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, 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 August 29, 1997, there were 10,368,000 shares of the Company's $.01 par
value common stock outstanding.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS) JULY 31, OCTOBER 31,
------- -------
ASSETS 1997 1996
------- -------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,713 $ 3,440
Investments 18,222 23,038
Accounts receivable 6,172 3,567
Inventories 1,749 2,059
Other current assets 760 1,366
------- -------
Total current assets 28,616 33,470
SYSTEMS AND EQUIPMENT LEASED UNDER OPERATING
LEASES, NET, AND HELD FOR LEASE 8,962 7,491
PROPERTY AND EQUIPMENT, NET 3,535 3,039
INTANGIBLE ASSETS, NET, PRIMARILY PURCHASED GAMES 3,895 802
OTHER ASSETS 880 495
------- -------
$45,888 $45,297
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 841 $ 1,369
Accrued liabilities:
Compensation 1,101 698
Expenses 286 198
Customer deposits 1,983 1,335
Tournament playoff liability 2,575 2,072
Current portion of long-term obligation 601 --
Income taxes payable 133 254
------- -------
Total current liabilities 7,520 5,926
DEFERRED INCOME TAXES 232 232
LONG-TERM OBLIGATION 1,860 --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 30,000 shares
authorized, 10,387 and 11,177 shares
issued and outstanding 104 112
Additional paid-in capital 30,352 37,043
Retained earnings 5,820 1,984
------- -------
Total shareholders' equity 36,276 39,139
------- -------
$45,888 $45,297
======= =======
See Notes to Consolidated Financial Statements
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(IN THOUSANDS, EXCEPT PER THREE MONTHS ENDED NINE MONTHS ENDED
SHARE AMOUNTS) JULY 31, JULY 31,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
REVENUE:
Shuffler lease $ 2,729 $ 2,514 $ 8,313 $ 7,009
Shufflers sales 2,422 1,226 6,421 2,866
Let It Ride(R)The Tournament(TM) 1,553 1,818 4,883 5,494
Other 744 326 1,770 716
-------- -------- -------- --------
7,448 5,884 21,387 16,085
COSTS AND EXPENSES:
Cost of leases, sales and Let
It Ride(R)The Tournament(TM) 2,699 2,312 7,712 5,628
Selling, general and
administrative 2,500 1,760 7,450 4,820
Research and development 397 305 1,115 848
-------- -------- -------- --------
5,596 4,377 16,277 11,296
-------- -------- -------- --------
INCOME FROM OPERATIONS 1,852 1,507 5,110 4,789
OTHER INCOME (EXPENSE):
Loss on notes receivable -- -- -- (3,370)
Interest income 249 378 886 1,088
-------- -------- -------- --------
Income before income taxes 2,101 1,885 5,996 2,507
Provision for income taxes 760 450 2,160 625
-------- -------- -------- --------
NET INCOME $ 1,341 $ 1,435 $ 3,836 $ 1,882
======== ======== ======== ========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 10,553 11,344 10,876 11,294
======== ======== ======== ========
NET INCOME PER SHARE $ .13 $ .13 $ .35 $ .17
======== ======== ======== ========
See Notes to Consolidated Financial Statements
SHUFFLE MASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
JULY 31,
--------------------
(IN THOUSANDS) 1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,836 $ 1,882
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,773 1,803
Provision for inventory obsolescence 432 210
Loss on notes receivable -- 3,300
Changes in operating assets and liabilities:
Accounts receivable (2,605) (728)
Inventories (122) (356)
Other current assets 6 (1,159)
Tournament playoff liability 503 3,643
Income taxes payable (121) 420
Accounts payable and accrued liabilities (37) 577
Customer deposits 648 503
-------- --------
Net cash provided by operating activities 5,313 10,095
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (60,706) (44,084)
Proceeds from the sale and maturity of investments 65,522 36,431
Payments for systems and equipment leased and held for lease (3,429) (2,304)
Purchases of property and equipment (1,103) (1,302)
Payments for intangible assets, including purchased games (281) (153)
Other (354) (195)
-------- --------
Net cash used by investing activities (351) (11,607)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common shares (6,736) --
Proceeds from issuance of common stock 47 894
-------- --------
Net cash (used) provided by financing activities (6,689) 894
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,727) (618)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,440 1,896
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,713 $ 1,278
======== ========
CASH PAID FOR INCOME TAXES $ 2,291 $ 277
======== ========
See Notes to Consolidated Financial Statements
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements:
The financial statements as of July 31, 1997, and for the three and nine
month periods ended July 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 periods. The results of operations for the three
and nine months ended July 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:
JULY 31, OCTOBER 31,
DESCRIPTION 1997 1996
----------------------------- ---------- ----------
Raw materials $1,560,000 $1,600,000
Work-in-progress 487,000 432,000
Finished goods 192,000 187,000
---------- ----------
2,239,000 2,219,000
Less: Valuation allowance (480,000) (160,000)
---------- ---------
$1,749,000 $2,059,000
========== ==========
3. Systems and Equipment Leased and Held for Lease:
Systems and equipment leased and held for lease include the various models
of shufflers, Let It Ride(R) table equipment and video machines.
