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, 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: (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 10, 2000, there were 7,140,393 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>
ASSETS
(unaudited)
JANUARY 31, OCTOBER 31,
(IN THOUSANDS) 2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,775 $ 1,476
Investments 576 4,165
Accounts receivable, net 2,908 3,482
Note receivable from related party 78 74
Inventories 4,330 4,524
Deferred income taxes 480 1,470
Other current assets 755 762
------------ ------------
Total current assets 10,902 15,953
PRODUCTS LEASED AND HELD FOR LEASE 5,943 5,309
PROPERTY AND EQUIPMENT, NET 2,372 2,628
INTANGIBLE ASSETS, NET 5,640 5,717
NON-CURRENT DEFERRED INCOME TAXES 595 595
OTHER ASSETS 401 403
------------ ------------
TOTAL ASSETS $ 25,853 $ 30,605
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,421 $ 1,607
Accrued liabilities:
Compensation 781 939
Expenses 246 2,997
Severance benefits 102 154
Current portion of long-term obligation to related party 546 546
Customer deposits and unearned revenue 1,707 1,741
Income taxes payable 183 542
------------ ------------
TOTAL CURRENT LIABILITIES 4,986 8,526
LONG-TERM OBLIGATION TO RELATED PARTY 543 677
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 30,000 shares authorized; 7,140 and
7,475 shares issued and outstanding 72 75
Additional paid-in capital 4,438 7,280
Retained earnings 15,814 14,047
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 20,324 21,402
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 25,853 $ 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
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JANUARY 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUE:
Shuffler lease $ 2,989 $ 2,662
Shuffler sales and service 1,468 945
Table games 2,911 2,218
Slot games 391 112
Other 741 41
------------ ------------
8,500 5,978
------------ ------------
COSTS AND EXPENSES:
Cost of products 2,662 1,738
Selling, general and administrative 2,201 1,987
Research and development 912 741
------------ ------------
5,775 4,466
------------ ------------
Income from operations 2,725 1,512
Interest income, net 32 96
------------ ------------
Income before income taxes 2,757 1,608
Provision for income taxes 990 575
------------ ------------
NET INCOME $ 1,767 $ 1,033
============ ============
EARNINGS PER COMMON SHARE, BASIC $ .24 $ .13
============ ============
EARNINGS PER COMMON SHARE, ASSUMING DILUTION $ .24 $ .13
============ ============
WEIGHTED AVERAGE COMMON SHARES, BASIC 7,350 8,083
============ ============
WEIGHTED AVERAGE COMMON SHARES, ASSUMING DILUTION 7,447 8,107
============ ============
</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>
THREE MONTHS ENDED
JANUARY 31,
-----------------------------
(IN THOUSANDS) 2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,767 $ 1,033
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,163 926
Provision for bad debts 37 --
Provision for inventory obsolescence 150 75
Deferred income taxes 990 --
Stock options issued for services (33) --
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts and note receivable 533 325
Inventories 44 (29)
Other current assets 7 (141)
Accounts payable and accrued liabilities (3,147) (761)
Customer deposits and unearned revenue (34) 139
Income taxes payable (359) 450
------------ ------------
Net cash provided by operating activities 1,118 2,017
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (37) (4,015)
Proceeds from the sales and maturities of investments 3,626 3,938
Payments for products leased and held for lease (1,269) (175)
Purchases of property and equipment -- (163)
Purchases of intangible assets (190) --
Other (3) 7
------------ ------------
Net cash provided (used by) investing activities 2,127 (408)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (3,267) (15)
Proceeds from issuance of common stock 455 8
Payments on long-term obligation to related party (134) (81)
------------ ------------
Net cash used by financing activities (2,946) (88)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 299 1,521
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,476 2,564
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,775 $ 4,085
============ ============
NON-CASH TRANSACTION:
Payment of obligation to related party with common stock $ 47 $ 47
============ ============
CASH PAID FOR:
Income taxes $ 360 $ 126
============ ============
Interest $ 13 $ 20
============ ============
</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 January 31, 2000, and for the three month
periods ended January 31, 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 period. The results of operations for the three
months ended January 31, 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.
