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, 1999
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 September 9, 1999, there were 7,680,534 shares of the Company's $.01 par
value common stock outstanding.
1
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS) JULY 31, OCTOBER 31,
-------- -----------
ASSETS 1999 1998
------- -------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,562 $ 2,564
Investments 4,109 5,908
Accounts receivable, net 4,884 3,702
Note receivable from related party 357 342
Inventories 2,789 2,305
Deferred income taxes 850 850
Other current assets 735 827
------- -------
Total current assets 16,286 16,498
SYSTEMS AND EQUIPMENT LEASED UNDER OPERATING
LEASES HELD FOR LEASE, NET 6,087 5,103
PROPERTY AND EQUIPMENT, NET 2,762 3,065
INTANGIBLE ASSETS, NET 5,819 3,098
OTHER ASSETS 228 529
------- -------
TOTAL ASSETS $31,182 $28,293
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,837 $ 1,002
Accrued liabilities:
Compensation 804 610
Severance benefits 418 901
Expenses 289 293
Current portion of long-term obligation to related party 529 529
Customer deposits and unearned revenue 1,626 1,660
Income taxes payable 489 151
------- -------
Total current liabilities 5,992 5,146
DEFERRED INCOME TAXES 35 35
LONG-TERM OBLIGATION TO RELATED PARTY 827 1,217
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 30,000 shares authorized; 78 80
Additional paid-in capital 9,998 11,366
Retained earnings 14,252 10,449
------- -------
Total shareholders' equity 24,328 21,895
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $31,182 $28,293
======= =======
</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,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Shuffler lease $ 2,911 $ 2,502 $ 8,344 $ 7,212
Shuffler sales and service 1,659 758 4,200 5,289
Table games 2,503 2,067 6,987 5,657
Video/slot games 210 141 438 1,588
Other 668 23 918 168
-------- -------- -------- --------
Total Revenue 7,951 5,491 20,887 19,914
COSTS AND EXPENSES:
Cost of products 2,660 2,674 6,601 7,244
Selling, general and administrative 2,159 2,494 6,211 7,015
Office relocation expenses -- 1,435 -- 1,435
Research and development 843 612 2,386 1,776
-------- -------- -------- --------
Total costs and expenses 5,662 7,215 15,198 17,470
-------- -------- -------- --------
(LOSS) INCOME FROM OPERATIONS 2,289 (1,724) 5,689 2,444
Interest income, net 62 283 253 726
-------- -------- -------- --------
Income (loss) before income taxes 2,351 (1,441) 5,943 3,170
Provision (benefit) for income taxes 850 (500) 2,140 1,105
-------- -------- -------- --------
NET (LOSS) INCOME $ 1,501 $ (941) $ 3,803 $ 2,065
======== ======== ======== ========
(LOSS) EARNINGS PER COMMON SHARE $ .19 $ (.09) $ .48 $ .21
======== ======== ======== ========
(LOSS) EARNINGS PER COMMON SHARE
-- ASSUMING DILUTION $ .19 $ (.09) $ .47 $ .20
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES 7,884 10,045 7,998 10,060
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
-- ASSUMING DILUTION 7,935 10,045 8,028 10,132
======== ======== ======== ========
</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) 1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,803 $ 2,065
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,172 2,789
Office relocation and other charges -- 2,650
Provision for bad debts -- 137
Provision for inventory obsolescence 350 278
Stock options issued for services 104 --
Changes in operating assets and liabilities
Accounts and notes receivable (1,197) 2,352
Inventories (834) (270)
Other current assets 92 (1,712)
Accounts payable and accrued liabilities 542 (270)
Customer deposits and unearned revenue (34) (142)
Income taxes payable 338 --
Other -- (198)
-------- --------
Net cash provided by operating activities 6,336 7,679
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (10,282) (17,664)
Proceeds from the sales and maturities of investments 12,081 13,346
Proceeds received on note receivable -- 378
Investment in systems and equipment leased and held for lease (3,033) (365)
Purchases of property and equipment (324) (250)
Purchases of intangible assets (3,217) --
Other 301 (337)
-------- --------
Net cash used by investing activities (4,474) (4,892)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligation to related party (390) (232)
Repurchase of common stock (1,647) (3,499)
Proceeds from issuance of common stock 173 188
-------- --------
Net cash used by financing activities (1,864) (3,543)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2) (756)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,564 1,053
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,562 $ 297
======== ========
NON-CASH TRANSACTION:
Payment of obligation to related party with common stock $ 142 $ 142
======== ========
CASH PAID FOR:
Income taxes $ 1,853 $ 1,447
======== ========
Interest $ 60 70
======== ========
</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, 1999, and for the nine month
period ended July 31, 1999 and 1998, 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 nine months ended July 31, 1999 are not
necessarily indicative of the results to be expected for the year
ending October 31, 1999. These interim statements should be read in
conjunction with the Company's October 31, 1998, financial
statements and notes thereto included in its Form 10-K.
