UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
--------------------------------------------------------------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2000
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: (952) 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 June 8, 2000, there were 7,173,133 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
ASSETS
<TABLE>
<CAPTION>
(unaudited)
APRIL 30, OCTOBER 31,
(IN THOUSANDS) 2000 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,077 $ 1,476
Investments 3,028 4,165
Accounts receivable, net 3,177 3,482
Note receivable from related party 81 74
Inventories 4,291 4,524
Deferred income taxes 480 1,470
Other current assets 1,280 762
----------- -----------
Total current assets 14,414 15,953
PRODUCTS LEASED AND HELD FOR LEASE 6,237 5,309
PROPERTY AND EQUIPMENT, NET 2,318 2,628
INTANGIBLE ASSETS, NET 5,437 5,717
NON-CURRENT DEFERRED INCOME TAXES 595 595
OTHER ASSETS 406 403
----------- -----------
TOTAL ASSETS $ 29,407 $ 30,605
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,187 $ 1,607
Accrued liabilities:
Compensation 1,087 939
Expenses 229 2,997
Severance benefits 65 154
Current portion of long-term obligation to related party 546 546
Customer deposits and unearned revenue 1,712 1,741
Income taxes payable 340 542
----------- -----------
TOTAL CURRENT LIABILITIES 6,166 8,526
LONG-TERM OBLIGATION TO RELATED PARTY 407 677
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 30,000 shares authorized; 7,173 and
7,475 shares issued and outstanding 72 75
Additional paid-in capital 4,762 7,280
Retained earnings 18,000 14,047
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 22,834 21,402
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 29,407 $ 30,605
=========== ===========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) APRIL 30, APRIL 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Shuffler lease $ 3,060 $ 2,771 $ 6,049 $ 5,433
Shuffler sales and service 2,423 1,596 3,891 2,541
Table games 2,958 2,266 5,869 4,484
Slot games 471 116 862 228
Other 723 209 1,464 250
----------- ----------- ----------- -----------
9,635 6,958 18,135 12,936
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of products 2,634 2,203 5,296 3,941
Selling, general and administrative 2,476 2,065 4,677 4,052
Research and development 1,158 802 2,070 1,543
----------- ----------- ----------- -----------
6,268 5,070 12,043 9,536
----------- ----------- ----------- -----------
Income from operations 3,367 1,888 6,092 3,400
Interest income, net 54 96 86 192
----------- ----------- ----------- -----------
Income before income taxes 3,421 1,984 6,178 3,592
Provision for income taxes 1,235 715 2,225 1,290
----------- ----------- ----------- -----------
NET INCOME $ 2,186 $ 1,269 $ 3,953 $ 2,302
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE, BASIC $ .30 $ .16 $ .54 $ .29
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE, DILUTED $ .29 $ .16 $ .53 $ .29
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES, BASIC 7,191 8,028 7,270 8,055
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES, DILUTED 7,460 8,044 7,453 8,075
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
---------------------------
(IN THOUSANDS) 2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,953 $ 2,302
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 2,369 1,939
Provision for bad debts 75 --
Provision for inventory obsolescence 275 225
Deferred income taxes 990 --
Stock options issued for services (10) --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts and note receivable 223 321
Inventories (42) 362
Other current assets (518) 177
Accounts payable and accrued liabilities (2,129) (556)
Customer deposits and unearned revenue (29) (79)
Income taxes payable (202) 48
----------- -----------
Net cash provided by operating activities 4,955 4,739
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (3,065) (6,157)
Proceeds from the sales and maturities of investments 4,202 8,006
Payments for products leased and held for lease (2,422) (1,672)
Purchases of property and equipment (21) (291)
Purchases of intangible assets (255) --
Other (12) 142
----------- -----------
Net cash (used) provided by investing activities (1,573) 28
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock (3,267) (953)
Proceeds from issuance of common stock 756 105
Payments on long-term obligation to related party (270) (259)
----------- -----------
Net cash used by financing activities (2,781) (1,107)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 601 3,660
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,476 2,564
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,077 $ 6,224
=========== ===========
NON-CASH TRANSACTION:
Payment of obligation to related party with common stock $ 94 $ 94
=========== ===========
CASH PAID FOR:
Income taxes $ 1,006 $ 1,235
=========== ===========
Interest $ 13 $ 40
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. INTERIM FINANCIAL STATEMENTS:
The financial statements as of April 30, 2000, and for the three and six
month periods ended April 30, 2000 and 1999, are unaudited, but, in the
opinion of management, include all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the financial
results for the interim periods. The results of operations for the three
and six months ended April 30, 2000 are not necessarily indicative of the
results to be expected for the year ending October 31, 2000. These interim
statements should be read in conjunction with the Company's October 31,
1999, financial statements and notes thereto included in its Form 10-K.
