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, 2001
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)
1106 Palms Airport Drive NV 89119
(Address of Principal Executive Offices) (State) (Zip Code)
Registrant's Telephone Number, Including Area Code: (702) 897-7150
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 31, 2001, there were 18,067,824 shares of the Company's $.01 par
value common stock outstanding.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(unaudited)
JULY 31, OCTOBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,643 $ 2,810
Investments 14,815 3,809
Accounts receivable, net 4,862 4,571
Current portion of note receivable from related parties 18 17
Inventories 6,880 6,194
Deferred income taxes 408 580
Other current assets 2,544 594
------------ ------------
Total current assets 33,170 18,575
SYSTEMS AND EQUIPMENT LEASED AND HELD FOR LEASE, NET 7,276 6,676
PROPERTY AND EQUIPMENT, NET 2,334 2,441
INTANGIBLE ASSETS, NET 8,942 5,802
NON-CURRENT DEFERRED INCOME TAXES 673 710
LONG-TERM NOTE RECEIVABLE FROM RELATED PARTIES 477 300
OTHER ASSETS 111 110
------------ ------------
TOTAL ASSETS $ 52,983 $ 34,614
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,998 $ 1,489
Accrued liabilities 2,328 2,576
Current portion of long-term obligation to related party 245 580
Customer deposits and unearned revenue 2,685 1,862
------------ ------------
TOTAL CURRENT LIABILITIES 9,256 6,507
LONG-TERM OBLIGATION TO RELATED PARTY -- 97
CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 67,500 shares authorized 181 163
Additional paid-in capital 12,172 5,263
Retained earnings 31,374 22,584
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 43,727 28,010
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 52,983 $ 34,614
============ ============
See notes to unaudited consolidated financial statements
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUE:
Shuffler lease $ 4,063 $ 3,333 $ 12,015 $ 9,382
Shuffler sales and service 2,794 2,255 9,646 6,146
Table games 3,897 3,089 11,115 8,958
Slot games 1,766 274 3,049 1,136
Other 64 237 317 1,701
------------ ------------ ------------ ------------
12,584 9,188 36,142 27,323
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of products 3,230 2,517 9,623 7,813
Selling, general and administrative 3,381 2,363 9,275 7,040
Research and development 1,384 1,169 4,316 3,239
------------ ------------ ------------ ------------
7,995 6,049 23,214 18,092
------------ ------------ ------------ ------------
Income from operations 4,589 3,139 12,928 9,231
Interest income, net 195 97 493 183
------------ ------------ ------------ ------------
Income before income taxes 4,784 3,236 13,421 9,414
Provision for income taxes 1,566 1,197 4,631 3,422
------------ ------------ ------------ ------------
NET INCOME $ 3,218 $ 2,039 $ 8,790 $ 5,992
============ ============ ============ ============
EARNINGS PER COMMON SHARE, BASIC $ .18 $ .13 $ .52 $ .37
============ ============ ============ ============
EARNINGS PER COMMON SHARE, DILUTED $ .17 $ .12 $ .48 $ .35
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES, BASIC 17,687 16,238 17,021 16,319
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES, DILUTED 18,939 17,269 18,474 16,936
============ ============ ============ ============
See notes to unaudited consolidated financial statements
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
JULY 31,
-----------------------------
(IN THOUSANDS) 2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,790 $ 5,992
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 4,102 3,619
Provision for bad debts 25 75
Provision for inventory obsolescence 500 350
Deferred income taxes 209 990
Stock options issued for services 92 (10)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts and notes receivable (279) (449)
Inventories (624) (258)
Other current assets (1,941) (488)
Accounts payable and accrued liabilities 1,605 (2,135)
Customer deposits and unearned revenue 823 41
Income taxes payable (238) (141)
------------ ------------
Net cash provided by operating activities 13,064 7,586
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (14,832) (4,883)
Proceeds from the sales and maturities of investments 4,331 4,752
Payments for products leased and held for lease (3,081) (3,569)
Purchases of property and equipment (473) (194)
Purchases of intangible assets (362) (910)
Acquisition of business, net of cash acquired (4,015) --
Other (200) (109)
------------ ------------
Net cash (used by) investing activities (18,632) (4,913)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (2,162) (3,267)
Proceeds from issuance of common stock 8,854 912
Payments on long-term obligation to related party (291) (407)
------------ ------------
Net cash (used) provided by financing activities 6,401 (2,762)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 833 (89)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,810 1,476
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,643 $ 1,387
============ ============
NON-CASH TRANSACTION:
Payment of obligation to related party with common stock $ 141 $ 141
============ ============
CASH PAID FOR:
Income taxes $ 4,546 $ 2,610
============ ============
Interest $ 9 $ 36
============ ============
See notes to unaudited consolidated financial statements
4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. INTERIM FINANCIAL STATEMENTS:
The financial statements as of July 31, 2001, and for the three and nine
month periods ended July 31, 2001 and 2000, 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, 2001 are not necessarily indicative of the
results to be expected for any subsequent quarter or for the year ending
October 31, 2001. These interim statements should be read in conjunction
with the Company's October 31, 2000, financial statements and notes thereto
included in its Form 10-K.
