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 July 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
(State or Other Jurisdiction 41-1448495
of Incorporation or Organization) (IRS Employer Identification No.)
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 August 31, 1998, there were 8,949,436 shares of the Company's $.01 par
value common stock outstanding.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS) JULY 31, OCTOBER 31,
----------- -----------
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS: (unaudited)
Cash and cash equivalents $ 297 $ 1,053
Investments 19,571 15,253
Accounts receivable 2,865 5,354
Note receivable from related party 337 697
Inventories 2,219 2,317
Other current assets 2,480 818
----------- -----------
Total current assets 27,769 25,492
SYSTEMS AND EQUIPMENT LEASED UNDER OPERATING
LEASES, NET, AND HELD FOR LEASE 5,384 7,497
PROPERTY AND EQUIPMENT, NET 2,907 3,744
INTANGIBLE ASSETS, NET 3,276 3,840
OTHER ASSETS 472 153
----------- -----------
$ 39,808 $ 40,726
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Office relocation charges $ 1,170 $ --
Accounts payable 723 600
Accrued liabilities:
Compensation 905 1,232
Expenses 185 251
Customer deposits and unearned revenue 1,804 1,946
Tournament playoff liability -- 198
Current portion of long-term obligation to related party 529 529
----------- -----------
Total current liabilities 5,316 4,756
DEFERRED INCOME TAXES 141 141
LONG-TERM OBLIGATION TO RELATED PARTY 1,344 1,718
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 30,000 shares
authorized; 9,610 and 9,968 shares
issued and outstanding, respectively 96 100
Additional paid-in capital 23,740 26,905
Retained earnings 9,171 7,106
----------- -----------
Total shareholders' equity 33,007 34,111
----------- -----------
$ 39,808 $ 40,726
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE THREE MONTHS ENDED NINE MONTHS ENDED
AMOUNTS) JULY 31, JULY 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Shuffler lease $ 2,502 $ 2,729 $ 7,212 $ 8,313
Let It Ride(R)table game 2,067 1,883 5,657 5,759
Shuffler sales 494 2,422 4,544 6,421
Video 141 192 1,588 351
Other 287 222 913 543
----------- ----------- ----------- -----------
5,491 7,448 19,914 21,387
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of products 2,674 2,699 7,244 7,712
Office relocation expenses 1,435 -- 1,435 --
Selling, general and administrative 2,494 2,500 7,015 7,450
Research and development 612 397 1,776 1,115
----------- ----------- ----------- -----------
7,215 5,596 17,470 16,277
----------- ----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS (1,724) 1,852 2,444 5,110
Interest income, net 283 249 726 886
----------- ----------- ----------- -----------
(Loss) income before income taxes (1,441) 2,101 3,170 5,996
Benefit (provision) for income taxes 500 (760) (1,105) (2,160)
----------- ----------- ----------- -----------
NET (LOSS) INCOME $ (941) $ 1,341 $ 2,065 $ 3,836
=========== =========== =========== ===========
(LOSS) EARNINGS PER COMMON
SHARE $ (.09) $ .13 $ .21 $ .35
=========== =========== =========== ===========
(LOSS) EARNINGS PER COMMON
SHARE -- ASSUMING DILUTION $ (.09) $ .13 $ .20 $ .35
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES 10,045 10,620 10,060 10,891
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
- -- ASSUMING DILUTION 10,045 10,660 10,132 10,946
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
---------------------------
(IN THOUSANDS) 1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,065 $ 3,836
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,789 2,773
Office relocation and other charges 2,650 --
Provision for inventory obsolescence 278 432
Provision for bad debts 137 --
Changes in operating assets and liabilities:
Accounts receivable 2,352 (2,605)
Inventories (270) (122)
Other current assets (1,712) 6
Tournament playoff liability (198) 503
Income taxes payable -- (121)
Accounts payable and accrued liabilities (270) (37)
Customer deposits and unearned revenue (142) 648
----------- -----------
Net cash provided by operating activities 7,679 5,313
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (17,664) (60,706)
Proceeds from the sale and maturity of investments 13,346 65,522
Proceeds received on note receivable 378 --
Payments for systems and equipment leased and held for lease (365) (3,429)
Purchases of property and equipment (250) (1,103)
Other (337) (385)
----------- -----------
Net cash used by investing activities (4,892) (101)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligation to related party (232) (250)
Repurchase of common stock (3,499) (6,736)
Proceeds from issuance of common stock 188 47
----------- -----------
Net cash used by financing activities (3,543) (6,939)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (756) (1,727)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,053 3,440
