0001437749-12-005764.txt : 20120604 0001437749-12-005764.hdr.sgml : 20120604 20120604162506 ACCESSION NUMBER: 0001437749-12-005764 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20120430 FILED AS OF DATE: 20120604 DATE AS OF CHANGE: 20120604 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHUFFLE MASTER INC CENTRAL INDEX KEY: 0000718789 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 411448495 STATE OF INCORPORATION: MN FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20820 FILM NUMBER: 12886385 BUSINESS ADDRESS: STREET 1: 1106 PALMS AIRPORT DRIVE CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7028977150 MAIL ADDRESS: STREET 1: 1106 PALMS AIRPORT DRIVE CITY: LAS VEGAS STATE: NV ZIP: 89119 10-Q 1 shuffle_10q-043012.htm FORM 10-Q shuffle_10q-043012.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2012
OR
o
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, Las Vegas
NV
89119
(Address of Principal
(State)
(Zip Code)
Executive Offices)
   
Registrant’s Telephone Number, Including Area Code: (702) 897-7150
 
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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
As of May 31, 2012, there were 55,801,370 shares of our $.01 par value common stock outstanding.
 
 
1

 
 
SHUFFLE MASTER, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 2012
TABLE OF CONTENTS
 
   
Page
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited):
 
 
Condensed Consolidated Statements of Operations for the Three and Six Months ended April 30, 2012 and 2011
3
 
Condensed Consolidated Balance Sheets as of April 30, 2012 and October 31, 2011
4
 
Condensed Consolidated Statements of Cash Flows for the Six Months ended April 30, 2012 and 2011
5
 
Notes to Condensed Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
46
Item 4.
Controls and Procedures
46
PART II—OTHER INFORMATION
Item 1.
Legal Proceedings
47
Item 1A.
Risk Factors
47
Item 2.
Unregistered Sale of Equity Securities and Use of Proceeds
48
Item 3.
Defaults Upon Senior Securities
49
Item 4.
Mine Safety Disclosures
49
Item 5.
Other Information
49
Item 6.
Exhibits
50
Signatures
51
 
 
2

 
 
PART I

ITEM 1.  FINANCIAL STATEMENTS
 
SHUFFLE MASTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue:
                       
Product leases and royalties
  $ 26,947     $ 24,264     $ 52,900     $ 47,840  
Product sales and service
    39,107       35,619       69,207       55,858  
Total revenue
    66,054       59,883       122,107       103,698  
Costs and expenses:
                               
Cost of leases and royalties
    9,427       8,354       18,378       15,536  
Cost of sales and service
    14,138       15,435       25,419       22,900  
Gross profit
    42,489       36,094       78,310       65,262  
Selling, general and administrative
    19,804       17,060       36,984       33,261  
Research and development
    7,925       6,883       15,452       12,799  
Total costs and expenses
    51,294       47,732       96,233       84,496  
                                 
Income from operations
    14,760       12,151       25,874       19,202  
                                 
Other income (expense):
                               
Interest income
    174       126       313       252  
Interest expense
    (378 )     (671 )     (855 )     (1,372 )
Other, net
    (146 )     (1,118 )     29       (961 )
Total other income (expense)
    (350 )     (1,663 )     (513 )     (2,081 )
Income before income taxes
    14,410       10,488       25,361       17,121  
Income tax provision
    4,675       2,542       7,977       4,371  
Net income
  $ 9,735     $ 7,946     $ 17,384     $ 12,750  
                                 
Basic earnings per share:
  $ 0.17     $ 0.15     $ 0.31     $ 0.24  
Diluted earnings per share:
  $ 0.17     $ 0.14     $ 0.31     $ 0.23  
                                 
Weighted average shares outstanding:
                         
Basic
    55,751       54,374       55,408       54,253  
Diluted
    56,653       55,010       56,154       54,953  
 
See Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
3

 
 
SHUFFLE MASTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
 
   
April 30,
2012
   
October 31,
2011
 
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 22,964     $ 22,189  
Accounts receivable, net of allowance for bad debts of $465 and $402
    38,952       39,713  
Investment in sales-type leases and notes receivable, net of allowance for bad debts of $26 and $44
    5,753       5,006  
Inventories
    27,138       24,335  
Prepaid income taxes
    6,654       3,279  
Deferred income taxes
    4,935       4,911  
Other current assets
    5,898       4,291  
Total current assets
    112,294       103,724  
Investment in sales-type leases and notes receivable, net of current portion and net of allowance for bad debts of $2 and $5
    4,857       3,704  
Products leased and held for lease, net
    35,184       35,196  
Property and equipment, net
    15,155       12,849  
Intangible assets, net
    67,193       66,517  
Goodwill
    85,393       85,392  
Deferred income taxes
    2,850       3,038  
Other assets
    2,490       2,467  
Total assets
  $ 325,416     $ 312,887  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 4,415     $ 5,001  
Accrued liabilities and other current liabilities
    19,887       21,135  
Deferred income taxes
    89       96  
Customer deposits
    3,333       3,407  
Income tax payable
    4,218       2,595  
Deferred revenue
    4,031       3,862  
Current portion of long-term debt
    501       508  
Total current liabilities
    36,474       36,604  
Long-term debt, net of current portion
    22,750       38,757  
Other long-term liabilities
    2,849       2,969  
Deferred income taxes
    2,549       942  
Total liabilities
    64,622       79,272  
Commitments and Contingencies (See Note 11)
               
Shareholders' equity:
               