2. INVENTORIES:
JANUARY 31, OCTOBER 31,
DESCRIPTION 2000 1999
---------------------------------------- ------------ ------------
(In thousands)
Raw materials $ 3,039 $ 2,598
Work-in-progress 511 564
Finished goods 780 1,362
------------ ------------
$ 4,330 $ 4,524
============ ============
3. PRODUCTS LEASED AND HELD FOR LEASE:
JANUARY 31, OCTOBER 31,
DESCRIPTION 2000 1999
---------------------------------------- ------------ ------------
(In thousands)
PRODUCTS LEASED:
Game equipment $ 6,927 $ 6,697
Gaming products 3,356 3,231
------------ ------------
10,283 9,928
------------ ------------
PRODUCTS HELD FOR LEASE:
Game equipment 2,869 2,242
Gaming products 1,227 741
------------ ------------
4,096 2,983
------------ ------------
14,379 12,911
Less: Accumulated depreciation (8,436) (7,602)
------------ ------------
$ 5,943 $ 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 quarter of fiscal 2000, the Company repurchased 392,500 shares
at a total cost of $3,267,000, compared to 2,150 shares repurchased at a
total cost of $15,000 in the first quarter of fiscal 1999. As of January
31, 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:
QUARTER ENDED JULY 31, 1999 1998
--------------------------------------------------- --------- ---------
(In thousands, except for per share amounts)
NET INCOME $ 1,767 $ 1,033
========= =========
BASIC:
Weighted average shares outstanding 7,307 8,018
Shares to be issued under asset purchase 43 65
--------- ---------
Weighted average common shares, basic 7,350 8,083
========= =========
ASSUMING DILUTION:
Weighted average common shares, basic 7,350 8,083
Dilutive impact of options and warrants outstanding 97 24
--------- ---------
Weighted average common shares, assuming dilution 7,447 8,107
========= =========
EARNINGS PER SHARE, BASIC $ .24 $ .13
========= =========
EARNINGS PER SHARE, ASSUMING DILUTION $ .24 $ .13
========= =========
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 did not terminate 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
January 31, 2000 represents severance benefits to be paid to two former
employees in fiscal 2000.
AS OF JANUARY 31, 2000 CHARGE UTILIZED NOT USED BALANCE
--------------------------- --------- --------- --------- ---------
(In thousands)
Write-down of assets $ 1,423 $ 1,423 $ -- $ --
Employee Severance Benefits 1,050 749 199 102
Other 177 163 14 --
--------- --------- --------- ---------
$ 2,650 $ 2,335 $ 213 $ 102
========= ========= ========= =========
6
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. OPERATING SEGMENT REPORTING:
The Company operates in two business segments: game equipment and gaming
products. The game equipment segment primarily designs, manufactures and
installs shufflers for sale or lease. It also distributes, installs and
services casino chip sorting machines and accessories for sale or lease.
The gaming products segment includes the design, manufacture, installation
and service of proprietary table games and slot games. Gaming products are
either sold or produce recurring revenue through fixed or participation
leases. 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.
