----- -----
Income from continuing operations 15.6% 12.9% 2.4% 11.6%
===== ===== ===== =====
REVENUE
Revenue for the three months ended April 30, 1996, was $9,915,000, an increase
of $8,212,000 or 482% over the same period last year. Revenue from Let It
Ride(R) The Tournament(TM) totaled $6,491,000 in the current quarter. Let It
Ride(R)The Tournament(TM) first generated revenues for the Company in the third
quarter of fiscal 1995. The Company is currently licensed in Nevada to operate
Let It Ride(R) The Tournament(TM). There were approximately 155 tables in
use at Nevada casinos as of April 30, 1996. Shuffler lease and sales revenue
increased due to increased penetration into markets outside of Nevada. Revenue
from leased shuffling systems increased to $2,305,000 in the current quarter
compared to $1,379,000 in the prior year second quarter, as the lease base
increased by 60% between the comparable periods. Shuffler system sales increased
to $870,000 from $208,000 in the second quarter of fiscal 1995. The Company
implemented a sales plan for the domestic market in the fourth quarter of fiscal
1995, which resulted in the increase of shuffler sales. Prior to that time, all
shuffler sales were to international customers.
Revenue for the six months ended April 30, 1996 was $19,024,000, an increase of
$15,855,000 over the six month period ended April 30, 1995. Revenues from Let It
Ride(R) The Tournament(TM) were $12,499,000 in the current six month period.
Lease revenue increased to $4,494,000 in the current year compared to $2,398,000
in the prior year period, while shuffler sales increased by $1,117,000 to
$1,640,000 in the current six month period. The increase in shuffler lease and
sales revenue was due to the reasons noted above.
COSTS AND EXPENSES
Gross margin was 37.4% and 36.2% for the current quarter and six months,
compared to 64.1% and 62.1% in the prior year. The decrease resulted from lower
margin revenues generated from Let It Ride(R) The Tournament(TM).
For the quarter ended April 30, 1996, Let It Ride(R) The Tournament(TM)
contributed a gross margin of 25.5%. Total Tournament related costs were
$4,835,000, and included $4,462,000 for the guaranteed prize pool and $373,000
of other expenses, including equipment installation, depreciation, and direct
costs for the playoffs held in Reno, Nevada in April 1996. The gross margin for
Let It Ride(R)The Tournament(TM) was 23.3% for the current six month period. The
margin improvement in the current second quarter resulted from a reallocation of
the $1 side bet, which reduced the amount of the dollar used to fund the
guaranteed prize pool to $.22 from $.30, effective April 8,1996. The
reallocation of the $1 side bet reduced both revenue and cost of sales by $.08
per $1 side bet. In addition, other direct costs of Let It Ride(R)The
Tournament(TM) decreased as a percentage of revenue since many of these costs
were fixed.
The gross profit margin on combined lease, sales and other revenue decreased to
60.0% in the current year second quarter from 64.1% in the same period in the
prior year. The Company provided approximately $100,000 for inventory valuation
reserves in the current quarter for potential adjustments to a certain shuffler
model. The gross margin on these same revenues decreased to 60.8% in the current
six month period compared to 62.1% last year. The decrease is principally due
the inventory valuation provision noted above.
Selling, general and administrative expenses increased by $798,000, to
$1,652,000 in the current year second quarter, and by $1,505,000 to $3,060,000
in the six month period ended April 30, 1996. Overall, expenses increased due to
additional staffing and related costs incurred to support the revenue growth
generated by the shuffler systems, and the third quarter fiscal 1995
introduction of Let It Ride(R) The Tournament(TM). In addition, approximately
$228,000 of expenses in the current year second quarter and $624,000 for the
current six months related to advertising, marketing and promotion for Let It
Ride(R) The Tournament(TM). Research and development expenses increased to
$307,000 from $114,000 in the prior year second quarter, and $543,000 compared
to $251,000 for the six month period. Additional expenses were incurred for
development of the video version of Let It Ride(R) and other new products.
OTHER INCOME (EXPENSE)
Interest and other income was $341,000 in the current second quarter and
$711,000 for the current six month period, compared to $118,000 and $208,000,
respectively, in the prior year. The increase in interest income resulted from
the increase in investments due to receipt of the net proceeds of $17,596,000
from the exercise of warrants in the third and fourth quarters of fiscal 1995.
