-----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, E3P1nUxL38qT0CKEQZ2cOOitRgFhMtcZ0/4bcyhiQkL5sVieLuqhBSm8YoWcrvJf 9XnSWnM6hQ/wUKpVr3vn8Q== /in/edgar/work/20000906/0000897101-00-000888/0000897101-00-000888.txt : 20000922 0000897101-00-000888.hdr.sgml : 20000922 ACCESSION NUMBER: 0000897101-00-000888 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000731 FILED AS OF DATE: 20000906 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHUFFLE MASTER INC CENTRAL INDEX KEY: 0000718789 STANDARD INDUSTRIAL CLASSIFICATION: [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: 717496 BUSINESS ADDRESS: STREET 1: 10921 VALLEY VIEW RD CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6129431951 10-Q 1 0001.txt 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, 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: (952) 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, 2000, there were 7,192,738 shares of the Company's $.01 par value common stock outstanding. 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SHUFFLE MASTER, INC. CONSOLIDATED BALANCE SHEETS ASSETS
(unaudited) JULY 31, OCTOBER 31, (IN THOUSANDS) 2000 1999 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,387 $ 1,476 Investments 4,296 4,165 Accounts receivable, net 3,918 3,482 Note receivable from related party 12 74 Inventories 4,432 4,524 Deferred income taxes 480 1,470 Other current assets 1,250 762 ------------ ------------ Total current assets 15,775 15,953 PRODUCTS LEASED AND HELD FOR LEASE, NET 6,615 5,309 PROPERTY AND EQUIPMENT, NET 2,315 2,628 INTANGIBLE ASSETS, NET 5,791 5,717 NON-CURRENT DEFERRED INCOME TAXES 595 595 OTHER ASSETS 499 403 ------------ ------------ TOTAL ASSETS $ 31,590 $ 30,605 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,125 $ 1,607 Accrued liabilities: Compensation 1,396 939 Expenses 209 2,997 Severance benefits 34 154 Current portion of long-term obligation to related party 546 546 Customer deposits and unearned revenue 1,782 1,741 Income taxes payable 199 542 ------------ ------------ TOTAL CURRENT LIABILITIES 6,291 8,526 LONG-TERM OBLIGATION TO RELATED PARTY 270 677 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $.01 par value; 30,000 shares authorized 72 75 Additional paid-in capital 4,918 7,280 Retained earnings 20,039 14,047 ------------ ------------ TOTAL SHAREHOLDER'S EQUITY 25,029 21,402 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 31,590 $ 30,605 ============ ============
See notes to consolidated financial statements 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SHUFFLE MASTER, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JULY 31, JULY 31, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ REVENUE: Shuffler lease $ 3,333 $ 2,911 $ 9,382 $ 8,344 Shuffler sales and service 2,255 1,659 6,146 4,200 Table games 3,089 2,503 8,958 6,987 Slot games 274 210 1,136 438 Other 237 668 1,701 918 ------------ ------------ ------------ ------------ 9,188 7,951 27,323 20,887 ------------ ------------ ------------ ------------ COST AND EXPENSES: Cost of products 2,517 2,660 7,813 6,601 Selling, general and administrative 2,363 2,159 7,040 6,211 Research and development 1,169 843 3,239 2,386 ------------ ------------ ------------ ------------ 6,049 5,662 18,092 15,198 ------------ ------------ ------------ ------------ Income from operations 3,139 2,289 9,231 5,689 Interest income, net 97 62 183 254 ------------ ------------ ------------ ------------ Income before income taxes 3,236 2,351 9,414 5,943 Provision for income taxes 1,197 850 3,422 2,140 ------------ ------------ ------------ ------------ NET INCOME $ 2,039 $ 1,501 $ 5,992 $ 3,803 ============ ============ ============ ============ EARNINGS PER COMMON SHARE, BASIC $ .28 $ .19 $ .83 $ .48 ============ ============ ============ ============ EARNINGS PER COMMON SHARE, DILUTED $ .27 $ .19 $ .80 $ .47 ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES, BASIC 7,217 7,884 7,253 7,998 ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES, DILUTED 7,675 7,935 7,527 8,028 ============ ============ ============ ============
See notes to consolidated financial statements 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SHUFFLE MASTER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NINE MONTHS ENDED JULY 31, ----------------------------- (IN THOUSANDS) 2000 1999 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,992 $ 3,803 ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization 3,619 3,172 Provision for bad debts 75 -- Provision for inventory obsolescence 350 -- Deferred income taxes 990 350 Stock options issued for services (10) 104 CHANGES IN OPERATING ASSETS AND LIABILITIES: Accounts and notes receivable (449) (1,197) Inventories (258) (834) Other current assets (488) 92 Accounts payable and accrued liabilities (2,135) 542 Customer deposits and unearned revenue 41 (34) Income taxes payable (141) 338 ------------ ------------ Net cash provided by operating activities 7,586 6,336 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (4,883) (10,282) Proceeds from the sales and maturities of investments 4,752 12,081 Payments for products leased and held for lease (3,569) (3,033) Purchases of property and equipment (194) (324) Purchases of intangible assets (910) (3,217) Other (109) 301 ------------ ------------ Net cash used by investing activities (4,913) (4,474) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of common stock (3,267) (1,647) Proceeds from issuance of common stock 912 173 Payments on long-term obligation to related party (407) (390) ------------ ------------ Net cash used by financing activities (2,762) (1,864) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS (89) (2) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,476 2,564 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,387 $ 2,562 ============ ============ NON-CASH TRANSACTION: Payment of obligation to related party with common stock $ 141 $ 142 ============ ============ CASH PAID FOR: Income taxes $ 2,610 $ 1,853 ============ ============ Interest $ 36 $ 60 ============ ============
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 July 31, 2000, and for the three and nine month periods ended July 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 periods. The results of operations for the three and nine months ended July 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. Certain reclassifications have been made to the July 31, 1999 consolidated financial statements to conform to the July 31, 2000 financial statement presentation. These reclassifications had no effect on the operating results for the three and nine months ended July 31, 1999, as previously reported. 2. INVENTORIES: JULY 31, OCTOBER 31, DESCRIPTION 2000 1999 ------------------------------ ------------ ------------ (In thousands) Raw materials $ 2,041 $ 2,598 Work-in-progress 734 564 Finished goods 1,657 1,362 ------------ ------------ $ 4,432 $ 4,524 ============ ============ 3. PRODUCTS LEASED AND HELD FOR LEASE: JULY 31, OCTOBER 31, DESCRIPTION 2000 1999 ------------------------------ ------------ ------------ (In thousands) PRODUCTS LEASED: Game equipment $ 7,353 $ 6,697 Gaming products 3,282 3,231 ------------ ------------ 10,635 9,928 ------------ ------------ PRODUCTS HELD FOR LEASE: Game equipment 2,357 2,242 Gaming products 1,489 741 ------------ ------------ 3,846 2,983 ------------ ------------ 14,481 12,911 Less: Accumulated depreciation (7,866) (7,602) ------------ ------------ $ 6,615 $ 5,309 ============ ============ 4. COMMON STOCK: In the first nine months of fiscal 2000, the Company repurchased 392,500 shares at a total cost of $3,267,000, compared to 236,350 shares repurchased at a total cost of $1,647,000 in the first nine months of fiscal 1999. All repurchases during fiscal 2000 occurred in the first quarter. As of July 31, 2000, the amount remaining for share repurchase under the most recent board authorization was $2,000,000. 5 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SHUFFLE MASTER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 5. EARNINGS PER SHARE: The following table shows the reconciliation of basic earnings per share to diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED JULY 31, JULY 31, ------------------------ ------------------------ 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands, except for per share amounts) NET INCOME 2,039 1,501 5,992 3,803 ========== ========== ========== ========== BASIC: Weighted average shares outstanding 7,185 7,830 7,215 7,939 Shares to be issued under asset purchase agreement 32 54 38 59 ---------- ---------- ---------- ---------- Weighted average common shares, basic 7,217 7,884 7,253 7,998 ========== ========== ========== ========== ASSUMING DILUTION: Weighted average common shares, basic 7,217 7,884 7,253 7,998 Dilutive impact of options outstanding 458 51 274 30 ---------- ---------- ---------- ---------- Weighted average common shares, diluted 7,675 7,935 7,527 8,028 ========== ========== ========== ========== EARNINGS PER SHARE, BASIC .28 .19 .83 .48 ========== ========== ========== ========== EARNINGS PER SHARE, DILUTED .27 .19 .80 .47 ========== ========== ========== ==========
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 were not terminated 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 balance of the severance liability as of October 31, 1999 was $154,000 and the remaining liability as of July 31, 2000 represents severance benefits to be paid to a former employee in fiscal 2000.
