UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
--------------------------------------------------------------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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 August 29, 2000, there were 7,192,738 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)
JULY 31, OCTOBER 31,
(IN THOUSANDS) 2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,387 $ 1,476
Investments 4,296 4,165
Accounts receivable, net 3,918 3,482
Note receivable from related party 12 74
Inventories 4,432 4,524
Deferred income taxes 480 1,470
Other current assets 1,250 762
------------ ------------
Total current assets 15,775 15,953
PRODUCTS LEASED AND HELD FOR LEASE, NET 6,615 5,309
PROPERTY AND EQUIPMENT, NET 2,315 2,628
INTANGIBLE ASSETS, NET 5,791 5,717
NON-CURRENT DEFERRED INCOME TAXES 595 595
OTHER ASSETS 499 403
------------ ------------
TOTAL ASSETS $ 31,590 $ 30,605
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,125 $ 1,607
Accrued liabilities:
Compensation 1,396 939
Expenses 209 2,997
Severance benefits 34 154
Current portion of long-term obligation to related party 546 546
Customer deposits and unearned revenue 1,782 1,741
Income taxes payable 199 542
------------ ------------
TOTAL CURRENT LIABILITIES 6,291 8,526
LONG-TERM OBLIGATION TO RELATED PARTY 270 677
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 30,000 shares authorized 72 75
Additional paid-in capital 4,918 7,280
Retained earnings 20,039 14,047
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 25,029 21,402
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 31,590 $ 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 OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JULY 31, JULY 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Shuffler lease $ 3,333 $ 2,911 $ 9,382 $ 8,344
Shuffler sales and service 2,255 1,659 6,146 4,200
Table games 3,089 2,503 8,958 6,987
Slot games 274 210 1,136 438
Other 237 668 1,701 918
------------ ------------ ------------ ------------
9,188 7,951 27,323 20,887
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of products 2,517 2,660 7,813 6,601
Selling, general and administrative 2,363 2,159 7,040 6,211
Research and development 1,169 843 3,239 2,386
------------ ------------ ------------ ------------
6,049 5,662 18,092 15,198
------------ ------------ ------------ ------------
Income from operations 3,139 2,289 9,231 5,689
Interest income, net 97 62 183 254
------------ ------------ ------------ ------------
Income before income taxes 3,236 2,351 9,414 5,943
Provision for income taxes 1,197 850 3,422 2,140
------------ ------------ ------------ ------------
NET INCOME $ 2,039 $ 1,501 $ 5,992 $ 3,803
============ ============ ============ ============
EARNINGS PER COMMON SHARE, BASIC $ .28 $ .19 $ .83 $ .48
============ ============ ============ ============
EARNINGS PER COMMON SHARE, DILUTED $ .27 $ .19 $ .80 $ .47
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES, BASIC 7,217 7,884 7,253 7,998
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES, DILUTED 7,675 7,935 7,527 8,028
============ ============ ============ ============
</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>
NINE MONTHS ENDED
JULY 31,
-----------------------------
(IN THOUSANDS) 2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,992 $ 3,803
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization 3,619 3,172
Provision for bad debts 75 --
Provision for inventory obsolescence 350 --
Deferred income taxes 990 350
Stock options issued for services (10) 104
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts and notes receivable (449) (1,197)
Inventories (258) (834)
Other current assets (488) 92
Accounts payable and accrued liabilities (2,135) 542
Customer deposits and unearned revenue 41 (34)
Income taxes payable (141) 338
------------ ------------
Net cash provided by operating activities 7,586 6,336
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (4,883) (10,282)
Proceeds from the sales and maturities of investments 4,752 12,081
Payments for products leased and held for lease (3,569) (3,033)
Purchases of property and equipment (194) (324)
Purchases of intangible assets (910) (3,217)
Other (109) 301
------------ ------------
Net cash used by investing activities (4,913) (4,474)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (3,267) (1,647)
Proceeds from issuance of common stock 912 173
Payments on long-term obligation to related party (407) (390)
------------ ------------
Net cash used by financing activities (2,762) (1,864)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (89) (2)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,476 2,564
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,387 $ 2,562
============ ============
NON-CASH TRANSACTION:
Payment of obligation to related party with common stock $ 141 $ 142
============ ============
CASH PAID FOR:
Income taxes $ 2,610 $ 1,853
============ ============
Interest $ 36 $ 60
============ ============
</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 July 31, 2000, and for the three and nine
month periods ended July 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 periods. The results of operations for the three
and nine months ended July 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.