JULY 31, OCTOBER 31,
DESCRIPTION 1997 1996
--------------------------------------- ----------- -----------
Systems and equipment leased:
Shuffler systems $ 5,477,000 $ 5,190,000
Let It Ride(R)equipment 3,222,000 2,329,000
----------- -----------
8,699,000 7,519,000
Less: Accumulated depreciation (3,835,000) (2,456,000)
----------- -----------
4,864,000 5,063,000
Systems and equipment held for lease:
Shuffler systems 1,977,000 1,522,000
Let It Ride(R)equipment 2,121,000 906,000
----------- -----------
$ 8,962,000 $ 7,491,000
=========== ===========
4. Common Stock:
In the current year second quarter, the Board of Directors authorized the
repurchase of up to $5,000,000 of the Company's shares in the open market
or privately negotiated transactions. The Company repurchased 228,000
shares at a total cost of $1,736,000 during the quarter ended July 31,
1997. The first $5,000,000 Board authorization for share repurchases was
completed in April 1997.
SHUFFLE MASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Contingencies:
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 certain of Progressive Games,
Inc.'s patents. Progressive Games, Inc. is asking for injunctive relief and
damages.
The Company has challenged the validity of some 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 had been sued in United States District Court in Nevada by DD
Stud, Inc. and Anchor Coin, both Nevada corporations, and had
counterclaimed against Stanley E. Fulton, Anchor Gaming, DD Stud, Inc., and
Anchor Coin. In August 1997, the Company and DD Stud, Inc., Anchor Coin,
Stanley E. Fulton and Anchor Gaming settled their pending claims and
related companion claims, and the lawsuit in federal court in Nevada is in
the process of being dismissed. The financial terms of the settlement were
not material.
6. Reclassifications:
Certain reclassifications were made to the July 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 $3,223,000 and $12,046,000
for the quarter and nine months ended July 31, 1996, respectively. This was
the amount collected by the Company during the third quarter and first nine
months of fiscal 1996 to fund Let It Ride(R) The Tournament(TM) guaranteed
cash prize payments. This reclassification had no effect on net income as
previously reported.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth selected financial information derived from the
Company's Consolidated Statements of Operations:
THREE MONTHS NINE MONTHS
---------------- ----------------
PERIOD ENDED JULY 31, 1997 1996 1997 1996
- ------------------------------------ ------ ------ ------ ------
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of products 36.2 39.3 36.1 35.0
------ ------ ------ ------
Gross margin 63.8 60.7 63.9 65.0
------ ------ ------ ------
Selling, general and administrative 33.6 29.9 34.8 30.0
Research and development 5.3 5.2 5.2 5.2
------ ------ ------ ------
Income from operations 24.9 25.6 23.9 29.8
Other income (expense), net 3.3 6.4 4.1 (14.2)
------ ------ ------ ------
Income before income taxes 28.2 32.0 28.0 15.6
Provision for income taxes 10.2 7.6 10.1 3.9
------ ------ ------ ------
Net income 18.0% 24.4% 17.9% 11.7%
====== ====== ====== ======
REVENUE
Revenue for the three months ended July 31, 1997, was $7,448,000, an increase of
$1,564,000 or 26.6% over the same period last year. Shuffler lease revenue
increased by $215,000, or 8.6% from the third quarter of last year, as the
installed lease base at the end of the respective periods increased by 4.9%.