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 297 $ 1,713
=========== ===========
CASH PAID FOR INCOME TAXES
Income taxes $ 1,447 $ 2,291
=========== ===========
Interest $ 70 $ 41
=========== ===========
NON-CASH TRANSACTIONS:
Payment of debt with common stock $ 142 $ --
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Interim Financial Statements:
The financial statements as of July 31, 1998, and for the three and nine
month periods ended July 31, 1998 and 1997, are unaudited, but in the
opinion of management include all adjustments necessary for a fair
presentation of the financial results for the interim periods. The results
of operations for the three and nine months ended July 31, 1998 are not
necessarily indicative of the results to be expected for the year ending
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. Office Relocation and Other Charges:
In the quarter ended July 31, 1998, the Company recorded a pre-tax charge
of $2,650,000, or $.17 per share, due to the relocation of the Company's
corporate office from Minneapolis, Minnesota to Las Vegas, Nevada, and
decreases in the valuation of certain assets. Relocation related charges of
$1,435,000 were recorded for employee severance, facility related asset
write-offs, and office lease cancellation costs. The Company recorded a
valuation allowance of $940,000 against inventories of certain single deck
shufflers and component parts, in advance of the planned introduction of
the next generation of single deck shuffler model. This charge was recorded
with the cost of products in the Consolidated Statements of Operations.
Finally, miscellaneous assets totaling $275,000 were written off in the
quarter ended July 31, 1998, and recorded in selling, general and
administrative expenses.
3. Inventories:
DESCRIPTION JULY 31, 1998 OCTOBER 31, 1997
------------------------------- ----------------- ----------------
(In thousands)
Raw materials $ 1,628 $ 1,580
Work-in-progress 550 635
Finished goods 575 337
----------------- ----------------
2,753 2,552
Less: Valuation allowance (534) (235)
----------------- ----------------
$ 2,219 $ 2,317
================= ================
4. Common Stock Repurchase:
In the current year third quarter, the Board of Directors authorized the
repurchase of up to 10% of the Company's outstanding common shares, or
approximately 1,000,000 shares, in the open market or privately negotiated
transactions. The Board of Directors authorized the repurchase of up to an
additional 1,000,000 shares in August 1998. The Company repurchased 398,500
shares at a total cost of $3,499,000 during the quarter ended July 31,
1998. Subsequent to July 31, 1998, and up to August 31, 1998, the Company
repurchased an additional 660,700 shares at a total cost of $5,324,000. As
of August 31, 1998, the first authorization was completed, and
approximately 940,000 shares remained for repurchase under the second
authorization.
5. Systems and Equipment Leased and Held for Lease:
5
<PAGE>
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Systems and equipment leased and held for lease include the various models
of shufflers, Let It Ride(R) table equipment and video machines.
DESCRIPTION JULY 31, 1998 OCTOBER 31, 1997
------------------------------------- ----------------- ----------------
(In thousands)
SYSTEMS AND EQUIPMENT LEASED:
Shuffler systems $ 5,435 $ 4,790
Table and video equipment 1,960 2,194
----------------- ----------------
7,395 6,984
Less: Accumulated depreciation (4,665) (3,680)
----------------- ----------------
2,730 3,304
SYSTEMS AND EQUIPMENT HELD FOR LEASE:
Shuffler systems 836 2,273
Table and video equipment 2,434 1,920
----------------- ----------------
3,270 4,193
Less: Valuation allowance (616) --
----------------- ----------------
2,654 4,193
----------------- ----------------
$ 5,384 $ 7,497
================= ================
6. 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 third quarter and nine months 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.
THREE MONTHS ENDED
JULY 31,
--------------------
SHARE RECONCILIATION 1998 1997
--------------------------------------------------- --------- ---------
(In thousands)
EARNINGS PER SHARE:
Weighted average shares outstanding 9,969 10,512
Shares to be issued under asset purchase 76 108
--------- ---------
Weighted average common shares 10,045 10,620
========= =========
EARNINGS PER SHARE - ASSUMING DILUTION:
Weighted average shares outstanding 9,969 10,512
Shares to be issued under asset purchase 76 108
Dilutive impact of options and warrants
outstanding -- 40
--------- ---------
Weighted average common shares and potential
dilutive shares outstanding 10,045 10,660
========= =========
For the quarter ended July 31, 1998, the dilutive impact of options and
warrants outstanding was excluded from the calculation since their
inclusion would be antidilutive due to the quarterly net loss reported by
the Company.