Common stock, $0.01 par value; 151,368 shares authorized; 55,698 and 54,196 shares issued and outstanding
    557       542  
Additional paid-in capital
    131,188       114,306  
Retained earnings
    98,222       80,838  
Accumulated other comprehensive income
    30,827       37,929  
Total shareholders' equity
    260,794       233,615  
Total liabilities and shareholders' equity
  $ 325,416     $ 312,887  
 
See Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
4

 
 
SHUFFLE MASTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share amounts)
(Unaudited)
 
   
Six Months Ended
April 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income
  $ 17,384     $ 12,750  
Adjustments to reconcile net income to cash provided by operating activities:                
Depreciation and amortization
    12,397       11,876  
Amortization of debt issuance costs and debt discount
    238       238  
Share-based compensation
    2,049       1,478  
Provision for bad debts
    108       101  
Write-down for inventory obsolescence
    707       113  
Loss (profit) on sale of leased assets
    (603 )     (2,379 )
Loss (gain) on sale of assets
    91       96  
Excess tax benefit from exercise of stock options
    (1,207 )     (771 )
Changes in operating assets and liabilities:
               
Accounts receivable and investment in sales-type leases and notes receivable
    (1,970 )     (1,221 )
Inventories
    (4,248 )     (5,668 )
Accounts payable and accrued liabilities
    (2,580 )     (16,533 )
Customer deposits and deferred revenue
    4       777  
Prepaid income taxes
    (3,377 )     2,305  
Income taxes payable
    1,466       2,404  
Deferred income taxes
    2,277       1,340  
Other
    (2,132 )     9,604  
Net cash provided by operating activities     20,604       16,510  
                 
Cash flows from investing activities:
               
Proceeds from sale of leased assets
    1,029       3,810  
Proceeds from sale of assets
    -       76  
Payments for products leased and held for lease
    (6,706 )     (7,263 )
Purchases of property and equipment
    (4,240 )     (2,001 )
Purchases of intangible assets
    (4,103 )     (6,145 )
Acquisition of business
    (5,500 )     (6,499 )
Other
    (454 )     (446 )
Net cash used in investing activities     (19,974 )     (18,468 )
                 
Cash flows from financing activities:
               
Proceeds from Revolver
    6,000       16,500  
Debt payments on Revolver
    (22,000 )     (10,000 )
Proceeds from issuances of common stock, net
    14,128       1,610  
Excess tax benefit from exercise of stock options
    1,207       771  
Other
    (30 )     (20 )
Net cash provided by (used in) financing activities     (695 )     8,861  
                 
Effect of exchange rate changes on cash and cash equivalents
    840       92  
                 
Net increase in cash and cash equivalents
    775       6,995  
Cash and cash equivalents, beginning of period
    22,189       9,988  
Cash and cash equivalents, end of period
  $ 22,964     $ 16,983  
 
See Notes to Unaudited Condensed Consolidated Financial Statements. 
 
 
5

 
 
SHUFFLE MASTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
1. DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION
 
Description of business.  Unless the context indicates otherwise, references to “Shuffle Master, Inc.,” “we,” “us,” “our,” or the “Company,” include Shuffle Master, Inc. and its consolidated subsidiaries.
 
We are a leading global gaming supplier committed to making gaming more fun for players and more profitable for operators through product innovation, and superior quality and service.  We operate in legalized gaming markets across the globe and provide state-of-the-art, value-add products in four distinct segments: Utility products, which include automatic card shufflers and roulette chip sorters; Proprietary Table Games (“PTG”), which include live games, side bets and progressives as well as our newly introduced i-Gaming, which features online versions of our table games, social gaming and mobile applications; Electronic Table Systems (“ETS”), which include various e-Table game platforms; and Electronic Gaming Machines (“EGM”), which include video slot machines.

We lease, license and sell our products. When we lease or license our products, we generally negotiate a month-to-month operating lease. When we sell our products, we offer our customers a choice between a sale, a longer-term sales-type lease or other long-term financing. We offer our products worldwide in markets that are highly regulated. We manufacture our products at our headquarters and manufacturing facility in Las Vegas, Nevada, as well as at our Australian headquarters and manufacturing facility in Milperra, New South Wales, Australia. In addition, we outsource the manufacturing of certain of our sub-assemblies in the United States, Europe and Asia.

Utility. Our Utility segment develops products for licensed casino operators that enhance table game speed, productivity, profitability and security. Utility products include automatic card shufflers and roulette chip sorters. This segment also includes our i-Shoe® Auto card reading shoe that gathers data and enables casinos to track table game play and our i-Score baccarat viewer that displays current game results and trends. These products are intended to cost-effectively provide licensed casino operators and other users with data on table game play for security and marketing purposes, which in turn allows them to increase their profitability.

Proprietary Table Games. Our PTG segment develops and delivers proprietary table games that enhance our casino customers' and other licensed operators' table game operations. Products in this segment include our proprietary table games, side bets, add-ons and progressives as well as our newly introduced i-Gaming products, which feature online versions of our table games, social gaming, and mobile applications.  Our proprietary content and features are also added to public domain games such as poker, baccarat, pai gow poker and blackjack table games and to electronic platforms such as Table Master® and i-Table®.
 
Electronic Table Systems.  Our ETS segment develops and delivers various products involving popular table game content using e-Table game platforms. Our primary ETS products are i-Table®, Table Master®, Vegas Star® and Rapid Table Games®.  Our i-Table® platform combines an electronic betting interface with a live dealer who deals the cards from our card reading shoe or shuffler that is designed to improve game speed and security while reducing many operating expenses associated with live tables. Our Table Master® and Vegas Star® products feature a virtual dealer which enables us to offer table game content in both traditional gaming markets and in markets where live table games are not permitted, such as some racinos, video lottery and arcade markets. Our Rapid Table Games® product enables the automation of certain components of traditional table games such as data collection, placement of bets, collection of losing bets and payment of winning bets combined with live dealer and game outcomes. This automation provides benefits to both casino operators and players, including greater security and faster speed of play.