Certain reclassifications have been made to the July 31, 1999 consolidated
financial statements to conform to the July 31, 2000 financial statement
presentation. These reclassifications had no effect on the operating
results for the three and nine months ended July 31, 1999, as previously
reported.
2. INVENTORIES:
JULY 31, OCTOBER 31,
DESCRIPTION 2000 1999
------------------------------ ------------ ------------
(In thousands)
Raw materials $ 2,041 $ 2,598
Work-in-progress 734 564
Finished goods 1,657 1,362
------------ ------------
$ 4,432 $ 4,524
============ ============
3. PRODUCTS LEASED AND HELD FOR LEASE:
JULY 31, OCTOBER 31,
DESCRIPTION 2000 1999
------------------------------ ------------ ------------
(In thousands)
PRODUCTS LEASED:
Game equipment $ 7,353 $ 6,697
Gaming products 3,282 3,231
------------ ------------
10,635 9,928
------------ ------------
PRODUCTS HELD FOR LEASE:
Game equipment 2,357 2,242
Gaming products 1,489 741
------------ ------------
3,846 2,983
------------ ------------
14,481 12,911
Less: Accumulated depreciation (7,866) (7,602)
------------ ------------
$ 6,615 $ 5,309
============ ============
4. COMMON STOCK:
In the first nine months of fiscal 2000, the Company repurchased 392,500
shares at a total cost of $3,267,000, compared to 236,350 shares
repurchased at a total cost of $1,647,000 in the first nine months of
fiscal 1999. All repurchases during fiscal 2000 occurred in the first
quarter. As of July 31, 2000, the amount remaining for share repurchase
under the most recent board authorization was $2,000,000.
5
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 NINE MONTHS ENDED
JULY 31, JULY 31,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C>
NET INCOME 2,039 1,501 5,992 3,803
========== ========== ========== ==========
BASIC:
Weighted average shares outstanding 7,185 7,830 7,215 7,939
Shares to be issued under asset purchase agreement 32 54 38 59
---------- ---------- ---------- ----------
Weighted average common shares, basic 7,217 7,884 7,253 7,998
========== ========== ========== ==========
ASSUMING DILUTION:
Weighted average common shares, basic 7,217 7,884 7,253 7,998
Dilutive impact of options outstanding 458 51 274 30
---------- ---------- ---------- ----------
Weighted average common shares, diluted 7,675 7,935 7,527 8,028
========== ========== ========== ==========
EARNINGS PER SHARE, BASIC .28 .19 .83 .48
========== ========== ========== ==========
EARNINGS PER SHARE, DILUTED .27 .19 .80 .47
========== ========== ========== ==========
</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 balance of the severance
liability as of October 31, 1999 was $154,000 and the remaining liability
as of July 31, 2000 represents severance benefits to be paid to a former
employee in fiscal 2000.
