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, 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 March 11, 1999, there were 7,991,000 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) JANUARY 31, OCTOBER 31,
--------------- ----------------
ASSETS 1999 1998
--------------- ----------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,085 $ 2,564
Investments 5,985 5,908
Accounts receivable, net 3,372 3,702
Note receivable from related party 347 342
Inventories 2,257 2,305
Deferred income taxes 850 850
Other current assets 968 827
--------------- ---------------
Total current assets 17,864 16,498
SYSTEMS AND EQUIPMENT LEASED UNDER OPERATING
LEASES, NET, AND HELD FOR LEASE 4,702 5,103
PROPERTY AND EQUIPMENT, NET 3,016 3,065
INTANGIBLE ASSETS, NET 2,961 3,098
OTHER ASSETS 522 529
--------------- ---------------
$ 29,065 $ 28,293
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 633 $ 1,002
Accrued liabilities:
Severance benefits 629 901
Compensation 513 610
Expenses 269 293
Current portion of long-term obligation to related party 529 529
Customer deposits and unearned revenue 1,799 1,660
Incomes taxes payable 601 151
--------------- ---------------
Total current liabilities 4,973 5,146
DEFERRED INCOME TAXES 35 35
LONG-TERM OBLIGATION TO RELATED PARTY 1,089 1,217
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 30,000 shares authorized, 8,019
and 8,015 shares issued and outstanding, respectively 80 80
Additional paid-in capital 11,406 11,366
Retained earnings 11,482 10,449
--------------- ---------------
Total shareholders' equity 22,968 21,895
--------------- ---------------
$ 29,065 $ 28,293
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
SHUFFLE MASTER, INC.
CONSOLIDATED INCOME STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JANUARY 31,
-------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
REVENUE:
Shuffler lease $ 2,662 $ 2,334
Shuffler sales and service 945 3,046
Let It Ride(R) table game 2,218 1,725
Video 112 157
Other 41 29
--------------- ---------------
5,978 7,291
COSTS AND EXPENSES:
Cost of products 1,738 2,544
Selling, general and administrative 1,987 2,296
Research and development 741 552
--------------- ---------------
4,466 5,392
--------------- ---------------
INCOME FROM OPERATIONS 1,512 1,899
Interest income, net 96 210
--------------- ---------------
Income before income taxes 1,608 2,109
Provision for income taxes 575 730
--------------- ---------------
NET INCOME $ 1,033 $ 1,379
=============== ===============
EARNINGS PER COMMON SHARE, BASIC $ .13 $ .14
=============== ===============
EARNINGS PER COMMON SHARE, ASSUMING DILUTION $ .13 $ .14
=============== ===============
WEIGHTED AVERAGE COMMON SHARES, BASIC 8,083 10,061
=============== ===============
WEIGHTED AVERAGE COMMON SHARES, ASSUMING DILUTION 8,107 10,082
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------------------------
(IN THOUSANDS) 1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,033 $ 1,379
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 926 945
Provision for bad debts -- 90
Provision for inventory obsolescence 75 113
Changes in operating assets and liabilities:
Accounts and note receivable 325 (1,596)
Inventories (29) 41
Other current assets (141) 130
Accounts payable and accrued liabilities (761) (505)
Customer deposits and unearned revenue 139 (9)
Income taxes payable 450 470
Other -- (198)
--------------- ---------------
Net cash provided by operating activities 2,017 860
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (4,015) (6,617)
Proceeds from the sales and maturities of investments 3,938 5,941
Payments for systems and equipment leased and held for lease (175) (29)
Proceeds received on note receivable -- 378
Purchases of property and equipment (163) (31)
Other 7 95
--------------- ---------------
Net cash used by investing activities (408) (263)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligation to related party (81) (75)
Repurchase of common stock (15) --
Proceeds from issuance of common stock 8 2
--------------- ---------------
Net cash used by financing activities (88) (73)
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,521 524
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,564 1,053
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,085 $ 1,577
=============== ===============
NON-CASH TRANSACTION:
Payment of obligation to related party with common stock $ 47 $ 47
=============== ===============
CASH PAID FOR:
Income taxes $ 126 $ 20
=============== ===============
Interest $ 20 $ 24
=============== ===============