Certain reclassifications have been made to the April 30, 1999 consolidated
financial statements to conform to the April 30, 2000 financial statement
presentation. These reclassifications had no effect on the operating
results for the quarter and six months ending April 30, 1999, as previously
reported.
2. INVENTORIES:
APRIL 30, OCTOBER 31,
DESCRIPTION 2000 1999
-------------------------------- ----------- -----------
(In thousands)
Raw materials $ 2,612 $ 2,598
Work-in-progress 516 564
Finished goods 1,163 1,362
----------- -----------
$ 4,291 $ 4,524
=========== ===========
3. PRODUCTS LEASED AND HELD FOR LEASE:
APRIL 30, OCTOBER 31,
DESCRIPTION 2000 1999
-------------------------------- ----------- -----------
(In thousands)
PRODUCTS LEASED:
Game equipment $ 6,947 $ 6,697
Gaming products 3,478 3,231
----------- -----------
10,425 9,928
----------- -----------
PRODUCTS HELD FOR LEASE:
Game equipment 3,337 2,242
Gaming products 1,438 741
----------- -----------
4,775 2,983
----------- -----------
15,200 12,911
Less: Accumulated depreciation (8,963) (7,602)
----------- -----------
$ 6,237 $ 5,309
=========== ===========
5
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
4. COMMON STOCK:
In the first six months of fiscal 2000, the Company repurchased 392,500
shares at a total cost of $3,267,000, compared to 145,500 shares
repurchased at a total cost of $953,000 in the first six months of fiscal
1999. As of April 30, 2000, the amount remaining for share repurchase under
the most recent board authorization was $2,000,000.
5. EARNINGS PER SHARE:
The following table shows the reconciliation of basic earnings per share to
diluted earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
NET INCOME $ 2,186 $ 1,269 $ 3,953 $ 2,302
======== ======== ======== ========
BASIC:
Weighted average shares outstanding 7,153 7,969 7,230 7,994
Shares to be issued under asset purchase 38 59 40 61
-------- -------- -------- --------
Weighted average common shares, basic 7,191 8,028 7,270 8,055
======== ======== ======== ========
ASSUMING DILUTION:
Weighted average common shares, basic 7,191 8,028 7,270 8,055
Dilutive impact of options outstanding 269 16 183 20
-------- -------- -------- --------
Weighted average common shares, diluted 7,460 8,044 7,453 8,075
======== ======== ======== ========
EARNINGS PER SHARE, BASIC $ .30 $ .16 $ .54 $ .29
======== ======== ======== ========
EARNINGS PER SHARE, DILUTED $ .29 $ .16 $ .53 $ .29
======== ======== ======== ========
</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. During fiscal 1999,
certain employees were not terminated and certain leases were not
cancelled, resulting in the reversal of $199,000 in severance benefits and
$14,000 in office lease cancellation charges. The remaining severance
liability as of April 30, 2000 represents severance benefits to be paid to
a former employee in fiscal 2000.
