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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-20820
SHUFFLE MASTER, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1448495
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
10901 Valley View Road, Eden Prairie MN 55344
(Address of Principal Executive Offices) (State) (Zip Code)
Registrant's Telephone Number, Including Area Code: (612) 943-1951
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
As of February 28, 1997, there were 10,955,843 shares of the Company's $.01 par
value common stock outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands) JANUARY 31, OCTOBER 31,
----------- ----------
ASSETS 1997 1996
----------- ----------
CURRENT ASSETS: (unaudited)
Cash and cash equivalents $ 795 $ 3,440
Investments 21,455 23,038
Accounts receivable, net 4,868 3,567
Inventories 3,033 2,059
Other current assets 1,401 1,366
------- -------
Total current assets 31,552 33,470
SYSTEMS AND EQUIPMENT LEASED UNDER OPERATING
LEASES, NET, AND HELD FOR LEASE 8,571 7,491
PROPERTY AND EQUIPMENT, NET 3,430 3,039
OTHER ASSETS 1,506 1,297
------- -------
$45,059 $45,297
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,032 $ 1,369
Accrued liabilities:
Compensation 735 698
Expenses 255 198
Customer deposits 1,832 1,335
Tournament playoff liability 1,835 2,072
Incomes taxes payable 518 254
------- -------
Total current liabilities 6,207 5,926
DEFERRED INCOME TAXES 232 232
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 30,000 shares authorized, 10,999
and 11,177 shares issued and outstanding 110 112
Additional paid-in capital 35,449 37,043
Retained earnings 3,061 1,984
------- -------
Total shareholders' equity 38,620 39,139
------- -------
$45,059 $45,297
======= =======
See Notes to Consolidated Financial Statements
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED
JANUARY 31,
-----------------------
(In thousands, except per share amounts) 1997 1996
-------- --------
REVENUE:
Shuffler lease $ 2,707 $ 2,190
Shuffler sales 1,706 792
Let It Ride(R)The Tournament(TM) 1,637 1,648
Other 437 119
-------- --------
6,487 4,749
COSTS AND EXPENSES:
Cost of leases, sales and Let It Ride(R)The Tournament(TM) 2,393 1,577
Selling, general and administrative 2,427 1,408
Research and development 337 236
-------- --------
Total operating expenses 5,157 3,221
-------- --------
INCOME FROM OPERATIONS 1,330 1,528
OTHER (EXPENSE) INCOME:
Loss on notes receivable -- (3,370)
Interest income 347 370
-------- --------
Income (loss) before income taxes 1,677 (1,472)
(Provision for) benefit of income taxes (600) 375
-------- --------
NET INCOME (LOSS) $ 1,077 $ (1,097)
======== ========
WEIGHTED AVERAGE COMMON AND COMMON 11,212 11,296
EQUIVALENT SHARES OUTSTANDING
======== ========
NET INCOME (LOSS) PER SHARE $ .10 $ (.10)
======== ========
See Notes to Consolidated Financial Statements
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
JANUARY 31,
-----------------------
(In thousands) 1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,077 $ (1,097)
Adjustments to reconcile net income (loss) to net cash
(used) provided by operating activities:
Depreciation and amortization 826 569
Amortization of investment discount (228) (235)
Provision for inventory obsolescence 150 --
Loss on notes receivable -- 3,300
Deferred income taxes -- (375)
Changes in operating assets and liabilities:
Accounts receivable (1,301) 83
Inventories (1,124) 245
Other current assets (35) (634)
Accounts payable (337) (67)
Accrued liabilities 94 113
Customer deposits 497 106
Tournament playoff liability (237) 871
Income taxes payable 264 (215)
-------- --------
Net cash (used) provided by operating activities (354) 2,664
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (13,989) (2,587)
Proceeds from the sales and maturity of investments 15,800 2,500
Payments for systems & equip. leased and held for lease (1,666) (726)
Purchases of property and equipment (562) (369)
Other (271) 17
-------- --------
Net cash used by investing activities (688) (1,165)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common shares (1,614) --
Proceeds from issuance of common stock 11 376
-------- --------
Net cash (used) provided by financing activities (1,603) 376
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,645) 1,875
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,440 1,896
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 795 $ 3,771
======== ========
CASH PAID FOR INCOME TAXES $ 337 $ 233
======== ========
See Notes to Consolidated Financial Statements
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements:
The financial statements as of January 31, 1997, and for the three month
periods ended January 31, 1997 and 1996, are unaudited, but in the opinion
of management include all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the financial
results for the interim period. The results of operations for the three
months ended January 31, 1997, are not necessarily indicative of the
results to be expected for the year ended October 31, 1997. These interim
statements should be read in conjunction with the Company's October 31,
1996, financial statements and notes thereto included in its Form 10-K.
