-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F8nwLXwdpGx5OqD+7hQ2HuqsSwAXzM/2ClwNyfd95I4yqpZ0mWk0Wf0kehZgV7rn pxwi0YguOdjL1tqED87g9w== 0000897101-00-000221.txt : 20000313 0000897101-00-000221.hdr.sgml : 20000313 ACCESSION NUMBER: 0000897101-00-000221 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHUFFLE MASTER INC CENTRAL INDEX KEY: 0000718789 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 411448495 STATE OF INCORPORATION: MN FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20820 FILM NUMBER: 566273 BUSINESS ADDRESS: STREET 1: 10921 VALLEY VIEW RD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6129431951 10-Q 1 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 0-20820 SHUFFLE MASTER, INC. (Exact name of registrant as specified in its charter) Minnesota 41-1448495 (State or Other Jurisdiction (IRS Employer Identification No.) of Incorporation or Organization) 10901 Valley View Road, Eden Prairie MN 55344 (Address of Principal Executive Offices) (State) (Zip Code) Registrant's Telephone Number, Including Area Code: (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 March 10, 2000, there were 7,140,393 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) 2000 1999 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,775 $ 1,476 Investments 576 4,165 Accounts receivable, net 2,908 3,482 Note receivable from related party 78 74 Inventories 4,330 4,524 Deferred income taxes 480 1,470 Other current assets 755 762 ------------ ------------ Total current assets 10,902 15,953 PRODUCTS LEASED AND HELD FOR LEASE 5,943 5,309 PROPERTY AND EQUIPMENT, NET 2,372 2,628 INTANGIBLE ASSETS, NET 5,640 5,717 NON-CURRENT DEFERRED INCOME TAXES 595 595 OTHER ASSETS 401 403 ------------ ------------ TOTAL ASSETS $ 25,853 $ 30,605 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,421 $ 1,607 Accrued liabilities: Compensation 781 939 Expenses 246 2,997 Severance benefits 102 154 Current portion of long-term obligation to related party 546 546 Customer deposits and unearned revenue 1,707 1,741 Income taxes payable 183 542 ------------ ------------ TOTAL CURRENT LIABILITIES 4,986 8,526 LONG-TERM OBLIGATION TO RELATED PARTY 543 677 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $.01 par value; 30,000 shares authorized; 7,140 and 7,475 shares issued and outstanding 72 75 Additional paid-in capital 4,438 7,280 Retained earnings 15,814 14,047 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 20,324 21,402 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 25,853 $ 30,605 ============ ============
See notes to consolidated financial statements 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SHUFFLE MASTER, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited)
THREE MONTHS ENDED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JANUARY 31, ---------------------------- 2000 1999 ------------ ------------ REVENUE: Shuffler lease $ 2,989 $ 2,662 Shuffler sales and service 1,468 945 Table games 2,911 2,218 Slot games 391 112 Other 741 41 ------------ ------------ 8,500 5,978 ------------ ------------ COSTS AND EXPENSES: Cost of products 2,662 1,738 Selling, general and administrative 2,201 1,987 Research and development 912 741 ------------ ------------ 5,775 4,466 ------------ ------------ Income from operations 2,725 1,512 Interest income, net 32 96 ------------ ------------ Income before income taxes 2,757 1,608 Provision for income taxes 990 575 ------------ ------------ NET INCOME $ 1,767 $ 1,033 ============ ============ EARNINGS PER COMMON SHARE, BASIC $ .24 $ .13 ============ ============ EARNINGS PER COMMON SHARE, ASSUMING DILUTION $ .24 $ .13 ============ ============ WEIGHTED AVERAGE COMMON SHARES, BASIC 7,350 8,083 ============ ============ WEIGHTED AVERAGE COMMON SHARES, ASSUMING DILUTION 7,447 8,107 ============ ============
See notes to consolidated financial statements 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SHUFFLE MASTER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
THREE MONTHS ENDED JANUARY 31, ----------------------------- (IN THOUSANDS) 2000 1999 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,767 $ 1,033 ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization 1,163 926 Provision for bad debts 37 -- Provision for inventory obsolescence 150 75 Deferred income taxes 990 -- Stock options issued for services (33) -- CHANGES IN OPERATING ASSETS AND LIABILITIES Accounts and note receivable 533 325 Inventories 44 (29) Other current assets 7 (141) Accounts payable and accrued liabilities (3,147) (761) Customer deposits and unearned revenue (34) 139 Income taxes payable (359) 450 ------------ ------------ Net cash provided by operating activities 1,118 2,017 