<TABLE>
<CAPTION>
AS OF APRIL 30, 2000 CHARGE UTILIZED NOT USED BALANCE
-------------------------------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Write-down of assets $ 1,423 $ 1,423 $ -- $ --
Employee severance benefits 1,050 786 199 65
Other 177 163 14 --
---------- ---------- ---------- ----------
$ 2,650 $ 2,372 $ 213 $ 65
========== ========== ========== ==========
</TABLE>
6
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
7. OPERATING SEGMENTS:
The Company operates in two business segments: game equipment and gaming
products. The game equipment segment includes the manufacturing, marketing
and installation and servicing of the Company's proprietary shuffler
product line as well as the distribution and servicing of casino chip
sorting machines and accessories all for sale or recurring lease revenue.
The gaming products segment includes the design, marketing, installation
and servicing of proprietary table games and slot games. Gaming products
generally produce recurring revenue through fixed or participation leases
and licenses. The Company does not allocate corporate expenses to its
business segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. The Company's chief
operating decision maker is the Chief Executive Officer.
<TABLE>
<CAPTION>
THREE MONTHS ENDED, SIX MONTHS ENDED,
APRIL 30, APRIL 30,
----------------------------- -----------------------------
(in thousands) 2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Game equipment $ 5,505 $ 4,576 $ 10,703 $ 8,224
Gaming products 4,130 2,382 7,432 4,712
------------ ------------ ------------ ------------
9,635 6,958 18,135 12,936
============ ============ ============ ============
OPERATING INCOME
Game equipment 3,205 2,499 5,914 4,480
Gaming products 1,981 898 3,546 1,944
Corporate (1,819) (1,509) (3,368) (3,024)
------------ ------------ ------------ ------------
3,367 1,888 6,092 3,400
============ ============ ============ ============
DEPRECIATION AND AMORTIZATION
Game equipment 447 492 844 929
Gaming products 588 309 1,184 586
Corporate 171 212 341 424
------------ ------------ ------------ ------------
1,206 1,013 2,369 1,939
============ ============ ============ ============
CAPITAL EXPENDITURES
Game equipment 604 1,218 1,544 1,348
Gaming products 614 329 1,133 374
Corporate 21 78 21 241
------------ ------------ ------------ ------------
$ 1,239 $ 1,625 $ 2,698 $ 1,963
============ ============ ============ ============
AS OF APRIL 30,
-----------------------------
2000 1999
------------ ------------
ASSETS
Game equipment $ 9,242 $ 6,752
Gaming products 10,760 6,745
Corporate 9,405 15,404
------------ ------------
$ 29,407 $ 28,901
============ ============
</TABLE>
7
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
8. CONTINGENCY:
On April 4, 2000, the Company sued Bally Gaming, Inc., a Nevada
corporation, and Bally Gaming Missouri, Inc., a Missouri corporation
(collectively hereinafter "Bally"), in District Court in Clark County,
Nevada alleging that Bally has failed to perform its obligations under its
Let's Make A Deal(TM) agreement with the Company and is otherwise liable to
the Company for damages. Bally has answered the complaint by denying any
liability and has made a counter-claim against the Company, claiming that
the Company owes Bally up to $500,000. The Company has denied Bally's
counter-claim and feels strongly that the Company is entitled to the
damages claimed in its complaint.