6
<PAGE>
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. Contingencies:
The Company is involved in litigation with Progressive Games, Inc., a
Florida corporation. The Company has a declaratory judgment action pending
in 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(R) and Let It Ride Bonus(R) 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.
In addition to the above consolidated actions, Progressive Games, Inc. sued
Boardwalk Regency Corporation, dba Caesars Atlantic City in United States
District Court in New Jersey, alleging that its use of the Company's Let It
Ride Bonus(R) game infringes one of Progressive Games, Inc.'s patents.
Progressive Games, Inc. requested and obtained a preliminary injunction
against Boardwalk Regency Corporation. The Judicial Panel on Multi-District
Litigation transferred this case to the District Court for the Southern
District of Mississippi, where the Mississippi Court stayed the preliminary
injunction pending the Mississippi Court's reconsideration of the New
Jersey Court's decision. Progressive Games, Inc. sued four other New Jersey
casinos and these actions have been stayed by the New Jersey Court pending
their transfer to the Mississippi Court.
Progressive Games, Inc., which is now owned by Mikohn Gaming Corporation,
announced that it would be suing the Company and its casino customers who
offer Let It Ride Bonus(R) under two recently obtained continuation
patents. These additional patents are subject to the same defenses as
Progressive Games, Inc.'s other patents.
The Company has agreed to defend and indemnify, and is defending and
indemnifying Boardwalk Regency Corporation as well as all of its other Let
It Ride The Tournament(R) and Let It Ride Bonus(R) casino licensees who
were sued by Progressive Games, Inc. due to their use of the Let It Ride
The Tournament(R) and Let It Ride Bonus(R) 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.
7
<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 Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------------------------ -------------------------------
PERIOD ENDED JULY 31, 1998 1997 1998 1997
- ------------------------------------------------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of products 48.7 36.2 36.4 36.1
------------- ------------- -------------- -------------
Gross margin 51.3 63.8 63.6 63.9
------------- ------------- -------------- -------------
Office relocation expenses 26.1 -- 7.2 --
Selling, general and administrative 45.4 33.6 35.2 34.8
Research and development 11.1 5.3 8.9 5.2
------------- ------------- -------------- -------------
(Loss) income from operations (31.3) 24.9 12.3 23.9
Interest income, net 5.1 3.3 3.6 4.1
------------- ------------- -------------- -------------
(Loss) income before income taxes (26.2) 28.2 15.9 28.0
Benefit (provision) for income taxes 9.1 (10.2) (5.5) (10.1)
------------- ------------- -------------- -------------
Net (loss) income (17.1%) 18.0% 10.4% 17.9%
============= ============= ============== =============
</TABLE>
REVENUE
Revenue for the quarter ended July 31, 1998, was $5,491,000 compared to revenue
of $7,448,000 in the same period last year. Shuffler sales revenue decreased by
$1,928,000 from the third quarter of last year. During the second and third
quarters of fiscal 1998, the Company emphasized the leasing of shufflers
domestically which resulted in decreased domestic sales. In the prior year third
quarter, shuffler unit sales totaled 332, of which 199 units were sales
conversions of units under lease or back-up units on the casino property.
Current quarter unit sales totaled 72, with 9 of these sales field conversions
of units previously on lease. Shuffler lease revenue was $2,502,000 in the
current third quarter compared to $2,729,000 in the same period of the prior
year. The current installed base of shufflers on lease was approximately 1,800
units compared to an installed base of leased shufflers of 1,850 at July 31,
1997, and 1,600 at October 31, 1997. The Company has added 200 shufflers to its
lease base during the nine months ended July 31, 1998. Revenue from the Let It
Ride(R) table game was $2,067,000 in the current quarter, an increase of
$184,000 from the prior year third quarter. The Company converted Let It Ride
The Tournament(R) tables to Let It Ride Bonus(R) tables during fourth quarter of
fiscal 1997. Current year revenue includes fixed fee amounts from Let It Ride
Bonus(R) and Let It Ride(R) Basic tables and revenue from Let it Ride(R)
equipment sales. Prior year Let It Ride(R) revenue was generated from the
Company's percentage of the $1 side bet option on Let It Ride The Tournament(R)
tables and revenue from the Let It Ride(R) Basic game. As of July 31, 1998,
there were 334 Bonus tables installed compared to 195 Tournament tables
installed as of July 31, 1997. In addition, there were 253 Let It Ride(R) Basic
tables installed in casinos as of July 31, 1998, compared to 359 at July 31,
1997. The decrease resulted from Basic tables being converted to Bonus tables
during the current year.