Electronic Gaming Machines.  Our EGM segment develops and delivers our PC-based video slot machines into select markets, primarily in Australasia.  We offer a selection of video slot titles which include a range of bonus round options that can be configured as a network of machines or as stand-alone units. In addition to selling the full EGM complement, we sell software conversion kits that allow existing EGM terminals to be converted to other games on the PC3 and PC4 platform. Popular titles for our EGMs include Cats Hats & Bats, Eureka Gold Mine 2, Emerald Fortunes and King of Babylon. In addition, we continue to develop a popular range of games utilizing the Pink Panther brand, under license from Metro-Goldwyn-Mayer Studios, Inc. consumer products.
 
Basis of presentation.  The accompanying Unaudited Condensed Consolidated Financial Statements include the results of operations, financial position and cash flows of Shuffle Master, Inc. and its consolidated subsidiaries. All material intercompany balances have been eliminated.  
 
 
6

 
 
In the opinion of our management, the accompanying Unaudited Condensed Consolidated Financial Statements include all adjustments necessary to fairly state, in all material respects, our results for the periods presented. These Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our 2011 Annual Report on Form 10-K filed with the SEC on January 5, 2012.  The results of operations for the three and six months ended April 30, 2012 are not necessarily indicative of results to be expected for the entire fiscal year.
 
Reclassification. The Company revised its October 31, 2011, condensed consolidated balance sheet to appropriately classify amounts that were previously included within accounts receivable as current investment in sales-type leases and notes receivable. This revision resulted in a $3.2 million increase in the current investment in sales-type leases and notes receivable with a corresponding reduction to accounts receivable. The revision, which the Company determined is not material, had no impact on total current assets, results of operations or cash flows.

Use of estimates and assumptions. The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our Condensed Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis. Actual results could differ from those estimates.

Revenue recognition. We recognize revenues when all of the following have been satisfied:

 
·
persuasive evidence of an arrangement exists;

 
·
the price to the customer is fixed and determinable;

 
·
delivery has occurred and any acceptance terms have been fulfilled; and

 
·
collection is reasonably assured.

Revenues are reported net of incentive rebates and discounts. Amounts billed prior to completing the earnings process are deferred until revenue recognition criteria are met.

Product lease and royalty revenue — Lease and royalty revenue is earned from the leasing of our tangible products and the licensing of our intangible products, such as our proprietary table games. When we lease or license our products, we generally negotiate month-to-month fixed fee contracts, or to a lesser extent, enter into participation arrangements whereby casinos pay a fee to us based on a percentage of net win.   Lease and royalty revenue commences upon the completed installation of the product. Lease terms are generally cancellable with 30 days' notice.  We recognize revenue from our leases and licenses upon installation of our product on a month to month basis.

Product sales and service revenue — We generate sales revenue through the sale of equipment in each product segment, including sales revenue from sales-type leases and the sale of lifetime licenses for our proprietary table games. Our credit sales terms are primarily 60 days or less.  Financing for intangible property and sales-type leases for tangible property have payment terms ranging generally from 24 to 36 months and are interest-bearing at market interest rates. Revenue from the sale of equipment is recorded in accordance with the contractual shipping terms. Products placed with customers on a trial basis are not recognized as revenue until the trial period ends, the customer accepts the product and all other relevant criteria have been met. If a customer purchases existing leased equipment, revenue is recorded on the effective date of the purchase agreement. Revenue on service and warranty contracts is recognized as the services are provided over the term of the contracts, which are generally one year. Revenue from the sale of lifetime licenses, under which we have no continuing obligation, is recorded on the effective date of the license agreement.

Multiple element arrangements — Some of our revenue arrangements contain multiple deliverables, such as a product sale combined with a service element or the delivery of a future product.  Most of our products and services qualify as separate units of accounting. When vendor specific objective evidence or third-party evidence is not available, the management's best estimate of selling price ("BESP") is the amount we would sell the product or service for individually. The determination of BESP is made based on our normal pricing and discounting practices, which consider multiple factors, such as market conditions, competitive landscape, internal costs and profit objectives. Revenues allocated to future performance obligations elements are deferred and will be recognized upon delivery and customer acceptance.
 
 
7

 
 
Fair value measurement disclosure.  In the current quarter, we adopted an Accounting Standards Update (“ASU”) on how to measure fair value and on what disclosures to provide about fair value measurements, which expands disclosure requirements particularly for Level 3 inputs to include following:
 
·
For fair value categorized in Level 3 of the fair value hierarchy:
     
 
1.
a quantitative disclosure of the unobservable inputs and assumptions used in the measurement,

 
2.
a description of the valuation processes in place (e.g., how the entity decides its valuation policies and procedures, as well as changes in its analyses of fair value measurements, from period to period), and

 
3.
a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs.
     
·
The level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed.

Recently issued accounting standards or updates – not yet adopted

Comprehensive income – In June 2011, FASB issued an ASU on presentation of comprehensive income to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This update changes the requirements for the presentation of other comprehensive income, eliminating the option to present components of other comprehensive income as part of the statement of stockholders' equity, among other items. The guidance requires that all non-owner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.

This ASU will be effective for our first quarter of fiscal 2013 and as the update only requires a change in presentation, we do not expect the update to have a material impact on our financial statements.

