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 January 31, 1998
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 March 9, 1998, there were 9,991,177 shares of the Company's $.01 par value
common stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
(IN THOUSANDS) ---------- ----------
ASSETS 1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,577 $ 1,053
Investments 15,929 15,253
Accounts receivable, net 6,860 5,354
Note receivable from related party 333 697
Inventories 2,163 2,317
Other current assets 688 818
---------- ----------
Total current assets 27,550 25,492
SYSTEMS AND EQUIPMENT LEASED UNDER OPERATING
LEASES, NET, AND HELD FOR LEASE 6,775 7,497
PROPERTY AND EQUIPMENT, NET 3,540 3,744
INTANGIBLE ASSETS, NET 3,679 3,840
OTHER ASSETS 245 153
---------- ----------
$ 41,789 $ 40,726
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 640 $ 600
Accrued liabilities:
Compensation 722 1,232
Expenses 216 251
Current portion of long-term obligation to related party 529 529
Customer deposits and unearned revenue 1,937 1,946
Tournament playoff liability -- 198
Incomes taxes payable 470 --
---------- ----------
Total current liabilities 4,514 4,756
DEFERRED INCOME TAXES 141 141
LONG-TERM OBLIGATION TO RELATED PARTY 1,595 1,718
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 30,000 shares authorized, 9,975
and 9,968 shares issued and outstanding, respectively 100 100
Additional paid-in capital 26,954 26,905
Retained earnings 8,485 7,106
---------- ----------
Total shareholders' equity 35,539 34,111
---------- ----------
$ 41,789 $ 40,726
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
SHUFFLE MASTER, INC.
CONSOLIDATED INCOME STATEMENTS
(unaudited)
THREE MONTHS ENDED
JANUARY 31,
------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
REVENUE: ---------- ----------
Shuffler lease $ 2,334 $ 2,707
Shuffler sales 2,816 1,706
Let It Ride(R)table game 1,725 1,899
Other 416 175
---------- ----------
7,291 6,487
COSTS AND EXPENSES:
Cost of leases, sales and Let It Ride(R) table game 2,544 2,393
Selling, general and administrative 2,296 2,427
Research and development 552 337
---------- ----------
5,392 5,157
---------- ----------
INCOME FROM OPERATIONS 1,899 1,330
Interest income, net 210 347
---------- ----------
Income before income taxes 2,109 1,677
Provision for income taxes 730 600
---------- ----------
NET INCOME $ 1,379 $ 1,077
========== ==========
EARNINGS PER COMMON SHARE $ .14 $ .10
========== ==========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ .14 $ .10
========== ==========
WEIGHTED AVERAGE COMMON SHARES 10,061 11,122
========== ==========
WEIGHTED AVERAGE COMMON SHARES - ASSUMING DILUTION 10,082 11,212
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
-------------------------
(IN THOUSANDS) 1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,379 $ 1,077
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 945 826
Provision for bad debts 90 --
Provision for inventory obsolescence 113 150
Changes in operating assets and liabilities:
Accounts receivable (1,596) (1,301)
Inventories 41 (1,124)
Other current assets 130 (35)
Accounts payable and accrued liabilities (505) (243)
Customer deposits and unearned revenue (9) 497
Tournament playoff liability (198) (237)
Income taxes payable 470 264
---------- ----------
Net cash provided (used) by operating activities 860 (126)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (6,617) (14,217)
Proceeds from the sales and maturity of investments 5,941 15,800
Payments for systems leased and held for lease (29) (1,666)
Proceeds received on note receivable 378 --
Purchases of property and equipment (31) (562)
Other 95 (271)
---------- ----------
Net cash used by investing activities (263) (916)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligation (75) --
Repurchase of common stock -- (1,614)
Proceeds from issuance of common stock 2 11
---------- ----------
Net cash used by financing activities (73) (1,603)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 524 (2,645)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,053 3,440
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,577 $ 795
========== ==========
NON-CASH TRANSACTION:
Payment of debt with common stock $ 47 $ --
========== ==========
CASH PAID FOR:
Income taxes $ 20 $ 337
========== ==========
Interest $ 24 $ --
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Interim Financial Statements:
The financial statements as of January 31, 1998, and for the three month
periods ended January 31, 1998 and 1997, 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 period. The results of operations for the three
months ended January 31, 1998, are not necessarily indicative of the
results to be expected for the year ended October 31, 1998. These interim
statements should be read in conjunction with the Company's October 31,
1997, financial statements and notes thereto included in its Form 10-K.