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (37) (4,015) Proceeds from the sales and maturities of investments 3,626 3,938 Payments for products leased and held for lease (1,269) (175) Purchases of property and equipment -- (163) Purchases of intangible assets (190) -- Other (3) 7 ------------ ------------ Net cash provided (used by) investing activities 2,127 (408) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of common stock (3,267) (15) Proceeds from issuance of common stock 455 8 Payments on long-term obligation to related party (134) (81) ------------ ------------ Net cash used by financing activities (2,946) (88) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 299 1,521 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,476 2,564 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,775 $ 4,085 ============ ============ NON-CASH TRANSACTION: Payment of obligation to related party with common stock $ 47 $ 47 ============ ============ CASH PAID FOR: Income taxes $ 360 $ 126 ============ ============ Interest $ 13 $ 20 ============ ============
See notes to 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, 2000, and for the three month periods ended January 31, 2000 and 1999, are unaudited, but, in the opinion of management, include all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the financial results for the interim period. The results of operations for the three months ended January 31, 2000 are not necessarily indicative of the results to be expected for the year ending October 31, 2000. These interim statements should be read in conjunction with the Company's October 31, 1999, financial statements and notes thereto included in its Form 10-K. 2. INVENTORIES: JANUARY 31, OCTOBER 31, DESCRIPTION 2000 1999 ---------------------------------------- ------------ ------------ (In thousands) Raw materials $ 3,039 $ 2,598 Work-in-progress 511 564 Finished goods 780 1,362 ------------ ------------ $ 4,330 $ 4,524 ============ ============ 3. PRODUCTS LEASED AND HELD FOR LEASE: JANUARY 31, OCTOBER 31, DESCRIPTION 2000 1999 ---------------------------------------- ------------ ------------ (In thousands) PRODUCTS LEASED: Game equipment $ 6,927 $ 6,697 Gaming products 3,356 3,231 ------------ ------------ 10,283 9,928 ------------ ------------ PRODUCTS HELD FOR LEASE: Game equipment 2,869 2,242 Gaming products 1,227 741 ------------ ------------ 4,096 2,983 ------------ ------------ 14,379 12,911 Less: Accumulated depreciation (8,436) (7,602) ------------ ------------ $ 5,943 $ 5,309 ============ ============ 5 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SHUFFLE MASTER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 4. COMMON STOCK: In the first quarter of fiscal 2000, the Company repurchased 392,500 shares at a total cost of $3,267,000, compared to 2,150 shares repurchased at a total cost of $15,000 in the first quarter of fiscal 1999. As of January 31, 2000, the amount remaining for share repurchase under the most recent board authorization was $2,000,000. 5. EARNINGS PER SHARE: The following table shows the reconciliation of basic earnings per share to diluted earnings per share: QUARTER ENDED JULY 31, 1999 1998 --------------------------------------------------- --------- --------- (In thousands, except for per share amounts) NET INCOME $ 1,767 $ 1,033 ========= ========= BASIC: Weighted average shares outstanding 7,307 8,018 Shares to be issued under asset purchase 43 65 --------- --------- Weighted average common shares, basic 7,350 8,083 ========= ========= ASSUMING DILUTION: Weighted average common shares, basic 7,350 8,083 Dilutive impact of options and warrants outstanding 97 24 --------- --------- Weighted average common shares, assuming dilution 7,447 8,107 ========= ========= EARNINGS PER SHARE, BASIC $ .24 $ .13 ========= ========= EARNINGS PER SHARE, ASSUMING DILUTION $ .24 $ .13 ========= ========= 6. FACILITIES RELOCATION AND OTHER CHARGES: In the third quarter of fiscal 1998, the Company recorded a pre-tax charge of $2,650,000 due to the relocation of the Company's administrative and manufacturing functions from Minneapolis, Minnesota to Las Vegas, Nevada and decreases in the valuation of certain assets. During fiscal 1999, certain employees did not terminate and certain leases were not cancelled, resulting in the reversal of $199,000 in severance benefits and $14,000 in office lease cancellation charges. The remaining severance liability as of January 31, 2000 represents severance benefits to be paid to two former employees in fiscal 2000. AS OF JANUARY 31, 2000 CHARGE UTILIZED NOT USED BALANCE --------------------------- --------- --------- --------- --------- (In thousands) Write-down of assets $ 1,423 $ 1,423 $ -- $ -- Employee Severance Benefits 1,050 749 199 102 Other 177 163 14 -- --------- --------- --------- --------- $ 2,650 $ 2,335 $ 213 $ 102 ========= ========= ========= ========= 6 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SHUFFLE MASTER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 7. OPERATING SEGMENT REPORTING: The Company operates in two business segments: game equipment and gaming products. The game equipment segment primarily designs, manufactures and installs shufflers for sale or lease. It also distributes, installs and services casino chip sorting machines and accessories for sale or lease. The gaming products segment includes the design, manufacture, installation and service of proprietary table games and slot games. Gaming products are either sold or produce recurring revenue through fixed or participation leases. 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. QUARTER ENDED JANUARY 31, 2000 1999 ------------------------- ------------ ------------ (in thousands) REVENUE Game equipment $ 5,198 $ 3,648 Gaming products 3,302 2,330 ------------ ------------ 8,500 5,978 ============ ============ OPERATING INCOME Game equipment 2,709 1,981 Gaming products 1,565 1,046 Corporate (1,549) (1,515) ------------ ------------ 2,725 1,512 ============ ============ DEPRECIATION AND AMORTIZATION Game equipment 397 437 Gaming products 596 277 Corporate 170 212 ------------ ------------ 1,163 926 ============ ============ ASSETS Game equipment 8,925 5,866 Gaming products 9,896 7,426 Corporate 7,032 15,773 ------------ ------------ 25,853 29,065 ============ ============ CAPITAL EXPENDITURES Game equipment 844 130 Gaming products 519 45 Corporate 96 163 ------------ ------------ $ 1,459 $ 338 ============ ============ 7 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SHUFFLE MASTER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 8. CONTINGENCY: On December 28, 1999 the Company settled all of its litigation with Progressive Games, Inc. ("PGI"), a wholly owned subsidiary of Mikohn Gaming Corporation ("Mikohn"). The Company made a one-time payment of $2,750,000 ($1,760,000 or $.22 per diluted share, after tax) to PGI and consented to the validity, enforceability and infringement of certain PGI patents. This settlement amount was accrued as an expense in the consolidated financial statements as of October 31, 1999. The Company will not pay future royalties for Let It Ride Bonus(R), Let It Ride The Tournament(R) and Three Card Poker(R). It will pay pre-negotiated royalties if it markets other table games utilizing a side bet with a fixed payout. Under separate license agreements, PGI/Mikohn will pay the Company future royalties of approximately $580,000 per year over the next five years for the rights to use the Company's coin sensing patents, the Company's multi-tiered game wagering patent and the Company's intellectual property related to its Bahama Bonus(TM) table game. The Company and PGI/Mikohn also entered into a mutually beneficial cross-supplier agreement. As part of the settlement PGI has released and will dismiss all claims against Prime Table Games, Derek Webb, Hannah O'Donnell and the Company's casino licensees named in the litigation, which satisfies the Company's indemnification obligations. 9. RECLASSIFICATIONS: Certain reclassifications have been made to the January 31, 1999 consolidated financial statements to conform to the January 31, 2000 financial statement presentation. These reclassifications had no effect on the operating results for the quarter ended January 31, 1999, as previously reported. 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 Consolidated Income Statements: THREE MONTHS ------------------------- PERIOD ENDED JANUARY 31, 2000 1999 - ----------------------------------- ---------- ---------- Revenue 100.0% 100.0% Cost of Products 31.3 29.1 ---------- ---------- Gross Margin 68.7 70.9 ---------- ---------- Selling, general and administrative 25.9 33.2 Research and development 10.7 12.4 ---------- ---------- Income from operations 32.1 25.3 Interest Income, net 0.3 1.6 ---------- ---------- Income before income taxes 32.4 26.9 Provision for income taxes 11.6 9.6 ---------- ---------- Net Income 20.8% 17.3% ========== ========== REVENUE: Revenue for the three months ended January 31, 2000, was $8,500,000, an increase of $2,522,000 or 42.2% from the same period last year. Shuffler sales and service revenue increased to $1,468,000 in the current quarter, compared to $945,000 in the first quarter last year. There were 113 current quarter unit sales, compared to 71 unit sales in the first quarter of the prior year. The average per unit sales price increased to $10,350 in the current quarter