AS OF JULY 31, 2000 CHARGE UTILIZED NOT USED BALANCE ----------------------------- ---------- ---------- ---------- ---------- (In thousands) Write-down of assets $ 1,423 $ 1,423 $ -- $ -- Employee severance benefits 1,050 817 199 34 Other 177 163 14 -- ---------- ---------- ---------- ---------- $ 2,650 $ 2,403 $ 213 $ 34 ========== ========== ========== ==========
6 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SHUFFLE MASTER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 7. OPERATING SEGMENTS: The Company operates in two business segments: game equipment and gaming products. The game equipment segment includes the manufacturing, marketing, installation and servicing of the Company's proprietary shuffler product line as well as the distribution and servicing of casino chip sorting machines and accessories all for sale or recurring lease revenue. The gaming products segment includes the design, marketing, installation and servicing of proprietary table games and slot games. Gaming products generally produce recurring revenue through fixed or participation leases and licenses. The Company does not allocate corporate expenses to its business segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is the Chief Executive Officer.
THREE MONTHS ENDED, NINE MONTHS ENDED, JULY 31, JULY 31, ----------------------------- ----------------------------- (in thousands) 2000 1999 2000 1999 ------------ ------------ ------------ ------------ REVENUE Game equipment $ 5,826 $ 5,238 $ 16,529 $ 13,462 Gaming products 3,362 2,713 10,794 7,425 ------------ ------------ ------------ ------------ 9,188 7,951 27,323 20,887 ============ ============ ============ ============ OPERATING INCOME Game equipment 3,372 2,734 9,286 7,214 Gaming products 1,218 1,021 4,764 2,965 Corporate (1,451) (1,466) (4,819) (4,490) ------------ ------------ ------------ ------------ 3,139 2,289 9,231 5,689 ============ ============ ============ ============ DEPRECIATION AND AMORTIZATION Game equipment 451 560 1,296 1,490 Gaming products 618 475 1,802 1,054 Corporate 180 204 521 628 ------------ ------------ ------------ ------------ 1,249 1,239 3,619 3,172 ============ ============ ============ ============ CAPITAL EXPENDITURES Game equipment 1,023 198 2,567 1,546 Gaming products 779 4,330 1,912 4,704 Corporate 173 83 194 324 ------------ ------------ ------------ ------------ $ 1,975 $ 4,611 $ 4,673 $ 6,574 ============ ============ ============ ============ AS OF JULY 31, ----------------------------- 2000 1999 ------------ ------------ ASSETS Game equipment $ 10,872 $ 8,401 Gaming products 10,744 11,178 Corporate 9,974 11,603 ------------ ------------ $ 31,590 $ 31,182 ============ ============
7 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SHUFFLE MASTER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 8. CONTINGENCY: On April 4, 2000, the Company sued Bally Gaming, Inc., a Nevada corporation, and Bally Gaming Missouri, Inc., a Missouri corporation (collectively hereinafter "Bally"), in District Court in Clark County, Nevada alleging that Bally has failed to perform its obligations under its Let's Make A Deal(TM) agreement with the Company and is otherwise liable to the Company for damages. Bally answered the complaint by denying any liability and has made a counter-claim against the Company, claiming that the Company owes Bally up to $500,000. 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 NINE MONTHS ------------------------- ------------------------- PERIOD ENDED JULY 31, 2000 1999 2000 1999 - ------------------------------------ ---------- ---------- ---------- ---------- Revenue 100.0% 100.0% 100.0% 100.0% Cost of Products 27.4 33.4 28.6 31.6 ---------- ---------- ---------- ---------- Gross Margin 72.6 66.6 71.4 68.4 ---------- ---------- ---------- ---------- Selling, general and administrative 25.7 27.2 25.8 29.7 Research and development 12.7 10.6 11.9 11.5 ---------- ---------- ---------- ---------- Income from operations 34.2 28.8 33.7 27.2 Interest income, net 1.0 0.8 0.7 1.2 ---------- ---------- ---------- ---------- Income before income taxes 35.2 29.6 34.4 28.4 Provision for income taxes 13.0 10.7 12.5 10.2 ---------- ---------- ---------- ---------- Net Income 22.2% 18.9% 21.9% 18.2% ========== ========== ========== ==========
REVENUE: Revenue for the third fiscal quarter ended July 31, 2000, was $9,188,000, an increase of $1,237,000 or 15.6% from the same period last year. Shuffler sales and service revenue increased to $2,255,000 in the current quarter, compared to $1,659,000 in the third quarter last year. Current quarter shuffler sales were 215 units at an average price of $9,100, while sales in the third quarter of the prior year were 150 units at an average price of $9,000. Average unit sales prices increased 1.0% in the current fiscal quarter as compared to the third quarter of fiscal 1999 due to the sale of higher priced ACE(TM) and King(TM) shufflers which were partly offset by the sale of lower priced multi-deck shufflers. Shuffler sales and service revenue also includes revenue from the sale of extended service and parts warranty contracts, which increased to $248,000 in the current third quarter from $234,000 in the third quarter of the prior year. Shuffler lease revenue increased by $422,000 or 14.4% to $3,333,000 in the current year third quarter. The shuffler installed lease base was 2,807 at July 31, 2000, compared to 2,174 at July 31, 1999 and 2,253 at October 31, 1999. This increase in the installed lease base from the prior year was due to the Company's fiscal 1999 and 2000 business strategy to increase its installed base of leased shufflers earning recurring revenue. The 554 unit increase in the installed shuffler lease base during the first nine months of the year was attributable to the placement of 742 ACE(TM) shufflers, offset by the net removal of 406 BG shufflers, the majority of which were exchanged for ACE(TM) shufflers, as well as the placement of 237 newly introduced King(TM) shufflers. Revenue from table games was $3,089,000, an increase of $586,000 or 23.4% from the third quarter last year. The installed base of Let It Ride Bonus(R) tables was 469 at July 31, 2000, compared to 376 installed Bonus tables at July 31, 1999 and 424 installed Bonus tables at October 31, 1999. The increase in installed Bonus tables compared to the prior year third quarter was due to new placements and conversion of Let It Ride(R) basic table games to Bonus table games following the vacation of a court injunction, in the fourth quarter of fiscal 1999, which previously prohibited the use of the Bonus game in New Jersey. 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 the basic game. There were 205 installed basic tables at July 31, 2000, compared to 267 installed basic tables at July 31, 1999 and 233 installed basic tables at October 31, 1999. The decrease in installed basic tables from July 31, 1999 was primarily due to conversions from the basic game to the Bonus game since the fourth quarter of fiscal 1999. Table revenue in the current year quarter also increased due to incremental revenue of $126,000 earned from Three Card Poker(R). There were 259 Three Card Poker(R) games installed as of July 31, 2000, 9 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- compared to 174 installed tables at July 31, 1999 and 188 installed tables at October 31, 1999. 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 year third quarter related to the December 1999 settlement with Progressive Games, Inc. Slot revenue increased by $64,000 or 30.5% to $274,000 in the current third quarter from the prior year third quarter. The installed lease base was 445 slot machines as of July 31, 2000, compared to 563 installed units as of July 31, 1999 and 526 units as of October 31, 1999. The decrease in the installed base from the prior year third quarter was due to the removal of Five Deck Frenzy(R) and Let's Make A Deal(TM) slot games. Recurring slot lease revenue decreased by $76,000 in the current third quarter compared to the prior year third quarter primarily due to the cessation of recording revenue on Let's Make A Deal(TM) slot game, pending resolution of litigation with Bally Gaming, Inc. This decrease in recurring slot revenue in the current third quarter was offset by $140,000 in revenue from the sale of video games. Other revenue decreased to $237,000 in the current third quarter from $668,000 in the prior year third quarter due primarily to reduced sales of Chipper Champ(TM) chip sorting machines and other TCS products under the Company's joint marketing agreement with TCS America, Inc. Recurring lease revenue from Chipper Champ(TM) chip sorting machines increased 16.5% to $148,000 in the current third quarter compared to $127,000 in the prior year third quarter. Revenue for the nine months ended July 31, 2000 was $27,323,000, an increase of $6,436,000 or 30.8% over the nine month period ended July 31, 1999. Shuffler lease