2. Inventories:
DESCRIPTION JANUARY 31, 1998 OCTOBER 31, 1997
--------------------------- ---------------- ----------------
(In thousands)
Raw materials and parts $ 1,856 $ 1,580
Work-in-process 622 635
Finished goods 35 337
----------- -----------
2,513 2,552
Less: Valuation allowance (350) (235)
----------- -----------
$ 2,163 $ 2,317
=========== ===========
3. Systems and equipment leased and held for lease:
Systems and equipment leased and held for lease includes the various
models of shufflers and Let It Ride(R) table equipment and video machines
and equipment.
DESCRIPTION JANUARY 31, 1998 OCTOBER 31, 1997
------------------------------------- ---------------- ----------------
(In thousands)
SYSTEMS AND EQUIPMENT LEASED:
Shuffler systems $ 4,841 $ 4,790
Let It Ride(R) equipment 2,025 2,194
----------- -----------
6,866 6,984
Less: Accumulated depreciation (4,141) (3,680)
----------- -----------
2,725 3,304
SYSTEMS AND EQUIPMENT HELD FOR LEASE:
Shuffler systems 1,916 2,273
Let It Ride(R) equipment 2,134 1,920
----------- -----------
$ 6,775 $ 7,497
=========== ===========
<PAGE>
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. Common Stock:
In the first quarter of fiscal 1997, the Company repurchased 179,100
shares at a total cost of $1,614,000. There were no share repurchases in
the current year first quarter. As of January 31, 1998, the amount
remaining for share repurchase under the second $5,000,000 board
authorization was $3,104,000.
5. Earnings per Share:
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). Earnings
per share amounts for the first quarter of fiscal 1997 have been presented
to conform with the requirements of SFAS 128. There was no change in
earnings per share from previously reported amounts.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
------------------------
SHARE RECONCILIATION 1998 1997
--------------------------------------------------------- ---------- ----------
(In thousands)
<S> <C> <C>
EARNINGS PER SHARE:
Weighted average shares outstanding 9,975 11,122
Shares to be issued under asset purchase 86 --
---------- ----------
Weighted average common shares 10,061 11,122
========== ==========
EARNINGS PER SHARE - ASSUMING DILUTION:
Weighted average shares outstanding 9,975 11,122
Shares to be issued under asset purchase 86 --
Dilutive impact of options and warrants outstanding 21 90
---------- ----------
Weighted average common shares and potential
dilutive shares outstanding 10,082 11,212
========== ==========
</TABLE>
6. Contingency:
The Company is involved in litigation with Progressive Games, Inc., a
Florida corporation. The Company has a declaratory judgment action pending
in the United States District Court in Nevada, Mississippi and Connecticut
requesting a determination that certain patents owned by Progressive
Games, Inc. are either invalid or not infringed by the Company.
Progressive Games, Inc. is suing the Company in United States District
Court in Nevada, Mississippi and Connecticut alleging the Company's Let It
Ride The Tournament(TM) and Let It Ride Bonus(TM) table games and
apparatus infringe certain of Progressive Games, Inc.'s patents.
Progressive Games, Inc. is asking for injunctive relief and damages.
Pursuant to the order of the Judicial Panel on Multidistrict Litigation
the actions pending in Nevada and Connecticut have been transferred to the
Southern District of Mississippi for coordinated or consolidated pretrial
proceedings with the actions already pending in that District.
The Company has agreed to defend and indemnify, and is defending and
indemnifying all of its Let It Ride The Tournament(TM) and Let It Ride
Bonus(TM) casino licensees who were sued by Progressive Games, Inc. due to
their use of the Let It Ride The Tournament(TM) and Let It Ride Bonus(TM)
table games and apparatus. If Progressive Games, Inc. should prevail in
its suit, management does not believe it would materially affect the
Company's financial condition.
