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, 2002
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 March 8, 2002, there were 17,781,181 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)
JANUARY 31, OCTOBER 31,
(IN THOUSANDS) 2002 2001
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 6,045 $ 3,082
Investments 15,670 15,621
Accounts receivable, net 5,293 5,419
Current portion of note receivable from related party 49 60
Inventories 5,919 6,210
Deferred income taxes 372 323
Other current assets 632 408
------------ ------------
Total current assets 33,980 31,123
SYSTEMS AND EQUIPMENT LEASED AND HELD FOR LEASE, NET 8,312 8,646
PROPERTY AND EQUIPMENT, NET 2,324 2,367
INTANGIBLE ASSETS, NET 5,224 5,487
GOODWILL 3,258 3,258
NON-CURRENT DEFERRED INCOME TAXES 1,189 984
LONG-TERM NOTE RECEIVABLE FROM RELATED PARTY 373 441
OTHER ASSETS 234 93
------------ ------------
TOTAL ASSETS $ 54,894 $ 52,399
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,815 $ 5,681
Accrued liabilities 1,721 2,424
Current portion of long-term obligation to related party -- 97
Customer deposits and unearned revenue 1,835 2,120
Income taxes payable 1,910 1,511
------------ ------------
TOTAL CURRENT LIABILITIES 11,281 11,833
CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 67,500 shares authorized;
17,760 and 17,609 shares issued and outstanding 178 176
Additional paid-in capital 6,709 6,211
Retained earnings 36,726 34,179
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 43,613 40,566
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 54,894 $ 52,399
============ ============
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) QUARTER ENDED
JANUARY 31,
----------------------------
2002 2001
------------ ------------
REVENUE:
Shuffler lease $ 3,983 $ 3,974
Shuffler sales and service 2,034 2,961
Table games 4,104 3,515
Slot products 1,763 529
Other 34 238
------------ ------------
TOTAL REVENUE 11,918 11,217
------------ ------------
COSTS AND EXPENSES:
Cost of products 3,090 3,141
Selling, general and administrative 3,361 2,890
Research and development 1,781 1,365
------------ ------------
TOTAL COSTS AND EXPENSES 8,232 7,396
------------ ------------
Income from operations 3,686 3,821
Interest income, net 202 125
------------ ------------
Income before income taxes 3,888 3,946
Provision for income taxes 1,341 1,400
------------ ------------
NET INCOME $ 2,547 $ 2,546
============ ============
EARNINGS PER COMMON SHARE, BASIC $ .14 $ .15
============ ============
EARNINGS PER COMMON SHARE, ASSUMING DILUTION $ .14 $ .14
============ ============
WEIGHTED AVERAGE COMMON SHARES, BASIC 17,691 16,451
============ ============
WEIGHTED AVERAGE COMMON SHARES, ASSUMING DILUTION 18,478 17,985
============ ============
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)
QUARTER ENDED
JANUARY 31,
-----------------------------
(IN THOUSANDS) 2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,547 $ 2,546
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,800 1,320
Provision for bad debts 13 --
Provision for inventory obsolescence 150 200
Deferred income taxes -- --
Stock options issued for services (254) 92
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts and note receivable 124 316
Inventories 141 (502)
Other current assets (224) (1,107)
Accounts payable and accrued liabilities (1,060) (1,215)
Customer deposits and unearned revenue (285) 19
Income taxes payable 399 966
------------ ------------
Net cash provided by operating activities 3,351 2,635
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (4,458) (4,720)
Proceeds from the sales and maturities of investments 4,409 1,325
Payments for products leased and held for lease (408) (536)
Purchases of property and equipment (160) (128)
Purchases of intangible assets (98) (165)
Other (81) --
------------ ------------
Net cash used by investing activities (796) (4,224)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock (179) (614)
Proceeds from issuance of common stock 637 1,821
Payments on long-term obligation to related party (50) (93)
------------ ------------
Net cash provided by financing activities 408 1,114
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,963 (475)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,082 2,810
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,045 $ 2,335
============ ============
NON-CASH TRANSACTION:
Payment of obligation to related party with common stock $ 47 $ 47
============ ============
Purchase of video equipment on extended terms $ 486 $ --
============ ============
CASH PAID FOR:
Income taxes $ 1,131 $ 392
============ ============
Interest $ -- $ 7
============ ============
See notes to unaudited consolidated financial statements
4
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, 2002, and for the quarter ended
January 31, 2002 and 2001, 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 quarter ended
January 31, 2002 are not necessarily indicative of the results to be
expected for the year ending October 31, 2002. These interim statements
should be read in conjunction with the Company's October 31, 2001,
financial statements and notes thereto included in its Form 10-K.