revenue increased by $1,038,000 or 12.4% to $9,382,000 in the current year nine months, compared to $8,344,000 in the prior year nine months, while shuffler sales and service increased by $1,946,000 or 46.3% to $6,146,000 in the current nine months compared to $4,200,000 in the prior year nine months. This shuffler sales increase was due to the sale of 530 shufflers in the current year nine months compared to the sale of 374 units in the prior year nine months. Table game revenue increased by $1,971,000 or 28.2% to $8,958,000 in the current year nine months compared to $6,987,000 in the prior year nine months, because of an increase in table placements to 933 tables as of July 31, 2000, up from 817 one year ago. Slot revenue increased by $698,000 to $1,136,000 due primarily to the installation of Let's Make A Deal(TM) and The Three Stooges(TM) slot games in late fiscal 1999 and early fiscal 2000. Other revenue in the current year nine months increased by $783,000 from the prior year nine months, principally due to the receipt of $700,000 in technology license and evaluation fees in the first and second quarters of fiscal 2000. COSTS AND EXPENSES: Gross margin was 72.6% and 71.4% for the current third quarter and nine months, respectively, compared to 66.6% and 68.4% in the comparable prior year periods. The margin increase in the current third quarter was partly due to higher margins on leased shuffler and table products. Additionally indirect cost of sales, which includes service and installation costs, expressed as a percentage of sales, decreased to 12.5% of sales in the current fiscal year third quarter from 13.2% in the prior year third quarter. This decrease is due to the combined effect of increases in service costs that were more than offset by decreases in indirect manufacturing and distribution costs. Selling, general and administrative expenses increased by $204,000 or 9.4% to $2,363,000 in the current third quarter, and by $829,000 or 13.3% to $7,040,000 in the current nine month period. Sales staffing, commission and travel expenses increased by $259,000 and $556,000 from the prior year third quarter and nine months, respectively, resulting from the hiring of new sales staff and increased commissions from increased sales in the first nine months of the current fiscal year. Accrued bonus expense under Company bonus plans increased $102,000 and $638,000 from the prior year third quarter and nine months due to increased staffing and increased operating income in the current year. Legal expense decreased $154,000 in the current third quarter and $328,000 in the current nine months compared to the comparable prior year periods due to the settlement with Progressive Games, Inc. in December 1999. 10 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- Research and development expenses increased by $326,000 or 38.7% over the prior year fiscal quarter to $1,169,000, and by $853,000 over the prior year nine month period to $3,239,000. This increase resulted from new game and operating system development costs as well as from additional expenses in the development of the Company's new continuous multi-deck shuffler system, the King(TM). INTEREST INCOME, NET: Interest income, net, was $97,000 in the current third quarter and $183,000 for the current nine month period, compared to $62,000 and $254,000, respectively, in comparable periods in the prior year. This increase in the current year third quarter is due to higher interest bearing investment account balances during the quarter. Investments were $4,296,000 as of July 31, 2000 compared to $4,109,000 as of July 31, 1999. INCOME TAXES: The Company recorded income tax expense at an effective rate of 37.0% for the current third quarter and 36.4% for the current nine months compared to the tax provision of 36.0% for the comparable periods in fiscal 1999, reflecting a decreased tax benefit from the Company's foreign sales corporation in the current year. EARNINGS PER SHARE: Diluted earnings per common share were $.27 for the current third quarter and $.80 for the current nine month period, compared to $.19 and $.47 for the respective prior year periods. Diluted weighted average common shares decreased to 7,675,000 in the third quarter, and 7,527,000 for the nine months, compared to 7,935,000 and 8,028,000 in comparable prior year periods, due to the repurchase of 585,000 shares of common stock during fiscal 1999 and 392,500 shares during fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES As of July 31, 2000, the Company had cash, cash equivalents and investments totaling $5,683,000, compared to $5,641,000 at October 31, 1999. The current ratio increased to 2.5 to 1 from 1.9 to 1 at October 31, 1999, while working capital increased to $9,484,000 at July 31, 2000 from $7,427,000 at October 31, 1999. Cash provided by operations totaled $7,586,000 in the current nine month period, compared to cash provided by operations of $6,336,000 in the first nine months of last year. Significant items under cash flows from operating activities in the first nine months of fiscal 2000 included net income of $5,992,000 and non-cash charges for depreciation and amortization as well as for provisions for bad debts, inventory obsolescence, and deferred taxes which totaled $5,024,000, compared to net income of $3,803,000 and non-cash charges of $3,626,000 in the first nine months of last year. The payment of an accrued expense 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 first nine months of the current fiscal year. Investing activities included cash used in the first nine months of the current fiscal year for capital expenditures totaling $4,673,000 for net additions to leased gaming equipment and game products as well as other fixed assets. Financing activities included the repurchase of $3,267,000 in common stock during the first quarter of the current fiscal year and the issuance of 94,000 shares of common stock for $770,000 pursuant to the exercise by non-officer employees of options granted under the 1993 Stock Option Plan. The Company believes its current cash and investments, cash provided by operations and $10,000,000 in unused borrowing capacity under its revolving line of credit facility will be sufficient to finance its current operations, share repurchase program, and new product development and roll-outs for the immediate future. 11 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- 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 April 4, 2000, the Company sued Bally Gaming, Inc., a Nevada corporation, and Bally Gaming Missouri, Inc., a Missouri corporation (collectively hereinafter "Bally"), in District Court in Clark County, Nevada alleging that Bally has failed to perform its obligations under its Let's Make A Deal(TM) agreement with the Company and is otherwise liable to the Company for damages. Bally has answered the complaint by denying any liability and has made a counter-claim against the Company, claiming that the Company owes Bally up to $500,000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 10.18 Executive Employment Agreement, by and between Shuffle Master, Inc. and Joseph J. Lahti, dated November 1, 1999 (confidential treatment requested as to portions). 10.19 Executive Employment Agreement, by and between Shuffle Master, Inc. and Gary W. Griffin, dated December 1, 1999 (confidential treatment requested as to portions). 27.0 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: September 6, 2000 /s/ Gary W. Griffin - -------------------------------------- Gary W. Griffin Chief Financial Officer /s/ Gerald W. Koslow - -------------------------------------- Gerald W. Koslow Corporate Controller 14 EX-10.18 2 0002.txt EXECUTIVE EMPLOYMENT AGREEMENT - JOSEPH J. LAHTI EXHIBIT 10.18 CONFIDENTIAL TREATMENT REQUESTED EXECUTIVE EMPLOYMENT AGREEMENT JOSEPH J. LAHTI THIS AGREEMENT is made and entered into as of the 1st day of November, 1999, by and between SHUFFLE MASTER, INC., a Minnesota corporation (the "Company"), and Joseph J. Lahti (the "Employee"). RECITALS A. The Company is in the business of developing, manufacturing, distributing and otherwise commercializing gaming equipment, games, and operating systems for gaming equipment and related products and services throughout the United States and in Canada and other countries (the "Business"). B. Company and Employee want to create an at-will employment relationship that protects the Company and potential successors with appropriate confidentiality and non-compete covenants and rewards the Employee with appropriate consideration therefore, including a severance package, and incentivizes him to remain in the employment of the Company. C. The Company and employee desire that Employee be employed by the Company on the terms and conditions of this Agreement. AGREEMENT In consideration of the mutual promises contained herein, Employee and the Company agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as its Chief Executive Officer. This employment relationship is "at will" and may be terminated by either party at any time, with termination provisions in certain circumstances as hereinafter set forth. 