10-Q

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 April 30, 2001

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number: 0-20820

SHUFFLE MASTER, INC.
(Exact name of registrant as specified in its charter)

Minnesota	41-1448495
(State or Other Jurisdiction	(IRS Employer Identification No.)
of Incorporation or Organization)

1106 Palms Airport Drive	NV	89119
(Address of Principal Executive Offices)	(State)	(Zip Code)

Registrant’s Telephone Number, Including Area Code:     (702) 897-7150

10901 Valley View Road, Eden Prairie                             MN	55344
(Former name, former address and former fiscal year, if changed since last report)

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 June 1, 2001 there were 11,493,627 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
(In thousands, except per share amounts)	(unaudited) April 30, 2001		October 31, 2000
Current assets:
Cash and cash equivalents	$	2,846	$	2,810
Investments		7,221		3,809
Accounts receivable, net		5,201		4,571
Current portion of note receivable from related parties		15		17
Inventories		6,707		6,194
Deferred income taxes		580		580
Other current assets		1,045		594
Total current assets		23,615		18,575
Systems and equipment leased and held for lease, net		6,591		6,676
Property and equipment, net		2,407		2,441
Intangible assets, net		9,201		5,802
Non-current deferred income taxes		710		710
Long term note receivable from related parties		475		300
Other assets		114		110
Total assets	$	43,113	$	34,614
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,693	$	1,489
Accrued liabilities		1,654		2,576
Current portion of long-term obligation to related party		367		580
Customer deposits and unearned revenue		1,917		1,862
Total current liabilities		6,631		6,507
Long-term obligation to related party		25		97
Contingencies
Shareholders’ equity:
Common stock, $.01 par value; 45,000 shares authorized; 11,467 and
10,710 shares issued and outstanding		115		109
Additional paid-in capital		8,184		5,317
Retained earnings		28,158		22,584
Total shareholders’ equity		36,457		28,010
Total liabilities and shareholders’ equity	$	43,113	$	34,614

See notes to consolidated financial statements

2

Part I – Financial Information
Item 1. Financial Statements

Shuffle Master, Inc.
Consolidated Statements of Income
(unaudited)

(In thousands, except per share amounts)	Three Months Ended April 30,				Six Months Ended April 30,
	2001		2000		2001		2000
Revenue:
Shuffler lease	$	3,978	$	3,060	$	7,952	$	6,049
Shuffler sales and service		3,891		2,423		6,852		3,891
Table games		3,703		2,958		7,218		5,869
Slot games		754		471		1,283		862
Other		15		723		253		1,464
		12,341		9,635		23,558		18,135
Costs and expenses:
Cost of products		3,252		2,634		6,393		5,296
Selling, general and administrative		3,004		2,476		5,894		4,677
Research and development		1,567		1,158		2,932		2,070
		7,823		6,268		15,219		12,043
Income from operations		4,518		3,367		8,339		6,092
Interest income, net		173		54		298		86
Income before income taxes		4,691		3,421		8,637		6,178
Provision for income taxes		1,665		1,235		3,065		2,225
Net income	$	3,026	$	2,186	$	5,572	$	3,953
Earnings per common share, basic	$	.27	$	.20	$	.50	$	.36
Earnings per common share, diluted	$	.24	$	.20	$	.46	$	.35
Weighted average common shares, basic		11,305		10,786		11,129		10,905
Weighted average common shares, diluted		12,358		11,190		12,157		11,180

See notes to consolidated financial statements

3

Part I – Financial Information
Item 1. Financial Statements

Shuffle Master, Inc.
Consolidated Statements of Cash Flows
(unaudited)

	Six Months Ended April 30,
(In thousands)	2001			2000
Cash flows from operating activities:
Net income	$	5,572		$	3,953
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization		2,642			2,369
Provision for bad debts		50			75
Provision for inventory obsolescence		350			275
Deferred income taxes		—			990
Stock options issued for services		92			(10	)
Changes in operating assets and liabilities:
Accounts and note receivable		(640	)		223
Inventories		(301	)		(42	)
Other current assets		(442	)		(518	)
Accounts payable and accrued liabilities		(612	)		(2,331	)
Customer deposits and unearned revenue		55			(29	)
Net cash provided by operating activities		6,766			4,955
Cash flows from investing activities:
Purchases of investments		(5,583	)		(3,065	)
Proceeds from the sales and maturities of investments		2,675			4,202
Payments for products leased and held for lease		(1,495	)		(2,422	)
Purchases of property and equipment		(337	)		(21	)
Purchases of intangible assets		(278	)		(255	)
Acquisition of business, net of cash acquired		(4,015	)		—
Other		(193	)		(12	)
Net cash (used by) investing activities		(9,226	)		(1,573	)
Cash flows from financing activities
Repurchase of common stock		(740	)		(3,267	)
Proceeds from issuance of common stock		3,427			662
Payments on long-term obligation to related party		(191	)		(176	)
Net cash (used) provided by financing activities		2,496			(2,781	)
Net increase in cash and cash equivalents		36			601
Cash and cash equivalents, beginning of period		2,810			1,476
Cash and cash equivalents, end of period	$	2,846		$	2,077
Non-cash transaction:
Payment of obligation to related party with common stock	$	94		$	94
Cash paid for:
Income taxes	$	3,331		$	1,006
Interest	$	9		$	13