2. INVENTORIES:
JULY 31, OCTOBER 31,
DESCRIPTION 1999 1998
----------------------------------------- ------- -------
(In thousands)
Raw materials $ 2,100 $ 1,589
Work-in-progress 474 366
Finished goods 750 535
------- -------
3,324 2,490
Less: Valuation allowance (535) (185)
------- -------
$ 2,789 $ 2,305
======= =======
3. SYSTEMS AND EQUIPMENT LEASED AND HELD FOR LEASE:
Systems and equipment leased and held for lease include the various
models of shufflers, table equipment and video/slot machines.
JULY 31, OCTOBER 31,
DESCRIPTION 1999 1998
------------------------------------------ ------- -------
(In thousands)
SYSTEMS AND EQUIPMENT LEASED:
Shuffler systems $ 5,777 $ 5,555
Table and video/slot equipment 4,338 2,061
------- -------
10,115 7,616
------- -------
SYSTEMS AND EQUIPMENT HELD FOR LEASE:
Shuffler systems 1,736 1,361
Table and video/slot equipment 1,687 1,561
------- -------
3,423 2,922
------- -------
13,538 10,538
Less: Accumulated depreciation (6,981) (4,965)
------- -------
6,557 5,573
Less: Valuation allowance (470) (470)
------- -------
$ 6,087 $ 5,103
======= =======
5
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SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMMON STOCK:
In the first nine months of fiscal 1999, the Company repurchased
236,350 shares at a total cost of $1,647,000. In the first nine
months of 1998, the Company repurchased 398,500 shares at a total
cost $3,499,000. As of July 31, 1999, the amount remaining for share
repurchases under the most recent board authorization was 500,000
shares.
5. EARNINGS PER SHARE:
The following table shows the reconciliation of basic earnings per
share to diluted earnings per share:
<TABLE>
<CAPTION>
QUARTER ENDED JULY 31, 1999 1998
--------------------------------------------------- -------- --------
(In thousands, except for per share amounts)
<S> <C> <C>
NET INCOME (LOSS) $ 1,501 $ (941)
======== ========
BASIC:
Weighted average shares outstanding 7,830 9,969
Shares to be issued under asset purchase 54 76
-------- --------
Weighted average common shares, basic 7,884 10,045
======== ========
ASSUMING DILUTION:
Weighted average common shares, basic 7,884 10,045
Dilutive impact of options and warrants outstanding 51 --
-------- --------
Weighted average common shares, assuming dilution 7,935 10,045
======== ========
EARNINGS (LOSS) PER SHARE, BASIC $ .19 $ (.09)
======== ========
EARNINGS (LOSS) PER SHARE, ASSUMING DILUTION $ .19 $ (.09)
======== ========
</TABLE>
For the quarter ended July 31, 1998, the dilutive impact of options
and warrants outstanding was excluded from the calculation, since
their inclusion was anti-dilutive due to the quarterly net loss
reported by the Company.
6
<PAGE>
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FACILITIES RELOCATION AND OTHER CHARGES
In the third quarter of fiscal 1998, the Company recorded a pre-tax
charge of $2,650,000 due to the relocation of the Company's
administrative and manufacturing functions from Minneapolis,
Minnesota to Las Vegas, Nevada and due to the decreases in the
valuation of certain assets. The charges and their utilization are
as follows:
AS OF JULY 31, 1999 CHARGE UTILIZED BALANCE
-------------------------------------- ------ -------- -------
(In thousands)
Write-down of assets $1,423 $ 953 $ 470
Employee severance benefits 1,050 632 418
Other 177 160 17
------ ------ ------
$2,650 $1,745 $ 905
====== ====== ======
7. CONTINGENCIES:
The Company is involved in litigation with Progressive Games, Inc.,
a Florida corporation, which is a wholly-owned subsidiary of Mikohn
Gaming Corp. The Company has a declaratory judgment action pending
in the United States District Court 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 and its Let It Ride The Tournament(R) and Let It Ride
Bonus(R) casino customers in United States District Court in Nevada,
Mississippi, Connecticut, New Jersey, Illinois, Indiana, and
Missouri, alleging that 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, all of the pending
actions have been transferred to the Southern District of
Mississippi for coordinated or consolidated pretrial proceedings.