The Company has realigned the reporting of its operating segments to
reflect a change in the chief decision maker's focus toward the increase in
business activity related to the development, manufacture and marketing of
slot products, including the Company's new operating system. Previously,
the segments were gaming equipment, which included shuffler products, and
gaming products, which included table games, slot games and operating
system activities. Certain items of prior year revenue, expenses, assets
and capital expenditures have been reclassified to follow the current
internal reporting practice, which includes recording transactions
identifiable with the Company's new segments. These reclassifications had
no effect on the operating results for the quarter ended January 31, 2001.
2. INVENTORIES:
JANUARY 31, OCTOBER 31,
DESCRIPTION 2002 2001
--------------------------------- ------------ ------------
(In thousands)
Raw materials and component parts $ 4,244 $ 4,260
Work-in-progress 412 527
Finished goods 1,263 1,423
------------ ------------
$ 5,919 $ 6,210
============ ============
3. SYSTEMS AND EQUIPMENT LEASED AND HELD FOR LEASE:
JANUARY 31, OCTOBER 31,
DESCRIPTION 2002 2001
--------------------------------- ------------ ------------
(In thousands)
Shufflers $ 9,089 $ 8,765
Table game equipment 2,400 2,379
Slot game equipment 6,619 6,225
------------ ------------
18,108 17,369
Less: Accumulated depreciation (9,796) (8,723)
------------ ------------
$ 8,312 $ 8,646
============ ============
4. INTANGIBLE ASSETS AND GOODWILL:
On November 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets," which establishes new accounting and reporting requirements for
goodwill and other intangible assets. Under this statement, goodwill and
intangible assets with indefinite lives are no longer subject to
amortization, but are tested for impairment at least annually.
5
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Additionally, goodwill is required to be separately disclosed from other
intangible assets on the face of the balance sheet. SFAS 142 also requires
the completion of a transitional impairment test within six months of the
date of adoption. The Company has completed its initial assessment of
impairment at the end of the first fiscal quarter of 2002.
In conjunction with adopting SFAS 142, the Company also reassessed its
previously recognized identifiable intangible assets and determined that
their useful lives and their classifications were appropriate. Goodwill
acquired relates to the acquisition of the QuickDraw(TM) shuffler product
line in April 2001 and is an asset of the shuffler operating segment.
Recorded amortization expense for the quarter ended January 31, 2002 and
2001 totaled $361,000 and $328,000, respectively.
The following presents information on the Company's intangible assets:
JANUARY 31, OCTOBER 31,
DESCRIPTION 2002 2001
------------------------------------------- ------------ ------------
(In thousands)
INTANGIBLE ASSETS
Purchased table games $ 3,400 $ 3,400
Purchased slot games 3,370 3,370
Patents and licenses 2,571 2,510
------------ ------------
9,341 9,280
Less accumulated amortization (4,117) (3,793)
------------ ------------
Net carrying amount $ 5,224 $ 5,487
============ ============
GOODWILL
Goodwill acquired $ 3,370 $ 3,370
Less accumulated amortization
recorded prior to adopting SFAS 142 (112) (112)
------------ ------------
Net carrying amount $ 3,258 $ 3,258
============ ============
5. COMMON STOCK:
In the first quarter of fiscal 2002, the Company repurchased 15,000 shares
in exchange for stock options exercised at a total cost of $179,000,
compared to 52,500 shares repurchased at a total cost of $614,000 in the
first quarter of fiscal 2001.