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 Consolidated Financial Statements:

The consolidated financial statements as of April 30, 2001, and for the three and six month periods ended April 30, 2001 and 2000, 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 in accordance with accounting principles generally accepted in the United States of America. The results of operations for the three and six months ended April 30, 2001 are not necessarily indicative of the results to be expected for the year ending October 31, 2001. These interim consolidated financial statements should be read in conjunction with the Company’s October 31, 2000, consolidated financial statements and notes thereto included in its Form 10-K.

Certain reclassifications have been made to the April 30, 2000 consolidated financial statements to conform to the April 30, 2001 consolidated financial statement presentation. These reclassifications had no effect on the operating results for the quarter and six months ending April 30, 2000, as previously reported.

2. Inventories:

Description	April 30, 2001		October 31, 2000
(In thousands)
Raw materials	$	4,264	$	3,294
Work-in-progress		1,179		823
Finished goods		1,264		2,077
	$	6,707	$	6,194

3. Systems and Equipment Leased and Held for Lease:

Description	April 30, 2001			October 31, 2000
(In thousands)
Game equipment		9,766			10,176
Gaming products		5,283			4,292
		15,049			14,468
Less: Accumulated depreciation		(8,458	)		(7,792	)
	$	6,591		$	6,676

4. Common Stock:

In the first six months of fiscal 2001, the Company repurchased 41,000 shares of common stock at a total cost of $740,000, compared to 392,500 shares repurchased at a total cost of $3,267,000 in the first six months of fiscal 2000. As of April 30, 2001, 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 (continued)

5. Earnings per Share:

The following table shows the reconciliation of basic earnings per share to diluted earnings per share:

	Three Months Ended April 30,				Six Months Ended April 30,
	2001		2000		2001		2000
(In thousands, except for per share amounts)
Net Income	$	3,026	$	2,186	$	5,572	$	3,953
Basic:
Weighted average shares outstanding		11,281		10,729		11,105		10,845
Shares to be issued under asset purchase		24		57		24		60
Weighted average common shares, basic		11,305		10,786		11,129		10,905
Assuming dilution:
Weighted average common shares, basic		11,305		10,786		11,129		10,905
Dilutive impact of options outstanding		1,053		404		1,028		275
Weighted average common shares, diluted		12,358		11,190		12,157		11,180
Earnings per share, basic	$	.27	$	.20	$	.50	$	.36
Earnings per share, diluted	$	.24	$	.20	$	.46	$	.35

6. Operating Segments:

The Company operates in two business segments: game equipment and gaming products. The game equipment segment includes the manufacturing, marketing, installing and servicing of the Company’s proprietary shuffler product line and, until January 2001, 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 and the Company’s new slot operating system. 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.

6

Part I – Financial Information
Item 1. Financial Statements

Shuffle Master, Inc.
Notes to Consolidated Financial Statements (continued)

	Three Months Ended, April 30,						Six Months Ended, April 30,
(in thousands)	2001			2000			2001			2000
Revenue
Game equipment	$	7,884		$	5,505		$	15,057		$	10,703
Gaming products		4,457			4,130			8,501			7,432
		12,341			9,635			23,558			18,135
Operating Income
Game equipment		4,941			3,205			9,008			5,914
Gaming products		1,732			1,981			3,410			3,546
Corporate		(2,155	)		(1,819	)		(4,079	)		(3,368	)
		4,518			3,367			8,339			6,092
Depreciation and Amortization
Game equipment		555			447			1,067			844
Gaming products		560			588			1,170			1,184
Corporate		207			171			405			341
		1,322			1,206			2,642			2,369
Capital Expenditures
Game equipment		208			604			208			1,544
Gaming products		855			614			1,565			1,133
Corporate
		218			21			337			21
	$	1,281		$	1,239		$	2,110		$	2,698