In August 1998, the New Jersey court issued an injunction enjoining
a casino customer from offering the Company's Let It Ride Bonus(R)
game. In November 1998, the New Jersey Casino Control Commission
decided not to allow the Let It Ride Bonus(R) game in any New Jersey
casino as long as one casino was enjoined from offering the Let It
Ride Bonus(R) game. The Company brought a motion in the consolidated
pretrial proceeding in the Southern District of Mississippi to
vacate the injunction issued by the New Jersey court against a
casino customer. This motion to vacate was granted on Sept. 13,
1999.
The Company has agreed to defend and indemnify, and is defending and
indemnifying, all of its 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.
In May 1999, Progressive Games, Inc. filed an additional lawsuit
against the Company, alleging that the Company's then
recently-introduced Bahama Bonus table game infringes certain of
Progressive's patents. Progressive Games, Inc. is seeking injunctive
relief and damages. In August 1999, a preliminary injunction
prohibiting the Company from offering or distributing this table
game was issued by the Federal District Court in Nevada. Upon
issuance of this injunction, the Company withdrew the two tables
which it had placed and has not placed any additional tables since
such date.
7
<PAGE>
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also, in August 1999, Progressive Games, Inc. named the Company as
an additional defendant in a pending lawsuit originally brought by
Progressive Games, Inc. against Prime Table Games, Inc., Derek Webb
and Hannah O'Donnell. This case is pending in the United States
District Court, District of Nevada. In this case, Progressive Games,
Inc. claims that the Company's Three Card Poker(R) table game
infringes certain of Progressive Games, Inc.'s patents.
The Company remains strong in its conviction that it does not
infringe any of Progressive Games, Inc.'s patents and alternatively
that its patents are either invalid or unenforceable. There are now,
however, multiple and opposing motions and suits filed by both
parties with conflicting rulings by three separate courts.
Management is unable to predict the ultimate outcome of the legal
proceedings and to estimate with any certainty the financial
implications for either side other than the ongoing cost of
litigation.
8. RECLASSIFICATIONS:
Certain reclassifications have been made to the July 31, 1998
consolidated financial statements to conform to the July 31, 1999
financial statement presentation. These reclassifications had no
effect on the operating results for the nine months or quarter
ending July 31, 1998, as previously reported.
8
<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:
THREE MONTHS NINE MONTHS
------------------------------------
PERIOD ENDED JULY 31, 1999 1998 1999 1998
----- ----- ----- -----
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Products 33.4 48.7 31.6 36.4
----- ----- ----- -----
Gross Margin 66.6 51.3 68.4 63.6
----- ----- ----- -----
Office relocation expenses -- 26.1 -- 7.2
Selling, general and administrative 27.2 45.4 29.7 35.2
Research and development 10.6 11.1 11.5 8.9
----- ----- ----- -----
Income from operations 28.8 (31.3) 27.2 12.3
Interest Income, net 0.8 5.1 1.2 3.6
----- ----- ----- -----
Income before income taxes 29.6 (26.2) 28.4 15.9
Provision for income taxes 10.7 (9.1) 10.2 5.5
----- ----- ----- -----
Net Income 18.9% (17.1%) 18.2% 10.4%
===== ===== ===== =====
REVENUE
Revenue for the third fiscal quarter ended July 31, 1999, was $7,951,000, an
increase of $2,460,000 or 44.8% from the same period last year. Shuffler sales
and service revenue increased to $1,659,000 in the current quarter, compared to
$758,000 in the third quarter last year. Current quarter shuffler sales were 150
units, while sales in the third quarter of the prior year were 72 units.
Shuffler sales and service revenue also included revenue from the sale of
extended service contracts, which increased to $234,000 in the current third
quarter from $200,000 in the prior year.
Shuffler lease revenue increased by $409,000 or 16.3% to $2,911,000 in the
current year third quarter. The shuffler installed lease base increased to 2,174
at July 31, 1999, compared to 1,800 at July 31, 1998 and 1,880 at October 31,
1998. This increase in the installed lease base from the prior year was due to
the Company's fiscal 1998 and 1999 business strategy to increase its installed
base of leased shufflers.