<PAGE>
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 Income Statements:
THREE MONTHS
--------------------------
PERIOD ENDED JANUARY 31, 1998 1997
- -----------------------------------------------------------------------
Revenue 100.0% 100.0%
Cost of products 34.9 36.9
---------- ----------
Gross margin 65.1 63.1
---------- ----------
Selling, general and administrative 31.5 37.4
Research and development 7.6 5.2
---------- ----------
Income from operations 26.0 20.5
Interest income, net 2.9 5.3
---------- ----------
Income before income taxes 28.9 25.8
Provision for income taxes 10.0 9.2
---------- ----------
Net income 18.9% 16.6%
========== ==========
REVENUE
Revenue for the three months ended January 31, 1998, was $7,291,000, an increase
of $804,000 or 12.4% over the same period last year. Shuffler system sales
increased to $2,816,000 in the current quarter compared to $1,706,000 in the
first quarter last year. Current period unit sales were 366 and included two
significant sales to international customers. Unit sales in the first quarter of
the prior year were 207. The average per unit sales price decreased to $7,694 in
the current quarter from $8,241 in the prior year due to the international sales
noted above. Most international sales are made to distributors at prices
generally lower than domestic sales pricing. Shuffler lease revenue decreased by
$373,000 to $2,334,000 in the current year. The shuffler installed lease base
was 1,614 at January 31, 1998, compared to 1,916 at January 31, 1997, and 1,600
at October 31, 1997. The installed base decreased during fiscal 1997 as the
Company increased its sales conversions of units previously on lease. However,
in the current year first quarter, conversion sales were 68 units, which was a
significant decrease from the number of leased units converted to sales on an
average quarterly basis in fiscal 1997. In fiscal 1998, the Company began to
focus its sales efforts on increasing its installed base of leased shufflers.
Revenue from the Let It Ride(R) table game decreased by $174,000 from the first
quarter last year. In the prior year, the Company's primary source of Let It
Ride(R) table revenue was derived from collecting a percentage of a $1 side bet
from its Tournament version of the game. The Tournament version was converted to
Let It Ride Bonus(TM) during the fourth quarter of fiscal 1997. The Company
collects a fixed monthly fee on a per table basis from the Bonus version. This
fixed monthly fee revenue will generally be less than the revenue generated on a
per table basis from the Tournament version. The installed base of Bonus tables
was 243 at January 31, 1998, compared to 200 installed Tournament tables at
January 31, 1997, and 222 installed Bonus tables at October 31, 1997. Let It
Ride(R) table revenue also includes revenue from the Let It Ride(R) basic game
which is recorded on a monthly fixed fee similar to the Bonus game, but at
prices significantly less than the Bonus game. There were 323 basic game tables
installed at January 31, 1998. Sales of Let It Ride(R) table equipment totaled
$93,000 in the current first quarter. Other revenue includes video revenue from
Let It Ride Bonus(TM) video and Five Deck Frenzy(TM), and extended service
contract revenue on sold shufflers. Five Deck Frenzy(TM) video placements under
the joint marketing agreement with IGT were 124 as of January 31, 1998.
<PAGE>
COSTS AND EXPENSES
Gross margin improved to 65.1% in the current year first quarter from 63.1% in
the same period in the prior year. The gross margin improved due to greater
operating efficiencies in the service area, and through a reduction of expenses
in support of the Let It Ride(R) table game revenue. Field service expenses
decreased to 10.4% of revenue in the current quarter compared to 14.6% in last
year's first quarter. In the prior year, the Company incurred expenses for the
Tournament version of Let It Ride(R). Similar expenses are not required to
support the Bonus version. The inventory valuation provision was $113,000 in the
current year compared to $150,000 last year due to valuation adjustments on
certain Let It Ride(R) signage and video equipment. These favorable margin
comparisons were offset by an increase in production related expenses due to a
decrease in the number of new shufflers produced and an increase in shufflers
reconditioned for lease installations in the current year first quarter compared
to last year.
Selling, general and administrative expenses were $2,296,000, a decrease of
$131,000 or 5.4%, from the prior year first quarter. Legal expenses were
approximately $200,000 in the current period, a decrease of $100,000 from last
year. Prior year legal expenses included costs in connection with a lawsuit by
DD Stud, Inc. and Anchor Coin which was settled in August 1997. Staffing related
expenses decreased by approximately $100,000 because of personnel reductions
made during fiscal 1997. The decreases were partially offset by a $90,000 bad
debt provision due to bankruptcy filings of two of the Company's customers.