	As of April 30,
	2001		2000
Assets
Game equipment	$	16,496	$	9,242
Gaming products		11,841		10,760
Corporate		14,776		9,405
	$	43,113	$	29,407

7. Contingency:

On April 5, 2001, the Company was sued by Innovative Gaming Corporation of America, a Minnesota corporation (“IGCA”). The suit was filed in the District Court of the State of Nevada, in Washoe County, Nevada. The defendants are the Company and Joe Lahti, the Company’s Chairman and Chief Executive Officer. The complaint alleges breach of contract, negligence, misrepresentation and related theories of liability, all relating to an alleged confidentiality agreement with respect to IGCA intellectual property. The Company has answered the complaint by denying any liability and raising various affirmative defenses. The Company completely denies IGCA’s claims and believes it will prevail in the lawsuit and accordingly, the Company has accrued no liability related to this litigation.

7

Part I – Financial Information
Item 1. Financial Statements

Shuffle Master, Inc.
Notes to Consolidated Financial Statements (continued)

8. Subsequent Event:

On May 21, 2001, the Board of Directors approved a three-for-two split of the Company’s common stock to be effected in the form of a dividend. The par value of the common stock will remain $.01 per share and the stock split will be effective at the close of business on June 18, 2001 for stockholders of record as of June 8, 2001.

Had share and per share amounts been restated to reflect this stock split, earnings per share, basic and diluted, would have been $.18 and $.16 for the second fiscal quarter ended April 30, 2001 and $.13 and $.13 for the second fiscal ended April 30, 2000. Additionally, earnings per share, basic and diluted, for the six months ended April 30, 2001 would have been $.33 and $.31 and, for the six months ended April 30, 2000, would have been $.24 and $.23.

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						Six Months
Period Ended April 30,	2001			2000			2001			2000
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products		26.4			27.3			27.1			29.2
Gross margin		73.6			72.7			72.9			70.8
Selling, general and administrative		24.3			25.7			25.0			25.8
Research and development		12.7			12.0			12.5			11.4
Income from operations		36.6			35.0			35.4			33.6
Interest income, net		1.4			0.5			1.3			0.5
Income before income taxes		38.0			35.5			36.7			34.1
Provision for income taxes		13.5			12.8			13.0			12.3
Net Income		24.5	%		22.7	%		23.7	%		21.8	%

Revenue:

Revenue for the second fiscal quarter ended April 30, 2001, was $12,341,000, an increase of $2,706,000 or 28.1% from the same period last year. This increase was attributable to increased revenue in all business segments. Shuffler sales and service revenue increased to $3,891,000 in the current quarter, compared to $2,423,000 in the second quarter last year. Current quarter shuffler sales were 351 units at an average price of $10,100, while sales in the second quarter of the prior year were 202 units at an average price of $10,500. Average unit sales prices decreased 3.8% due to increased conversion sales of ACE® and King™ shufflers in the current quarter. Shuffler sales and service revenue also includes revenue from the sale of extended service contracts, which increased to $247,000 in the current second quarter from $236,000 in the second quarter of the prior fiscal year. Shuffler lease revenue increased by $918,000, or 30.0%, to $3,978,000 in the current fiscal year second quarter. The shuffler installed lease base was 3,016 at April 30, 2001, compared to 2,505 at April 30, 2000 and 2,935 at October 31, 2000. This increase in the installed lease base from the prior year was due to the Company’s fiscal 2000 and 2001 business strategy to increase its installed base of leased ACE® and King™ shufflers. The 81 unit increase in the installed lease base during the quarter was attributable to the net placement of 130 ACE® and 140 King™ shufflers and the net removal of 83 multi-deck and 106 single deck BG shufflers. In the current year second quarter, sales of units converted from lease totaled 155 units, compared to 16 leased units converted to sales in the prior year fiscal first quarter.