Certain reclassifications have been made to the July 31, 2000 consolidated
financial statements to conform with the July 31, 2001 financial statement
presentation. These reclassifications had no effect on the operating
results for the three and nine months ended July 31, 2000, as previously
reported.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" ("SFAS No. 141") and SFAS No. 142 "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS Nos. 141 and 142 prescribe
new accounting guidance for business combinations and related acquired
intangible assets, including goodwill.
Under SFAS No. 142, goodwill as well as other intangibles determined to
have an infinite life will no longer be amortized; however, these assets
will be reviewed for impairment on a periodic basis. SFAS No. 142 also
includes provisions for the reclassification of certain existing recognized
intangibles such as goodwill, reclassification of certain intangibles out
of previously reported goodwill and the identification of reporting units
for purposes of assessing potential future impairments of goodwill. The
Company plans to adopt these standards on November 1, 2001. The Company is
currently assessing but has not yet determined the impact of SFAS No. 142
on its financial position and results of operations.
2. INVENTORIES:
JULY 31, OCTOBER 31,
DESCRIPTION 2001 2000
----------------------------------- ------------ ------------
(In thousands)
Raw materials $ 3,850 $ 3,294
Work-in-progress 1,125 823
Finished goods 1,905 2,077
------------ ------------
$ 6,880 $ 6,194
============ ============
3. SYSTEMS AND EQUIPMENT LEASED AND HELD FOR LEASE:
JULY 31, OCTOBER 31,
DESCRIPTION 2001 2000
----------------------------------- ------------ ------------
(In thousands)
Game equipment $ 9,741 $ 10,176
Gaming products 6,505 4,292
------------ ------------
16,246 14,468
Less: Accumulated depreciation (8,970) (7,792)
------------ ------------
$ 7,276 $ 6,676
============ ============
5
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. COMMON STOCK:
In the first nine months of fiscal 2001, the Company repurchased 130,000
shares at a total cost of $2,162,000, compared to 392,500 shares
repurchased at a total cost of $3,267,000 in the first nine months of
fiscal 2000. Additionally, the Company issued 1,831,000 shares of common
stock for $8,854,000 pursuant to stock options exercised by employees and
directors under the Company's stock options plans. On September 10, 2001
the Board of Directors voted to terminate all prior common share repurchase
authorizations and authorized the repurchase of up to $5,000,000 of the
Company's common shares.
5. EARNINGS PER SHARE:
The following table shows the reconciliation of basic earnings per share to
diluted earnings per share. (All amounts have been restated to reflect the
effects of the Company's three for two stock splits in November 2000 and
June 2001):
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands, except for per share amounts)
NET INCOME $ 3,218 $ 2,039 $ 8,790 $ 5,992
========== ========== ========== ==========
BASIC:
Weighted average shares outstanding 17,663 16,165 16,997 16,233
Shares to be issued under asset purchase 24 73 24 86
---------- ---------- ---------- ----------
Weighted average common shares, basic 17,687 16,238 17,021 16,319
========== ========== ========== ==========
ASSUMING DILUTION:
Weighted average common shares, basic 17,687 16,238 17,021 16,319
Dilutive impact of options outstanding 1,252 1,031 1,453 617
---------- ---------- ---------- ----------
Weighted average common shares, diluted 18,939 17,269 18,474 16,936
========== ========== ========== ==========
EARNINGS PER SHARE, BASIC $ .18 $ .13 $ .52 $ .37
========== ========== ========== ==========
EARNINGS PER SHARE, DILUTED $ .17 $ .12 $ .48 $ .35
========== ========== ========== ==========
6. OPERATING SEGMENTS:
The Company operates in two business segments: game equipment and gaming
products. The game equipment segment includes the manufacturing, marketing,
installing and servicing of the Company's proprietary shuffler product line
and, until the sale of this product line in January 2001, 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,
slot games, and the Company's new slot operating system. 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.