As of January 31, 2002, the amount remaining for share repurchases under
the most recent board authorization was $1,410,000.
6
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. EARNINGS PER SHARE:
The following table shows the reconciliation of basic earnings per share to
diluted earnings per share:
QUARTER ENDED JANUARY 31, 2002 2001
-------------------------------------------- ------------ ------------
(In thousands, except for per share amounts)
NET INCOME $ 2,547 $ 2,546
============ ============
BASIC:
Weighted average shares outstanding 17,691 16,403
Shares to be issued under asset purchase -- 48
------------ ------------
Weighted average common shares, basic 17,691 16,451
============ ============
ASSUMING DILUTION:
Weighted average common shares, basic 17,691 16,451
Dilutive impact of options and warrants
outstanding 787 1,534
------------ ------------
Weighted average common shares, assuming
dilution 18,478 17,985
============ ============
EARNINGS PER SHARE, BASIC $ .14 $ .15
============ ============
EARNINGS PER SHARE, ASSUMING DILUTION $ .14 $ .14
============ ============
Share and per share amounts for the quarter ended January 31, 2002 and 2001
reflect the three-for-two stock split of the Company's common stock as of
June 18, 2001.
7. RECENTLY ADOPTED ACCOUNTING STANDARDS:
In July 2001, the FASB issued SFAS 141, "Business Combinations." SFAS 141
requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminated the pooling-of-interests
method. The adoption of SFAS 141 on November 1, 2001 and did not have an
impact on the Company's consolidated financial statements.
Also in July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets," which was effective and adopted by the Company on November 1,
2001. SFAS 142 requires, among other things, the discontinuation of
goodwill amortization. Additionally, the statement includes provisions for
the reclassification of certain existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill
and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also requires the
Company to complete a transitional goodwill impairment test within six
months from the date of adoption. The Company completed its transitional
impairment test by the end of the first fiscal quarter.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which was effective and adopted by the
Company on January 1, 2002. SFAS 144 requires that long-lived assets
expected to be held longer than one year are subject to depreciation and
must be written down to fair value upon impairment. Long-lived assets that
are to be sold within one year must be separately identified and carried at
the lower of carrying value or fair value less costs to sell. Long-lived
assets no longer expected to be sold within one year, such as foreclosed
real estate, must be written down to the lower of current fair value or
7
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
fair value at the date of foreclosure adjusted to reflect depreciation
since acquisition. The adoption of SFAS 144 did not have a significant
impact on the Company's consolidated financial statements.
8. OPERATING SEGMENT REPORTING:
The Company now operates in three operating segments: shufflers, table
games and slot products. The shuffler segment includes the development,
acquisition, manufacture, marketing, installation and servicing of the
Company's proprietary shuffler product line. The table games segment
includes the design, acquisition, marketing, installation and servicing of
the Company's line of proprietary table games. The slot products segment
includes the design, acquisition, development, programming, marketing,
installation, and servicing of Company developed and cooperatively
developed slot games and retrofit kits, as well as the Company's
proprietary operating system. Financial information related to these
segments is evaluated regularly by the Company's chief operating decision
maker, the Chief Executive Officer, with the exception of operating income
by segment. For purposes of computing operating income by segment, the
Company allocates certain operating expenses that are not directly incurred
by any operating segment. The Company allocates these costs using an
activity based allocation methodology and other direct measurements of
operating activity.