</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 January 31, 1999, and for the three month
periods ended January 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 period. The results of operations for the three
months ended January 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:
<TABLE>
<CAPTION>
DESCRIPTION JANUARY 31, 1999 OCTOBER 31, 1998
---------------------------------------------------- ------------------------ ----------------------
(In thousands)
<S> <C> <C>
Raw materials and parts $ 1,600 $ 1,589
Work-in-process 464 366
Finished goods 453 535
----------------------- ---------------------
2,517 2,490
Less: Valuation allowance (260) (185)
----------------------- ---------------------
$ 2,257 $ 2,305
======================= =====================
</TABLE>
3. Systems and equipment leased and held for lease:
<TABLE>
<CAPTION>
DESCRIPTION JANUARY 31, 1999 OCTOBER 31, 1998
---------------------------------------------------- ------------------------ ----------------------
<S> <C> <C>
(In thousands)
SYSTEMS AND EQUIPMENT LEASED:
Shuffler systems $ 5,807 $ 5,555
Table and video equipment 2,098 2,061
----------------------- ----------------------
7,905 7,616
Less: Accumulated depreciation (5,538) (4,965)
----------------------- ----------------------
2,367 2,651
SYSTEMS AND EQUIPMENT HELD FOR LEASE:
Shuffler systems 1,236 1,361
Table and video equipment 1,569 1,561
----------------------- ----------------------
2,805 2,922
Less: Valuation allowance (470) (470)
----------------------- ----------------------
2,335 2,452
----------------------- ----------------------
$ 4,702 $ 5,103
======================= ======================
</TABLE>
5
<PAGE>
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Common Stock:
In the first quarter of fiscal 1999, the Company repurchased 2,150 shares
at a total cost of $15,000. There were no share repurchases in the first
quarter of fiscal 1998. As of January 31, 1999, the amount remaining for
share repurchase under the most recent board authorization was $1,985,000.
5. Earnings per Share:
The following table shows the reconciliation of basic earnings per share
to diluted earnings per share:
<TABLE>
<CAPTION>
QUARTER ENDED JANUARY 31, 1999 1998
------------------------------------------------------------ -------------------- --------------------
(In thousands, except per share amounts)
<S> <C> <C>
NET INCOME $ 1,033 $ 1,379
=================== =====================
BASIC:
Weighted average shares outstanding 8,018 9,975
Shares to be issued under asset purchase 65 86
------------------- ---------------------
Weighted average common shares, basic 8,083 10,061
=================== =====================
ASSUMING DILUTION:
Weighted average common shares, basic 8,083 10,061
Dilutive impact of options outstanding 24 21
------------------- ---------------------
Weighted average common shares, assuming
dilution 8,107 10,082
=================== =====================
EARNINGS PER SHARE, BASIC $ .13 $ .14
=================== =====================
EARNINGS PER SHARE, ASSUMING DILUTION $ .13 $ .14
=================== =====================
</TABLE>
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 decreases in the valuation of certain assets. The charges and their
utilization are as follows:
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1999 CHARGE UTILIZED BALANCE
----------------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
(In thousands)
Write-down of assets $ 1,423 $ 953 $ 470
Employee severance and termination benefits 1,050 421 629
Other 177 145 32
-------------- -------------- --------------
$ 2,650 $ 1,519 $ 1,131
============== ============== ==============
</TABLE>
6
<PAGE>
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Contingency:
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
consolidated pretrial proceedings.
In August 1998, the New Jersey court issued a preliminary 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 the casino customer.
This matter was argued before the court on January 22, 1999 and a decision
is pending.
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. If Progressive Games, Inc. should prevail in
its suit, management does not believe it would materially affect the
Company's financial condition or results of operations.
8. Reclassifications:
Certain reclassifications have been made to the January 31, 1998
consolidated financial statements to conform to the January 31, 1999
financial statement presentation. These reclassifications had no effect on
the operating results for the quarter ended January 31, 1998, as
previously reported.