6
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
THREE MONTHS ENDED, NINE MONTHS ENDED,
JULY 31, JULY 31,
------------------------- -------------------------
(in thousands) 2001 2000 2001 2000
---------- ---------- ---------- ----------
REVENUE
Game equipment $ 6,921 $ 5,826 $ 21,978 $ 16,529
Gaming products 5,663 3,362 14,164 10,794
---------- ---------- ---------- ----------
12,584 9,188 36,142 27,323
========== ========== ========== ==========
OPERATING INCOME
Game equipment 3,810 3,372 12,818 9,286
Gaming products 3,039 1,218 6,449 4,764
Corporate expenses (2,260) (1,451) (6,339) (4,819)
---------- ---------- ---------- ----------
4,589 3,139 12,928 9,231
========== ========== ========== ==========
DEPRECIATION AND AMORTIZATION
Game equipment 559 451 1,626 1,296
Gaming products 685 618 1,855 1,802
Corporate 216 180 621 521
---------- ---------- ---------- ----------
1,460 1,249 4,102 3,619
========== ========== ========== ==========
CAPITAL EXPENDITURES
Game equipment 325 1,023 533 2,567
Gaming products 1,345 779 2,910 1,912
Corporate 136 173 473 194
---------- ---------- ---------- ----------
$ 1,806 $ 1,975 $ 3,916 $ 4,673
========== ========== ========== ==========
AS OF JULY 31,
-------------------------
2001 2000
---------- ----------
ASSETS
Game equipment $ 14,762 $ 10,872
Gaming products 15,349 10,744
Corporate 22,872 9,974
---------- ----------
$ 52,983 $ 31,590
========== ==========
7. CONTINGENCIES:
On April 5, 2001, the Company was sued by Innovative Gaming Corporation of
America, a Minnesota corporation ("IGCA"). The suit was filed in the
District Court of the State of Nevada, in Washoe County, Nevada. The
defendants are the Company and Joseph Lahti, the Company's Chairman. The
complaint alleges breach of contract, negligence, misrepresentation and
related theories of liability, all relating to a confidentiality agreement
with respect to what IGCA claims to be its intellectual property. The
Company has answered the complaint by denying any liability and raising
various affirmative defenses. The Company completely denies IGCA's claims
and believes it will prevail in the lawsuit.
7
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As part of the finalized settlement of the Company's litigation with
International Game Technology ("IGT") in July 2001, the Company entered
into several confidential definitive agreements relating to the development
of future games. Certain of these agreements provide that IGT and the
Company will develop five new game titles based upon licenses to be
provided by the Company. In consideration of certain work to be performed
by IGT in connection with the new game titles, IGT may become entitled to a
$400,000 completion payment from the Company for each game title developed.
IGT will become entitled to such completion payments only if IGT timely
meets certain performance obligations respective to each game, and if each
specific game achieves defined minimum placement levels in the competitive
marketplace.