from $9,457 in the prior year, due to the sale of 62 higher priced ACE(TM) shufflers. Shuffler lease revenue increased by $327,000 or 12.2% to $2,989,000 in the current fiscal quarter. The shuffler installed lease base was 2,427 at January 31, 2000, compared to 1,974 at January 31, 1999 and 2,253 at October 31, 1999. The 174 unit increase in the installed lease base during the quarter was attributable to the placement of 283 ACE(TM) shufflers during the quarter, offset by the net removal of 129 BG shufflers, the majority of which were exchanged for ACE(TM) shufflers. In the current year first quarter, sales of units converted from lease totaled 21 units, compared to eight leased units converted to sales in the prior year first quarter. Revenue from the Let It Ride(R) table game was $2,911,000, an increase of $693,000 or 31.2% from the first quarter last year. The installed base of Bonus tables was 425 at January 31, 2000, compared to 339 installed Bonus tables at January 31, 1999 and 424 installed Bonus tables at October 31, 1999. A majority of the increase in installed Bonus tables compared to the prior year first quarter relates to the conversion of Let It Ride(R) basic table games to Bonus table games following a legal motion to vacate the court injunction prohibiting the use of the Bonus game in New Jersey in the fourth quarter of fiscal 1999. Let It Ride(R) table revenue also includes revenue from the Let It Ride(R) basic game that is recorded on a monthly fixed fee similar to the Bonus game, but at prices significantly less than the Bonus game. There were 236 basic tables installed at January 31, 2000, compared to 280 installed basic tables at January 31, 1999 and 233 installed basic tables at October 31, 1999. The decrease in installed basic tables from January 31, 1999 was primarily due to conversions from the basic game to the Bonus game during the fourth quarter of fiscal 1999. Table revenue in the current year quarter also increased due to the incremental revenue of $247,000 earned from Three Card Poker(R). There were 202 Three Card Poker(R) games installed as of January 31, 2000. The Company purchased this table game from its developer in the third quarter of fiscal 1999. Additionally, the Company earned $144,000 in table game royalties in the current fiscal quarter related to the settlement with Progressive Games, Inc. 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 $279,000 or 250.0% to $391,000 in the current fiscal quarter from the prior year fiscal quarter due to an installed lease base of 524 slot machines as of January 31, 2000. This installed base consisted of primarily Let's Make A Deal(TM) video slot games as well as Five Deck Poker(TM) and The Three Stooges(TM) games. Other revenue increased to $741,000 in the current fiscal quarter due partly to revenue earned from the lease and sale of Chipper Champ(R) chip sorting machines and the sale of other TCS products under the Company's joint marketing agreement with TCS America, Inc. Other revenue also increased due to the receipt of a $200,000 technology evaluation fee. COSTS AND EXPENSES: Gross margin decreased to 68.7% in the current year first quarter from 70.9% in the same period in the prior year. The gross margin decreased due to increased sales of lower margin products under the TCS agreement and due to increases in lower margin revenues from video products, which, combined, accounted for 13.3% of revenue in the current quarter, compared to 2.6% of sales in the prior year first quarter. Higher margin revenue from shuffler leases and sales correspondingly decreased to 52.5% of sales in the current fiscal quarter from 60.3% in the prior year first fiscal quarter. Selling, general and administrative expenses were $2,201,000, an increase of $214,000 or 10.8% from the prior year first quarter. This increase was due to higher sales, advertising and promotional expenses in the current quarter that offset lower legal expenses following the settlement with PGI in the current quarter. Sales expenses increased by $178,000 from the prior year first quarter due to increased commissions and travel related to increased sales and increased sales staffing. Advertising and promotional expenses increased by $77,000 from the prior year first quarter due to special events and trade show expenses incurred in the current first quarter. Legal expenses decreased by $128,000 to $147,000 in the current first fiscal quarter as litigation expenses ceased following the settlement with Progressive Games, Inc. in December 1999. The Company provided $37,000 for bad debts in the current fiscal quarter compared to no provision in the prior year first quarter. Research and development expenses were $912,000, an