2. Inventories:
DESCRIPTION JANUARY 31, 1997 OCTOBER 31, 1996
------------------------------------- ------------------- ------------------
Raw materials and parts $ 2,653 $ 1,600
Work-in-process 617 432
Finished goods 97 187
------------------- ------------------
3,367 2,219
Less: valuation allowance (334) (160)
------------------- ------------------
$ 3,033 $ $2,059
=================== ==================
3. Systems and equipment leased and held for lease:
Systems and equipment leased and held for lease includes the various
models of shufflers and Let It Ride(R) table equipment and video machines.
DESCRIPTION JANUARY 31, 1997 OCTOBER 31, 1996
--------------------------------------------------- ----------------- ------------------
Systems and equipment leased:
Shuffler systems $ 5,577 $ 5,190
Let It Ride(R)equipment 2,738 2,329
----------------- ------------------
8,315 7,519
Less: Accumulated depreciation (3,009) (2,456)
----------------- ------------------
5,306 5,063
Systems and equipment held for lease:
Shuffler systems 1,674 1,522
Let It Ride(R)equipment 1,591 906
----------------- ------------------
$ 8,571 $ 7,491
================= ==================
4. Common Stock:
In the fourth quarter of fiscal 1996, the Board of Directors authorized
the repurchase of up to $5,000,000 of the Company's common shares in the
open market or privately negotiated transactions. The Company repurchased
179,100 shares at a total cost of $1,614,000 during the quarter ended
January 31, 1997. As of January 31, 1997, the remaining authorization was
$3,386,000.
5. Contingency:
The Company is involved in litigation with Progressive Games, Inc., a
Florida corporation. The Company has a declaratory judgment action pending
in the United States District Court in Nevada, Mississippi, and
Connecticut, requesting a determination that certain patents owned by
Progressive Games, Inc. are either invalid or not infringed by the
Company. Progressive Games, Inc. is suing the Company in United States
District Court in Nevada, Mississippi and Connecticut alleging the
Company's Let It Ride(R) The Tournament(TM) game and apparatus infringe
three of Progressive Games, Inc.'s patents. Progressive Games, Inc. is
asking for injunctive relief and damages.
The Company has challenged the validity of Progressive Games, Inc.'s
patents in the U.S. Patent and Trademark Office. The Company believes that
the pertinent claims of Progressive Games, Inc.'s patents are invalid, but
in the event they are held to be valid, the Company believes the Let It
Ride(R) The Tournament(TM) game and apparatus do not infringe any of
Progressive Games, Inc.'s patents.
The Company has agreed to defend and indemnify, and is defending and
indemnifying all of its Let It Ride(R) The Tournament(TM) casino licensees
who were sued by Progressive Games, Inc. due to their use of the Let It
Ride(R) The Tournament(TM) game and apparatus. If Progressive Games, Inc.
should prevail in its suit, management does not believe it would
materially affect the Company's financial condition.
The Company has been sued in United States District Court in Nevada by DD
Stud, Inc. and Anchor Coin, both Nevada corporations, alleging that the
Company's basic Let It Ride(R) game infringes certain of their patent
rights. The Company has answered the complaint denying infringement and
counterclaiming for declaratory relief that the plaintiff's patents are
invalid. The Company has also counterclaimed for damages against Stanley
E. Fulton and Anchor Gaming, a Nevada corporation as well as against DD
Stud, Inc. and Anchor Coin, alleging violations of antitrust and abuse of
the patent process. Management believes that its game does not infringe
the patent rights, and will continue to vigorously defend its position.
6. Reclassifications:
Certain reclassifications were made to the January 31, 1996, financial
statements to conform to the current period presentation. Specifically,
Let It Ride(R) The Tournament(TM) playoff prize fund revenue, and related
playoff prize fund expenses included in cost of sales, leases and Let It
Ride(R) The Tournament(TM) were each reduced by $4,361,000. This was the
amount collected by the Company during the first quarter of fiscal 1996 to
fund Let It Ride(R) The Tournament(TM) guaranteed cash prize payments.