QUARTER ENDED,
JANUARY 31,
-----------------------------
(in thousands) 2002 2001
------------ ------------
REVENUE
Shufflers $ 6,017 $ 6,935
Table games 4,104 3,515
Slot products 1,763 529
Corporate 34 238
------------ ------------
11,918 11,217
============ ============
OPERATING INCOME
Shufflers 3,048 3,860
Table games 3,430 2,919
Slot products (775) (1,207)
Corporate (2,017) (1,751)
------------ ------------
3,686 3,821
============ ============
DEPRECIATION AND AMORTIZATION
Shufflers 565 485
Table games 162 179
Slot products 862 423
Corporate 211 233
------------ ------------
1,800 1,320
============ ============
CAPITAL EXPENDITURES
Shufflers 386 --
Table games 17 86
Slot products 589 624
Corporate 160 119
------------ ------------
$ 1,152 $ 829
============ ============
8
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
AS OF JANUARY 31,
----------------------------
2002 2001
------------ ------------
ASSETS
Shufflers $ 13,520 $ 14,039
Table games 5,505 5,665
Slot products 8,981 9,317
Corporate 26,888 23,379
------------ ------------
$ 54,894 $ 52,399
============ ============
9. 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 Second
Judicial District Court of the State of Nevada, in Washoe County, Nevada.
The defendants are the Company and Joseph J. Lahti, the Company's former
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.
In the ordinary course of conducting its business, the Company has and may
be involved in litigation, administrative proceedings and regulatory
government investigations. The Company believes that the final disposition
of these matters will not have a material adverse effect on its financial
position, results of operations or liquidity.
9
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:
REVENUE:
QUARTER ENDED
JANUARY 31,
---------------------
2002 2001
-------- --------
Revenue 100.0% 100.0%
Cost of products 25.9 28.0
-------- --------
Gross margin 74.1 72.0
-------- --------
Selling, general and administrative 28.2 25.7
Research and development 15.0 12.2
-------- --------
Income from operations 30.9 34.1
Interest income, net 1.7 1.1
-------- --------
Income before income taxes 32.6 35.2
Provision for income taxes 11.2 12.5
-------- --------
Net income 21.4% 22.7%
======== ========
The following table summarizes segment revenue as a percentage of sales for the
quarters ended January 31, 2002 and 2001.
QUARTER ENDED
JANUARY 31,
---------------------
2002 2001
-------- --------
REVENUE BY SEGMENT
Shufflers 50.5% 61.8%
Table games 34.4 31.3
Slot products 14.8 4.7
Other 0.3 2.2
-------- --------
Total 100.0% 100.0%
======== ========
10
PART I. - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables summarize shufflers sold, shufflers under lease, and table
games and slot games installed at January 31, 2002 and 2001:
AS OF JANUARY 31,
----------------------------
2002 2001
------------ ------------
SHUFFLERS SOLD
Single deck shufflers 90 132
Multi-deck shufflers 72 140
------------ ------------
Total 162 272
============ ============
SHUFFLERS UNDER LEASE
Single deck shufflers 1,946 1,854
Multi-deck shufflers 1,175 1,245
------------ ------------
Total 3,121 3,099
============ ============
TABLE GAMES INSTALLED
Three Card Poker(R) 624 353
Let It Ride Bonus(R) 535 505
Let It Ride(R)Basic 131 184
Other 15 26
------------ ------------
Total 1,305 1,068
============ ============
SLOT GAMES INSTALLED
Cooperative slot games 565 207
Company slot games 250 301
------------ ------------
Total 815 508
============ ============
Revenue for the first fiscal quarter ended January 31, 2002 was $11,918,000, an
increase of $702,000, or 6.3%, from the same period last year. Shuffler sales
and service revenue decreased by $927,000 to $2,034,000 in the current fiscal
year first quarter, compared to $2,961,000 in the first fiscal quarter last
year. Current quarter shuffler sales were 162 units at an average price of
$10,280, while sales in the first quarter of the prior fiscal year were 272
units at an average price of $9,790. Average unit sales prices increased 5.0%
due to a shift in the mix of shuffler sales toward higher priced ACE(R)
shufflers in the current fiscal year first quarter. Shuffler lease revenue
increased by $9,000, or 0.2%, to $3,983,000 in the current fiscal year first
quarter. The shuffler installed lease base was 3,121 at January 31, 2002,
compared to 3,099 at January 31, 2001 and 3,075 at October 31, 2001. The 46 unit
increase in the installed lease base during the first quarter of fiscal 2002 was
attributable to the net placement of 17 ACE(R), 12 King(TM), 15 multi-deck
shufflers and 10 QuickDraw(R) shufflers, offset by the net removal of 8 single
deck BG shufflers. In the current fiscal year first quarter, sales of units
converted from lease totaled 38 units, compared to 172 leased units converted to
sales in the prior fiscal year first quarter.