8
<PAGE>
PART I - FINANCIAL INFORMATION
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 SIX MONTHS
----------------------- -----------------------
PERIOD ENDED APRIL 30, 2000 1999 2000 1999
------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Products 27.3 31.7 29.2 30.5
--------- --------- --------- ---------
Gross Margin 72.7 68.3 70.8 69.5
--------- --------- --------- ---------
Selling, general and administrative 25.7 29.7 25.8 31.3
Research and development 12.0 11.5 11.4 11.9
--------- --------- --------- ---------
Income from operations 35.0 27.1 33.6 26.3
Interest income, net 0.5 1.4 0.5 1.5
--------- --------- --------- ---------
Income before income taxes 35.5 28.5 34.1 27.8
Provision for income taxes 12.8 10.3 12.3 10.0
--------- --------- --------- ---------
Net Income 22.7% 18.2% 21.8% 17.8%
========= ========= ========= =========
</TABLE>
REVENUE:
Revenue for the second fiscal quarter ended April 30, 2000, was $9,635,000, an
increase of $2,677,000 or 38.5% from the same period last year. This increase
was attributable to increased sales in all business segments. Shuffler sales and
service revenue increased to $2,423,000 in the current quarter, compared to
$1,596,000 in the second quarter last year. Current quarter shuffler sales were
202 units at an average price of $10,500, while sales in the second quarter of
the prior year were 153 units at an average price of $8,700. Average unit sales
prices increased 20.7% due to a shift in sales mix toward sales of the ACE(TM)
and King(TM) shufflers in the current quarter. Shuffler sales and service
revenue also includes revenue from the sale of extended service contracts, which
increased to $236,000 in the current second quarter from $198,000 in the second
quarter of the prior year. Shuffler lease revenue increased by $289,000 or 10.4%
to $3,060,000 in the current year second quarter. The shuffler installed lease
base was 2,505 at April 30, 2000, compared to 2,114 at April 30, 1999 and 2,253
at October 31, 1999. This increase in the installed lease base from the prior
year was due to the Company's fiscal 1999 and 2000 business strategy to increase
its installed base of leased shufflers. The 252 unit increase in the installed
shuffler lease base during the first six months of the year was attributable to
the placement of 475 ACE(TM) shufflers, offset by the net removal of 282 BG
shufflers, the majority of which were exchanged for ACE(TM) shufflers.
Revenue from table games was $2,958,000, an increase of $692,000 or 30.5% from
the second quarter last year. The installed base of Let It Ride Bonus(R) tables
was 446 at April 30, 2000, compared to 367 installed Bonus tables at April 30,
1999 and 424 installed Bonus tables at October 31, 1999. The increase in
installed Bonus tables compared to the prior year second quarter was due to new
placements and conversion of Let It Ride(R) basic table games to Bonus table
games following the vacation of a court injunction, in the fourth quarter of
fiscal 1999, which previously prohibited the use of the Bonus game in New
Jersey. Let It Ride(R) table revenue also includes revenue from the Let It
Ride(R) basic game. Revenue from both games is generated from monthly fixed
fees, with the prices of the Bonus game significantly higher than the basic
game. There were 222 installed basic tables at April 30, 2000, compared to 281
installed basic tables at April 30, 1999 and 233 installed basic tables at
October 31, 1999. The decrease in installed basic tables from April 30, 1999 was
primarily due to conversions from the basic game to the Bonus game since the
fourth quarter of fiscal 1999. Table revenue in the current year quarter also
increased due to incremental revenue of $276,000 earned from Three Card
Poker(R). There were 225 Three Card Poker(R) games
9
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
installed as of April 30, 2000, compared to 188 installed games at October 31,
1999. The Company purchased this table game from its developer in the third
quarter of fiscal 1999. Additionally, the Company earned $144,000 in table game
royalties in the current year second quarter related to the December 1999
settlement with Progressive Games, Inc.
Slot revenue increased by $355,000 or 306% to $471,000 in the current second
quarter from the prior year second quarter due to an installed lease base of 548
slot machines as of April 30, 2000, compared to 354 installed units as of April
30, 1999 and 526 units as of October 31, 1999. The increase in the installed
base from the prior year second quarter was due to the rollout of the Let's Make
A Deal(TM) video slot game during fiscal 1999 and the introduction of The Three
Stooges(TM) game in fiscal 2000.
Other revenue increased by $514,000 to $723,000 in the current second quarter
from the prior year second fiscal quarter due primarily to the receipt of a
$500,000 non-exclusive license fee related to the Company's math technology used
in slot game design. Other revenue also increased in the current second fiscal
quarter due to revenue earned from the lease and sale of Chipper Champ(R) chip
sorting machines and the sale of other TCS products under the Company's joint
marketing agreement with TCS America, Inc.