<TABLE>
<CAPTION>
AS OF JULY 31, 2000 CHARGE UTILIZED NOT USED BALANCE
----------------------------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Write-down of assets $ 1,423 $ 1,423 $ -- $ --
Employee severance benefits 1,050 817 199 34
Other 177 163 14 --
---------- ---------- ---------- ----------
$ 2,650 $ 2,403 $ 213 $ 34
========== ========== ========== ==========
</TABLE>
6
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. OPERATING SEGMENTS:
The Company operates in two business segments: game equipment and gaming
products. The game equipment segment includes the manufacturing, marketing,
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, NINE MONTHS ENDED,
JULY 31, JULY 31,
----------------------------- -----------------------------
(in thousands) 2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Game equipment $ 5,826 $ 5,238 $ 16,529 $ 13,462
Gaming products 3,362 2,713 10,794 7,425
------------ ------------ ------------ ------------
9,188 7,951 27,323 20,887
============ ============ ============ ============
OPERATING INCOME
Game equipment 3,372 2,734 9,286 7,214
Gaming products 1,218 1,021 4,764 2,965
Corporate (1,451) (1,466) (4,819) (4,490)
------------ ------------ ------------ ------------
3,139 2,289 9,231 5,689
============ ============ ============ ============
DEPRECIATION AND AMORTIZATION
Game equipment 451 560 1,296 1,490
Gaming products 618 475 1,802 1,054
Corporate 180 204 521 628
------------ ------------ ------------ ------------
1,249 1,239 3,619 3,172
============ ============ ============ ============
CAPITAL EXPENDITURES
Game equipment 1,023 198 2,567 1,546
Gaming products 779 4,330 1,912 4,704
Corporate 173 83 194 324
------------ ------------ ------------ ------------
$ 1,975 $ 4,611 $ 4,673 $ 6,574
============ ============ ============ ============
<CAPTION>
AS OF JULY 31,
-----------------------------
2000 1999
------------ ------------
ASSETS
Game equipment $ 10,872 $ 8,401
Gaming products 10,744 11,178
Corporate 9,974 11,603
------------ ------------
$ 31,590 $ 31,182
============ ============
</TABLE>
7
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 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.
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 NINE MONTHS
------------------------- -------------------------
PERIOD ENDED JULY 31, 2000 1999 2000 1999
------------------------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Products 27.4 33.4 28.6 31.6
---------- ---------- ---------- ----------
Gross Margin 72.6 66.6 71.4 68.4
---------- ---------- ---------- ----------
Selling, general and administrative 25.7 27.2 25.8 29.7
Research and development 12.7 10.6 11.9 11.5
---------- ---------- ---------- ----------
Income from operations 34.2 28.8 33.7 27.2
Interest income, net 1.0 0.8 0.7 1.2
---------- ---------- ---------- ----------
Income before income taxes 35.2 29.6 34.4 28.4
Provision for income taxes 13.0 10.7 12.5 10.2
---------- ---------- ---------- ----------
Net Income 22.2% 18.9% 21.9% 18.2%
========== ========== ========== ==========
</TABLE>
REVENUE:
Revenue for the third fiscal quarter ended July 31, 2000, was $9,188,000, an
increase of $1,237,000 or 15.6% from the same period last year. Shuffler sales
and service revenue increased to $2,255,000 in the current quarter, compared to
$1,659,000 in the third quarter last year. Current quarter shuffler sales were
215 units at an average price of $9,100, while sales in the third quarter of the
prior year were 150 units at an average price of $9,000. Average unit sales
prices increased 1.0% in the current fiscal quarter as compared to the third
quarter of fiscal 1999 due to the sale of higher priced ACE(TM) and King(TM)
shufflers which were partly offset by the sale of lower priced multi-deck
shufflers. Shuffler sales and service revenue also includes revenue from the
sale of extended service and parts warranty contracts, which increased to
$248,000 in the current third quarter from $234,000 in the third quarter of the
prior year. Shuffler lease revenue increased by $422,000 or 14.4% to $3,333,000
in the current year third quarter. The shuffler installed lease base was 2,807
at July 31, 2000, compared to 2,174 at July 31, 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 earning recurring revenue. The 554 unit increase in the
installed shuffler lease base during the first nine months of the year was
attributable to the placement of 742 ACE(TM) shufflers, offset by the net
removal of 406 BG shufflers, the majority of which were exchanged for ACE(TM)
shufflers, as well as the placement of 237 newly introduced King(TM) shufflers.