2. SELECTED BALANCE SHEET DATA

The following provides additional disclosures for selected balance sheet accounts:
 
   
April 30,
2012
   
October 31,
2011
 
   
(In thousands)
 
Net inventories:
           
Raw materials and component parts
  $ 13,957     $ 12,984  
Work-in-process
    3,874       3,947  
Finished goods
    9,307       7,404  
Total
  $ 27,138     $ 24,335  
 
 
   
April 30,
2012
   
October 31,
2011
 
   
(In thousands)
 
Other current assets:
           
Other prepaid expenses
    2,944       2,302  
Other receivables
    2,239       1,271  
Other
    715       718  
Total
  $ 5,898     $ 4,291  
 
 
8

 
 
   
April 30,
2012
   
October 31,
2011
 
   
(In thousands)
 
Products leased and held for lease:
           
Utility
  $ 49,426     $ 47,073  
Less: accumulated depreciation
    (33,090 )     (29,891 )
Utility, net
    16,336       17,182  
                 
Proprietary Table Games
    8,623       6,158  
Less: accumulated depreciation
    (3,879 )     (2,496 )
Proprietary Table Games, net
    4,744       3,662  
                 
Electronic Table Systems
    27,298       28,749  
Less: accumulated depreciation
    (15,470 )     (15,571 )
Electronic Table Systems, net
    11,828       13,178  
                 
Electronic Gaming Machines
    2,763       1,266  
Less: accumulated depreciation
    (487 )     (92 )
Electronic Gaming Machines, net
    2,276       1,174  
                 
Total, net
  $ 35,184     $ 35,196  
 
 
   
April 30,
2012
   
October 31,
2011
 
   
(In thousands)
 
Accrued and other current liabilities:
       
Accrued compensation
    10,897       13,932  
Accrued taxes
    2,352       2,124  
Other accrued liabilities
    6,638       5,079  
Total
  $ 19,887     $ 21,135  
 
 
9

 
 
3. INTANGIBLE ASSETS AND GOODWILL
 
Amortizable intangible assets.  All of our recorded intangible assets, excluding goodwill and the StargamesTM and CARDTM tradenames, are subject to amortization. We amortize our intangible assets as the economic benefits of the intangible asset are consumed or otherwise used up. Amortization expense was $2.3 million and $2.5 million for the three months ended April 30, 2012 and 2011, respectively and $4.6 and $4.9 million for the six months ended April 30, 2012 and 2011, respectively. Amortization expenses are included in cost of leases and royalties and cost of sales and service, except for customer relationships which are included in selling, general and administrative expenses.

Amortizable intangible assets are comprised of the following:
 
 
Weighted Average
Useful Life
 
April 30,
2012
   
October 31,
2011
 
     
(In thousands)
 
Amortizable intangible assets:
             
               
Patents, games and products
10 years
  $ 67,756     $ 68,999  
Less: accumulated amortization
      (52,061 )     (52,145 )
        15,695       16,854  
Customer relationships
10 years
    26,715       25,688  
Less: accumulated amortization
      (13,879 )     (12,829 )
        12,836       12,859  
Licenses and other
6 - 9 years
    22,750       18,925  
Less: accumulated amortization
      (8,720 )     (7,581 )
        14,030       11,344  
Total
    $ 42,561     $ 41,057  
 
 
The increase in amortizable intangible assets for the six months ended April 30, 2012 relates to our purchase of table games intellectual property and acquisition of licenses to be used in our EGM segment.

Tradenames. Intangibles with an indefinite life, consisting of the Stargames and CARD tradenames, are not amortized, and were $24.6 million and $25.5 million as of April 30, 2012 and October 31, 2011, respectively.
 
Goodwill.  Changes in the carrying amount of goodwill for the years ended October 31, 2010, 2011 and the six months ended April 30, 2012, are as follows:
 
Activity by Segment
 
Utility
   
Proprietary
Table Games
   
Electronic
Table Systems
   
Electronic
Gaming Machines
   
Total
 
   
(In thousands)
                         
                               
Goodwill
  $ 42,560     $ 9,326     $ 34,188     $ 11,995     $ 98,069  
Accumulated impairments
    -       -       (22,137 )     -       (22,137 )
Balance as of October 31, 2010
  $ 42,560     $ 9,326     $ 12,051     $ 11,995     $ 75,932  
                                         
Foreign currency translation adjustment
    1,459       -       1,140       1,135     $ 3,734  
Acquisition
    4,799       -       -       -       4,799  
Other
    -       927       -       -       927  
Balance as of October 31, 2011
  $ 48,818     $ 10,253     $ 13,191     $ 13,130     $ 85,392  
                                         
Foreign currency translation adjustment
    (2,635 )     -       (410 )     (408 )   $ (3,453 )
Acquisition
    -       3,000       -       -       3,000  
Other
    -       454       -       -       454  
Balance as of April 30, 2012
  $ 46,183     $ 13,707     $ 12,781     $ 12,722     $ 85,393  
 
 
The $3.0 million of additional goodwill in our PTG segment relates to the acquisition of games and intellectual property that were treated as a business acquisition for accounting purposes.
 
 
10

 
 
The $0.5 million of additional goodwill in our PTG segment relates to our acquisition of certain assets from Bet Technology, Inc. (“BTI”) in 2004.  In 2004, we recorded an initial estimated liability of $7.6 million for contingent installment payments computed as the excess fair value of the acquired assets over the fixed installments and other direct costs.  In November 2004, we began paying monthly note installments based on a percentage of certain revenue from BTI games for a period of up to ten years, not to exceed $12.0 million.  The final principal and interest payment related to our initial estimated liability of $7.6 million was paid in February 2009 and all payments made subsequently have been recorded as additional goodwill.  As of April 30, 2012, we have paid approximately $11.0 million of the $12.0 million maximum amount.