Revenue from table games was $4,104,000, an increase of $589,000, or 16.8%, from
the first fiscal quarter last year. This increase was primarily due to the net
placement of Three Card Poker(R) tables. There were 624 Three Card Poker(R)
installed tables at January 31, 2002, compared to 353 installed tables at
January 31, 2001 and 570 installed tables at October 31, 2001. Additionally, the
installed base of Let It Ride Bonus(R) tables was 535 installed Bonus tables at
January 31, 2002, compared to 505 installed Bonus tables at January 31, 2001 and
535 installed Bonus tables at October 31, 2001. 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 131 installed
basic tables at January 31, 2002, compared to 184 installed basic tables at
January 31, 2001, and 143 installed basic tables at October 31, 2001. The
decrease in installed basic tables from January 31, 2001 was primarily due to
conversions from the basic game to the Bonus game.
11
PART I. - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Slot revenue increased by $1,234,000, or 233.0%, to $1,763,000 in the current
fiscal year first quarter from $529,000 in the prior fiscal year first quarter.
The installed lease base was 815 units as of January 31, 2002, compared to 508
units as of January 31, 2001 and 720 units as of October 31, 2001. The increase
in the installed slot base from the prior fiscal year first quarter was due to
the placement of cooperative The Three Stooges(R) and Let's Make A Deal(R) slot
games under the Company's fiscal 2000 agreements with International Game
Technology (IGT). Accordingly, recurring slot game lease revenue increased by
$1,255,000 to $1,756,000 in the current fiscal year first quarter, compared to
$501,000 in the prior fiscal year first quarter. The Company's recorded slot
revenue included $215,000 in revenue related to the Company's fiscal 2000 slot
game agreements with IGT.
Other revenue decreased to $34,000 in the current fiscal year first quarter from
$238,000 in the prior fiscal year first quarter due to the termination of the
Company's joint marketing agreement with TCS America, Inc. in January 2001.
GROSS MARGIN:
Gross margin was 74.1% in the current fiscal year first quarter, compared to
72.0% in the prior fiscal year first quarter. This increase in gross margin
percentage was primarily due to service, installation and indirect production
costs, which, expressed as a percentage of sales, decreased to 11.9% in the
current fiscal year first quarter from 14.8% in the prior fiscal year first
quarter. Additionally, this increased gross margin percentage reflects the
recording in the current fiscal year first quarter of $215,000 in revenue
pursuant to the Company's fiscal 2000 slot game agreements with IGT.
OPERATING EXPENSES:
Selling, general and administrative expenses increased by $471,000, or 16.3%, to
$3,361,000 in the current fiscal year first quarter. These expenses increased in
the current fiscal year first quarter primarily due to the reclassification of
the costs of customer training and game product management activities out of
cost of products and research and development expenses. These reclassifications
increased selling, general and administrative expenses by approximately
$240,000. Additionally, general and administrative expenses for the Company's
Australian operations, acquired in April 2001, were approximately $200,000 in
the current fiscal year first quarter.