8
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 unaudited Consolidated Statements of Income:
THREE MONTHS NINE MONTHS
------------------- -------------------
PERIOD ENDED JULY 31, 2001 2000 2001 2000
- ---------------------------------- ------ ------ ------ ------
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Products 25.7 27.4 26.6 28.6
------ ------ ------ ------
Gross Margin 74.3 72.6 73.4 71.4
------ ------ ------ ------
Selling, general and administrative 26.9 25.7 25.7 25.8
Research and development 11.0 12.7 11.9 11.9
------ ------ ------ ------
Income from operations 36.4 34.2 35.8 33.7
Interest income, net 1.6 1.0 1.3 0.7
------ ------ ------ ------
Income before income taxes 38.0 35.2 37.1 34.4
Provision for income taxes 12.4 13.0 12.8 12.5
------ ------ ------ ------
Net Income 25.6% 22.2% 24.3% 21.9%
====== ====== ====== ======
REVENUE:
Revenue for the third fiscal quarter ended July 31, 2001, was $12,584,000, an
increase of $3,396,000 or 37.0% from the same period last year. This increase
was attributable to increased revenue in all business segments. Shuffler sales
and service revenue increased to $2,794,000 in the current quarter, compared to
$2,255,000 in the third quarter last year. Current quarter shuffler sales were
250 units at an average price of $9,800, while sales in the third quarter of the
prior fiscal year were 215 units at an average price of $9,100. Average unit
sales prices increased 7.7% due to increased sales of higher-priced ACE(R)
shufflers in the current quarter. Shuffler sales and service revenue also
includes revenue from the sale of extended service contracts, which increased to
$265,000 in the current third quarter from $248,000 in the third quarter of the
prior fiscal year. Shuffler lease revenue increased by $730,000 or 21.9% to
$4,063,000 in the current fiscal year third quarter. The shuffler installed
lease base was 3,085 at July 31, 2001, compared to 2,807 at July 31, 2000 and
2,935 at October 31, 2000. This increase in the installed lease base from the
prior year was due to the Company's fiscal 2000 and 2001 business objectives to
increase its installed base of leased ACE(R) and King(TM) shufflers. The 146
unit increase in the installed lease base during the first nine months of fiscal
2001 was attributable to the net placement of 229 ACE(R) and 93 King(TM)
shufflers, and the net removal of 72 multi-deck and 104 single deck BG
shufflers. In the current year fiscal third quarter, sales of units converted
from lease totaled 17 units, compared to 22 leased units converted to sales in
the prior year fiscal third quarter.
Revenue from table games was $3,897,000, an increase of $808,000 or 26.2% from
the third fiscal quarter last year. This increase was primarily due to placement
of Three Card Poker(R) table games. There were 500 Three Card Poker(R) games
installed at July 31, 2001, compared to 259 installed tables at July 31, 2000
and 293 installed tables at October 31, 2000. Additionally, the installed base
of Let It Ride Bonus(R) tables was 540 at July 31, 2001, compared to 469
installed Bonus tables at July 31, 2000 and 500 installed Bonus tables at
October 31, 2000. The increase in installed Bonus tables compared to the prior
year third fiscal quarter was due to new placements and conversion of Let It
Ride(R) basic table games to Bonus table games. 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 those of the basic game. There were 160 installed
basic tables at July 31, 2001, compared to 205 installed basic tables at July
31, 2000 and 186 installed basic tables at October 31, 2000. The decrease in
installed basic tables from July 31, 2000 was primarily due to conversions from
the basic game to the Bonus game.
9
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 $1,492,000 or 544.5% to $1,766,000 in the current
fiscal year third quarter from the prior year fiscal third quarter. Included in
current quarter slot revenue is $1,000,000 in revenue related to provisions of
the Company's fiscal 2000 video slot game agreements with IGT. These agreement
provisions prescribed minimum profits due to the Company based on video game
rollout schedules. This revenue relates to these minimums and is in addition to
revenue currently being generated by units installed in casinos.
The slot video installed lease base was 511 slot units as of July 31, 2001,
compared to 445 installed units as of July 31, 2000 and 545 units as of October
31, 2000. The increase in the installed base from the prior year fiscal third
quarter was due to the placement of The Three Stooges(R) and Let's Make A
Deal(R) slot games under the Company's agreements with IGT. Accordingly,
recurring slot lease revenue increased by $613,000 to $762,000 in the current
fiscal third quarter compared to the prior year third fiscal quarter.
Other revenue decreased to $64,000 in the current fiscal third quarter from
$237,000 in the prior year fiscal third quarter due to the termination of the
Company's joint marketing agreement with TCS America, Inc. in January 2001.
Revenue for the nine months ended July 31, 2001 was $36,142,000, an increase of
$8,819,000 or 32.3% over the nine month period ended July 31, 2000. Shuffler
lease revenue increased by $2,633,000 or 28.1% to $12,015,000 in the current
year nine months, compared to $9,382,000 in the prior fiscal year nine months,
while shuffler sales and service revenue increased by $3,500,000 or 57.0% to
$9,646,000 in the current nine months compared to $6,146,000 in the prior year
nine months. This shuffler sales increase was due to the sale of 873 shufflers
in the current year nine months compared to 530 units in the prior year nine
months. Table game revenue increased by $2,157,000 or 24.1% to $11,115,000 in
the current year nine months as compared to $8,958,000 in the prior year nine
months, as total table placements increased by 269 tables to 1,225 tables at
July 31, 2001 from 956 tables at July 31, 2000, due primarily to placements of
the Three Card Poker(R) game. Video slot game revenue increased by $1,913,000 or
168.4% to $3,049,000, due primarily to the recording in the current nine months
of the $1,000,000 in revenue from IGT related to minimum profit provisions in
the Company's fiscal 2000 video slot game agreements with IGT, as well as
increasing lease revenue from current year installations of Press Your Luck(TM),
Let's Make A Deal(R), and The Three Stooges(R). Other revenue in the current
year nine months decreased by $1,384,000 from the prior year nine months,
principally due to the termination of the Company's joint marketing agreement
with TCS America, Inc. in January 2001 and the receipt of $700,000 in technology
license and evaluation fees in the prior year nine months.