4. DEBT

Debt consisted of the following:
 
   
April 30,
2012
   
October 31,
2011
 
   
(In thousands)
 
Revolver
  $ 21,446     $ 37,446  
Other long term debt
    1,805       1,819  
Total Debt
    23,251       39,265  
Less: current portion
    (501 )     (508 )
Total long-term debt
  $ 22,750     $ 38,757  
 
 
$200.0 million senior secured revolving credit facility. On October 29, 2010, we entered into a senior secured credit agreement (the “Senior Secured Revolving Credit Facility”) with Wells Fargo Securities, LLC and Banc of America Securities LLC, as joint lead arrangers and joint lead bookrunners, Bank of America, N.A., as syndication agent, and Union Bank, N.A., as documentation agent. The Senior Secured Revolving Credit Facility provides for senior secured credit facilities in an aggregate principal amount of $200.0 million consisting of a 5-year revolving credit facility (the “Revolver”) in an aggregate principal amount of $200.0 million with a sub-facility for letters of credit of $25.0 million, a sub-facility for multicurrency borrowings in Euros, Australian dollars and Canadian dollars of $25.0 million, and a sub-facility for swing line loans of $20.0 million, each on customary terms and conditions. The Senior Secured Revolving Credit Facility includes an option to increase the Revolver to $300.0 million, which would require syndication approval.

Loans under the Revolver (other than Swing Line Loans, as defined) bear interest at the Base Rate, as defined, or LIBOR, as elected by us. Base Rate interest is calculated at the Base Rate plus the applicable margin and the Base Rate is the highest of:

 
·
the Federal Funds Rate plus .50%;

 
·
the prime commercial lending rate of the Administrative Agent, as defined; and

 
·
the one month LIBOR rate for such day plus 2.00%.

Swing Line Loans bear interest at the Base Rate plus the applicable margin. Our effective interest rate as of April 30, 2012 was 2.0%. Borrowings under the Revolver may be used for working capital, capital expenditures and general corporate purposes (including share repurchases).

As of April 30, 2012, the amount drawn under the Revolver was $21.4 million and after considering restrictive financial covenants under the Senior Secured Revolving Credit Facility, we had approximately $178.6 million of available remaining credit under the Revolver. The Revolver matures on October 29, 2015.

Covenants. Our Senior Secured Revolving Credit Facility contains three financial maintenance covenants requiring us to maintain a Total Leverage Ratio, as defined therein, of not more than 3.75 to 1.0, a Senior Leverage Ratio, as defined therein, of not more than 3.0 to 1.0 until October 31, 2013 and not more than 2.75 to 1.00 after October 31, 2013 and Interest Expense Coverage Ratio, as defined therein, in excess of 3.0 to 1.0 at the end of any fiscal quarter. As of April 30, 2012, our Total Leverage Ratio, Senior Leverage Ratio and Interest Expense Coverage Ratio were 0.28 to 1.0, 0.26 to 1.0 and 50.19 to 1.0, respectively.

Guarantors and collateral. The Revolver obligations under our Senior Secured Revolving Credit Facility are guaranteed by each existing and future wholly-owned domestic subsidiary of ours that is not an immaterial subsidiary and are secured by a first priority lien on substantially all of our and our guarantors’ assets.  
 
 
11

 
 
5. SHAREHOLDERS’ EQUITY
 
Common stock repurchases. Our board of directors periodically authorizes us to repurchase shares of our common stock.  As of April 30, 2012, $21.1 million remained outstanding under our board authorization.  We cancel shares that are repurchased.  No shares were repurchased during the three and six months ended April 30, 2012.  Although we generally prioritize bank debt reduction over share repurchases we may consider share repurchases when there are anomalies in the share value created by, but not limited to, market conditions.
 
The timing of our common stock repurchases pursuant to our board of directors’ authorization is dependent on future opportunities and on our views, as they may change from time to time, as to the most prudent uses of our capital resources, including cash and borrowing capacity.

Other comprehensive income. For the three and six months ended April 30, 2012 and 2011, other comprehensive income consisted primarily of foreign currency translation adjustments.  The following table provides information related to other comprehensive income:
 
   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net income (loss)
  $ 9,735     $ 7,946     $ 17,384     $ 12,750  
Currency translation adjustment
    (1,539 )     15,281       (7,102 )     16,101  
Total other comprehensive income (loss)
  $ 8,196     $ 23,227     $ 10,282     $ 28,851  
 
 
Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. The Company’s other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.

Additional paid in capital.  For the six months ended April 30, 2012, the activity in additional paid in capital consisted of $14.1 million in proceeds received from stock option exercises and $2.8 million in share-based compensation expense and related tax effect/benefit from stock option activity.

6. SHARE-BASED COMPENSATION
 
Share-based award plans.  In February 2004, our board of directors adopted and, in March 2004, our shareholders approved the Shuffle Master, Inc. 2004 Equity Incentive Plan (the “2004 Plan”) and the Shuffle Master, Inc. 2004 Equity Incentive Plan for Non-Employee Directors (the “2004 Directors’ Plan”). These approved plans replaced our prior plans and no further options may be granted from the prior plans. Both the 2004 Plan and the 2004 Directors’ Plan provide for the grant of stock options, stock appreciation rights (none issued) and restricted stock. In addition, the 2004 Plan provides for the grant of restricted stock units. Awards granted under the plans (collectively “Awards”) may be granted individually or in any combination. Stock options may not be granted at an exercise price less than the market value of our common stock on the date of grant and may not be subsequently repriced. Equity granted under the 2004 Plan generally vests in equal increments over four years and expires in ten years. Equity granted under the 2004 Directors’ Plan generally vests over periods of one to two years.
 