This reclassification had no effect on net income.
7. Purchase:
On March 10, 1997, the Company purchased the entire video game library
from Dr. Mark Yoseloff for cash and the issuance of common shares. The
payments and issuance of common shares will be made over a five year
period. The Company also signed Dr. Yoseloff to a five-year employment
contract, beginning August 1, 1997. From March 10, 1997, to July 31, 1997,
the Company has retained the services of Dr. Yoseloff under an exclusive
consulting contract.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON TABLE
The following table sets forth selected financial information derived from the
Company's Consolidated Statements of Operations:
THREE MONTHS
------------------------------------
PERIOD ENDED JANUARY 31, 1997 1996
- --------------------------------------------- ---------------- ----------------
Revenue 100.0% 100.0%
Cost of products 36.9 33.2
---------------- ----------------
Gross margin 63.1 66.8
---------------- ----------------
Selling, general and administrative 37.4 29.6
Research and development 5.2 5.0
---------------- ----------------
Income from operations 20.5 32.2
Other income (expense), net 5.3 (63.2)
---------------- ----------------
Income (loss) before income taxes 25.8 (31.0)
(Provision for) benefit of income taxes (9.2) 7.9
---------------- ----------------
Net income (loss) 16.6% (23.1%)
================ ================
REVENUE
Revenue for the three months ended January 31, 1997, was $6,487,000, an increase
of $1,738,000 or 36.6% over the same period last year. Shuffler lease revenue
increased by $517,000, or 23.6% to $2,707,000. The installed base of shufflers
under lease contract increased by 21.2% between the comparable periods. Shuffler
system sales increased to $1,706,000 in the current quarter compared to $792,000
in the first quarter last year. The increase resulted from significant sales to
domestic customers in markets outside of Nevada due to expansion of the sales
force. Current quarter revenue from Let It Ride(R) The Tournament(TM) totaled
$1,637,000, a decrease of $11,000 from the comparable quarter last year. Let It
Ride(R) The Tournament(TM) has been operating under a field trial in Mississippi
since June 1996. In December 1996, the Company installed tables at the Foxwoods
Resort Casino in Connecticut. There were approximately 200 Tournament tables in
casinos in Nevada, Mississippi, and Connecticut as of January 31, 1997, compared
to 160 tables in Nevada as of January 31, 1996. The Company derives revenue from
a percentage of the $1.00 bonus bet option in Nevada and Mississippi, while
revenue from the tables in Foxwoods Resort Casino is billed monthly on a fixed
fee basis. Despite the increase in installed tables, revenue was flat, generally
due to a combination of a decrease in hands played and decreased participation
by the players in the $1.00 bonus bet option in the Nevada casinos. The increase
in other revenues is primarily due to the increase in the number of Let It
Ride(R) basic tables in casinos. The basic version of Let It Ride(R) does not
include the $1.00 bonus bet option. Revenue is generated on the basic game from
monthly license fees charged to casinos.
COSTS AND EXPENSES
The gross margin was 63.1% in the current year first quarter compared to 66.8%
in the same period in the prior year. The margin decrease resulted primarily
from two factors. The Company provided $150,000 to inventory valuation reserves
in the current year first quarter for anticipated valuation adjustments on early
version finished shufflers and component parts, and certain Let It Ride(R)
equipment. Secondly, service related expenses increased significantly in the
first quarter of 1997 compared to the first quarter last year as field support
expenses increased in advance of planned jurisdictional expansion.
Selling, general and administrative expenses increased by $1,019,000 to
$2,427,000 in the current year first quarter. Overall, expenses increased due to
additional staffing and facilities related expenses made necessary by the
Company's growth in revenue. Sales staffing doubled as the Company has focused
on market expansion of its product lines. The Company also recorded incentive
compensation accruals due to achieving certain current period financial
objectives. Legal and professional expenses were approximately $300,000 in the
current quarter, principally due to the ongoing litigation (see note 5 to the
Consolidated Financial Statements). Research and development expenses increased
by $101,000, or 42.8% from the first quarter of last year. The increase was due
to increased professional fees as the Company retained the services of outside
consultants to develop new games for the gaming industry.
OTHER (EXPENSE) INCOME
Interest income was $347,000 in the current year first quarter compared to
$370,000 in the prior year. Prior year other expense includes a $3,370,000 loss
on notes receivable.