Revenue from the table games was $2,503,000 for the current third quarter, an
increase of $436,000 or 21.1% from the third quarter last year. The installed
base of Let it Ride Bonus(R) tables was 376 at July 31, 1999, compared to 334
installed Bonus tables at July 31, 1998 and 376 installed Bonus tables at
October 31, 1998. During the current fiscal year first quarter, 42 Bonus tables
were converted to basic tables in response to a November 1998 injunction issued
by the United States District Court in New Jersey enjoining one of the Company's
New Jersey casino customers from offering Let It Ride Bonus(R) table games in
New Jersey (see Note 7 to the Consolidated Financial Statements). 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 267 basic game tables
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
installed at July 31, 1999, compared to 253 installed basic tables at July 31,
1998 and 250 installed basic tables at October 31, 1998. Following the purchase
of the Three Card Poker(R) table game in May 1999, the Company increased its
installed base to 174 tables by July 31, 1999.
Video/slot game revenue, which includes revenue from the Let's Make a Deal(TM),
Five Deck Frenzy(TM), Five Deck Poker(TM), and Let It Ride Bonus(R) video/slot
games, was $210,000 in the current third quarter, up $69,000 from a year
earlier, due to the placement of the Let's Make a Deal(TM) video/slot game
starting in March 1999.
Revenue for the nine months ended July 31, 1999, was $20,887,000, an increase of
$973,000 or 4.9% over the nine month period ended July 31, 1998. Shuffler lease
revenue increased by $1,132,000 or 15.7% to $8,344,000 in the current year
compared to $7,212,000 in the prior year nine months, while shuffler sales and
service decreased by $1,089,000 or 20.6% to $4,200,000 in the current nine
months compared to $5,289,000 in the prior year nine months. The decrease was
due to the sale of 374 shufflers in the current nine months compared to 629 in
the prior year nine months. Table game revenue increased by $1,330,000 or 23.5%
to $6,987,000 in the current nine months as compared to $5,657,000 in last
year's nine month period, because of an increase in table placements. Video/slot
game revenue decreased by $1,150,000 to $438,000 due primarily to the inclusion
of the $1,000,000 Bally licensing fee in prior year nine month revenue. Other
revenue increased by $750,000 from the prior year to $918,000, principally due
to lease revenue earned on chip sorting machines acquired from TCS America, Inc.
in February 1999 and to revenue from the sale of TCS products.
COSTS AND EXPENSES
Gross margin was 66.6% and 68.4% for the current quarter and nine months,
compared to 51.3% and 63.6% in the comparable prior year periods. Prior year
period gross margin included an inventory valuation allowance charge of $940,000
for single deck shufflers and parts. Excluding this valuation charge, gross
margin for the prior year third quarter and nine months would have been 68.4%
and 68.3% respectively. Gross margin for the current third quarter was lower
than the prior year quarter due to a shift in product sales mix toward lower
margin TCS product sales, which comprised a greater percentage of total revenue
in the current quarter. In addition, increased inventory valuation reserves in
the current third quarter reduced gross margin. The Company provided $125,000
and $350,000 in the current quarter and nine months, respectively, for inventory
valuation adjustments on table and video/slot components. The valuation
provision in the prior year third quarter and nine months period was $47,000 and
$278,000, respectively, (excluding the valuation allowance of $940,000 noted
above).
Selling, general and administrative expenses decreased by $335,000 to $2,159,000
in the current year third quarter, and by $804,000 to $6,211,000 in the nine
month period ended July 31, 1999. Specifically, sales and marketing expenses
decreased by $84,000 and $653,000 from the prior year quarter and nine months.
The decreases were due primarily to lower promotional and advertising expenses
on certain products, which decreased by $184,000 from the prior nine months, and
sales staffing expenses, which decreased by $80,000, as a result of personnel
transition and lower commissions related to lower shuffler sales in the first
nine months of the current fiscal year. Legal and professional fees were
$178,000 and $567,000 for the current quarter and nine months, reduced from
$264,000 and $616,000 in the prior year. Ongoing litigation decreased between
the comparable periods due to the timing of litigation activities. Bad debt
expense decreased in the current nine month period by $137,000 from the prior
year nine months. Research and development expenses increased to $843,000 from
$612,000 in the prior year third quarter,
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
and to $2,386,000 from $1,776,000 for the prior year nine month period. Much of
this increase resulted from new game development costs and amortization expense
for purchased intellectual property, as well as from additional expenses in the
development of the Company's new products.