Other expense includes a loss on notes receivable of $3,370,000 recognized by
the Company in the first quarter of the current year. The Company wrote off the
notes after certain improprieties had occurred at the company to which the funds
were advanced. A detailed evaluation by Company management found the notes to be
uncollectible. See additional discussion regarding this loss under Note 6 to the
Consolidated Financial Statements.
INCOME TAXES
The Company recorded income tax expense at an effective annual rate of 26.3% for
the quarter and 28.1% year-to-date. The effective rate differs from the federal
statutory rate of 34% due to the expected current year decrease in the deferred
tax asset valuation allowance resulting from the realization of net operating
loss carryforwards, research and experimentation tax credit carryforwards for
both state and federal income tax reporting, and alternative minimum tax credit
carryforwards.
NET INCOME PER SHARE
The net income per share was $.14 for the current year second quarter, and $.04
for the current six month period. The loss recognized on the loan write-off in
the first quarter had a negative impact on earnings per share of $.22. Weighted
average common and common equivalent shares outstanding increased to 11,242,000
from 9,243,000 in the second quarter of fiscal 1995, and to 11,282,000 for the
current six month period from 9,243,000 for the six months ended April 30, 1995,
principally due to the third and fourth quarter of fiscal 1995 exercise of
1,897,500 warrants.
NEW PRODUCTS AND JURISDICTIONS
In April 1996, the Company received final regulatory approval from the State of
Nevada for its bonus version of video Let It Ride(R). The Company began test
marketing the video Let It Ride(R) machines in May 1996 in Nevada casinos.
The Company received approval from the Mississippi Gaming Commission in May 1996
to operate a field trial of Let It Ride(R)The Tournament(TM) in Mississippi
casinos. Pending an agreement with casino operators and the approval of that
agreement by the Commission's Executive Director, the Company expects to begin
the field trial in its third quarter ending July 31, 1996. The Company is
currently seeking approvals for Let It Ride(R)The Tournament(TM) in other
jurisdictions.
The discussion and anticipation of new product launches is a forward-looking
statement which involves risks and uncertainties, including the acceptance of
new products and existing products in new gaming jurisdictions. This is in
addition to other competitive and business risks described in the Company's
report on Form 10-K for the year ended October 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1996, the Company had cash and cash equivalents, and investments
totaling $24,991,000, compared to $20,828,000 at October 31, 1995. The current
ratio decreased to 6.6 to 1 from 9.8 to 1 at October 31, 1995, while working
capital increased to $26,032,000 at April 30, 1996, from $23,297,000 at October
31, 1995.
Cash provided from operations totaled $5,741,000 in the current six months
compared to cash provided by operations of $616,000 in the same period last
year. Non-cash charges, including the provision for the loss on notes
receivable, and depreciation and amortization were $4,444,000 in the current
period. The change in the operating assets and liabilities provided cash of
$1,503,000. Cash used by investing activities included additions to the
shuffling systems available for lease of $1,488,000, and fixed asset additions
of $704,000, principally for leasehold improvements and office furniture and
fixtures made necessary by the expansion of the corporate office and the current
construction of a new facility in Las Vegas. Cash provided by financing
activities was $617,000 in the current year due primarily to option and
warrant excercises.
The Company believes its current cash and cash equivalents, investments, and
cash generated from operations will be adequate to meets it operational, capital
expenditure, share repurchase, and research and development needs for the
foreseeable future.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been a party to legal proceedings with D&D Gaming. In 1995, the
Company filed a declaratory judgment action against D&D Gaming, and D&D Gaming
filed suit against the Company for willful patent infringement. Both actions
involve the Company's Let It Ride(R) The Tournament(TM) game. In April 1996,
D&D Gaming assigned all of its rights, title and interest in the patents that
were the subject matter of this proceeding to Progressive Games, Inc., and the
Court allowed Progressive Games, Inc. to be substituted as a party for D&D
Gaming. See additional discussion regarding these legal proceedings under Note 6
to the Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Exhibit 27, Financial Data Schedules
(b) Reports on Form 8-K: The Company filed Form 8-K under Item 4
to report a change in the Registrant's Certifying Accountant.
The date of the report was February 28, 1996.
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.
SHUFFLE MASTER, INC.
(Registrant)
Date: June 10, 1996
/s/ Steven A. Kahn
Steven A. Kahn
Vice President and Chief Financial Officer
/s/ John A. Rahja
John A. Rahja
Controller
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<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
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