INCOME TAXES
The Company recorded an income tax provision of $600,000 at an effective rate of
35.8% in the current year first quarter. In the first quarter of fiscal 1996,
the Company recorded an income tax benefit of $375,000, or 25.5%. The Company
reversed all of its deferred tax asset valuation allowance in fiscal 1996. The
current year effective rate reflects the sum of federal and state income tax
provisions.
NET INCOME (LOSS) PER SHARE
The net income per share for the current year first quarter was $.10, compared
to a net loss per share of $.10 in the prior year first quarter. The per share
amount for the first quarter of fiscal 1996 includes the tax effected loss of
$.22 per share due to the loss on notes receivable. Weighted average shares
outstanding decreased to 11,212,000 from 11,296,000 in the first quarter of
fiscal 1996 principally due to the current period repurchase of 179,100 shares.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1997, the Company had cash and cash equivalents, and
investments totaling $22,250,000, compared to $26,478,000 at October 31, 1996.
The current ratio decreased to 5.1 to 1 from 5.6 to 1 at October 31, 1996, while
working capital decreased to $25,345,000 at January 31, 1997, from $27,544,000
at October 31, 1996.
Cash used by operations totaled $354,000 in the current year first quarter
compared to cash provided by operations of $2,664,000 in the first quarter of
last year. Significant items under operating activities in the current period
were cash provided by net income of $1,077,000, and non-cash charges for
depreciation and amortization, and inventory allowance provisions of $976,000.
Uses of cash include increases of $1,301,000 and $1,124,000 for accounts
receivable and inventories, respectively. The increase in accounts receivable
resulted from increased shuffler sales in the current year first quarter, while
inventory levels increased to meet anticipated future shuffler sales and lease
demand. Investing activities include the redemption of $1,900,000 of investments
which was used to fund the share repurchase. Payments for systems and equipment
leased and held for lease included over $900,000 for the purchase of video
machines and related equipment for Let It Ride(R) Bonus Video. Property and
equipment purchases were $562,000 with approximately $250,000 of leasehold
improvements for the new facility under lease in Las Vegas, Nevada. Under
financing activities, $1,614,000 was expended for the repurchase of 179,100 of
the Company's common shares under its share repurchase program. The Board of
Directors authorized management of the Company to repurchase up to $5,000,000 of
the Company's common stock.
The Company believes its current cash and investments, and cash provided by
operations will be sufficient to finance the Company's current operations, share
repurchase program, and new product development needs.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements that reflect 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
acceptance of the Company's existing products; competitive advances;
acceleration and/or deceleration of various product development and roll out
schedules; consumer and industry acceptance o the Company's products in new
jurisdictions and new products as introduced; higher than expected product
development and/or roll out costs; current and/or unanticipated future
litigation; general economics conditions; regulatory and jurisdictional issues
involving Shuffle Master specifically, and for the gaming industry in general;
and the relative financial health of the gaming industry both nationally and
internationally.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been a party to legal proceedings with D&D Gaming which began in
1995 when the Company filed a declaratory judgment action against D&D Gaming,
and D&D Gaming filed suit against the Company for willful patent infringement.
Both actions involve the Company's Let It Ride(R) The Tournament(TM) game. D&D
Gaming assigned all of its rights, title and interest in the patents that were
the subject matter of this proceeding to Progressive Games, Inc., and in April
1996, the Court allowed Progressive Games, Inc. to be substituted as a party for
D&D Gaming. The Company has been sued in District Court in Nevada, Mississippi
and Connecticut. In February 1997, the District Court in Mississippi denied a
motion by Progressive Games, Inc. for preliminary injunctive relief relative to
the Let It Ride(R) The Tournament(TM) apparatus.
The Company was served with a lawsuit by DD Stud, Inc. and Anchor Coin in
September 1996. The lawsuit alleges the Company's Let It Ride(R) basic game
infringes on certain patents held by DD Stud, Inc. and licensed by Anchor Coin.
See additional discussion regarding these legal proceedings under Note 5 to the
Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Promissory between Shuffle Master, Inc. and Joseph J.
Lahti, President and Chief Executive Officer, dated
November 4, 1996
27 Financial Data Schedule
(b) Reports on Form 8-K: none
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHUFFLE MASTER, INC.
(Registrant)
Date: March 14, 1997
/s/ Joseph J. Lahti
- --------------------------------
Chief Financial Officer
/s/ John A. Rahja
- ---------------------------------
John A. Rahja
Corporate Controller