Research and development expenses increased by $416,000, or 30.5%, over the
prior fiscal year fiscal first quarter to $1,781,000. This increase resulted
from activities in support of new game and slot operating system development,
including $337,000 in development expenses incurred under the Company's fiscal
2000 slot game agreements with IGT.
INTEREST INCOME, NET:
Interest income, net, was $202,000 in the current fiscal year first quarter,
compared to $125,000 in the prior fiscal year first quarter. Cash and
investments increased to $21,715,000 at January 31, 2002 from $9,935,000 at
January 31, 2001. This increase in interest-bearing cash and investments was due
primarily to the Company increasing its operating profits in fiscal 2001 and
receiving $9,247,000 in proceeds from the issuance of stock through the exercise
of employee and director common stock options during fiscal 2001, offset by the
repurchase of 690,000 shares of the Company's common stock for $8,571,000.
INCOME TAXES:
The Company recorded income tax expense at an effective rate of 34.5% for the
current fiscal year first quarter, compared to the tax provision of 35.5% for
the first quarter of fiscal 2001. This decrease reflects a shift of the
Company's taxable income to more favorable tax jurisdictions and the tax benefit
received on foreign sales activities.
12
PART I. - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNINGS PER SHARE:
The Company earned $.14 per share, assuming dilution, for the current fiscal
year first quarter, unchanged from the $.14 per share, assuming dilution, in the
first quarter of the prior fiscal year. Weighted average shares outstanding,
assuming dilution, increased to 18,478,000 from 17,985,000 in the first fiscal
quarter of fiscal 2002, due to the exercise of 1,935,000 stock options, offset
by the repurchase of 690,000 shares, during fiscal year 2001. Additionally, the
dilutive impact of common stock options outstanding on earnings per share
decreased by 748,000 shares to 787,000 shares during the quarter ended January
31, 2002, from 1,535,000 shares during the quarter ended January 31, 2001. The
decrease in dilutive effects is a result of the exercise of 1,935,000 common
stock options during fiscal 2001, which decreased 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 split in June 2001.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated financial statements requires the
Company's management to adopt accounting policies and to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Management periodically evaluates its policies, estimates and
assumptions related to, among others: revenue recognition; the amortization,
depreciation, and valuation of long-lived tangible and intangible assets;
inventory obsolescence, impairment and costing methods; and credit losses. The
Company's management bases its estimates on historical experience and
expectations of the future. Future actual results will likely differ from these
estimates.
The Company has determined that the following accounting policies and related
estimates are critical to the preparation of the Company's consolidated
financial statements:
REVENUE RECOGNITION:
The Company recognizes revenue when it secures a signed customer contract or
purchase order that states a fixed and determinable price, the collectablity of
the revenue is assured, and the goods or services have been delivered or
rendered. Product sales are recorded upon shipment and lease, license, and
royalty revenue is recognized upon the completed installation of the product.
Revenue on service contracts is recognized on a straight-line basis over the
life of the contract.
The Company records a significant portion of its revenue from slot games under
revenue participation agreements with casinos. As participation revenue amounts
are not known until the following month, the Company accrues unbilled revenue by
estimating such revenue by reference to prior cash receipts and periodic game
performance data. Actual billings may differ from accruals due to variations in
game play, down time, and slot game installations or removals. Such variations
are adjusted in the subsequent period when actual billing is determined. The
Company monthly reviews and adjusts its accrual rates.
LONG-LIVED AND INTANGIBLE ASSETS:
The Company has a significant investment in long-lived leased assets and
property, plant and equipment. Additionally, the Company has acquired
significant patents, licenses, games, goodwill and other intellectual property.
The Company estimates that the undiscounted future cash flows expected to result
from the use of these assets exceeds the current carrying value of these assets.
Any adverse change to the estimate of these undiscounted future cash flows could
necessitate an impairment charge that would adversely affect operating results.