Revenue for the six months ended April 30, 2000, was $18,135,000, an increase of
$5,199,000 or 40.2% over the six month period ended April 30, 1999. Shuffler
lease revenue increased by $616,000 or 11.3% to $6,049,000 in the current year
six months compared to $5,433,000 in the prior year six months, while shuffler
sales and service increased by $1,350,000 to $3,891,000 in the current six
months compared to $2,541,000 in the prior year six months. This shuffler sales
increase was due to the sale of 315 shufflers in the current year six months
compared to 224 in the prior year six months. Table game revenue increased by
$1,385,000 or 30.9% to $5,869,000 in the current year six months as compared to
$4,484,000 in the prior year six months, because of an increase in table
placements. Video revenue increased by $634,000 to $862,000 due primarily to the
installation of Let's Make A Deal(TM) and The Three Stooges(TM) video slot games
in late fiscal 1999 and during fiscal 2000. Other revenue in the current year
six months increased by $1,214,000 from the prior year six months, principally
due to the receipt of $700,000 in technology license and evaluation fees and
$517,000 in sales and leases of Chipper Champ(R) chip sorting machines.
COSTS AND EXPENSES:
Gross margin was 72.7% and 70.8% for the current second quarter and six months,
respectively, compared to 68.3% and 69.5% in the comparable prior year periods.
The margin increase in the current second quarter was due to the increase in
revenues from the new, higher priced ACE(TM) and King(TM) shuffler products, as
well as the $500,000 license fee related to the Company's math technology used
in slot game design. Additionally, service and installation costs, expressed as
a percentage of sales, decreased to 8.7% of sales in the current fiscal year
second quarter from 10.1% in the prior year second quarter. Excluding license
and evaluation fee revenue from gross margin for purposes of comparison, gross
margin would have been 71.2% and 70.0% for the current second quarter and six
months, respectively.
Selling, general and administrative expenses increased by $411,000 or 19.9% to
$2,476,000 in the current second quarter, and by $625,000 to $4,677,000 in the
current six month period. Sales staffing, commission and travel expenses
increased by $137,000 and $297,000 from the prior year second quarter and six
months, respectively, resulting from the hiring of new sales staff and increased
commissions from increased sales in the first six months of the current fiscal
year. Accrued bonus expense under Company bonus plans increased $316,000 and
$532,000 from the prior year second quarter and six months due to increased
operating income in the current year and increased staffing. Legal expense
decreased $88,000 in the current second quarter and $174,000 in the current six
months due to the settlement with Progressive Games, Inc. in December 1999.
Also, computer system consulting expense increased by $56,000 in the current
second quarter as part of a new, year-long program to upgrade the Company's
information systems.
10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
Research and development expenses increased by $356,000 or 44.4% over the prior
year fiscal quarter to $1,158,000 and by $527,000 over the prior year six month
period to $2,070,000. This increase resulted from new game and operating system
development costs as well as from additional expenses in the development of the
Company's new continuous multi-deck shuffler system, the King(TM).
INTEREST INCOME, NET:
Interest income, net, was $54,000 in the current second quarter and $86,000 for
the current six month period, compared to $96,000 and $192,000, respectively, in
comparable periods in the prior year. This decrease is due to the decrease in
interest bearing cash and investment accounts to $5,105,000 at April 30, 2000
from $10,283,000 at April 30, 1999. The decrease in cash and investments was
primarily due to stock repurchases of $4,592,000 during fiscal 1999 and
$3,267,000 during fiscal 2000 as well as the payment of $2,750,000 to settle the
Company's litigation with Progressive Games, Inc. in December 1999.
INCOME TAXES:
The Company recorded income tax expense at an effective rate of 36.0% for both
the current second quarter and current six months equal to the tax provision of
36.0% for the comparable periods in fiscal 1999, reflecting an unchanged tax
benefit from the Company's foreign sales corporation and an unchanged provision
for state income taxes.
EARNINGS PER SHARE:
Earnings per common share were $.29 for the current second quarter and $.53 for
the current six month period, compared to $.16 and $.29 for the respective prior
year periods. Diluted weighted average common shares decreased to 7,460,000 in
the second quarter, and 7,453,000 for the six months, compared to 8,044,000 and
8,075,000 in comparable prior year periods, due to the repurchase of 585,000
shares of common stock during fiscal 1999 and 392,500 shares during fiscal 2000.