Research and development expenses were $552,000, an increase of $215,000 or
63.7% from the prior year. In the second quarter of fiscal 1997, the Company
created a new games development group in its Las Vegas office which is included
with research and development expenses. Much of the expense increase resulted
from activities in support of new game development, including amortization
expense for purchased new games. In addition, the Company incurred additional
expenses as it continues development of new shuffler systems.
INTEREST INCOME, NET
Interest income, net, was $210,000 in the current year first quarter compared to
$347,000 in the prior year. Cash and investments were $17,506,000 at January 31,
1998, compared to $22,250,000 at January 31, 1997. Cash and investments
decreased as the Company expended $10,396,000 for share repurchases during
fiscal 1997.
INCOME TAXES
The Company recorded an income tax provision at an effective rate of 34.6% in
the current year first quarter compared to a tax provision of 34.6% for all of
fiscal 1997. The effective current year tax rate reflects the anticipated tax
benefit from the Company's foreign sales corporation.
EARNINGS PER SHARE
The Company earned $.14 per share for the current year first quarter compared to
$.10 in the prior year. Weighted average shares outstanding - assuming dilution,
decreased to 10,082,000 from 11,212,000 in the first quarter of fiscal 1997 due
to the fiscal 1997 repurchase of 1,241,000 shares.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1998, the Company had cash and cash equivalents, and
investments totaling $17,506,000, compared to $16,306,000 at October 31, 1997.
The current ratio increased to 6.1 to 1 from 5.4 to 1 at October 31, 1997, while
working capital increased to $23,036,000 at January 31, 1998, from $20,736,000
at October 31, 1997.
Cash provided by operations totaled $860,000 in the current year first quarter
compared to cash used by operations of $126,000 in the first quarter of last
year. Significant items under cash flows from operating activities in the
current period include net income of $1,379,000, and non-cash charges for
depreciation and amortization, and inventory and bad debt allowance provisions
of $1,148,000. Uses of cash include an increase of $1,596,000 in accounts
receivable resulting from increased shuffler sales and extended payment terms on
certain of the shuffler sales. Accounts payable and accrued liabilities used
$505,000 of cash principally for the payment of certain compensation earned for
meeting fiscal 1997 financial objectives. Investing activities include an
increase in the investments balance of $676,000, and receipt of $378,000 in
payment of an outstanding note receivable.
The Company believes its current cash and investments, and cash provided by
operations will be sufficient to finance its current operations, share
repurchase program, and new product development for the foreseeable future.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements that reflect risks and
uncertainties that could cause actual results to differ materially from
expectations.
Factors that could cause actual results to differ materially from expectations
include, but are not limited to, the following: changes in the level of
acceptance of the Company's existing products; competitive advances;
acceleration and/or deceleration of various product development and roll out
schedules; consumer and industry acceptance of the Company's products in new
jurisdictions and new products as introduced; higher than expected product
development and/or product roll out costs; current and/or unanticipated future
litigation; general economic conditions; regulatory and jurisdictional issues
involving Shuffle Master specifically, and for the gaming industry in general;
and the relative financial health of the gaming industry both nationally and
internationally; and the risks and factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 The Tournament(TM) game. 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. The Company has
been sued in District Court in Nevada, Mississippi and Connecticut. See
additional discussion regarding this legal proceeding under Note 6 to the
Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K: none
<PAGE>
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: March 11, 1998
/s/ Gary W. Griffin
- ---------------------------------
Gary W. Griffin
Chief Financial Officer
/s/ John A. Rahja
- ---------------------------------
John A. Rahja
Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 1,577
<SECURITIES> 15,929
<RECEIVABLES> 7,060
<ALLOWANCES> 200
<INVENTORY> 2,163
<CURRENT-ASSETS> 27,550
<PP&E> 5,283
<DEPRECIATION> 1,743
<TOTAL-ASSETS> 41,789
<CURRENT-LIABILITIES> 4,514
<BONDS> 0
<COMMON> 100
0
0
<OTHER-SE> 35,439
<TOTAL-LIABILITY-AND-EQUITY> 41,789
<SALES> 2,816
<TOTAL-REVENUES> 7,291
<CGS> 992
<TOTAL-COSTS> 2,544
<OTHER-EXPENSES> 552
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,109
<INCOME-TAX> 730
<INCOME-CONTINUING> 1,379
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,379
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