The Company estimates useful lives for its tangible and intangible assets based
on historical experience, estimates of products' commercial lives, the
likelihood of technological obsolescence, and estimates of the duration of
commercial viability for patents, licenses and games. Should the actual useful
life of a class of assets differ from the estimated useful life, the Company
would record an impairment charge. The Company reviews useful lives,
obsolescence, and assesses the commercial viability of these assets
periodically.
INVENTORY OBSOLESCENCE, IMPAIRMENT AND COSTING METHODS:
The Company values its inventory at the lower of cost or market and estimates a
reserve for obsolescence or impairment. Significant adverse changes in demand
for the Company's products or supply of raw materials could affect the valuation
of inventory and could result in actual obsolescence or impairment charges that
differ from estimates. Additionally, such changes in product demand could
require changes to the Company's production schedule and thereby reduce the
amount of manufacturing labor and overhead absorbed into product cost, adversely
affecting operating results. The Company reviews for the obsolescence and
impairment of inventory quarterly and the production schedule and manufacturing
costs periodically.
13
PART I. - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROVISION FOR CREDIT LOSSES:
The Company maintains a provision for estimated credit losses based on
historical experience and specific customer collection issues. Any unforeseen
change in customer liquidity or financial condition could adversely affect the
collectability of that account and the Company's operating results. The Company
has established credit policies and procedures for reserving or writing off
specific customer accounts. The Company closely monitors delinquent accounts and
monthly evaluates the need to change the allowance for bad debts.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL:
As of January 31, 2002, the Company had cash, cash equivalents and investments
totaling $21,715,000, compared to $18,703,000 at October 31, 2001. The current
ratio increased to 3.0 from 2.6 at October 31, 2001, while working capital
increased by $3,409,000 to $22,699,000 at January 31, 2002 from $19,290,000 at
October 31, 2001. The increase in cash, working capital, and the current ratio
at January 31, 2002 is primarily the result of the Company's increased operating
profits during the current fiscal year first quarter 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 $3,351,000 in the current fiscal year first
quarter, compared to cash provided by operations of $2,635,000 in the first
quarter of the prior fiscal year. Significant items in cash flows from operating
activities in the current period included net income of $2,547,000 and non-cash
charges for depreciation and amortization as well as for provisions for bad
debts, inventory obsolescence, and deferred taxes, all of which totaled
$1,709,000, compared to net income of $2,546,000 and non-cash charges of
$1,520,000 in the first quarter of the prior fiscal year.
Significant uses and sources of cash flow from operating activities in the
current fiscal year quarter included a decrease in accounts receivable,
inventory and accrued expenses of $124,000, $141,000, and $1,060,000,
respectively, primarily due to the collection of receivables, the installation
of slot game equipment (and the transfer of such equipment from finished goods
equipment to leased equipment), and the payment of performance-based incentive
compensation in December 2001, respectively. The amount owed to IGT under the
Company's fiscal 2000 slot games is included in accounts payable and increased
by $65,000 to $4,649,000 in the current fiscal year first quarter.
Investing activities in the current fiscal year first quarter included the
purchase of $894,000 in shufflers, table games, and slot games leased to
customers. Financing activities during the first quarter of the current fiscal
year included the repurchase of 15,000 shares of common stock using cash of
$179,000 and the issuance of 153,000 shares of common stock for $637,000
pursuant to stock options exercised by employees and directors under the
Company's stock option plans.