COSTS AND EXPENSES:
Gross margin was 74.3% and 73.4% in the current fiscal third quarter and nine
months year to date, compared to 72.6% and 71.4% in the comparable prior year
periods. Current quarter gross margin includes the $1,000,000 in slot revenue
recorded pursuant to the Company's fiscal 2000 video slot game agreements with
IGT. Excluding this slot revenue item, gross margin for the current third fiscal
quarter and nine months would have been 72.1% and 72.6% respectively. This
decrease in gross margin was primarily due to service, installation, and
indirect production costs, which, expressed as a percentage of sales, increased
to 13.2% in the current year fiscal third quarter from 12.5% in the prior year
fiscal year third quarter.
Selling, general and administrative expenses increased by $1,018,000 or 43.1% to
$3,381,000 in the current third fiscal quarter and by $2,235,000 to $9,275,000
in the current nine month period. Selling, general and administrative expenses
increased in the current fiscal third quarter and nine months, due to increases
in information systems modifications, bad debt, investor relations and executive
staffing expenses totaling $480,000 and $728,000, respectively. Legal expenses
increased by $191,000 and $137,000 from the prior year fiscal third quarter and
nine months, respectively, due to ongoing litigation with Innovative Gaming
Corporation of America and the settlement of litigation with IGT in the current
third fiscal quarter. General and administrative expenses in the Company's
recently acquired Australian shuffler production unit were $308,000 for the
current fiscal third quarter.
10
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 $215,000 or 18.4% over the prior
year fiscal quarter to $1,384,000, and by $1,077,000 over the prior year nine
month period to $4,316,000. These increases resulted from new game and slot
operating system development costs.
INTEREST INCOME, NET:
Interest income, net, was $195,000 in the current third fiscal quarter, compared
to $97,000 in the prior year third fiscal quarter. Cash and investments
increased to $18,458,000 at July 31, 2001, from $6,619,000 at October 31, 2000.
This increase in interest-bearing cash and investments was due primarily to the
Company increasing its operating profits in fiscal 2001 and receiving $8,854,000
in proceeds from the issuance of common stock through the exercise of employee
and director common stock options during the first nine months of fiscal 2001.
INCOME TAXES:
The Company recorded income tax expense at an effective rate of 32.7% for the
current third quarter, compared to the tax provision of 37.0% for the third
quarter of fiscal 2000. This decrease reflects a shift of the Company's taxable
income to more favorable tax jurisdictions and increased available federal
research and experimental credits for the current year as well as a
corresponding adjustment in the current quarter of the tax provision to reflect
a year-to-date effective tax rate of 34.5%.
EARNINGS PER SHARE:
The Company earned $.17 per share, assuming dilution, for the current year
fiscal third quarter, compared to $.13 per share, assuming dilution, in the
prior fiscal year. Weighted average shares outstanding, assuming dilution,
increased to 18,939,000 from 11,269,000 in the third fiscal quarter of 2000 due
to the exercise of 1,831,000 stock options during fiscal year 2001 and an
increase in the dilutive impact of remaining common stock options outstanding.
The dilutive impact of common stock options outstanding on earnings per share
increased by 221,000 shares to 1,252,000 shares during the quarter ended July
31, 2001, from 1,031,000 shares during the quarter ended July 31, 2000. The
increase in dilutive effects is a result of the increase in the market price of
the Company's common stock throughout the past year. This increase in market
price increased the number and dilutive impact of common stock options that
could be exercised. Per share and shares outstanding amounts for current year
and prior year fiscal quarters reflect the two three-for-two stock splits
effective in November 2000 and June 2001.
RECENTLY ISSUED ACCOUNTING STANDARDS:
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" ("SFAS No. 141") and SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS Nos. 141 and 142 prescribe new
accounting guidance for business combinations and related acquired intangible
assets, including goodwill.