Revenue from table games was $3,089,000, an increase of $586,000 or 23.4% from
the third quarter last year. The installed base of Let It Ride Bonus(R) tables
was 469 at July 31, 2000, compared to 376 installed Bonus tables at July 31,
1999 and 424 installed Bonus tables at October 31, 1999. The increase in
installed Bonus tables compared to the prior year third 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 205 installed basic tables at July 31, 2000, compared to 267
installed basic tables at July 31, 1999 and 233 installed basic tables at
October 31, 1999. The decrease in installed basic tables from July 31, 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 $126,000 earned from Three Card
Poker(R). There were 259 Three Card Poker(R) games installed as of July 31,
2000,
9
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
compared to 174 installed tables at July 31, 1999 and 188 installed tables 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 third quarter related to the December
1999 settlement with Progressive Games, Inc.
Slot revenue increased by $64,000 or 30.5% to $274,000 in the current third
quarter from the prior year third quarter. The installed lease base was 445 slot
machines as of July 31, 2000, compared to 563 installed units as of July 31,
1999 and 526 units as of October 31, 1999. The decrease in the installed base
from the prior year third quarter was due to the removal of Five Deck Frenzy(R)
and Let's Make A Deal(TM) slot games. Recurring slot lease revenue decreased by
$76,000 in the current third quarter compared to the prior year third quarter
primarily due to the cessation of recording revenue on Let's Make A Deal(TM)
slot game, pending resolution of litigation with Bally Gaming, Inc. This
decrease in recurring slot revenue in the current third quarter was offset by
$140,000 in revenue from the sale of video games.
Other revenue decreased to $237,000 in the current third quarter from $668,000
in the prior year third quarter due primarily to reduced sales of Chipper
Champ(TM) chip sorting machines and other TCS products under the Company's joint
marketing agreement with TCS America, Inc. Recurring lease revenue from Chipper
Champ(TM) chip sorting machines increased 16.5% to $148,000 in the current third
quarter compared to $127,000 in the prior year third quarter.
Revenue for the nine months ended July 31, 2000 was $27,323,000, an increase of
$6,436,000 or 30.8% over the nine month period ended July 31, 1999. Shuffler
lease revenue increased by $1,038,000 or 12.4% to $9,382,000 in the current year
nine months, compared to $8,344,000 in the prior year nine months, while
shuffler sales and service increased by $1,946,000 or 46.3% to $6,146,000 in the
current nine months compared to $4,200,000 in the prior year nine months. This
shuffler sales increase was due to the sale of 530 shufflers in the current year
nine months compared to the sale of 374 units in the prior year nine months.
Table game revenue increased by $1,971,000 or 28.2% to $8,958,000 in the current
year nine months compared to $6,987,000 in the prior year nine months, because
of an increase in table placements to 933 tables as of July 31, 2000, up from
817 one year ago. Slot revenue increased by $698,000 to $1,136,000 due primarily
to the installation of Let's Make A Deal(TM) and The Three Stooges(TM) slot
games in late fiscal 1999 and early fiscal 2000. Other revenue in the current
year nine months increased by $783,000 from the prior year nine months,
principally due to the receipt of $700,000 in technology license and evaluation
fees in the first and second quarters of fiscal 2000.
COSTS AND EXPENSES:
Gross margin was 72.6% and 71.4% for the current third quarter and nine months,
respectively, compared to 66.6% and 68.4% in the comparable prior year periods.
The margin increase in the current third quarter was partly due to higher
margins on leased shuffler and table products. Additionally indirect cost of
sales, which includes service and installation costs, expressed as a percentage
of sales, decreased to 12.5% of sales in the current fiscal year third quarter
from 13.2% in the prior year third quarter. This decrease is due to the combined
effect of increases in service costs that were more than offset by decreases in
indirect manufacturing and distribution costs.