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 percentages derived from the
Company's Consolidated Income Statements:
<TABLE>
<CAPTION>
THREE MONTHS
----------------------------------------------
PERIOD ENDED JANUARY 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue 100.0% 100.0%
Cost of products 29.1 34.9
---------------------- --------------------
Gross margin 70.9 65.1
---------------------- --------------------
Selling, general and administrative 33.2 31.5
Research and development 12.4 7.6
---------------------- --------------------
Income from operations 25.3 26.0
Interest income, net 1.6 2.9
---------------------- --------------------
Income before income taxes 26.9 28.9
Provision for income taxes 9.6 10.0
---------------------- --------------------
Net income 17.3% 18.9%
====================== ====================
</TABLE>
REVENUE
Revenue for the three months ended January 31, 1999, was $5,978,000, a decrease
of $1,313,000 or 18.0% from the same period last year. Shuffler sales and
service revenue decreased to $945,000 in the current quarter, compared to
$3,046,000 in the first quarter last year. There were 71 current period unit
sales, compared to 366 unit sales in the first quarter of the prior year. Prior
year sales revenue included two significant sales to international customers.
The average per unit sales price increased to $9,457 in the current quarter from
$7,694 in the prior year due to the effect of price increases announced during
fiscal 1998 and to the effect in the prior year of the international sales noted
above. Most international sales are made to distributors at prices generally
lower than domestic sales pricing. Shuffler sales and service revenue also
includes revenue from the sale of extended service contracts, which increased to
$229,000 in the current first quarter from $160,000 in the prior year. Shuffler
lease revenue increased by $328,000 to $2,662,000 in the current year. The
shuffler installed lease base was 1,974 at January 31, 1999, compared to 1,614
at January 31, 1998 and 1,880 at October 31, 1998. The increase in the installed
lease base from the prior year was a result of the Company's business strategy,
implemented in fiscal 1998, to increase its installed base of leased shufflers.
In the current year first quarter, sales of units converted from lease totaled
eight units, a significant decrease from the 68 leased units converted to sales
in the prior year first quarter.
Revenue from the Let It Ride(R) table game was $2,218,000, an increase of
$493,000 from the first quarter last year. The installed base of Bonus tables
was 339 at January 31, 1999, compared to 243 installed Bonus tables at January
31, 1998 and 375 installed Bonus tables at October 31, 1998. During the current
year first quarter, 42 Bonus tables were replaced by 36 basic tables as the
result of the November 1998 injunction issued by the United States District
Court in New Jersey enjoining one of the Company's New Jersey customers from
offering Let It Ride Bonus(R) table games. 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 game. Let It Ride(R)
table revenue includes revenue from the Let It Ride(R) basic game that is
recorded on a monthly fixed fee similar to the Bonus game, but at prices
significantly less than the Bonus game. There were 280 basic tables installed at
January 31, 1999, compared to 323 installed basic tables at January 31, 1998 and
250 installed basic tables at October 31, 1998. The decrease in installed basic
tables from January 31, 1998 was due to conversions from the basic game to the
Bonus game during fiscal 1998. Video revenue includes revenue from Five Deck
Frenzy(TM), Five Deck Poker(TM), and Let It Ride Bonus(R) video.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
COSTS AND EXPENSES
Gross margin improved to 70.9% in the current year first quarter from 65.1% in
the same period in the prior year. The gross margin increased due to a shift in
product mix to higher margin shuffler lease and Let It Ride(R) table game
revenue which comprised a greater percentage of total revenue in the current
year first quarter compared to the prior year. Additionally, margins improved on
shuffler sales, and the Company experienced increased operating efficiencies in
service and field support functions.
Selling, general and administrative expenses were $1,987,000, a decrease of
$309,000 or 13.5%, from the prior year first quarter. This decrease was due to
lower promotional, advertising and sales expenses in the current quarter as well
as savings in facilities and administrative costs due to the consolidation of
the Company's operations into Las Vegas, Nevada from Minneapolis, Minnesota.
Advertising and promotional expenses decreased by $143,000 from the prior year
first quarter, resulting from a decrease in promotional expenses for certain
products and decreased trade show related expenses. Sales and marketing expenses
decreased by $191,000 from the prior year due to lower sales staffing expenses.