2. SALARY AND BENEFITS. Employee shall be paid an annual base salary of Two Hundred Forty-six Thousand and No/100 Dollars ($246,000.00), paid in the same intervals as other employees of the Company. If the Employee is employed with the Company through October 31, 2000, Employee will be eligible to receive an executive bonus in accordance with the terms and conditions of the executive bonus program authorized by the Board of Directors of the Company, as set forth on Exhibit A attached hereto. Employee's salary is set on the expectation (except for vacation days and holidays) that on average at least 40 hours per week of Employee's time will be devoted to Employees duties hereunder. The Company agrees to provide Employee with the benefits it provides its executive team. Employee will not, however, be eligible to participate in the Company's non-executive bonus program. 3. OUTSIDE CONSULTING. Employee may render consulting services to other businesses from time to time if Employee meets all of the following requirements: (a) the consulting services do not interfere with the Employee's ability to fulfill his duties and obligations to the Company; (b) the consulting services are not rendered to any business which may compete with the Company in any area of the Business; (c) the consulting services do not relate to any products or services which form part of the Business. 4. NON-COMPETITION. Employee shall not, for a period of five (5) years following the date of this Agreement, either while employed by the Company or its successor, and during any of the five (5) year period remaining thereafter: (a) directly or indirectly own, manage, operate, participate in, consult with or work for any business which is engaged in the Business anywhere in the United States or Canada. (b) either alone or in conjunction with any other person, partnership or business, directly or indirectly, solicit or divert or attempt to solicit or divert any of the employees or agents of the Company or its affiliates to work for or represent any competitor of the Company or its affiliates or to call upon any of the customers of the Company or its affiliates. The foregoing covenants shall benefit as well any successor to the Company. In consideration of the foregoing covenants, the Company agrees to compensate Employee as follows: 2 (a) On the date this Agreement is executed, the Company shall pay to Employee the sum of One Hundred Thirty-five Thousand Dollars ($135,000.00); (b) On January 5th, 2001 (provided Employee is employed by the Company on such date) and on each January 5th, thereafter, that Employee is employed by the Company through January 5th, 2004, the Company shall pay to Employee the sum of $150,000.00; (c) Upon the termination of the employment of Employee, the Company shall pay to Employee a sum equal to $600,000.00 on or before the date of termination as compensation for the five-year covenant set forth above, less a credit, if any, for each $150,000.00 payment previously made to Employee under Section 4(b). All such payments shall be subject to applicable withholding. 5. CONFIDENTIALITY; INVENTIONS. (a) Employee shall fully and promptly disclose to the Company all inventions, discoveries, software and writings that Employee may make, conceive, discover, develop or reduce to practice either solely or jointly with others during Employee's employment with the Company, whether or not during usual working hours. Employee agrees that all such inventions, discoveries, software and writing shall be and remain the sole and exclusive property of the Company, and Employee hereby agrees to assign, and hereby assigns all of Employee's right, title and interest in and to any such inventions, discoveries, software and writings to the Company. Employee agrees to keep complete records of such inventions, discoveries, software and writings, which records shall be and remain the sole property of the Company, and to execute and deliver, either during or after Employee's employment with the Company, such documents as the Company shall deem necessary or desirable to obtain such letters patent, utility models, inventor's certificates, copyrights, trademarks or other appropriate legal rights of the United States and foreign countries as the Company may, in its sole discretion, elect, and to vest title thereto in the Company, its successors, assigns, or nominees. (b) "Inventions," as used herein, shall include inventions, discoveries, improvements, ideas and conceptions, developments and designs, whether or not patentable, tested, reduced to practice, subject to copyright or other rights or forms of protection, or relating to data processing, communications, computer software systems, programs and procedures. (c) Employee understands that all copyrightable work that Employee may create while employed by the Company is a "work made for hire," and that 3 the Company is the owner of the copyright therein. Employee hereby assigns all right, title and interest to the copyright therein to the Company. (d) Employee has no inventions, improvements, discoveries, software or writings useful to the Company or its subsidiaries or affiliates in the normal course of business, which were conceived, made or written prior to the date of this Agreement. (e) Employee will not publish or otherwise disclose, either during or after Employee's employment with the Company, any unpublished or proprietary or confidential information or secret relating to the Company, the Business, the Company's operations or the Company's products or services. Employee will not publish or otherwise disclose proprietary or confidential information of others to which Employee has had access or obtained knowledge in the course of Employee's employment with the Company. Upon termination of Employee's employment with the Company, Employee will not, without the prior written consent of the Company, retain or take with Employee any drawing, writing or other record in any form or nature which relates to any of the foregoing. (f) Employee understands that Employee's employment with the Company creates a relationship of trust and confidence between Employee and the Company. Employee understands that Employee may encounter information in the performance of Employee's duties that is confidential to the Company or its customers. Employee agrees to maintain in confidence all information pertaining to the Business or the Company to which Employee has access including, but not limited to, information relating to the Company's products, inventions, trade secrets, know how, systems, formulas, processes, compositions, customer information and lists, research projects, data processing and computer software techniques, programs and systems, costs, sales volume or strategy, pricing, profitability, plans, marketing strategy, expansion or acquisition or divestiture plans or strategy and information of similar nature received from others with whom the Company does business. Employee agrees not to use, communicate or disclose or authorize any other person to use, communicate or disclose such information orally, in writing, or by publication, either during employee's employment with the Company or thereafter except as expressly authorized in writing by the Company unless and until such information becomes generally known in the relevant trade to which it relates without fault on employee's part, or as required by law. 6. SEVERANCE BENEFITS. In the event of the termination of Employee's employment by the Company prior to November 1, 2000 without just cause, as defined in Section 7, the Employee will receive the following benefits: 4 (a) Within three (3) days following Employee's last day of employment, Employee will be paid a lump sum equal to twice the sum of (i) Employee's then prevailing annual base salary (but not less than the annual base salary set forth in Section 2 hereof); plus (ii) twenty-four (24) times the average "deemed monthly bonus" received over the thirty-six (36) months preceding termination. The deemed monthly bonus amounts to be included in the average shall equal one twelfth (1/12) of the annual bonus received by the Employee (or which would have been received if the Employee worked the full fiscal year in which he was terminated pursuant to Section 7) in each fiscal year in which each such month in the thirty-six (36) month period falls. To the extent that the above calculation includes bonus amounts for a fiscal year not ended at time of Employee's termination, the average deemed monthly bonus will be determined as of the end of the month following the Employee's last day of employment and the deemed monthly bonus for the then current fiscal year will be based on the Company's actual year-to-date EBT as of the end of such