Revenue from table games was $3,703,000, an increase of $745,000 or 25.2% from the second quarter last year. The installed base of Let It Ride Bonus® tables was 513 at April 30, 2001, compared to 446 installed Bonus tables at April 30, 2000 and 500 installed Bonus tables at October 31, 2000. The increase in installed Bonus tables compared to the prior year second quarter was due to new placements and conversion of Let It Ride® basic table games to Bonus table games. Let It Ride® table revenue also includes revenue from the Let It Ride® basic game. Revenue from both games is generated from monthly fixed fees, with the prices of the Bonus game significantly higher than those of basic game. There were 184 installed basic tables at April 30, 2001, compared to 222 installed basic tables at April 30, 2000 and 186 installed basic tables at October 31, 2000. The decrease in installed basic tables from April 30, 2000 was primarily due to conversions from the basic game to the Bonus

9

Part I – Financial Information
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations

RESULTS OF OPERATIONS (continued)

game. Table game revenue in the current fiscal year second quarter also increased due to incremental revenue earned from Three Card Poker®. There were 426 Three Card Poker® games installed at April 30, 2001, compared to 225 installed games at April 30, 2000 and 293 installed tables at October 31, 2000.

Slot revenue increased by $283,000, or 60%, to $754,000 in the current second quarter from the prior year fiscal second quarter. The installed base was 509 slot machines as of April 30, 2001, compared to 548 installed units as of April 30, 2000 and 545 units as of October 31, 2000. The decrease in the installed base from the prior year fiscal second quarter was due primarily to the removal of the Let’s Make A Deal® video slot games. Recurring slot lease and operating system revenue increased by $200,000 to $615,000 in the current year fiscal second quarter compared to the prior year fiscal second quarter, due primarily to revenue from Press Your Luck™ slot games, while sales of video equipment increased by $83,000 to $139,000.

Other revenue decreased to $15,000 in the current second quarter from $723,000 in the prior year second quarter due to the termination of the Company’s joint marketing agreement with TCS America, Inc. in January 2001. Other revenue also decreased in the current year second quarter by comparison to the prior year fiscal second quarter due to the receipt in the prior year of a $500,000 license fee related to the Company’s math technology used in slot game design.

Revenue for the six months ended April 30, 2001, was $23,558,000, an increase of $5,423,000 or 29.9% over the six month period ended April 30, 2000. Shuffler lease revenue increased by $903,000 or 31.5% to $7,952,000 in the current year six months compared to $6,049,000 in the prior year six months, while shuffler sales and service revenue increased by $2,961,000 or 76.1% to $6,852,000 in the current six months, compared to $3,891,000 in the prior year six months. This shuffler sales increase was due to the sale of 623 shufflers in the current year six months, compared to 315 in the prior year six months. Table game revenue increased by $1,349,000 or 23.0% to $7,218,000 in the current year six months as compared to $5,869,000 in the prior year six months, as total table placements increased by 236 tables to 1,147 tables at April 30, 2001 from 911 tables at April 30, 2000, due primarily to placements of the Three Card Poker® game. Video slot game revenue increased by $421,000 or 48.8% due primarily to lease and operating system revenue from the installation of Press Your Luck™ video slot games in late fiscal 2000 and during fiscal 2001. Other revenue in the current year six months decreased by $1,211,000 from the prior year six months, principally due to the termination of the Company’s joint marketing agreement with TCS America, Inc. in January 2001 and the receipt of $700,000 in technology license and evaluation fees in the prior year six months.

Costs and Expenses:

Gross margin was 73.6% and 72.9% for the current second quarter and six months, respectively, compared to 72.7% and 70.8% in the comparable prior year periods. The gross margin increase was due to a shift in revenue toward the sale and lease of higher margin shuffler products and away from the sale of lower margin Chipper Champ™ machines and accessories. Revenue from higher margin shuffler sale and lease revenue increased to 63.7% of sales in the current fiscal second quarter from 56.9% in the prior fiscal year second quarter. Additionally, service, installation, and indirect production costs, expressed as a percentage of sales, decreased to 11.5% of sales in the current fiscal year second quarter from 12.9% in the prior fiscal year second quarter.

Selling, general and administrative expenses increased by $528,000 or 21.3% to $3,004,000 in the current second quarter, and by $1,217,000 to $5,894,000 in the current six month period. Sales expenses increased by $193,000 and $408,000 from the prior year second quarter and six months, respectively, due to increased commissions and salaries related to increased sales and sales staffing. Other selling, general and administrative expenses increased in the current fiscal second quarter and six months, including increased administrative staffing, promotional costs, product approval costs, and organizational consulting costs totaling $318,000 and $665,000, respectively. Additionally, the Company increased information systems and infrastructure expenses by $80,000 and $190,000 in the current fiscal second quarter and six months, compared to comparable prior

10

Part I – Financial Information
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations

RESULTS OF OPERATIONS (continued)

year periods. Litigation expenses decreased by $18,000 and $53,000 from the prior year fiscal second quarter and six months, respectively, due to prior year settlements of litigation with Progressive Games, Inc. and Bally Gaming, Inc.