CAPITAL RESOURCES:
The Company believes its existing cash, investments and cash provided by
operations will be sufficient to finance the Company's current operations and
new product development for the foreseeable future. Additionally, the Company
maintains a $15,000,000 revolving credit agreement with U.S. Bank, N.A. to
provide quick access to funds that might be required for working capital needs
related to product rollouts, product or intellectual property acquisitions and
share repurchases. The credit agreement matures in October 2003. The Company
did not have any long-term debt or capital lease obligations as of January 31,
2002.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements. The Company considers such
statements to be made under the safe harbor created by the federal securities
laws to which it is subject, and assumes no obligation to update or supplement
such statements. Forward-looking 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
14
PART I. - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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; product
performance issues; higher than expected manufacturing, service, selling,
administrative, product development and/or roll out costs; changes in the
Company's business systems or in technologies affecting the Company's products
or operations; current and/or unanticipated future litigation; regulatory and
jurisdictional issues (e.g., delays in obtaining necessary approvals, or changes
in a jurisdiction's regulatory scheme) involving the Company or its products
specifically, and the gaming industry in general; general and casino industry
economic conditions; and the financial health of the Company's casino and
distributor customers both nationally and internationally. Additional
information on these and other risk factors that could potentially affect the
Company's financial results may be found in documents filed by the Company with
the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of January 31, 2002, the Company had approximately $15.7 million in
investments. The investments are primarily in fixed income and investment grade
securities. The Company's investment policy emphasizes return of principal and
liquidity and is focused on fixed returns that limit volatility and risk of
principal. Because of the Company's investment policies, the primary market risk
associated with its portfolio is interest rate risk.
Assuming interest rates were to change by 100 basis points, the net hypothetical
change in fair value of financial instruments (and correspondingly in
shareholders' equity) is estimated to be $65,000 after tax (0.15% of total
shareholders' equity). The Company believes that such a change in interest rates
would not have a material impact on future earnings or cash flows, as it is
unlikely that the Company would need or choose to substantially liquidate its
investment portfolio.
The effect of interest rate risk on the potential near-term net income, cash
flow and fair value was determined based on interest rate sensitivity analyses.
The models project the impact of interest rate changes on a wide range of
factors, including duration and prepayment. Fair value was estimated based on
the net present value of cash flows or duration estimates, assuming an immediate
1% increase in interest rates. Because duration is estimated, rather than a
known quantity, for certain securities and because other market factors may
impact security valuations, there can be no assurance that the Company's
portfolio would perform in line with the estimated values.
As of January 31, 2002, the Company had no borrowings outstanding under its
revolving credit agreement.
15
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 Second
Judicial District Court of the State of Nevada, in Washoe County, Nevada. The
defendants are the Company and Joseph J. Lahti, the Company's former 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.
In the ordinary course of conducting its business, the Company has and may
become involved in litigation, administrative proceedings and regulatory
government investigations. The Company believes that the final disposition of
these matters will not have a material adverse effect on its financial position,
results of operations or liquidity.
ITEM 5. OTHER INFORMATION
The Company's Proxy Statement, dated February 11, 2002, which was first
distributed to the Company's shareholders and which was filed with the
Securities and Exchange Commission on that same date, mistakenly reported that,
in November 2001, the Board of Directors made a discretionary grant under the
Company's directors' option plan, to each of its outside directors, of options
to purchase 11,250 shares of the Company's common stock. In fact, the Company's
outside directors had not been granted any options since March 2001. Recently,
upon their re-election at the 2002 annual meeting of the Company's shareholders
held on March 13, 2002, each of the Company's outside directors was granted
options to purchase 10,000 shares of the Company's common stock at an exercise
price of $18.68 per share, which was the closing price on that day.
Additionally, the Company mistakenly reported in the same Proxy Statement and in
its Form 10K for the year ended October 31, 2001, that the Company's chairman,
Mark L. Yoseloff, repaid his note and accrued interest on July 12, 2001. In
fact, the correct date for this repayment was July 2, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a). Exhibits: None
b). Reports on Form 8-K: None
16
SIGNATURES
Pursuant to the requirements of 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 18, 2002
/s/ Mark L. Yoseloff
- ----------------------------------------
Mark L. Yoseloff
Chairman and Chief Executive Officer
/s/ Gerald W. Koslow
- ----------------------------------------
Gerald W. Koslow
Chief Financial Officer
(Principal Accounting Officer)
17