month compared to the budgeted year-to-date EBT as of the end of such month. If actual EBT equals or exceeds budgeted EBT, the Employee's deemed monthly bonus amount for that fiscal year shall equal 1/12 of the Employee's bonus target (50% of salary). (b) In addition, during the two year period immediately following Employee's last day of employment, Employee shall continue to receive all of the Company's employee benefits, if eligible, and if not eligible for health benefits, the Company shall pay the COBRA premiums for continuation coverage during the two-year period. (c) Any stock option previously granted to the Employee (not already exercisable and vested) will become exercisable and all stock options will become fully vested on the first day immediately following Employee's last day of employment. Employee will be entitled to exercise said options during the twenty-four (24) month period following Employee's last day of employment, in accordance with the terms of the Company's stock option plan as amended from time to time (including limitations on exercise not inconsistent with this paragraph), unless during such twenty-four (24) month period there is a sale or merger of the Company that constitutes a change in control as defined in the Company's stock option plan. In the event of such a change in control Employee will reasonably cooperate with the Company, and exercise his stock options in a way as to not hinder the progress or closing of the sale or merger transaction, and in no event later than three (3) months following the closing. 7. TERMINATION BY COMPANY WITHOUT JUST CAUSE. Employee's employment by the Company is "at will"; the Company may terminate Employee's employment at any time either 5 with or without just cause. Further, in the event the Company is sold or merged with another company or in the event of a Change in Control, Employee shall be considered to have been terminated without just cause on the date of the merger or sale or Change in Control. Notwithstanding any such termination without just cause, Employee will remain bound under the covenants not to compete and confidentiality obligations of Sections 4 and 5 of this Agreement and the Severance Benefits provided under Section 6 will remain in full force and effect. 8. TERMINATION BY COMPANY FOR JUST CAUSE. The Company may terminate Employee for just cause. In the event the Company terminates the Employee for just cause, the Employee will remain bound under the covenant not to compete and confidentiality obligations contained in Sections 4 and 5 and will not be entitled to any of the severance benefits provided under Section 6. Termination for "just cause" shall include, but not be limited to: (a) chronic inattention to duty; (b) dishonesty as to a matter which is materially injurious to the Company; (c) the commission of a willful act or omission intended to materially injure the business of the Company; (d) a violation of any material provision of this Agreement, including, in particular, the provisions of Sections 4 and 5 hereof; or (e) a determination in good faith by the vote of a majority of the Company's board of directors that the Employee has failed to make a good faith effort to perform his duties as assigned by the Company's Board of Directors; provided, that if the Company desires to terminate Employee for the reasons stated in subsection 8(f), it shall first give Employee written notice of such intention, stating the specific reasons for the termination, and Employee shall have 30 days from the date of receipt of such notice to cure the alleged wrongdoing to the reasonable satisfaction of the Company; provided 6 further, that the provisions of subsection (f) shall be inapplicable following a sale or merger of the Company or a Change in Control. 9. TERMINATION BY EMPLOYEE. In the event Employee voluntarily terminates his employment with the Company (or its successor) prior to November 1, 2000, Employee will remain bound under the confidentiality and non-compete obligations of Sections 4 and 5 and will not be entitled to receive the full benefits provided under Section 6. Voluntary termination means any termination by the Employee without just cause. "Just cause" is defined for the purposes of this paragraph as a material breach of a substantial provision of this Agreement by the Employer. Voluntary termination includes a termination caused by the death of Employee or by the disability of Employee for more than six (6) months. In the event a voluntary termination occurs due to the death or disability of Employee, in addition to any other benefits to which Employee is entitled under this Agreement, Employee will receive the full benefits under Section 6(c) of this Agreement. 10. NO CONFLICTING AGREEMENTS. Employee has the right to enter into this Agreement, and hereby confirms Employee has no contractual or other impediments to the performance of Employee's obligations including, without limitation, any non-competition or similar agreement in favor of any other person or entity. 11. COMPANY POLICIES. During the period of Employee's employment, Employee shall engage in no activity or employment which may conflict with the interest of the Company, and Employee shall comply with all policies and procedures of the Company including, without limitation, all policies and procedures pertaining to ethics. 12. INDEPENDENT COVENANTS. The covenants on the part of the Employee contained in Sections 4 and 5 hereof shall be construed as agreements independent of any other provision in 7 this Agreement; it is agreed that the relief for any claim or cause of action of the Employee against the Company, whether predicated on this Agreement or otherwise, shall be measured in damages and shall not constitute a defense to enforcement by the Company of those covenants. 13. INJUNCTIVE RELIEF; ATTORNEYS' FEES. In recognition of the irreparable harm that a violation by Employee of any of the covenants contained in Sections 4 and 5 hereof would cause the Company, the Employee agrees that, in addition to any other relief afforded by law, an injunction (both temporary and permanent) against such violation or violations may be issued against him or her and every other person and entity concerned thereby, it being the understanding of the parties that both damages and an injunction shall be proper modes of relief and are not to be considered alternative remedies. Employee consents to the issuance of such injunction relief without the posting of a bond or other security. In the event of any such violation, THE EMPLOYEE AGREES TO PAY THE COSTS, EXPENSES AND REASONABLE ATTORNEYS' FEES INCURRED BY THE COMPANY IN PURSUING ANY OF ITS RIGHTS WITH RESPECT TO SUCH VIOLATIONS, IN ADDITION TO THE ACTUAL DAMAGES SUSTAINED BY THE COMPANY AS A RESULT THEREOF. 14. NOTICE. Any notice sent by registered mail to the last known address of the party to whom such notice is to be given shall satisfy the requirements of notice in this Agreement. 15. ENTIRE AGREEMENT. This Agreement is the entire agreement of the parties hereto concerning the subject matter hereof and supersedes and replaces any oral or written existing agreements between the Company and the Employee relating generally to the same subject matter. Company and Employee hereby acknowledge that there are no agreements or understandings of any nature, oral or written, regarding Employee's employment, apart from this Agreement. 8 16. SEVERABILITY. It is further agreed and understood by the parties hereto that if any provision of this Agreement should be determined by a court to be unenforceable in whole or in part, it shall be deemed modified to the minimum extent necessary to make it reasonable and enforceable under the circumstances. 17. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota, without giving effect to the principles of conflicts of laws thereof. 18. HEIRS, SUCCESSORS AND ASSIGNS. The terms, conditions, and covenants hereof shall extend to, be binding upon, and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. 