Research and development expenses increased by $409,000, or 35.3%, over the prior year fiscal quarter to $1,567,000 and by $862,000 over the prior year six month period to $2,932,000. This increase resulted from new game and operating system development costs.

Interest Income, net:

Interest income, net, was $173,000 in the current year second quarter, compared to $54,000 in the prior year second quarter. Cash and investments increased to $10,067,000 at April 30, 2001, from $6,619,000 at October 31, 2000. This increase in interest-bearing cash and investments was due primarily to the Company increasing its operating profits in fiscal 2001 and receiving $3,427,000 in proceeds from the issuance of common stock through the exercise of common stock options during the first six months of fiscal 2001.

Income Taxes:

The Company recorded an income tax provision at an effective rate of 35.5% in the current year second quarter, compared to the tax provision of 36.0% for the second quarter of fiscal 2000, reflecting a decreased provision for state income taxes.

Earnings per Share:

The Company earned $.24 per share, assuming dilution, for the current year second quarter, compared to $.20 per share, assuming dilution, in the prior year. Weighted average shares outstanding, assuming dilution, increased to 12,358,000 from 11,190,000 in the second quarter of fiscal 2000 due to the dilutive impact of common stock options outstanding. The dilutive impact of common stock options outstanding increased by 649,000 shares to 1,053,000 shares during the quarter ended April 30, 2001, from 404,000 shares during the quarter ended April 30, 2000, reflecting the increase in the market price of the Company’s common stock throughout the past year. This increase in market price increased the number and dilutive impact of common stock options that could be exercised. Per share and shares outstanding amounts for current year and prior year fiscal quarters reflect the three-for-two stock split effective in November 2000.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital:

As of April 30, 2001, the Company had cash, cash equivalents and investments totaling $10,067,000, compared to $6,619,000 at October 31, 2000. The current ratio increased to 3.6 from 2.9 at October 31, 2000, while working capital increased by $4,916,000 to $16,984,000 at April 30, 2001, from $12,068,000 at October 31, 2000. The increase in cash, working capital, and the current ratio at April 30, 2001 relates to the Company’s increasing its operating profits during the current fiscal year six months and receiving increased proceeds from the issuance of common stock upon the exercise of employee and director stock options during the same period.

Cash Flows:

Cash provided by operations totaled $6,766,000 in the current year six months compared to cash provided by operations of $4,955,000 in the first six months of last year. Significant items under cash flows from operating activities in the current period include net income of $5,572,000 and non-cash charges for depreciation and amortization as well as for provisions for bad debts, inventory obsolescence, deferred taxes, and stock options

11

Part I – Financial Information
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations

RESULTS OF OPERATIONS (continued)

issued for services, all of which totaled $3,134,000, compared to net income of $3,953,000 and non-cash charges of $3,699,000 in the first six months of last year. Significant uses of cash flow from operating activities included an increase in accounts receivable of $640,000 due to increased sales and an increase in inventory of $301,000 to supply materials and components to manufacture shufflers and video games, including the recently approved The Three Stooges® video slot game introduced in April 2001 under the Company’s Development and Distribution Agreement with IGT.

Investing activities included the acquisition of Gaming Products, an Australian manufacturer of the QuickDraw® shuffler product line, through two wholly-owned subsidiaries, on April 28, 2001. This acquisition involved the purchase of the assets and the assumption of certain liabilities of three separate companies operating under the Gaming Products name as well as the stock of Gaming Products Pty. Ltd., a fourth company that hold patents relating to the QuickDraw® shuffler. The Company paid $4,015,000, net of cash acquired, for this acquisition. The Company is in the process of finalizing its evaluation of the fair values of the assets acquired and liabilities assumed. The Company does not expect any material subsequent adjustments to the balances recorded at April 30, 2001.

Additionally, in first six months of the current fiscal year, the Company invested in capital expenditures totaling $2,110,000 for net additions to leased gaming equipment and game products, new game licenses and other fixed assets. The Company also increased its investment portfolio by $3,412,000 to $7,221,000 in the same period.

Financing activities during the first six months of the current fiscal year included the repurchase of 41,000 shares of common stock using cash of $740,000 and the issuance of 615,000 shares of common stock generating cash of $3,427,000 pursuant to exercise by employees and directors of options granted under the Company’s stock option plans.