Most of the decrease resulted from attrition and reduced commission compensation
due to lower current quarter revenue. No provision for bad debts was recorded in
the current quarter compared to a $90,000 provision in the prior year first
quarter. Legal expenses totaled $275,000 in the current period, an increase of
$75,000 from last year, due to legal expenses incurred in connection with a
lawsuit by Progressive Games, Inc., a wholly owned subsidiary of Mikohn Gaming
Corp. (See Note 7 to the Consolidated Financial Statements.) Research and
development expenses were $741,000, an increase of $189,000 or 34.2% from the
prior year. Much of the expense increase resulted from activities in support of
new game development, including intangible amortization expense for purchased
intellectual property. In addition, the Company incurred additional expenses in
the development of its new shuffler systems.
INTEREST INCOME, NET
Interest income, net, was $96,000 in the current year first quarter compared to
$210,000 in the prior year. Cash and investments decreased to $10,070,000 at
January 31, 1999, from $17,506,000 at January 31, 1998. The decrease in cash and
investments was due to common stock repurchases of $15,942,000 during fiscal
1998.
INCOME TAXES
The Company recorded an income tax provision at an effective rate of 35.8% in
the current year first quarter, compared to a tax provision of 35.6% for all of
fiscal 1998.
EARNINGS PER SHARE
The Company earned $.13 per share, assuming dilution, for the current year first
quarter compared to $.14 per share, assuming dilution, in the prior year.
Weighted average shares outstanding - assuming dilution, decreased to 8,107,000
from 10,082,000 in the first quarter of fiscal 1998 due primarily to the fiscal
1998 repurchase of 2,000,000 shares.
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000
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 specifically in
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
preliminary assessment is 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 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 compliant. 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. While this particular issue is
independent of the Year 2000 date change, 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 multi-deck continuous shuffler, 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 games for
operation on IGT and IGT progressive systems, and has been informed by IGT that
such machines and systems are Year 2000 compliant. Games currently in the market
on Bally machines are not a significant source of revenue.
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.
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 (CONTINUED)
In view of its fiscal 1997 systems upgrades, no significant expenses were
incurred in the first 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 January 31, 1999, the Company had cash and cash equivalents and
investments totaling $10,070,000, compared to $8,472,000 at October 31, 1998.
The current ratio increased to 3.6 to 1 from 3.2 to 1 at October 31, 1998, while
working capital increased to $12,891,000 at January 31, 1999, from $11,352,000
at October 31, 1998. Cash provided by operations totaled $2,017,000 in the
current year first quarter compared to cash provided by operations of $860,000
in the first quarter of last year. Significant items under cash flows from
operating activities in the current period include net income of $1,033,000, and
non-cash charges for depreciation, amortization, and inventory obsolescence
provision which totaled $1,001,000. A significant source of cash included the
reduction of accounts receivable of $330,000 due to the collection of shuffler
sales and lease receivables. Uses of cash for operating activities included a
decrease of accounts payable of $370,000 due to payment of amounts owed for the
purchase of inventory as of October 31, 1998, for production of the Company's
newest shuffler, the ACE(TM), and payment of $270,000 in accrued severance
benefits related to the Company's office relocation announced in the prior
fiscal year. Investing activities include expenditures totaling $338,000 for
additions to the shuffler and table game assets, and other fixed assets.
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 market
penetration of the Company's products relative to the size of the available
market for those products; 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 manufacturing, service, selling,
administrative, 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.
11
<PAGE>
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., 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. 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) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K: none
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: March 15, 1999
/s/ Gary W. Griffin
Gary W. Griffin
Chief Financial Officer
/s/ Gerald W. Koslow
Gerald W. Koslow
Corporate Controller
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 4,085
<SECURITIES> 5,985
<RECEIVABLES> 3,497
<ALLOWANCES> 125
<INVENTORY> 2,257
<CURRENT-ASSETS> 17,864
<PP&E> 5,254
<DEPRECIATION> 2,238
<TOTAL-ASSETS> 29,065
<CURRENT-LIABILITIES> 4,973
<BONDS> 1,089
0
0
<COMMON> 80
<OTHER-SE> 22,888
<TOTAL-LIABILITY-AND-EQUITY> 29,065
<SALES> 945
<TOTAL-REVENUES> 5,978
<CGS> 828
<TOTAL-COSTS> 1,738
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</TABLE>