19. EXCISE TAX PAYMENTS. (a) In the event that any payment or benefit (within the meaning of Section 28OG(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), paid or payable to the Employee or for his benefit or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company or a Change in Control of the Company (a "Payment" or "Payments"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee will be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any interest or penalties, other than interest and penalties imposed by reason of the Employee's failure to file timely a tax return or pay taxes shown as due on his return, imposed with respect to such taxes and the Excise Tax), including any Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of such Gross-Up Payment shall be made at the Company's expense by an accounting firm selected by the Employee and reasonably acceptable to the Company which is 9 designated as one of the ten (10) largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation, to the Company and the Employee promptly following the date of termination of the Employee's employment, if applicable, or such other time as requested by the Company or the Employee. The Gross-Up Payment, if any, as determined pursuant to this Section 19(b) shall be paid by the Company to the Employee within five days of the receipt of the Determination. In the event that the tax returns of either Employee or the Company are audited with respect to this issue, the same accounting firm shall be retained in connection with the audit and any appeal, and the amount of the Gross-Up Payment shall be subject to revision, depending upon the final outcome of the audit. (c) Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the Determination, an Excise Tax will be imposed on any Payment or Payments, the Company shall pay to the applicable government taxing authorities as Excise Tax withholding, the amount of the Excise Tax that the Company has actually withheld from the Payment or Payments. 20. WAIVER OF CONFLICT OF INTEREST. Employee has been represented in this matter by Moss & Barnett; the Company has been represented by Thomas G. Barry, Jr., General Counsel. The parties acknowledge that Moss & Barnett has previously represented both the Employee and the Company on other matters, both unrelated and related. Both parties nonetheless waive any potential or actual conflict of interest relating to Moss & Barnett's representation of Employee in this matter. The Company further waives any objections to Moss & Barnett's continued representations of Employee in this matter, and Employee waives any objections to Moss & Barnett's continued representation of the Company in other matters. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, month and year first above written. EMPLOYER: EMPLOYEE: SHUFFLE MASTER, INC. By /s/ Gary W. Griffin /s/ Joseph J. Lahti ----------------------------------- ----------------------------------- Its Chief Financial Officer Joseph J. Lahti ------------------------------ 10 EXHIBIT A Employee may earn a percentage of Employee's base salary as a bonus during fiscal year 2000, which will vary depending on the percentage of targeted income before taxes (REDACTED; CONFIDENTIAL TREATMENT REQUESTED) earned by the Company: COMPANY EARNINGS AS % OF TARGETED INCOME BEFORE TAXES BONUS - ------------ ----- a. Less than 90% 0 b. 90% $98,400.00 (40% of base salary) c. 90% - 100% $98,400.00 + $2,460.00 for each increase of one percent (1%) over ninety percent (90%) d. 100% $123,000.00 (50% of base salary) e. 100% - 120% $123,000.00 + $1,230.00 for each increase of one percent over 100% f. 120% $147,600.00 (60% of base salary) g. over 120% 60% of base salary plus an additional 1% of base salary for each increase of one percent over 120%. For example, if the Company earns 100% of its targeted income before taxes during fiscal 2000, Employee would be paid a performance bonus of $123,000.00 ($246,000.00 x 50%). If the Company earns 90% of its targeted income before taxes during fiscal 2000, Employee would be paid a performance bonus of $98,400.00 ($246,000.00 x 40%). If the Company earns 120% of its targeted income before taxes, then Employee's performance bonus would be $147,600.00 ($246,000.00 x 60%). If the Company earns more than 120% of its targeted income before taxes, Employee's performance bonus would further increase by an amount equal to one percent ( 1% ) of his base salary for each percent by which the percentage increase in income before taxes exceeds the target. In no event shall the amount of the bonus exceed twice Employee's annual base salary. 1 EX-10.19 3 0003.txt EXECUTIVE EMPLOYMENT AGREEMENT - GARY W. GRIFFIN EXHIBIT 10.19 CONFIDENTIAL TREATMENT REQUESTED EXECUTIVE EMPLOYMENT AGREEMENT GARY W. GRIFFIN THIS AGREEMENT is made and entered into as of the 1st day of December, 1999, by and between Shuffle Master, Inc., a Minnesota corporation (the "Company"), and Gary W. Griffin (the "Employee"). RECITALS A. The Company is in the business of developing, manufacturing, distributing and otherwise commercializing gaming equipment, games, and operating systems for gaming equipment and related products and services throughout the United States and in Canada and other countries (the "Business"). B. Company and Employee want to create an at-will employment relationship that protects the Company with appropriate confidentiality and non-compete covenants and rewards the Employee with a severance package for performing his obligations for the full term of this contract or such shorter term as may be created by his earlier termination by the Company or its successors without just cause. C. The Company and employee desire that Employee be employed by the Company on the terms and conditions of this Agreement. AGREEMENT In consideration of the mutual promises contained herein, Employee and the Company agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as its Secretary, Treasurer/Chief Financial Officer. Employee shall perform the duties of those positions and shall perform such other related duties as the Company may direct from time to time. Employee's employment with the Company is for a term of one year, but may be terminated earlier in accordance with the provisions of this Agreement. 2. SALARY AND BENEFITS. Employee shall be paid an annual base salary of One Hundred Fifty-six Thousand and No/100 Dollars ($156,000.00), paid in the same intervals as other employees of the Company. If the Employee is employed with the Company through October 31, 2000, Employee will be eligible to receive an executive bonus in accordance with the terms and conditions of the executive bonus program authorized by the Board of Directors of the Company, as set forth on Exhibit A attached hereto. Employee will receive a stock option grant to purchase 25,000 shares of the Company's common stock in accordance with and subject to the terms and conditions imposed by the Board of Directors at its November 4th, 1999 meeting and the 1993 Employee Stock Option Plan. Employee's salary is set on the expectation (except for vacation days and holidays) that on average at least 40 hours per week of Employee's time will be devoted to Employees duties hereunder. The Company agrees to provide Employee with the benefits it provides its executive team. Employee will not, however, be eligible to participate in the Company's non-executive bonus program. 3. OUTSIDE CONSULTING. Employee shall devote Employee's full time and best efforts to the Company. Employee may render consulting services to other businesses from time to time only if Employee meets all of the following requirements: (a) the consulting services do not interfere in any manner with the Employee's ability to fulfill all of his duties and obligations to the Company; (b) the consulting services are not rendered to any business which may compete with the Company in any area of the Business; (c) the consulting services do not relate to any products or services which form part of the Business. 2 4. NON-COMPETITION. In consideration of the provisions of this agreement and the severance benefits for which Employee is eligible pursuant to Section 6, Employee shall not, while employed by the Company or its successor, and for one (1) year thereafter: (a) directly or indirectly own, manage, operate, participate in, consult with or work for any business which is engaged in the Business anywhere in the United States or Canada. (b) either alone or in conjunction with any other person, partnership or business, directly or indirectly, solicit or divert or attempt to solicit or divert any of the employees or agents of the Company or its affiliates to work for or represent any competitor of the Company or its affiliates or to call upon any of the customers of the Company or its affiliates. 5. CONFIDENTIALITY; INVENTIONS. (a) Employee shall fully and promptly disclose to the Company all inventions, discoveries, software and writings that Employee may make, conceive, discover, develop or reduce to practice either solely or jointly with others during Employee's employment with the Company, whether or not during usual working hours. Employee agrees that all such inventions, discoveries, software and writing shall be and remain the sole and exclusive property of the Company, and Employee hereby agrees to assign, and hereby assigns all of Employee's right, title and interest in and to any such inventions, discoveries, software and writings to the Company. Employee agrees to keep complete records of such inventions, discoveries, software and writings, which records shall be and remain the sole property of the Company, and to execute and deliver, either during or after Employee's employment with the Company, such documents as the Company shall deem necessary or desirable to obtain such letters patent, utility models, inventor's certificates, copyrights, trademarks or other appropriate legal rights of the United States and foreign countries as the Company may, in its sole discretion, elect, and to vest title thereto in the Company, its successors, assigns, or nominees. (b) "Inventions," as used herein, shall include inventions, discoveries, improvements, ideas and conceptions, developments and designs, whether or not patentable, tested, reduced to practice, subject to copyright or other rights or forms of protection, or relating to data processing, communications, computer software systems, programs and procedures. (c) Employee understands that all copyrightable work that Employee may create while employed by the Company is a "work made for hire," and that the Company is the owner of the copyright therein. Employee hereby assigns all right, title and interest to the copyright therein to the Company. 