Capital Resources:

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 in the immediate 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 April 5, 2001, the Company was sued by Innovative Gaming Corporation of America, a Minnesota corporation (“IGCA”). The suit was filed in the District Court of the State of Nevada, in Washoe County, Nevada. The defendants are the Company and Joseph Lahti, the Company’s Chairman and Chief Executive Officer. The complaint alleges breach of contract, negligence, misrepresentation and related theories of liability, all relating to an alleged confidentiality agreement with respect to IGCA intellectual property. The Company has answered the complaint by denying any liability and raising various affirmative defenses. The Company completely denies IGCA’s claims and believes it will prevail in the lawsuit.

On May 9, 2001, International Game Technology, a Nevada corporation, and IGT, a Nevada corporation (herein collectively, “IGT”), filed a patent infringement lawsuit against the Company in the United States District Court for the District of Minnesota in Minneapolis, Minnesota. This complaint and a later amended complaint alleged that the Company infringed upon IGT’s patents, trade dress and trademarks by virtue of the Company’s approved field test of six converted S+ “Double Platinum” slot machines. On May 17, 2001, the District Court denied IGT’s request for a temporary restraining order.

On May 31, 2001, IGT and the Company entered into a settlement agreement, resolving all the claims filed by IGT. As part of the settlement, IGT granted licenses to the Company for certain IGT patents, trade dress and trademarks related to S+ units originally manufactured by IGT. The Company also agreed that the total number of S+ conversions would not exceed a cap that increases quarterly, and that reaches a maximum aggregate of 15,000 total units. The settlement further provides that IGT and the Company will share certain revenue related to the conversions.

The Company and IGT also agreed that IGT will develop five new game titles based upon licenses to be provided by the Company. Profits from those games will be split between the Company and IGT, with fifty to seventy percent of the profits going to IGT.

Item 4. Submission of Matters to a Vote of Securities Holders

At the Annual Meeting of Shareholders held on March 22, 2001, certain matters were submitted to the shareholders for their approval as set forth in the Company’s Proxy Statement dated February 14, 2001, previously filed with the Securities and Exchange Commission:

1) Directors elected at the meeting:

	Votes Cast For	Votes Withheld
Joseph J. Lahti	9,991,930	395,812
Thomas A. Sutton	9,991,555	396,187
Patrick J. Cruzen	9,994,255	393,487
Mark L. Yoseloff	9,905,874	481,868

2) An amendment to the 1993 Stock Option Plan was approved to increase by 450,000 the number of shares reserved for issuance. A total of 9,311,270 shares voted in favor thereof, 887,674 shares voted against, while 63,798 shares abstained.

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

10.26 Employment Agreement, by and between Shuffle Master, Inc. and Mark Lipparelli, dated April 30, 2001 (confidential treatment requested as to portions).

10.27 Amendment to the Shuffle Master, Inc. 1993 Stock Option Plan, approved by the shareholders on March 22, 2001 (Incorporated by reference to the specified exhibit in the Registrants’Registration Statement on Form S-8, Registration No. 333-39060).

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:      June 14, 2001

/s/ Gary W. Griffin
Gary W. Griffin
Chief Financial Officer

/s/ Gerald W. Koslow
Gerald W. Koslow
Corporate Controller

14

EX-10

                                   EX - 10.26
                     Employment Agreement - Mark Lipparelli

                                                                   EXHIBIT 10.26

                         CONFIDENTIAL TREATMENT REQUEST

                              EMPLOYMENT AGREEMENT


                                 MARK LIPPARELLI

         THIS AGREEMENT is made and entered into as of the 30th day of April,
2001, by and between Shuffle Master, Inc., a Minnesota corporation (the
"Company"), and Mark Lipparelli (the "Employee"), a resident of the State of
Nevada.

                                    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 determined in accordance with the terms and
                  conditions of this Agreement.

         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 Executive
Vice President, reporting to the Chief Executive Officer and the President of
the Company. Employee shall perform the duties of that position 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 beginning April 30, 2001
through October 31, 2002, but may be terminated earlier in accordance with the
provisions of this Agreement.