INTEREST INCOME, NET
Interest income, net, was $62,000 in the current third quarter and $253,000 for
the current nine month period, compared to $283,000 and $726,000, respectively,
in the prior year. This decrease is due to the decrease in cash and investments
to $6,671,000 at July 31, 1999 from $19,868,000 at July 31, 1998. The decrease
in cash and investments was primarily due to stock repurchases of $15,942,000
during fiscal 1998 and $1,647,000 during fiscal 1999.
INCOME TAXES
The Company recorded income tax expense at an effective annual rate of 36.2% for
the quarter and 36.0% year-to-date, compared to 34.7% and 34.9% in the
comparable prior year periods. The increase in the effective rate is due to an
expected decrease in the income tax benefit in fiscal 1999 from the Company's
foreign sales corporation.
EARNINGS PER COMMON SHARE
Net income per share was $.19 for the current year third quarter and $.47 for
the current nine month period, assuming dilution. Weighted average common shares
decreased to 7,935,000 from 10,045,000 in the third quarter of fiscal 1998, and
to 8,028,000 for the current nine month period from 10,132,000 for the nine
months ended July 31, 1998, due to the repurchase of 2,000,000 common shares in
fiscal 1998 and 236,350 shares during fiscal 1999. The calculation of earnings
per common share assumes dilution in periods in which the Company reported net
income.
YEAR 2000 READINESS
The Year 2000 readiness issue arises from the inability of older software in
computer information systems or other devices with date-sensitive functions to
properly recognize and accurately process date-sensitive information on and
after January 1, 2000. This problem is expected to exist in computer programs
that have defined dates using a two-digit year. If the Company or its customers,
suppliers, or other third parties rely on systems that are at risk for this
problem and fail to make necessary corrections, the result could be failure or
malfunction of certain computer systems and other devices dependent upon
date-sensitive functions. For companies so affected, this problem could cause
disruptions of operations, including, among other things, a temporary inability
to operate or distribute equipment or products, process transactions, send
invoices, or engage in other normal business activities.
While Shuffle Master's review of Year 2000 issues is ongoing, the Company's
assessment to date indicates that it has no material exposure to Year 2000
issues. Key factors in this assessment, as well as certain disclaimers, are
presented below.
During fiscal 1997 the Company completed: 1) a business system conversion
involving all of its core financial and operating applications software, 2) an
upgrade of processors or complete systems in substantially all of its servers
and personal computers, 3) an upgrade of its network software and most of
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
its personal computer applications software and, 4) an upgrade of its main phone
system and voice mail software. These conversions and upgrades were made for
reasons unrelated to the Year 2000 issue, but are Year 2000 ready. Based on
these changes, the Company does not anticipate that the Year 2000 issue will
significantly affect its internal operations.
In early fiscal 1999, the Company determined that it has date-sensitive
functions in the operating system software for its Let It Ride Bonus(R) game
equipment. The Company is now in the process of updating the software to allow
operation without concern for calendar dates. The required updates are now
approximately 80% complete. The Company expects to obtain all necessary
regulatory approvals for the upgraded software during 1999. The Company's first
generation single deck and multi-deck shuffler products operate without
date-sensitive functions. The Company's newer shuffler products, including the
ACE(TM) and the King(TM), use software that references dates for service
reporting functions only and have been designed to operate during and after the
Year 2000. The Company also markets or will market games for operation on IGT,
Bally Gaming and Acres Gaming systems, and has been informed by these companies
that such machines and systems are Year 2000 ready.
The Company is in the process of evaluating its key vendors' and service
providers' Year 2000 readiness to determine the extent to which such
relationships may affect the Company's operations. In the event that Year 2000
issues are identified with key vendors, the Company expects to be able to manage
purchases and inventories to minimize Year 2000 issue related delays, if any, in
parts supply. In addition, a significant portion of the Company's revenue is
recurring in nature and is not, in the short term, materially dependent on new
unit production. Currently management believes that the Company's exposure to
third party Year 2000 risks is not significant. However, there can be no
assurance that affected systems of other companies on which the Company may rely
will be converted or that such failure to convert would not have an adverse
effect on the Company's operations. Management is also unable to gauge the
impact of Year 2000 issues in its casino customers' operations. Such operations
are collectively many times the size of the Company and the Company does not
have the resources to undertake such an evaluation. Similarly, the Company is
not in a position to speculate on the impact of potential system failures in the
economy at large. Management is continuing to analyze, assess, and plan for
various Year 2000 contingencies.