3 (d) Employee has no inventions, improvements, discoveries, software or writings useful to the Company or its subsidiaries or affiliates in the normal course of business, which were conceived, made or written prior to the date of this Agreement. (e) Employee will not publish or otherwise disclose, either during or after Employee's employment with the Company, any unpublished or proprietary or confidential information or secret relating to the Company, the Business, the Company's operations or the Company's products or services. Employee will not publish or otherwise disclose proprietary or confidential information of others to which Employee has had access or obtained knowledge in the course of Employee's employment with the Company. Upon termination of Employee's employment with the Company, Employee will not, without the prior written consent of the Company, retain or take with Employee any drawing, writing or other record in any form or nature which relates to any of the foregoing. (f) Employee understands that Employee's employment with the Company creates a relationship of trust and confidence between Employee and the Company. Employee understands that Employee may encounter information in the performance of Employee's duties that is confidential to the Company or its customers. Employee agrees to maintain in confidence all information pertaining to the Business or the Company to which Employee has access including, but not limited to, information relating to the Company's products, inventions, trade secrets, know how, systems, formulas, processes, compositions, customer information and lists, research projects, data processing and computer software techniques, programs and systems, costs, sales volume or strategy, pricing, profitability, plans, marketing strategy, expansion or acquisition or divestiture plans or strategy and information of similar nature received from others with whom the Company does business. Employee agrees not to use, communicate or disclose or authorize any other person to use, communicate or disclose such information orally, in writing, or by publication, either during employee's employment with the Company or thereafter except as expressly authorized in writing by the Company unless and until such information becomes generally known in the relevant trade to which it relates without fault on employee's part, or as required by law. 4 6. SEVERANCE BENEFITS. In the event this Agreement is terminated under Section 7, during the one (1) year period immediately following Employee's last day of employment, Employee will receive the following benefits: (a) Employee will be paid an annual salary in the amount of One Hundred Fifty-Six Thousand Dollars plus twelve (12) times the average "deemed monthly bonus" received over the thirty-six (36) months preceding termination. The deemed monthly bonus amounts to be included in the average shall equal one twelfth (1/12) of the annual bonus received by the Employee (or which would have been received if the Employee worked the full fiscal year in which he was terminated pursuant to Section 7) in each fiscal year in which each such month in the thirty-six (36) month period falls. To the extent that the above calculation includes bonus amounts for a fiscal year not ended at time of Employee's termination, the average deemed monthly bonus will be determined as of the end of the month following the Employee's last day of employment and the deemed monthly bonus for the then current fiscal year will be based on the Company's actual year-to-date EBT as of the end of such month compared to the budgeted year-to-date EBT as of the end of such month. If actual EBT equals or exceeds budgeted EBT, the Employee's deemed monthly bonus amount for that fiscal year shall equal 1/12 of the Employee's bonus target (50% of salary). Employee will be paid this salary over the one (1) year period immediately following his last date of employment, at the same time as other Employees of the Company. In addition, during the period of severance payments the Employee shall continue to receive all of the Company's employee benefits, if eligible, and if not eligible for health benefits, the Company shall pay the COBRA premiums for continuation coverage during the period of severance payments. This will be Employee's sole remedy for termination without just cause prior to the end of the term set forth in Section 1. (b) Any stock option previously granted to the Employee (not already exercisable and vested) will become exercisable and all stock options will become fully vested on the first day immediately following Employee's last day of employment. Employee will be entitled to exercise said options during the eighteen (18) month period following Employee's last day of employment, in accordance with the terms of the Company's stock option plan as amended from time to time (including limitations on exercise not inconsistent with this paragraph), unless during such eighteen (18) month period there is a sale or merger of the Company that constitutes a change in control as defined in the Company's stock option plan. In the event of such a change in control Employee will reasonably 5 cooperate with the Company, and exercise his stock options in a way as to not hinder the progress or closing of the sale or merger transaction, and in no event later than three (3) months following the closing. 7. EARLY TERMINATION BY COMPANY WITHOUT JUST CAUSE. Employee's employment by the Company is "at will"; the Company may terminate this Agreement at any time either with or without just cause. Further, in the event the Company is sold or merged with another company during the term hereof, the successor company may terminate Employee's employment on 30 days' notice or refrain from offering employment to Employee on these terms and in a similar capacity, in which case Employee shall be considered to have been terminated without just cause. Notwithstanding any such termination by either the Company or its successor, Employee will remain bound under the covenants not to compete and confidentiality obligations of Sections 4 and 5 of this Agreement and the Severance Benefits provided under Section 6 will remain in full force and effect. 8. EARLY TERMINATION BY COMPANY FOR JUST CAUSE. The Company may terminate Employee for just cause. In the event the Company terminates the Employee for just cause, the Employee will remain bound under the covenant not to compete and confidentiality obligations contained in Sections 4 and 5 and will not be entitled to any of the severance benefits provided under Section 6. Termination for "just cause" shall include, but not be limited to: (a) chronic inattention to duty; (b) dishonesty as to a matter which is materially injurious to the Company; (c) the commission of a willful act or omission intended to materially injure the business of the Company; 6 (d) a violation of any material provision of this Agreement, including, in particular, the provisions of Sections 4 and 5 hereof; or (e) a determination in good faith by the vote of a majority of the Company's board of directors that the Employee has failed to make a good faith effort to perform his duties as assigned by the Company's CEO or Board of Directors; provided, that if the Company desires to terminate Employee for the reasons stated in subsection 8(f), it shall first give Employee written notice of such intention, stating the specific reasons for the termination, and Employee shall have 30 days from the date of receipt of such notice to cure the alleged wrongdoing to the reasonable satisfaction of the Company; provided further, that the provisions of subsection (f) shall be inapplicable following a sale of the Company or a change in control. 