         2. SALARY AND BENEFITS. During the Company's fiscal year ending October
31, 2001: (a) Employee shall be paid an annual base salary of One Hundred Fifty
Thousand Dollars ($150,000.00) (from his initial hiring date through September
30, 2001, at which time Employee, shall be paid an annual base salary of One
Hundred Eighty Thousand Dollars ($180,000)), paid in the same intervals as other
employees of the Company; and (b) if employed through October 31, 2001, 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,


                                       1



as set forth on Exhibit A attached hereto. (REDACTED; CONFIDENTIAL TREATMENT
REQUESTED) During the Company's fiscal year commencing November 1, 2001,
Employee will receive a base salary no less than that set forth above and if
employed through October 31, 2002 will be eligible to participate in an
executive bonus program authorized by the Board of Directors of the Company for
that year, which is expected to be generally similar to that set forth in
Exhibit A, but with a full year of employment required and such performance
targets and bonus percentages as may be adopted by the Board. Employee will
receive a stock option grant to purchase 50,000 shares of the Company's common
stock at its closing price on March 28, 2001, in accordance with and subject to
the terms and conditions imposed by the Board of Directors at its March 28, 2001
meeting and to the extent not inconsistent with the terms of the granting
resolution, in accordance with, and subject to the terms and conditions of the
1993 Employee Stock Option Plan, as amended. The stock underlying this option
grant will come from the authorized but unissued shares of the Company and not
from the pool of stock authorized for issuance under the 1993 Stock Option Plan.

         Vesting of the above option grants occurs, unless otherwise
accelerated, as follows: one-third on April 30, 2002, provided the employee is
employed with the Company on such date; and one-third on April 30, 2003,
provided the employee is employed with the Company on such date; and one-third
on April 30, 2004, provided the employee is employed with the Company on such
date.

         The Company shall register the 50,000 shares of common stock underlying
the stock option grant for sale on or before March 15, 2002. Employee will have
twelve (12) months from his last day of Employment, or six (6) months following
any severance period whichever period is longer, during which to exercise any
vested stock options. Employee, unless required to do so earlier, must exercise
any vested stock option on or before March 27, 2011 or such option will forfeit
and be of no further force and effect.

         Employee's salary is set on the expectation that (except for vacation
days and holidays) Employee's full time will be devoted to Employee's 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. Employee shall receive three (3)
weeks paid vacation per calendar year prorated based on the number of weeks
actually employed during any such calendar year.

         During Employee's employment with the Company, the Company will
promptly pay or reimburse Employee for reasonable travel, entertainment and
other expenses incurred by Employee in the furtherance of or in


                                       2



connection with the performance of Employee's duties. Such reimbursement will be
in accordance with Company policies in existence from time to time.

         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 approved in writing by the Chief Executive
Officer or by the President of the Company. Company acknowledges and approves
that Employee during the first two (2) weeks of his employment with Company will
be providing consulting services to Employees' previous Company which may
significantly reduce the amount of time Employee can devote to Company during
the first two (2) weeks of his employment. Company approves such consulting by
Employee during the first two (2) weeks of his employment. Employee may serve in
any capacity with any civic, educational or charitable organization, provided
such service does not prevent Employee meeting his fiduciary obligation to
Company.

         4. NON-COMPETITION. In consideration of the provisions of this
Agreement and the severance benefits for which Employee is eligible pursuant to
Section 9, Employee shall not, while employed by the Company or its successor
and thereafter until November 1, 2002:

         (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 or successors to work
                  for or represent any competitor of the Company or its
                  affiliates or successors or to call upon any of the customers
                  of the Company or its affiliates or successors.

         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.


                                       3



         (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.

         (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. EARLY 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 with or without just cause. Notwithstanding any
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 9 will remain in
full force and effect.


                                       4



         7. 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 the confidentiality obligations contained in Sections 4 and 5 and
will not be entitled to any of the severance benefits provided under Section 9.
Termination for "just cause" shall include:

         (a)      repeated inattention to duty, which has not been remedied by
                  Employee within thirty (30) days following written notice
                  thereof;

         (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; or

         (d)      a violation of any material provision of this Agreement,
                  including, in particular, the provisions of Sections 4 and 5
                  hereof.

         8. VOLUNTARY TERMINATION BY EMPLOYEE. In the event Employee voluntarily
terminates his employment with the Company (or its successor), 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 9. Voluntary termination means any termination by the Employee on
or before September 30, 2001, without a material breach of a substantial
provision of this Agreement by the Company and any termination by the Employee
after September 30, 2001 without a material breach of a substantial provision of
this Agreement by the Company (REDACTED; CONFIDENTIAL TREATMENT REQUESTED).
Voluntary termination includes a termination caused by the death of Employee or
disability of Employee for more than six (6) months.