The 2004 Plan provides for the grants of Awards to our officers, other employees and contractors. The maximum number of Awards which may be granted is 2.7 million of which no more than 1.9 million may be granted as restricted stock. The 2004 Directors’ Plan provides for the grants of Awards to our non-employee directors. The maximum number of Awards which may be granted is 1.1 million of which no more than 0.8 million may be granted as restricted stock.

In January 2009, our board of directors adopted and, in March 2009, our shareholders approved the Shuffle Master, Inc. 2004 Equity Incentive Plan (as amended and restated on January 28, 2009) (the “Amended 2004 Plan”). The Amended 2004 Plan increased the number of shares available for issuance in addition to other related technical changes. Subject to the Amended 2004 Plan, the aggregate number of shares that may be granted under the Amended 2004 Plan may not exceed 5.2 million shares of which no more than 2.6 million shares may be granted as restricted stock.
 
As of April 30, 2012, under the Amended 2004 Plan and 2004 Directors’ Plan, there were 0.9 million and 0.2 million shares available for grant, respectively.
 
 
12

 
 
A summary of activity related to stock options is presented below:
 
   
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term
   
Aggregate
Intrinsic
Value
 
   
(In thousands, except per share amount)
 
Outstanding at November 1, 2011
    4,638     $ 14.04              
Granted
    430       12.13              
Exercised
    (1,289 )     10.96              
Forfeited or expired
    (243 )     19.73              
                             
Outstanding at April 30, 2012
    3,536     $ 14.54       5.8     $ 20,837  
                                 
Fully vested and expected to vest at April 30, 2012
    3,491     $ 14.58       5.7     $ 20,557  
                                 
Exercisable at April 30, 2012
    2,369     $ 16.75       4.3     $ 11,941  
 
 
There were no stock options granted during the three months ended April 30, 2012 and the weighted average grant date fair value of stock options granted during the six months ended April 30, 2012 was $6.23. The weighted average grant date fair value of stock options granted during the three and six months ended April 30, 2011 was $5.16 and $5.67, respectively.

For the three and six months ended April 30, 2012, 1.0 million and 1.3 million stock options were exercised, respectively. The tax effect/benefit from stock option exercises affected our deferred tax asset or income tax payable as well as our additional paid-in capital by an equal amount and had no effect on our income tax provision. As of April 30, 2012, there was approximately $5.2 million of unamortized compensation expense related to stock options, which expense is expected to be recognized over a weighted-average period of 1.9 years.

A summary of activity related to restricted stock is presented below:
 
   
Shares
   
Weighted
Average
Grant-Date
Fair Value
   
Remaining
Vesting
Period
   
Aggregate
Intrinsic
Value
 
   
(In thousands, except per share amount)
 
Nonvested at November 1, 2011
    394     $ 10.53              
Granted
    455       12.35              
Vested
    (134 )     11.41              
Forfeited
    (14 )     6.40              
                             
Nonvested at April 30, 2012
    701     $ 11.63       1.86     $ 12,392  
                                 
Expected to vest
    666     $ 11.61       1.82     $ 11,775  
 
 
The total value of each restricted stock grant, based on the fair market value of the stock on the date of grant, is amortized to compensation expense over the related vesting period. As of April 30, 2012, there was approximately $7.3 million of unamortized compensation expense related to restricted stock, which expense is expected to be recognized over a weighted-average period of 2.0 years.
 
 
13

 
 
Recognition of compensation expense.  The following table shows information about compensation costs recognized:
 
   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands)
 
Compensation costs:
                       
Stock options
  $ 512     $ 467     $ 1,003     $ 988  
Restricted stock
    605       276       1,046       490  
Total compensation cost
  $ 1,117     $ 743     $ 2,049     $ 1,478  
Related tax benefit
  $ (389 )   $ (260 )   $ (713 )   $ (516 )
 

Option valuation models require the input of certain assumptions and changes in assumptions used can materially affect the fair value estimate. Expected volatility is based on a combination of implied and historical factors related to our common stock. Expected term represents the estimated weighted-average time between grant date and its exercise date and is based on historical factors. Expected dividend yield is based on our expectation that dividends will not be paid within the average expected life of existing options. Risk free interest rate is based on U.S. Treasury rates appropriate for the expected term. We estimate the fair value of each stock option award on the grant date using the Black-Scholes valuation model incorporating the weighted-average assumptions noted in the following table:
 
   
Three Months Ended
April 30, 2012
   
Six Months Ended
April 30, 2012
 
Option valuation assumptions:
           
Expected dividend yield
    N/A    
None
 
Expected volatility
    N/A       64.9 %
Risk-free interest rate
    N/A       0.7 %
Expected term
    N/A    
4.5 years
 
 
 
7. INCOME TAXES

Our effective income tax rate from continuing operations for the three and six months ended April 30, 2012 was 32.4% and 31.5%, respectively. Our effective income tax rate from continuing operations for the three and six months ended April 30, 2011 was 24.2% and 25.5%, respectively. The higher effective income tax rate for the six months ended April 30, 2012 compared to the prior year period is attributable to nondeductible expenses recorded in the current period for transaction costs related to the Ongame (as defined below under Note 11) acquisition and changes in valuation allowances.  Our effective income tax rate may fluctuate due to changes in the amount and mix of domestic and foreign income, changes in tax legislation, changes in valuation allowances and changes in assessments of uncertain tax positions and related accumulated interest and penalties.
 