QUARTER ENDED JANUARY 31, 2000 1999
------------------------- ------------ ------------
(in thousands)
REVENUE
Game equipment $ 5,198 $ 3,648
Gaming products 3,302 2,330
------------ ------------
8,500 5,978
============ ============
OPERATING INCOME
Game equipment 2,709 1,981
Gaming products 1,565 1,046
Corporate (1,549) (1,515)
------------ ------------
2,725 1,512
============ ============
DEPRECIATION AND AMORTIZATION
Game equipment 397 437
Gaming products 596 277
Corporate 170 212
------------ ------------
1,163 926
============ ============
ASSETS
Game equipment 8,925 5,866
Gaming products 9,896 7,426
Corporate 7,032 15,773
------------ ------------
25,853 29,065
============ ============
CAPITAL EXPENDITURES
Game equipment 844 130
Gaming products 519 45
Corporate 96 163
------------ ------------
$ 1,459 $ 338
============ ============
7
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
8. CONTINGENCY:
On December 28, 1999 the Company settled all of its litigation with
Progressive Games, Inc. ("PGI"), a wholly owned subsidiary of Mikohn Gaming
Corporation ("Mikohn"). The Company made a one-time payment of $2,750,000
($1,760,000 or $.22 per diluted share, after tax) to PGI and consented to
the validity, enforceability and infringement of certain PGI patents. This
settlement amount was accrued as an expense in the consolidated financial
statements as of October 31, 1999. The Company will not pay future
royalties for Let It Ride Bonus(R), Let It Ride The Tournament(R) and Three
Card Poker(R). It will pay pre-negotiated royalties if it markets other
table games utilizing a side bet with a fixed payout.
Under separate license agreements, PGI/Mikohn will pay the Company future
royalties of approximately $580,000 per year over the next five years for
the rights to use the Company's coin sensing patents, the Company's
multi-tiered game wagering patent and the Company's intellectual property
related to its Bahama Bonus(TM) table game. The Company and PGI/Mikohn also
entered into a mutually beneficial cross-supplier agreement.
As part of the settlement PGI has released and will dismiss all claims
against Prime Table Games, Derek Webb, Hannah O'Donnell and the Company's
casino licensees named in the litigation, which satisfies the Company's
indemnification obligations.
9. RECLASSIFICATIONS:
Certain reclassifications have been made to the January 31, 1999
consolidated financial statements to conform to the January 31, 2000
financial statement presentation. These reclassifications had no effect on
the operating results for the quarter ended January 31, 1999, as previously
reported.
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:
THREE MONTHS
-------------------------
PERIOD ENDED JANUARY 31, 2000 1999
- ----------------------------------- ---------- ----------
Revenue 100.0% 100.0%
Cost of Products 31.3 29.1
---------- ----------
Gross Margin 68.7 70.9
---------- ----------
Selling, general and administrative 25.9 33.2
Research and development 10.7 12.4
---------- ----------
Income from operations 32.1 25.3
Interest Income, net 0.3 1.6
---------- ----------
Income before income taxes 32.4 26.9
Provision for income taxes 11.6 9.6
---------- ----------
Net Income 20.8% 17.3%
========== ==========
REVENUE:
Revenue for the three months ended January 31, 2000, was $8,500,000, an increase
of $2,522,000 or 42.2% from the same period last year. Shuffler sales and
service revenue increased to $1,468,000 in the current quarter, compared to
$945,000 in the first quarter last year. There were 113 current quarter unit
sales, compared to 71 unit sales in the first quarter of the prior year. The
average per unit sales price increased to $10,350 in the current quarter from
$9,457 in the prior year, due to the sale of 62 higher priced ACE(TM) shufflers.
Shuffler lease revenue increased by $327,000 or 12.2% to $2,989,000 in the
current fiscal quarter. The shuffler installed lease base was 2,427 at January
31, 2000, compared to 1,974 at January 31, 1999 and 2,253 at October 31, 1999.
The 174 unit increase in the installed lease base during the quarter was
attributable to the placement of 283 ACE(TM) shufflers during the quarter,
offset by the net removal of 129 BG shufflers, the majority of which were
exchanged for ACE(TM) shufflers. In the current year first quarter, sales of
units converted from lease totaled 21 units, compared to eight leased units
converted to sales in the prior year first quarter.
Revenue from the Let It Ride(R) table game was $2,911,000, an increase of
$693,000 or 31.2% from the first quarter last year. The installed base of Bonus
tables was 425 at January 31, 2000, compared to 339 installed Bonus tables at
January 31, 1999 and 424 installed Bonus tables at October 31, 1999. A majority
of the increase in installed Bonus tables compared to the prior year first
quarter relates to the conversion of Let It Ride(R) basic table games to Bonus
table games following a legal motion to vacate the court injunction prohibiting
the use of the Bonus game in New Jersey in the fourth quarter of fiscal 1999.