increase of $171,000 or 23.1% from the prior year first quarter. Most of the expense increase resulted from activities in support of new game system development. In addition, the Company incurred additional expenses in the development of its new continuous multi-deck shuffler, the King(TM). INTEREST INCOME, NET: Interest income, net, was $32,000 in the current year first quarter compared to $96,000 in the prior year. Cash and investments decreased to $2,351,000 at January 31, 2000, from $5,641,000 at October 31, 1999. The decrease in interest bearing cash and investments was due primarily to common stock repurchases of $3,267,000 during the first quarter of fiscal 2000. INCOME TAXES: The Company recorded an income tax provision at an effective rate of 36% in the current year first quarter, equal to the tax provision of 36% for fiscal 1999, reflecting an unchanged tax benefit from the Company's foreign sales corporation and an unchanged provision for state income taxes. EARNINGS PER SHARE: The Company earned $.24 per share, assuming dilution, for the current year first quarter compared to $.13 per share, assuming dilution, in the prior year. Weighted average shares outstanding - assuming dilution, decreased to 7,447,000 from 8,107,000 in the first quarter of fiscal 1999 due primarily to the fiscal 1999 repurchase of 585,000 shares and the fiscal 2000 repurchase of 392,500 shares. 10 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- YEAR 2000: The Year 2000 readiness issue arose from the inability of older software in computer information systems or other devices with date-sensitive functions to properly recognize and accurately process date-sensitive information on and after January 1, 2000. This problem is expected to exist in computer programs that have defined dates using a two-digit year. If the Company or its customers, suppliers, or other third parties rely on systems that are at risk for this problem and fail to make necessary corrections, the result could be failure or malfunction of certain computer systems and other devices dependent upon date-sensitive functions. For companies so affected, this problem could cause disruptions of operations, including, among other things, a temporary inability to operate or distribute equipment or products, process transactions, send invoices, or engage in other normal business activities. While Shuffle Master's assessment of Year 2000 issues is ongoing, at the date of this report the Company had not experienced any effects from Year 2000 issues. A summary of the Company's preparation for Year 2000 issues, as well as certain disclaimers, is presented below. During fiscal 1997 the Company completed: 1) a business system conversion involving all of its core financial and operating applications software, 2) an upgrade of processors or complete systems in substantially all of its servers and personal computers, 3) an upgrade of its network software and most of its personal computer applications software and, 4) an upgrade of its main phone system and voice mail software. These conversions and upgrades were made for reasons unrelated to the Year 2000 issue, but are Year 2000 ready. Based on these changes, the Company does not believe that the Year 2000 issue has or will significantly affect its internal operations. In early fiscal 1999, the Company determined that it has date-sensitive functions in the operating system software for its Let It Ride Bonus(R) game equipment. The Company updated the software to allow operation without concern for calendar dates. The required updates are now 100% complete. The Company obtained all necessary regulatory approvals for the upgraded software during 1999. The Company's first generation single deck and multi-deck shuffler products operate without date-sensitive functions. The Company's newer shuffler products, including the ACE(TM) and the King(TM), use software that references dates for service reporting functions only and have been designed to operate during and after the Year 2000. The Company also markets or will market games for operation on IGT, Bally Gaming and Acres Gaming systems, and was informed by these companies that such machines and systems were Year 2000 ready. The Company has evaluated its key vendors' and service providers' Year 2000 readiness to determine the extent to which such relationships may affect the Company's operations. In the event that Year 2000 issues were to have been identified with key vendors, the Company expected to be able to manage purchases and inventories to minimize the Year 2000 issue related delays in parts supply. In addition, a significant portion of the Company's revenue is recurring in nature and is not, in the short