Total shuffler sales were $2,422,000 in the current quarter, an increase of
$1,196,000, or 97.6% from the prior year third quarter. Shuffler unit sales
totaled 332 in the current third quarter, of which 199 units were sales
conversions of units under lease or back-up units on the casino property. A
total of 172 shufflers were sold in last year's third quarter. Revenue from Let
It Ride(R) The Tournament(TM) was $1,553,000 in the current quarter, down from
$1,818,000 in the prior year. Last year's third quarter included revenue of
$184,000 resulting from receipt of surplus funds collected to fund the
guaranteed prize payouts. There has been no receipt of surplus funds during the
current fiscal year. Excluding the surplus funds, Let It Ride(R) The
Tournament(TM) revenue decreased by $81,000, or 5.0% from the third quarter in
fiscal 1996. Revenue from Let It Ride(R) The Tournament(TM) is derived from a
percentage of the $1.00 bonus bet option in Nevada and Mississippi, while
revenue from Foxwoods Resort Casino and Mohegan Sun is earned monthly on a fixed
fee basis. There were approximately 195 tables under license at these
jurisdictions as of July 31, 1997.
Revenue for the nine months ended July 31, 1997, was $21,387,000, an increase of
$5,302,000 or 33.0% over the nine month period ended July 31, 1996. Lease
revenue increased to $8,313,000 in the current year compared to $7,009,000 in
the prior year period, while shuffler sales increased by $3,555,000 to
$6,421,000 in the current nine month period. Let It Ride(R) The Tournament(TM)
revenue decreased by 12.5% between the comparable nine month periods due to a
combination of a decrease in hands played and decreased participation by the
players in the $1.00 bonus bet option in Nevada casinos. In addition, prior year
revenue included the receipt of $430,000 of surplus funds collected to fund the
guaranteed prize payouts. Other revenue increased by $1,054,000 from the prior
year, principally due to revenue generated from the monthly royalty fees on the
installed Let It Ride(R) basic tables, revenue recognized on the sale of service
and warranty contracts sold to casinos that purchased shufflers, and Let It
Ride(R) Bonus Video(TM) revenue.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONT'D.)
Late in the current third quarter, the Company began the process of converting
Let It Ride(R) The Tournament(TM) tables to Let It Ride(R) Bonus(TM) tables in
Nevada. Prior to the conversion, the Company participated in the revenue with
casinos based on a percentage of the $1.00 bonus bets placed by players in The
Tournament(TM) game. The revenue on the Let It Ride(R) Bonus(TM) table game will
be derived from a monthly fixed fee. A similar conversion will take place in all
Mississippi casinos in September 1997. Mississippi revenue will also be derived
on a fixed fee basis. In connection with these conversions, the Company may sell
associated Let It Ride(R) table game equipment to participating casinos.
In May 1997, the Company, through its joint venture agreement with International
Game Technology, introduced Five Deck Frenzy(TM), a wide area progressive video
poker game. The market test in Nevada was completed in June, and the statewide
rollout of the game is currently in progress.
COSTS AND EXPENSES
Gross margin was 63.8% and 63.9% for the current quarter and nine months,
compared to 60.7% and 65.0% in the prior year. The gross margin in the third
quarter of 1996 was negatively affected by production variances resulting from
lower shuffler production. The Company provided $109,000 and $432,000 to
inventory valuation reserves in the current quarter and nine months,
respectively, for valuation adjustments on early version finished shufflers and
component parts, and certain Let It Ride(R) equipment. The valuation provision
for the prior year third quarter was $110,000, and $210,000 for nine months.
Although the provision amounts were similar between the comparable quarters, the
margin effect was greater in fiscal 1996 due to lower revenues. Service related
expenses increased in the third quarter and nine months of fiscal 1997 compared
to the prior year as the Company increased its field support staff due to
jurisdictional expansion.
Selling, general and administrative expenses increased by $740,000, to
$2,500,000 in the current year third quarter, and by $2,630,000 to $7,450,000 in
the nine month period ended July 31, 1997. Overall, expenses increased due to
additional staffing and facilities related costs made necessary by revenue and
jurisdictional growth. Facilities expenses increased as the Company leased a new
building in Las Vegas, Nevada, beginning November 1996. Incentive compensation
accruals were recorded in the current year due to achieving certain financial
objectives. Legal and professional fees were approximately $272,000 and $990,000
for the current quarter and nine months, respectively, compared to $231,000 and
$545,000 in the prior year. The increased professional fees resulted from the
ongoing litigation (see Note 5 to the Consolidated Financial Statements), and
increased licensing and patent related expenditures. Research and development
expenses increased to $397,000 from $305,000 in the prior year third quarter,
and $1,115,000 compared to $848,000 for the nine month comparable periods. The
additional expenses were incurred for the development of new video games.