Selling, general and administrative expenses increased by $204,000 or 9.4% to
$2,363,000 in the current third quarter, and by $829,000 or 13.3% to $7,040,000
in the current nine month period. Sales staffing, commission and travel expenses
increased by $259,000 and $556,000 from the prior year third quarter and nine
months, respectively, resulting from the hiring of new sales staff and increased
commissions from increased sales in the first nine months of the current fiscal
year. Accrued bonus expense under Company bonus plans increased $102,000 and
$638,000 from the prior year third quarter and nine months due to increased
staffing and increased operating income in the current year. Legal expense
decreased $154,000 in the current third quarter and $328,000 in the current nine
months compared to the comparable prior year periods due to the settlement with
Progressive Games, Inc. in December 1999.
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 $326,000 or 38.7% over the prior
year fiscal quarter to $1,169,000, and by $853,000 over the prior year nine
month period to $3,239,000. 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 $97,000 in the current third quarter and $183,000 for
the current nine month period, compared to $62,000 and $254,000, respectively,
in comparable periods in the prior year. This increase in the current year third
quarter is due to higher interest bearing investment account balances during the
quarter. Investments were $4,296,000 as of July 31, 2000 compared to $4,109,000
as of July 31, 1999.
INCOME TAXES:
The Company recorded income tax expense at an effective rate of 37.0% for the
current third quarter and 36.4% for the current nine months compared to the tax
provision of 36.0% for the comparable periods in fiscal 1999, reflecting a
decreased tax benefit from the Company's foreign sales corporation in the
current year.
EARNINGS PER SHARE:
Diluted earnings per common share were $.27 for the current third quarter and
$.80 for the current nine month period, compared to $.19 and $.47 for the
respective prior year periods. Diluted weighted average common shares decreased
to 7,675,000 in the third quarter, and 7,527,000 for the nine months, compared
to 7,935,000 and 8,028,000 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.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2000, the Company had cash, cash equivalents and investments
totaling $5,683,000, compared to $5,641,000 at October 31, 1999. The current
ratio increased to 2.5 to 1 from 1.9 to 1 at October 31, 1999, while working
capital increased to $9,484,000 at July 31, 2000 from $7,427,000 at October 31,
1999. Cash provided by operations totaled $7,586,000 in the current nine month
period, compared to cash provided by operations of $6,336,000 in the first nine
months of last year. Significant items under cash flows from operating
activities in the first nine months of fiscal 2000 included net income of
$5,992,000 and non-cash charges for depreciation and amortization as well as for
provisions for bad debts, inventory obsolescence, and deferred taxes which
totaled $5,024,000, compared to net income of $3,803,000 and non-cash charges of
$3,626,000 in the first nine months of last year. The payment of an accrued
expense 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 nine months of the current fiscal year.
Investing activities included cash used in the first nine months of the current
fiscal year for capital expenditures totaling $4,673,000 for net additions to
leased gaming equipment and game products as well as other fixed assets.
Financing activities included the repurchase of $3,267,000 in common stock
during the first quarter of the current fiscal year and the issuance of 94,000
shares of common stock for $770,000 pursuant to the exercise by non-officer
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.
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PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.18 Executive Employment Agreement, by and between Shuffle Master,
Inc. and Joseph J. Lahti, dated November 1, 1999 (confidential
treatment requested as to portions).
10.19 Executive Employment Agreement, by and between Shuffle Master,
Inc. and Gary W. Griffin, dated December 1, 1999 (confidential
treatment requested as to portions).
27.0 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: September 6, 2000
/s/ Gary W. Griffin
--------------------------------------
Gary W. Griffin
Chief Financial Officer
/s/ Gerald W. Koslow
--------------------------------------
Gerald W. Koslow
Corporate Controller
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