 
14

 
 
8. EARNINGS PER SHARE
 
Shares used to compute basic and diluted earnings per share from operations are as follows:
 
   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net income available to common shares
  $ 9,735     $ 7,946     $ 17,384     $ 12,750  
                                 
Basic
                               
Weighted average shares
    55,751       54,374       55,408       54,253  
                                 
Diluted
                               
Weighted average shares, basic
    55,751       54,374       55,408       54,253  
Dilutive effect of options
    902       636       746       700  
Weighted average shares, diluted
    56,653       55,010       56,154       54,953  
                                 
Basic earnings per share
  $ 0.17     $ 0.15     $ 0.31     $ 0.24  
Diluted earnings per share
  $ 0.17     $ 0.14     $ 0.31     $ 0.23  
                                 
Weighted average anti-dilutive shares excluded from diluted EPS
    1,618       3,417       2,105       3,211  
 
 
9. FAIR VALUE MEASUREMENT
 
We utilize a three level hierarchy that defines the assumptions used to measure certain assets and liabilities at fair value.
 
Cash and cash equivalents, accounts receivable, the current portion of our investment in sales-type leases and notes receivable are not presented in the table below as their carrying value approximates fair value due to their short term nature.  It is impracticable to estimate the fair value of the long-term portion of our investment in sales-type leases and notes receivable as it is comprised of many insignificant balances, customers with different credit profiles and various interest rates.  The fair value of our Revolver as of April 30, 2012 and October 31, 2011 has been calculated based on market borrowing rates available as of April 30, 2012 and October 31, 2011, respectively, for debt with similar terms and maturities. The following table provides the fair value measurement information about the Company’s long-term debt.
 
   
Carrying Value
April 30, 2012
   
Fair Value
April 30, 2012
   
Carrying Value
October 31, 2011
   
Fair Value
October 31, 2011
 
Fair Value
Hierarchy
                           
Revolver
  $ 21,446     $ 21,564     $ 37,446     $ 37,679  
Level 2
 
 
15

 
 
10. OPERATING SEGMENTS
 
The following provides financial information concerning our reportable segments of our operations:
 
   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenue:
                       
Utility
  $ 24,990     $ 19,172     $ 44,606     $ 36,533  
Proprietary Table Games
    11,954       10,546       25,629       21,772  
Electronic Table Systems
    6,866       11,797       15,130       19,928  
Electronic Gaming Machines
    22,244       18,368       36,742       25,465  
    $ 66,054     $ 59,883     $ 122,107     $ 103,698  
Gross profit (loss):
                               
Utility
  $ 16,154     $ 11,584     $ 27,337     $ 22,432  
Proprietary Table Games
    9,818       8,405       21,360       17,667  
Electronic Table Systems
    2,684       4,837       6,813       9,487  
Electronic Gaming Machines
    13,833       11,268       22,800       15,676  
    $ 42,489     $ 36,094     $ 78,310     $ 65,262  
Operating income (loss):
                               
Utility
  $ 14,202     $ 9,858     $ 23,652     $ 19,086  
Proprietary Table Games
    6,736       7,385       16,641       15,760  
Electronic Table Systems
    (838 )     1,719       (121 )     3,532  
Electronic Gaming Machines
    10,394       8,393       16,247       10,157  
Unallocated Corporate
    (15,734 )     (15,204 )     (30,545 )     (29,333 )
    $ 14,760     $ 12,151     $ 25,874     $ 19,202  
Depreciation and amortization:
                               
Utility
  $ 1,899     $ 1,947     $ 3,675     $ 3,199  
Proprietary Table Games
    1,350       1,456       2,603       2,769  
Electronic Table Systems
    1,653       1,705       3,310       3,903  
Electronic Gaming Machines
    345       60       543       128  
Unallocated Corporate
    1,133       947       2,266       1,877  
    $ 6,380     $ 6,115     $ 12,397     $ 11,876  
Capital expenditures:
                               
Utility
  $ 990     $ 2,169     $ 2,210     $ 4,366  
Proprietary Table Games
    664       746       2,204       6,175  
Electronic Table Systems
    506       1,516       2,226       3,077  
Electronic Gaming Machines
    872       67       5,130       67  
Unallocated Corporate
    3,255       794       3,279       1,724  
    $ 6,287     $ 5,292       15,049     $ 15,409  
 
 
16

 
 
REVENUE BY GEOGRAPHIC AREA

The following provides financial information concerning our revenues by geographic area:
 
   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Dollars in thousands)
 
Revenue:
                                               
United States
  $ 28,771       43.6 %   $ 24,345       40.7 %   $ 54,955       45.0 %   $ 50,350       48.6 %
Canada
    2,226       3.4 %     1,882       3.1 %     3,744       3.1 %     3,274       3.2 %
Other North America
    1,125       1.7 %     1,592       2.7 %     2,178       1.8 %     2,360       2.3 %
Europe
    2,440       3.7 %     2,236       3.7 %     4,027       3.3 %     3,642       3.5 %
Australia
    25,293       38.3 %     24,563       41.0 %     43,987       36.0 %     35,514       34.2 %
Asia
    6,016       9.1 %     4,822       8.1 %     12,665       10.4 %     7,776       7.5 %
Other
    183       0.2 %     443       0.7 %     551       0.4 %     782       0.7 %
    $ 66,054       100.0 %   $ 59,883       100.0 %   $ 122,107       100.0 %   $ 103,698       100.0 %
 
 
11. COMMITMENTS AND CONTINGENCIES
 
Ongame Network Ltd. On March 5, 2012, through our wholly-owned subsidiary Shuffle Master International, Inc., we entered into a definitive agreement to acquire Ongame Network Ltd., a limited liability company incorporated and existing under the laws of Gibraltar (“Ongame”), from bwin.party services (Austria) GmbH (“bwin.party”). Ongame is one of the world’s largest business to business online poker providers.
 