term, materially dependent on new unit production. Management believes that the Company's exposure to third party Year 2000 risks is not significant and has diminished rapidly with passage of time. However, there can be no assurance that systems of other companies on which the Company may rely were converted or that such failure to convert would not have an adverse effect on the Company's operations. It appears that none of the Company's casino customers experienced any Year 2000 problems, however, such operations are collectively many times the size of the Company and the Company does not have the resources to undertake a complete evaluation. In view of its fiscal 1997 systems upgrades, no significant expenses were incurred in fiscal 1999 to address Year 2000 issues. The Company also does not expect that it will incur any significant expenses related to Year 2000 issues during the remainder of fiscal 2000. 11 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- As of January 31, 2000, the Company had cash and cash equivalents and investments totaling $2,351,000, compared to $5,641,000 at October 31, 1999. The current ratio increased to 2.2 to 1 from 1.9 to 1 at October 31, 1999, while working capital decreased to $5,916,000 at January 31, 2000, from $7,427,000 at October 31, 1999. The repurchase of $3,267,000 in common stock during the first quarter of fiscal 2000 contributed to the decrease in cash and working capital at January 31, 2000. The payment of $2,750,000 under the Company's settlement with Progressive Games, Inc., in December 1999 was a significant use of cash for operating activities in the current fiscal quarter and contributed to the increase in the current ratio. Cash provided by operations totaled $1,118,000 in the current year first quarter compared to cash provided by operations of $2,017,000 in the first quarter of last year. Significant items under cash flows from operating activities in the current period include net income of $1,767,000, and non-cash charges for depreciation and amortization as well as for provisions for bad debts, inventory obsolescence, and deferred income taxes, which totaled $2,340,000. Another significant source of cash included the reduction of accounts receivable of $533,000 due to the collection of shuffler sales and lease receivables. Investing activities include capital expenditures totaling $1,269,000 for additions to leased gaming equipment and game products as well as other fixed assets. 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 development for the foreseeable 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 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. 12 PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS: On December 28, 1999 the Company settled all of its litigation with Progressive Games, Inc. ("PGI"), a wholly owned subsidiary of Mikohn Gaming Corporation ("Mikohn"). The Company made a one-time payment of $2,750,000 ($1,760,000 or $.22 per diluted share, after tax) to PGI and consented to the validity, enforceability and infringement of certain PGI patents. This settlement amount was accrued as an expense in the consolidated financial statements as of October 31, 1999. The Company will not pay future royalties for Let It Ride Bonus(R), Let It Ride The Tournament(R) and Three Card Poker(R). It will pay pre-negotiated royalties if it markets other table games utilizing a side bet with a fixed payout. Under separate license agreements, PGI/Mikohn will pay the Company future royalties of approximately $580,000 per year over the next five years for the rights to use the Company's coin sensing patents, the Company's multi-tiered game wagering patent and the Company's intellectual property related to its Bahama Bonus(TM) table game. The Company and PGI/Mikohn also entered into a mutually beneficial cross-supplier agreement. As part of the settlement PGI has released and will dismiss all claims against Prime Table Games, Derek Webb, Hannah O'Donnell and the Company's casino licensees named in the litigation, which satisfies the Company's indemnification obligation. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K: none 13 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 10, 2000 /s/ Gary W. Griffin - ------------------------------------- Gary W. Griffin Chief Financial Officer /s/ Gerald W. Koslow - ------------------------------------- Gerald W. Koslow Corporate Controller 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS OCT-31-2000 NOV-01-1999 JAN-31-2000 1,775 576 3,080 172 4,330 10,902 4,710 2,338 25,853 4,986 543 72 0 0 20,252 25,853 1,468 8,500 218 2,662 912 0 13 2,757 990 1,767 0 0 0 1,767 .24 .24
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