         9. SEVERANCE BENEFITS. In the event that Employee is terminated without
"just cause" (as defined in Section 7) or leaves his employment involuntarily
(as defined in Section 8) prior to the end of the term set forth in Section 1
hereof, then:

         (a)      During the period immediately following Employee's last day of
                  employment through October 31, 2002 (the "Severance Period"),
                  Employee will be paid each month, as Employee's sole remedy,
                  an amount equal to Employee's then prevailing monthly base
                  salary. In addition, during the Severance Period the Employee
                  shall continue to receive all of the Company's employee
                  benefits, if eligible; if Employee is not eligible for health
                  benefits, the Company shall pay the COBRA premiums for
                  continuation coverage during the period of severance payments.

         (b)      Provided that Employee has not breached his obligations
                  contained in Sections 4 and 5, Employee's option to purchase
                  16,666 shares of the Company's common stock that was scheduled
                  to vest on April 30, 2002, in the event of the Employee's
                  continued employment through such date, if it hasn't already
                  vested, will vest on April 30, 2002, notwithstanding
                  Employee's termination of employment.


                                       5



         10. COOPERATION WITH CHANGE IN CONTROL. Employee will reasonably
cooperate with the Company in the event of a change in control, and exercise his
stock options in a way as to not hinder the progress or closing of the
transaction, and in no event later than three (3) months following the closing.

         11. 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.

         12. D & O POLICY. During Employee's employment with the Company, the
Company shall maintain director and officer liability insurance in reasonable
scope and amounts. Notwithstanding the existence of such insurance, Employee
shall also be entitled to indemnification in accordance with the by-laws of the
Company.

         13. 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.

         14. 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, and the issuance of an preliminary
injunction against Employee pursuant to Nevada Rules of Civil Procedure 65, 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


                                       6



ACTUAL DAMAGES SUSTAINED BY THE COMPANY AS A RESULT THEREOF; provided, however,
that if there is a final determination by the Court that the Employee did not
violate any of the covenants contained in Sections 4 and 5 hereof, Employee
shall have no obligation to pay the foregoing costs, expenses and attorneys'
fees of the Company and the Company agrees to pay the costs, expenses and
reasonable attorneys' fees incurred by the Employee in defending himself with
respect to such alleged violations.

         15. 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.

         16. 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.

         17. 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.

         18. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Nevada, without giving effect to the
principles of conflicts of laws thereof.

         19. 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.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day, month and year first above written.

COMPANY:                                   EMPLOYEE:

SHUFFLE MASTER, INC.

By:  /s/ Joseph J. Lahti                   By: /s/ Mark Lipparelli
    --------------------------------          ----------------------------------
Its: Chief Executive Officer                  Mark Lipparelli


                                       7



                                    EXHIBIT A

                   EXECUTIVE BONUS PROGRAM - F/Y/E 10/31/2001

         Employee may earn a percentage of Employee's base salary (actually
received during the Company's fiscal year ending 10/31/01) as a bonus during
fiscal year 2001, 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%                        40% of base salary actually received during
                                    the Company's fiscal year ending 10/31/01.

c.       90% - 100%                 40% of base salary actually received during
                                    the Company's fiscal year ending 10/31/01
                                    plus an additional one percent (1%) of base
                                    salary actually received during the
                                    Company's fiscal year ending 10/31/01 for
                                    each increase of one percent (1%) over
                                    ninety percent (90%).

d.       100%                       50% of base salary actually received during
                                    the Company's fiscal year ending 10/31/01.

e.       100% - 120%                50% of base salary actually received during
                                    the Company's fiscal year ending 10/31/01,
                                    plus an additional one-half percent (.05%)
                                    of base salary for each increase of one
                                    percent (1%) over 100%.

f.       120%                       60% of base salary actually received during
                                    the Company's fiscal year ending 10/31/01.

g.       over 120%                  60% of base salary actually received during
                                    the Company's fiscal year ending 10/31/01,
                                    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 2001, and assuming Employee had been employed by Company for
the entire fiscal year ending October 31, 2001, Employee would be paid a
performance bonus of $75,000(150,000 x 50%). If the Company earns 90% of its
targeted income before taxes during fiscal 2001, and assuming Employee had been
employed for the entire fiscal year ending October 31, 2001, Employee would be
paid a performance bonus of $60,000 ($150,000 x 40%). If the Company earns 120%
of its targeted income before taxes and assuming Employee had been employed by
Company for the entire fiscal year ending October 31, 2001, Employee's
performance bonus would be $90,000 ($150,000 x 60%). If the Company earns more
than 120% of its targeted income before taxes, and assuming that Employee had
been employed by Company for the entire fiscal year ending October 31, 2001,
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 Employee's bonus exceed 2 times the Employee's annual base salary
actually received during the fiscal year ending October 31, 2001.