YEAR 2000 READINESS:
The Company experienced no significant Year 2000 compliance issues and Year 2000
did not have a material effect on its business, operations or financial
condition.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2000, the Company had cash, cash equivalents and investments
totaling $5,105,000, compared to $5,641,000 at October 31, 1999. The current
ratio increased to 2.3 to 1 from 1.9 to 1 at October 31, 1999, while working
capital increased to $8,248,000 at April 30, 2000 from $7,427,000 at October 31,
1999. Cash provided by operations totaled $4,955,000 in the current six month
period, compared to cash provided by operations of $4,739,000 in the first six
months of last year. Significant items under cash flows from operating
activities in the first six months of fiscal 2000 included net income of
$3,953,000 and non-cash charges for depreciation and amortization as well as for
provisions for bad debts, inventory obsolescence, and deferred taxes which
totaled $3,699,000, compared to net income of $2,302,000 and non-cash charges of
$2,164,000 in the first six months of last year. The payment of an accrued
liability of $2,750,000 under the Company's settlement with Progressive Games,
Inc. in December 1999 was a significant use of cash for operating activities in
the first six months of the current fiscal year.
Investing activities included cash used in the first six months of the current
fiscal year for capital expenditures totaling $2,698,000 for net additions to
leased gaming equipment and game products as well as other fixed assets. Sources
of cash from investing activities included net receipts of $1,137,000 from the
sale of investments in the first six months of the current fiscal year.
Financing activities included the repurchase of $3,267,000 in common stock
11
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
during the first quarter of the current fiscal year and the issuance of 80,000
shares of common stock for $661,000 pursuant to the exercise by employees of
options granted under the 1993 Stock Option Plan.
The Company believes its current cash and investments, cash provided by
operations and $10,000,000 in unused borrowing capacity under its revolving line
of credit facility will be sufficient to finance its current operations, share
repurchase program, and new product development and roll-outs for the immediate
future.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements. Such statements reflect and are
subject to 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 4, 2000, the Company sued Bally Gaming, Inc., a Nevada corporation, and
Bally Gaming Missouri, Inc., a Missouri corporation (collectively hereinafter
"Bally"), in District Court in Clark County, Nevada alleging that Bally has
failed to perform its obligations under its Let's Make A Deal(TM) agreement with
the Company and is otherwise liable to the Company for damages. Bally has
answered the complaint by denying any liability and has made a counter-claim
against the Company, claiming that the Company owes Bally up to $500,000. The
Company has denied Bally's counter-claim and feels strongly that the Company is
entitled to the damages claimed in its complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Annual Meeting of Shareholders held on April 14, 2000, certain matters
were submitted to the shareholders for their approval as set forth in the
Company's Proxy Statement dated March 17, 2000, previously filed with the
Securities and Exchange Commission:
1) Directors elected at the meeting:
Votes Cast For Votes Withheld
-------------- --------------
Joseph J. Lahti 6,710,237 30,776
Thomas A. Sutton 6,688,875 52,138
Patrick J. Cruzen 6,687,075 53,938
Mark L. Yoseloff 6,643,222 97,791
2) A shareholder proposal to have the Board of Directors base the
granting of stock options under the 1993 Stock Option Plan to senior
executives on certain income targets was rejected. A total of
2,870,870 shares voted against the proposal, 794,601 shares voted in
favor of the proposal, 105,304 shares abstained, and there were
2,970,238 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27, Financial Data Schedule
b) Reports on Form 8-K: none
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHUFFLE MASTER, INC.
(Registrant)
Date: June 12, 2000
/s/ Gary W. Griffin
-------------------------------------
Gary W. Griffin
Chief Financial Officer
/s/ Gerald W. Koslow
-------------------------------------
Gerald W. Koslow
Corporate Controller
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