In view of its fiscal 1997 systems upgrades, no significant expenses were
incurred in the third quarter of fiscal 1999 to address Year 2000 issues. The
Company also does not expect that it will incur any significant expenses related
to Year 2000 issues during the remainder of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1999, the Company had cash, cash equivalents and investments
totaling $6,671,000, compared to $8,472,000 at October 31, 1998. The current
ratio decreased to 2.7 to 1 from 3.2 to 1 at October 31, 1998, while working
capital decreased to $10,294,000 at July 31, 1999 from $11,352,000 at October
31, 1998. The net reduction in cash and working capital balances in fiscal 1999
stems primarily from the Company's expenditures to expand its product lines and
to repurchase its common stock. Cash provided by operations totaled $6,336,000
in the current year first nine months, compared to cash provided by operations
of $7,679,000 in the first nine months of last year. Significant items under
cash flows from operating activities in the first nine months of fiscal 1999
included net income of $3,803,000 and non-cash charges for depreciation,
amortization, stock options issued for services and inventory
12
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
obsolescence of $3,626,000, compared to net income of $2,065,000 and non-cash
charges of $3,204,000 (excluding the $2,650,000 office relocation and inventory
valuation charge) in the first nine months of last year. Uses of cash in the
first nine months of 1999 included the increase of accounts receivable of
$1,197,000 due to the recording of significant shuffler sales at the end of the
current third fiscal quarter and an $834,000 increase of inventories due to the
stocking of raw materials and components to be used in the production of the
company's new ACE(TM) and King(TM) shufflers as well as in the refurbishment of
older model multi-deck shufflers. Uses of cash for operating activities also
included payment of $483,000 in accrued severance benefits related to the
Company's office relocation announced in the prior fiscal year.
Uses of cash for investing activities included lease, property and intangible
asset expenditures totaling $6,574,000, primarily for additions to shuffler and
table game assets, as well as for the purchase of a 50% interest in chip sorting
machines from TCS America, Inc. in February 1999 and the purchase of the Three
Card Poker(R) table game in May 1999. Sources of cash from investing activities
included net receipts of $1,799,000 from the sale of investments in the first
nine months of fiscal 1999. Uses of cash for financing activities included the
repurchase of $1,647,000 in common stock during the first nine months of fiscal
1999.
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 immediate future.
However, to ensure proper levels of cash for operating purposes during product
roll-outs, the Company may seek to establish a line of credit.
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 consumer
or commercial acceptance of the Company's existing products and new products as
introduced; competitive advances; acceleration and/or deceleration of various
product development and roll out schedules; higher than expected manufacturing,
service, selling, administrative, product development and/or roll out costs;
current and/or unanticipated future litigation; regulatory and jurisdictional
issues involving Shuffle Master or its products specifically, and for the gaming
industry in general; general and casino industry economic conditions; the
financial health of the Company's casino and distributor customers 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.
13
<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 and
D&D Gaming filed suit against the Company and its Let It Ride The Tournament(R)
casino customers for willful patent infringement. The original action involved
the Company's Let It Ride The Tournament(R) game and was amended to include the
Company's Let It Ride Bonus(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., which was subsequently acquired and
became a wholly-owned subsidiary of Mikohn Gaming Corp. The Company and its Let
It Ride The Tournament(R) and Let It Ride Bonus(R) table game casino customers
have been sued in District Court in Nevada, Mississippi, Connecticut, New
Jersey, Illinois, Indiana, and Missouri. These actions have been consolidated
for pretrial proceedings in Mississippi.
In May 1999, Progressive Games, Inc. filed a lawsuit against the Company,
alleging that the Company's Bahama Bonus table game infringes certain of
Progressive's patents. In August 1999, a preliminary injunction prohibiting the
Company from offering or distributing this table game was issued by the Federal
District Court in Nevada.
In August 1999, Progressive Games, Inc. named the Company as an additional
defendant in a pending lawsuit originally brought by Progressive Games, Inc.
against Prime Table Games, Inc., Derek Webb and Hannah O'Donnell. This case is
pending in the United States District Court, District of Nevada and Progressive
Games, Inc. claims that the Company's Three Card Poker(R) table game infringes
certain of Progressive Games, Inc.'s patents.
See additional discussion regarding these legal proceedings under Note 7 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
14
<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 13, 1999
/s/ Gary W. Griffin
- ------------------------------------------------------------
Gary W. Griffin
Chief Financial Officer
/s/ Gerald W. Koslow
- ------------------------------------------------------------
Gerald W. Koslow
Corporate Controller
15
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