Under SFAS No. 142, goodwill as well as other intangibles determined to have an
infinite life will no longer be amortized; however, these assets will be
reviewed for impairment on a periodic basis. SFAS No. 142 also includes
provisions for the reclassification of certain existing recognized intangibles
such as goodwill, reclassification of certain intangibles out of previously
reported goodwill and the identification of reporting units for purposes of
assessing potential future impairments of goodwill. The Company plans to adopt
these standards on November 1, 2001. The Company is currently assessing but has
not yet determined the impact of SFAS No. 142 on its financial position and
results of operations.
11
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
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LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL:
As of July 31, 2001, the Company had cash, cash equivalents and investments
totaling $18,458,000, compared to $6,619,000 at October 31, 2000. The current
ratio increased to 3.6 from 2.9 at October 31, 2000, while working capital
increased by $11,846,000 to $23,914,000 at July 31, 2001 from $12,068,000 at
October 31, 2000. The increase in cash, working capital, and the current ratio
at July 31, 2001 is primarily the result of the Company's increased operating
profits during the current fiscal year nine months and receipt of proceeds from
the issuance of common stock from employee and director stock options exercised
during the same period.
CASH FLOWS:
Cash provided by operations totaled $13,064,000 in the current year nine months
compared to cash provided by operations of $7,586,000 in the first nine months
of last year. Significant items in the cash flows from operating activities in
the current period include net income of $8,790,000 and non-cash charges for
depreciation and amortization as well as for provisions for bad debts, inventory
obsolescence, deferred taxes, and stock options issued for services, all of
which totaled $4,928,000, compared to net income of $5,992,000 and non-cash
charges of $5,024,000 in the first nine months of last year.
Significant uses and sources of cash flow from operating activities in the
current nine months also included an increase in accounts receivable, inventory,
and accounts payable of $279,000, $624,000, and $1,605,000, respectively,
primarily due to the purchase of game components and increased video slot game
lease activities, which include recently approved versions of The Three
Stooges(R) and Let's Make A Deal(R) games. Additionally, in the current third
fiscal quarter, the Company recorded, in other current assets, payments
receivable from IGT for $1,750,000, of which $1,000,000 was currently recognized
as revenue and $750,000 was deferred to future quarters, all related to its
fiscal 2000 video slot game agreements with IGT.
Investing activities in the first nine months of the current fiscal year
included the acquisition in April 2001 of Gaming Products, an Australian
manufacturer of the QuickDraw(R) shuffler product line, for $4,015,000, net of
cash acquired. Additionally, the Company invested $3,894,000 for gaming
equipment and game products leased to customers, new game licenses and other
fixed assets. The Company also increased its investment portfolio by $11,006,000
to $14,815,000 in the same period.
Financing activities during the first nine months of the current fiscal year
included the repurchase of 130,000 shares of common stock using cash of
$2,162,000 and the issuance of 1,831,000 shares of common stock for $8,854,000
pursuant to stock options exercised by employees and directors under the
Company's stock option plans.
CAPITAL RESOURCES:
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 in 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
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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)
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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 5, 2001, the Company was sued by Innovative Gaming Corporation of
America, a Minnesota corporation ("IGCA"). The suit was filed in the District
Court of the State of Nevada, in Washoe County, Nevada. The defendants are the
Company and Joseph Lahti, the Company's Chairman. The complaint alleges breach
of contract, negligence, misrepresentation and related theories of liability,
all relating to a confidentiality agreement with respect to what IGCA claims to
be its intellectual property. The Company has answered the complaint by denying
any liability and raising various affirmative defenses. The Company completely
denies IGCA's claims and believes it will prevail in the lawsuit and has accrued
no liability related to this litigation.
Effective July 31, 2001, the Company finalized the terms of its settlement with
IGT that was entered into on May 31, 2001 and that was disclosed in the
Company's fiscal 2001 second quarter 10-Q. All claims raised in the litigation
have been settled and the case has been dismissed with prejudice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.28 Articles of Amendment to the Articles of Incorporation of
Shuffle Master, Inc. dated June 6, 2001.
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 14, 2001
/s/ Gary W. Griffin
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Gary W. Griffin
Chief Financial Officer
(Principal Financial Officer)
/s/ Gerald W. Koslow
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Gerald W. Koslow
Corporate Controller
(Principal Accounting Officer)
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