OTHER INCOME (EXPENSE)
Interest income was $249,000 in the current third quarter and $886,000 for the
current nine month period, compared to $378,000 and $1,088,000, respectively, in
the prior year. The decrease in interest income resulted from decreased cash and
investments due to cash used to fund over $6,700,000 of share repurchases during
the current nine month period. Prior year other expense included a $3,370,000
loss on notes receivable.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONT'D.)
INCOME TAXES
The Company recorded income tax expense at an effective annual rate of 36.2% for
the quarter and 36.0% year-to-date, compared to 26.3% and 28.1% in the prior
year periods. The Company reversed all of its deferred tax asset valuation
allowance in fiscal 1996, resulting in reduced tax expense in the prior year.
NET INCOME PER SHARE
Net income per share was $.13 for the current year third quarter, and $.35 for
the current nine month period. Weighted average common and common equivalent
shares outstanding decreased to 10,553,000 from 11,344,000 in the third quarter
of fiscal 1996, and to 10,876,000 for the current nine month period from
11,294,000 for the nine months ended July 31, 1996, principally due to the
repurchase of 798,000 common shares during the current nine month period through
the Board authorized share repurchase programs.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1997, the Company had cash and cash equivalents, and investments
totaling $19,935,000, compared to $26,478,000 at October 31, 1996. The current
ratio decreased to 3.8 to 1 from 5.6 to 1 at October 31, 1996, while working
capital decreased to $21,096,000 at July 31, 1997, from $27,544,000 at October
31, 1996. The primary reason for the decrease in the current ratio and working
capital was the use of $6,736,000 to repurchase the Company's common shares.
Cash flows from operating activities totaled $5,313,000 in the current nine
months compared to cash flows from operating activities of $10,095,000 in the
same period last year. Significant items under cash flows from operating
activities in the current period include net income of $3,836,000, non-cash
charges for depreciation and amortization of $2,773,000, and inventory allowance
provisions of $432,000. Cash of $2,605,000 was used to fund an increase in
accounts receivable. The increase in accounts receivable resulted from increased
shuffler sales in the current third quarter and payment terms offered on other
fiscal 1997 sales. Cash provided by investing activities included the redemption
of approximately $4,800,000 of investments used to fund the share repurchases.
Payments for systems and equipment leased and held for lease included
approximately $2,000,000 for the purchase of equipment for Let It Ride(R) the
table game, and video slot machines and related equipment for the Let It Ride(R)
Bonus Video(TM). Property and equipment purchases, primarily in the first
quarter, were $1,103,000 and included approximately $790,000 for leasehold
improvements and furnishings for the new facility under lease in Las Vegas,
Nevada. Under financing activities, the Company repurchased 798,000 of its
common shares at a total cost of $6,736,000 under its share repurchase programs.
The Company believes its current cash and investments, and cash provided by
operations will be sufficient to finance its current operations, share
repurchase program, and new product developments needs.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report may contain 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 of 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 economic conditions; regulatory and jurisdictional issues
involving the Company 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
In 1995, 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.
The Company was served with a lawsuit by DD Stud, Inc. and Anchor Coin in
September 1996. In August 1997, the lawsuit was settled.
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:
* Exhibit 10.1 Employment Contract, by and between Shuffle
Master, Inc. and Mark Yoseloff, dated March
7, 1997 (confidential treatment requested)
* Exhibit 10.2 Purchase Agreement, by and between Shuffle
Master, Inc., and Well Suited L.L.C., and
Mark Yoseloff, dated March 7, 1997
(confidential treatment requested)
* Exhibit 10.3 Purchase/License Agreement, by and between
Shuffle Master, Inc., and Visual
Communications Consultants, Inc. dba
Advanced Gaming Concepts, and Mark Yoseloff,
dated March 7, 1997 (confidential treatment
requested)
* Exhibit 27 Financial Data Schedules
(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: September 8, 1997
/s/ Joseph J. Lahti
Joseph J. Lahti
Chief Financial Officer
/s/ John A. Rahja
John A. Rahja
Vice President and Controller