Revenue for the nine months ended July 31, 1998, was $19,914,000, a decrease of
$1,473,000 or 6.9% compared to the nine month period ended July 31, 1997.
Shuffler sales decreased by $1,877,000 to $4,544,000 in the current nine month
period due to the change in shuffler marketing strategy to emphasizing leases
from sales as discussed above. Lease revenue decreased to $7,212,000 in the
current year compared to $8,313,000 in the prior year period. Even though the
Company has added 200 shufflers to the lease base during the current year,
significant sales conversions from leased units late in
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONT'D)
fiscal 1997 decreased the lease base at the beginning of fiscal 1998, which
decreased lease revenue early in fiscal 1998. Let It Ride(R) table game revenue
decreased by $102,000, or 1.8% between the comparable nine month periods
reflecting the higher revenue per table for the Let It Ride The Tournament(R)
version of the game. Video revenue increased by $1,237,000 from the prior year,
principally due to revenue recognized from the grant of certain video licensing
rights in the second quarter of fiscal 1998. The increase of $370,000 in other
revenue is due primarily to revenue recognized on the sale of service and
warranty contracts sold to casinos that purchased shufflers.
COSTS AND EXPENSES
OFFICE RELOCATION AND OTHER CHARGES:
In June 1998, the Company announced it would close its corporate office in
Minneapolis, Minnesota and consolidate operations with its office in Las Vegas,
Nevada. The Company also announced an accelerated timetable for production and
market introduction of its next generation single deck shuffler. As a result of
the relocation and planned new product introduction, the Company recorded a
pre-tax charge of $2,650,000 in its third quarter ended July 31, 1998.
Relocation charges of $1,435,000 were recorded for employee severance, facility
related asset write-offs, and lease cancellation costs. These expenses were
separately disclosed in the Consolidated Statements of Operations. The Company
recorded a valuation allowance of $940,000 against the value of inventories of
certain single deck shufflers and component parts. The value of these single
deck shufflers was decreased as the Company was nearing product introduction of
its next generation of single deck shuffler model, called the ACE(TM). This
charge was recorded with the cost of products in the Consolidated Statements of
Operations. Miscellaneous assets totaling $275,000 were written-off and included
in the total charge. The write-off included certain prepaid, intangible and
fixed assets, and was recorded with selling, general and administrative
expenses.
OTHER OPERATING COSTS AND EXPENSES:
Gross margin was 51.3% and 63.6% for the current quarter and nine months,
compared to 63.8% and 63.9% in the prior year. Excluding the charge of $940,000
discussed above, gross margin would have been 68.4% and 68.3% for the current
quarter and nine months. The approximate 5% improvement in the margins
(excluding the charge) between the comparable quarters is due to improved
product margins and decreased indirect cost of product expenses. In addition,
the nine month comparisons for the current period include $1,000,000 of video
license revenue with insignificant direct expenses. Decreased provisions to
inventory allowances also had a positive effect on gross margin. The Company
provided $47,000 and $278,000 for inventory valuation reserves (excluding the
$940,000 referred to above) in the current quarter and nine months,
respectively, for valuation adjustments on early version finished shufflers and
component parts, and certain equipment related to Let It Ride The Tournament(R).
The valuation provision for the prior year third quarter and nine month period
was $109,000 and $432,000, respectively.
Selling, general and administrative expenses decreased by $6,000, to $2,494,000
in the current year third quarter, and by $435,000 to $7,015,000 in the nine
month period ended July 31, 1998. Current quarter expenses included $275,000 of
miscellaneous asset write-offs (see "office relocation and other charges"
above). Advertising expenses decreased between the comparable quarters by
$150,000 as the Company reduced its general advertising spending. Legal and
professional fees were approximately $264,000 and
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONT'D)
$616,000 for the current quarter and nine months, respectively, compared to
$272,000 and $990,000 in the prior year. Professional fees for the ongoing
litigation (see Note 7 to the Consolidated Financial Statements) and patent
related expenditures both decreased between the comparable periods. Staffing
related expenses decreased by approximately $525,000 between the nine month
comparable periods due to staffing reductions in marketing, and general and
administrative departments. Research and development expenses increased to
$612,000 from $397,000 in the prior year third quarter, and to $1,776,000
compared to $1,115,000 for the nine month periods. The additional expenses were
incurred for the development of video games and new shuffler products.