Let It Ride(R) table revenue also 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 236 basic tables
installed at January 31, 2000, compared to 280 installed basic tables at January
31, 1999 and 233 installed basic tables at October 31, 1999. The decrease in
installed basic tables from January 31, 1999 was primarily due to conversions
from the basic game to the Bonus game during the fourth quarter of fiscal 1999.
Table revenue in the current year quarter also increased due to the incremental
revenue of $247,000 earned from Three Card Poker(R). There were 202 Three Card
Poker(R) games installed as of January 31, 2000. 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 fiscal
quarter related to the settlement with Progressive Games, Inc.
9
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Slot revenue increased by $279,000 or 250.0% to $391,000 in the current fiscal
quarter from the prior year fiscal quarter due to an installed lease base of 524
slot machines as of January 31, 2000. This installed base consisted of primarily
Let's Make A Deal(TM) video slot games as well as Five Deck Poker(TM) and The
Three Stooges(TM) games.
Other revenue increased to $741,000 in the current fiscal quarter due partly 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. Other revenue also increased due to the receipt of a
$200,000 technology evaluation fee.
COSTS AND EXPENSES:
Gross margin decreased to 68.7% in the current year first quarter from 70.9% in
the same period in the prior year. The gross margin decreased due to increased
sales of lower margin products under the TCS agreement and due to increases in
lower margin revenues from video products, which, combined, accounted for 13.3%
of revenue in the current quarter, compared to 2.6% of sales in the prior year
first quarter. Higher margin revenue from shuffler leases and sales
correspondingly decreased to 52.5% of sales in the current fiscal quarter from
60.3% in the prior year first fiscal quarter.
Selling, general and administrative expenses were $2,201,000, an increase of
$214,000 or 10.8% from the prior year first quarter. This increase was due to
higher sales, advertising and promotional expenses in the current quarter that
offset lower legal expenses following the settlement with PGI in the current
quarter. Sales expenses increased by $178,000 from the prior year first quarter
due to increased commissions and travel related to increased sales and increased
sales staffing. Advertising and promotional expenses increased by $77,000 from
the prior year first quarter due to special events and trade show expenses
incurred in the current first quarter. Legal expenses decreased by $128,000 to
$147,000 in the current first fiscal quarter as litigation expenses ceased
following the settlement with Progressive Games, Inc. in December 1999. The
Company provided $37,000 for bad debts in the current fiscal quarter compared to
no provision in the prior year first quarter. Research and development expenses
were $912,000, an increase of $171,000 or 23.1% from the prior year first
quarter. Most of the expense increase resulted from activities in support of new
game system development. In addition, the Company incurred additional expenses
in the development of its new continuous multi-deck shuffler, the King(TM).
INTEREST INCOME, NET:
Interest income, net, was $32,000 in the current year first quarter compared to
$96,000 in the prior year. Cash and investments decreased to $2,351,000 at
January 31, 2000, from $5,641,000 at October 31, 1999. The decrease in interest
bearing cash and investments was due primarily to common stock repurchases of
$3,267,000 during the first quarter of fiscal 2000.
INCOME TAXES:
The Company recorded an income tax provision at an effective rate of 36% in the
current year first quarter, equal to the tax provision of 36% for 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:
The Company earned $.24 per share, assuming dilution, for the current year first
quarter compared to $.13 per share, assuming dilution, in the prior year.
Weighted average shares outstanding - assuming dilution, decreased to 7,447,000
from 8,107,000 in the first quarter of fiscal 1999 due primarily to the fiscal
1999 repurchase of 585,000 shares and the fiscal 2000 repurchase of 392,500
shares.