9. EARLY TERMINATION BY EMPLOYEE. In the event Employee voluntarily terminates his employment with the Company (or its successor) prior to December 1, 2000, Employee will remain bound under the confidentiality and non-compete obligation of Sections 4 and 5 and will not be entitled to receive any of the severance benefits provided under Section 6. Voluntary termination means any termination by the Employee without just cause. Just cause is defined as a material breach of a substantial provision of this Agreement by the Employer. Voluntary termination includes a termination caused by the death of Employee or by the disability of Employee for more than six (6) months. In the event a voluntary termination occurs due to the death or disability of Employee, in addition to any other benefits to which Employee is entitled under this Agreement, Employee will receive the full benefits under Section 6(b) of this Agreement. 7 10. NO CONFLICTING AGREEMENTS. Employee has the right to enter into this Agreement, and hereby confirms Employee has no contractual or other impediments to the performance of Employee's obligations including, without limitation, any non-competition or similar agreement in favor of any other person or entity. 11. COMPANY POLICIES. During the term of Employee's employment, Employee shall engage in no activity or employment which may conflict with the interest of the Company, and Employee shall comply with all policies and procedures of the Company including, without limitation, all policies and procedures pertaining to ethics. 12. INDEPENDENT COVENANTS. The covenants on the part of the Employee contained in Sections 4 and 5 hereof shall be construed as agreements independent of any other provision in this Agreement; it is agreed that the relief for any claim or cause of action of the Employee against the Company, whether predicated on this Agreement or otherwise, shall be measured in damages and shall not constitute a defense to enforcement by the Company of those covenants. 13. INJUNCTIVE RELIEF; ATTORNEYS' FEES. In recognition of the irreparable harm that a violation by Employee of any of the covenants contained in Sections 4 and 5 hereof would cause the Company, the Employee agrees that, in addition to any other relief afforded by law, an injunction (both temporary and permanent) against such violation or violations may be issued against him or her and every other person and entity concerned thereby, it being the understanding of the parties that both damages and an injunction shall be proper modes of relief and are not to be considered alternative remedies. Employee consents to the issuance of such injunction relief without the posting of a bond or other security. In the event of any such 8 violation, THE EMPLOYEE AGREES TO PAY THE COSTS, EXPENSES AND REASONABLE ATTORNEYS' FEES INCURRED BY THE COMPANY IN PURSUING ANY OF ITS RIGHTS WITH RESPECT TO SUCH VIOLATIONS, IN ADDITION TO THE ACTUAL DAMAGES SUSTAINED BY THE COMPANY AS A RESULT THEREOF. 14. NOTICE. Any notice sent by registered mail to the last known address of the party to whom such notice is to be given shall satisfy the requirements of notice in this Agreement. 15. ENTIRE AGREEMENT. This Agreement is the entire agreement of the parties hereto concerning the subject matter hereof and supersedes and replaces any oral or written existing agreements between the Company and the Employee relating generally to the same subject matter. Company and Employee hereby acknowledge that there are no agreements or understandings of any nature, oral or written, regarding Employee's employment, apart from this Agreement. 16. SEVERABILITY. It is further agreed and understood by the parties hereto that if any provision of this Agreement should be determined by a court to be unenforceable in whole or in part, it shall be deemed modified to the minimum extent necessary to make it reasonable and enforceable under the circumstances. 17. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota, without giving effect to the principles of conflicts of laws thereof. 9 18. HEIRS, SUCCESSORS AND ASSIGNS. The terms, conditions, and covenants hereof shall extend to, be binding upon, and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. 19. LIMITATION ON PAYMENTS. (a) Anything in this Agreement to the contrary notwithstanding, in the event that qualified independent certified public accountants retained by the Company for the purpose (the "Auditors") determine that any payment or distribution by the Company to or for the benefit of the Employee, whether paid or payable (or distributed or distributable) pursuant to the terms of this Agreement or otherwise (a "Payment"), would be nondeductible by the Company for federal income tax purposes because of section 280G of the Internal Revenue Code of 1954, as amended (the "Code"), then the aggregate present value of the amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement (the "Agreement Payments") shall be reduced (but not below zero) to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Company because of section 280G of the Code. (b) If the Auditors determine that any Payment would be nondeductible by the Company because of section 280G of the Code, then the Company shall promptly give the Employee notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Employee may then elect, in Employee's sole discretion, which and how much of the Agreement Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments equals the Reduced Amount) and shall advise the Company in writing of his election within 10 days of his receipt of notice. If no such election is made by the Employee within such 10-day period, then the Company may elect which and how much of the Agreement Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments equals the Reduced Amount) and shall notify the Employee promptly of such election. Present values shall be determined in accordance with section 280G(d) (4) of the Code. All determinations made by the Auditors under this section shall be binding upon the Company and the Employee and shall be made within 60 days of the Employee's termination of employment with the Company. (c) As a result of the uncertainty in the application of section 280G of the Code at the time of the initial determination by the Auditors hereunder, it is possible that Agreement Payments will have been made by the Company which should not 10 have been made (an "Overpayment") or that additional Agreement Payments which will not have been made by the Company could have been made (an "Underpayment"). In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Employee which the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Employee which Employee shall repay to the Company, together with interest at the applicable federal rate provided for in section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Employee to the Company if and to the extent that such payment would not reduce the amount which is subject to taxation under section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid by the Company to or for the benefit of the Employee, together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, month and year first above written. EMPLOYER: EMPLOYEE: SHUFFLE MASTER, INC. By /s/ Joseph J. Lahti /s/ Gary W. Griffin ----------------------------------- ----------------------------------- Its President and CEO Gary W. Griffin ------------------------------ 11 EXHIBIT A Employee may earn a percentage of Employee's base salary as a bonus during fiscal year 2000, which will vary depending on the percentage of targeted income before taxes (REDACTED; CONFIDENTIAL TREATMENT REQUESTED) earned by the Company: COMPANY EARNINGS AS % OF TARGETED INCOME BEFORE TAXES BONUS - ------------ ----- a. Less than 90% 0 b. 90% $62,400.00 (40% of base salary) c. 90% - 100% $62,400.00 + $1,560 for each increase of one percent (1%) over ninety percent (90%) d. 100% $78,000.00 (50% of base salary) e. 100% - 120% $78,000.00 + $780 for each increase of one percent over 100% f. 120% $93,600.00 (60% of base salary) g. over 120% 60% of base salary plus an additional 1% of base salary for each increase of one percent over 120%. For example, if the Company earns 100% of its targeted income before taxes during fiscal 2000, Employee would be paid a performance bonus of $78,000.00 ($156,000.00 x 50%). If the Company earns 90% of its targeted income before taxes during fiscal 2000, Employee would be paid a performance bonus of $62,400.00 ($156,000.00 x 40%). If the Company earns 120% of its targeted income before taxes, then Employee's performance bonus would be $93,600.00 ($156,000.00 x 60%). If the Company earns more than 120% of its targeted income before taxes, Employee's performance bonus would further increase by an amount equal to one percent (1%) of his base salary for each percent by which the percentage increase in income before taxes exceeds 120% of the target. In no event shall the amount of the bonus exceed twice his annual base salary. 1 EX-27.0 4 0004.txt FINANCIAL DATA SCHEDULE
5 1,000 9-MOS OCT-31-2000 NOV-01-1999 JUL-31-2000 1,387 4,296 4,128 210 4,432 15,775 4,899 2,584 31,590 6,291 270 0 0 72 24,957 31,590 5,238 27,323 950 7,813 3,239 0 0 9,414 3,422 5,992 0 0 0 5,992 .83 .80
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