INTEREST INCOME, NET
Interest income was $304,000 in the current third quarter and $796,000 for the
current nine month period, compared to $289,000 and $926,000, respectively, in
the prior year. Interest expense was $21,000 and $70,000, respectively, for the
current quarter and nine months, and $40,000 for both the quarterly and nine
month periods in the prior year. The increase in interest income in the current
quarter resulted from an increase in cash and investments of $3,562,000 compared
to July 31, 1997.
INCOME TAXES
The Company recorded an income tax benefit at an effective annual rate of 34.7%
for the quarter and income tax expense of 34.9% year-to-date, compared to 36.2%
and 36.0% in the prior year periods. The decrease in the effective rate is due
to an expected increase in the income tax benefit in fiscal 1998 from the
Company's foreign sales corporation.
(LOSS) EARNINGS PER COMMON SHARE
Net loss per share was $.09 for the current year third quarter, and net income
per share was $.20 for the current nine month period, assuming dilution.
Weighted average common shares decreased to 10,045,000 from 10,660,000 in the
third quarter of fiscal 1997, and to 10,132,000 for the current nine month
period from 10,946,000 for the nine months ended July 31, 1997, due to the
repurchase of 398,500 common shares in July 1998 and additional share
repurchases in fiscal 1997 under previous share repurchase programs. The
calculation of earnings per common share assumes dilution in periods in which
the Company reported net income.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1998, the Company had cash and cash equivalents, and investments
totaling $19,868,000 compared to $16,306,000 at October 31, 1997. The current
ratio decreased to 5.2 to 1 from 5.4 to 1 at October 31, 1997, while working
capital increased to $22,453,000 at July 31, 1998, from $20,736,000 at October
31, 1997.
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (CONT'D)
Cash flows from operating activities totaled $7,679,000 in the current nine
months compared to cash flows from operating activities of $5,313,000 in the
same period last year. Significant items under cash flows from operating
activities in the current period include net income of $2,065,000, non-cash
charges for depreciation and amortization of $2,789,000, and office relocation
and other charges of $2,650,000. Cash of $2,352,000 was generated from a
decrease in accounts receivable due to significant cash collections on accounts
receivable for shuffler sales made on an installment basis. Other current assets
increased by $1,712,000, principally due to increases in non-trade receivables
of $800,000, and prepaid income taxes of $614,000. The non-trade receivable was
recorded due to the second quarter sale of certain video licensing rights.
Prepaid income taxes resulted from a decrease in the estimated annual income tax
liability due to the third quarter expense recorded for the office relocation
and other charges. Cash used by investing activities included the net purchase
of $4,318,000 of investments. In the prior year nine month period, payments for
systems and equipment leased and held for lease included approximately
$2,000,000 for the purchase of equipment for Let It Ride(R) the table game, and
video slot machines and related equipment for the Let It Ride Video(TM).
Property and equipment purchases, primarily in the first quarter of the prior
year, were $1,103,000 and included approximately $790,000 for leasehold
improvements and furnishings for the new facility under lease in Las Vegas,
Nevada. Under financing activities in the current year, the Company repurchased
398,500 of its common shares at a total cost of $3,499,000. In the nine months
ended July 31, 1997, the Company repurchased 798,000 of its common shares at a
total cost of $6,736,000 under its share repurchase programs.
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 needs.
FORWARD LOOKING STATEMENTS
This report may contain 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 roll out costs; current and/or unanticipated future
litigation; general economic conditions; regulatory and jurisdictional issues
involving the Company specifically, and for the gaming industry in general; and
the relative financial health of the gaming industry both nationally and
internationally.
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1995, the Company filed a declaratory judgment action against D&D Gaming,
Inc., and D&D Gaming filed suit against the Company for willful patent
infringement. Both actions involved the Company's Let It Ride The Tournament(R)
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 and its casino licensees have been sued in District Court in Nevada,
Mississippi, Connecticut and New Jersey by Progressive Games, Inc. alleging that
their use of Let It Ride The Tournament(R) and Let It Ride Bonus(R) games
infringe certain of Progressive Games, Inc.'s patents. See additional discussion
regarding this legal proceeding under Note 7 to the Consolidated Financial
Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
* Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K: On July 10, 1998, the Company filed a Form
8-K reporting two events pursuant to Item 5.
No financial statements were filed with this
report.
12
<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: September 11, 1998
/s/ Gary W. Griffin
- ---------------------------------------
Gary W. Griffin
Chief Financial Officer
/s/ John A. Rahja
- ---------------------------------------
John A. Rahja
Vice President and Controller
13
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