10
<PAGE>
PART I - FINANCIAL INFORMATION
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 arose 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 assessment of Year 2000 issues is ongoing, at the date of
this report the Company had not experienced any effects from Year 2000 issues. A
summary of the Company's preparation for Year 2000 issues, as well as certain
disclaimers, is 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 ready. Based on
these changes, the Company does not believe that the Year 2000 issue has or 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 updated the software to allow operation without concern
for calendar dates. The required updates are now 100% complete. The Company
obtained 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 was informed by
these companies that such machines and systems were Year 2000 ready.
The Company has evaluated 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 were to have been
identified with key vendors, the Company expected to be able to manage purchases
and inventories to minimize the Year 2000 issue related delays 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. Management believes that the Company's exposure to third party Year
2000 risks is not significant and has diminished rapidly with passage of time.
However, there can be no assurance that systems of other companies on which the
Company may rely were converted or that such failure to convert would not have
an adverse effect on the Company's operations. It appears that none of the
Company's casino customers experienced any Year 2000 problems, however, such
operations are collectively many times the size of the Company and the Company
does not have the resources to undertake a complete evaluation.
In view of its fiscal 1997 systems upgrades, no significant expenses were
incurred in 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 2000.
11
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
As of January 31, 2000, the Company had cash and cash equivalents and
investments totaling $2,351,000, compared to $5,641,000 at October 31, 1999. The
current ratio increased to 2.2 to 1 from 1.9 to 1 at October 31, 1999, while
working capital decreased to $5,916,000 at January 31, 2000, from $7,427,000 at
October 31, 1999. The repurchase of $3,267,000 in common stock during the first
quarter of fiscal 2000 contributed to the decrease in cash and working capital
at January 31, 2000. The payment 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 current fiscal quarter and contributed to the
increase in the current ratio. Cash provided by operations totaled $1,118,000 in
the current year first quarter compared to cash provided by operations of
$2,017,000 in the first quarter of last year. Significant items under cash flows
from operating activities in the current period include net income of
$1,767,000, and non-cash charges for depreciation and amortization as well as
for provisions for bad debts, inventory obsolescence, and deferred income taxes,
which totaled $2,340,000. Another significant source of cash included the
reduction of accounts receivable of $533,000 due to the collection of shuffler
sales and lease receivables. Investing activities include capital expenditures
totaling $1,269,000 for additions to leased gaming equipment and game products
as well as 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. 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.
12
<PAGE>
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS:
On December 28, 1999 the Company settled all of its litigation with Progressive
Games, Inc. ("PGI"), a wholly owned subsidiary of Mikohn Gaming Corporation
("Mikohn"). The Company made a one-time payment of $2,750,000 ($1,760,000 or
$.22 per diluted share, after tax) to PGI and consented to the validity,
enforceability and infringement of certain PGI patents. This settlement amount
was accrued as an expense in the consolidated financial statements as of October
31, 1999. The Company will not pay future royalties for Let It Ride Bonus(R),
Let It Ride The Tournament(R) and Three Card Poker(R). It will pay
pre-negotiated royalties if it markets other table games utilizing a side bet
with a fixed payout.
Under separate license agreements, PGI/Mikohn will pay the Company future
royalties of approximately $580,000 per year over the next five years for the
rights to use the Company's coin sensing patents, the Company's multi-tiered
game wagering patent and the Company's intellectual property related to its
Bahama Bonus(TM) table game. The Company and PGI/Mikohn also entered into a
mutually beneficial cross-supplier agreement.
As part of the settlement PGI has released and will dismiss all claims against
Prime Table Games, Derek Webb, Hannah O'Donnell and the Company's casino
licensees named in the litigation, which satisfies the Company's indemnification
obligation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K: none
13
<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 10, 2000
/s/ Gary W. Griffin
- -------------------------------------
Gary W. Griffin
Chief Financial Officer
/s/ Gerald W. Koslow
- -------------------------------------
Gerald W. Koslow
Corporate Controller
14
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