The acquisition is subject to completion of certain conditions, including the continued material accuracy of the parties’ representations and warranties; the performance of and compliance with all covenants in the definitive agreement; and the receipt of required regulatory approvals.  The closing of the transaction is expected to occur not more than nine months following execution of the definitive agreement (the “Closing”).  As consideration for the acquisition of the shares of Ongame, and indirectly the acquisition of Ongame’s subsidiaries, at the Closing we will pay €19.5 million (approximately $25.8 million using the translation rate available as of April 30, 2012) in cash, subject to certain adjustments at Closing.  We may also become obligated to additionally pay up to €10 million in cash within five years of Closing contingent upon the commencement of legalized, real-money online poker in the U.S. occurring, if at all, within five years of Closing.  The €10 million (approximately $13.2 million using the translation rate available as of April 30, 2012) contingent payment decreases through the five-year period.  The contingent payment will be €10 million if real-money online poker is legalized in the U.S. on or before 730 days following Closing, €7 million if legalized on or after 731 days following Closing and on or before 1,095 days following Closing, €5 million on or after 1,096 days following Closing and on or before 1,461 days following Closing, and €3 million on or after 1,462 days following Closing and on or before 1,826 days following Closing.  We expect to fund the acquisition with cash on hand and availability on the Senior Secured Revolving Credit Facility.
 
The obligations of the signatories under the definitive agreement are guaranteed by each party’s ultimate parent entity to the benefit of the respective other party.
 
Employment agreements. We have entered into employment agreements with our corporate officers and certain other key employees with durations ranging from one to four years. Significant contract provisions include minimum annual base salaries, healthcare benefits, bonus compensation if performance measures are achieved and non-compete provisions. These contracts are primarily “at will” employment agreements, under which the employee or we may terminate employment. If we terminate any of these employees without cause, we are obligated to pay the employee severance benefits as specified in their individual employment agreement. As of April 30, 2012 and October 31, 2011, minimum aggregate severance benefits totaled $7.4 million and $6.6 million, respectively.

Legal proceedings. In the ordinary course of business, we are involved in various legal proceedings and other matters that are complex in nature and have outcomes that are difficult to predict.  We record accruals for such contingencies to the extent that we conclude that it is probable that a loss will be incurred and the amount of loss can be reasonably estimated.  We have not recorded any loss accruals for these contingencies other than as we have considered reasonable for the matters noted below. Our assessment of each matter may change based on future unexpected events.  An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position.  Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity, but may be material to the results of operations in any given period.  We assume no obligation to update the status of pending litigation after the date of this Form 10-Q, except as may be required by applicable law, statute or regulation.
 
 
17

 
 
TableMAX – In April 2009, TableMAX IP Holdings, Inc. and TableMAX Gaming, Inc. filed a complaint (the “First Complaint”) against us in the United States District Court for the District of Nevada.  This case is a patent infringement claim alleging that our Table Master® product infringes U.S. Patents 5,688,174, 6,921,337 and 7,201,661.  The First Complaint sought injunctive relief and an unspecified amount of damages, including claims for attorneys’ fees, costs, increased damages and disbursements.  In August 2009, TableMAX Holdings, Inc. and TableMAX Gaming, Inc. voluntarily dismissed the First Complaint.  On the same date, TableMAX IP Holdings, Inc., TableMAX Gaming, Inc. and Vegas Amusement, Inc. the alleged owner of Patents 5,688,174, 6,921,337 and 7,201,661, (collectively “TableMAX”), filed a new complaint (the “New Complaint”) making allegations materially the same as the allegations in the First Complaint.  In August 2009, TableMAX filed an amended complaint (the “Second Complaint”), which superseded and is materially the same as the New Complaint, except that the plaintiffs added a new claim that Table Master® infringes U.S. Patent 7,575,512, which was issued on August 18, 2009.  In August 2009, the plaintiffs filed a Motion for Preliminary Injunction in the Second Complaint that sought to enjoin future sales of our Table Master® product.  In October 2009, the Court denied the Motion for Preliminary Injunction without hearing oral argument and the Court also denied without prejudice various motions for summary judgment that we filed. During the discovery process, TableMAX made new allegations that certain of our Vegas Star® products infringe one of the patents in the Second Complaint. In January 2010, TableMAX filed a Second Amended Complaint (the "Third Complaint"), which has materially the same allegations as the Second Complaint, except that it alleges that our Vegas Star® product allegedly infringes all of the patents in suit. A document produced in the discovery process appears to limit TableMAX's allegations of infringement regarding our Vegas Star® product to only one of TableMAX's patents in suit.
 
The Court set the Markman hearing for December 2010.  In November 2010, the Court granted our Motion to Stay. The stay was granted because of pending reexamination proceedings before the United States Patent and Trademark Office as to the four patents that are the subject of the lawsuit.  The reexamination proceedings were initiated as a result of our request. We believe that the final results of the reexamination proceedings will be beneficial to us in future Court proceedings. It is possible that all four reexamination proceedings will conclude in fiscal 2012 and thus the stay may be lifted in fiscal 2012. At present, the case remains stayed.  We believe that the claim is entirely without merit and we intend to continue to vigorously defend this matter.
 
Macau Rapid Baccarat ® Patent Issue – On or about June 3, 2009, at the G2E Asia Gaming Show, customs officials from Macau SAR seized a Shuffle Master, Inc. (“SMI”) Rapid Baccarat ® unit related to a claim by a Macau patent holder of our alleged patent infringement.  On October 27, 2009, the governmental official in charge of the investigation elected to dismiss the investigation based on a finding that no patent infringement existed based upon the report of the Macau customs officials.  In November 2009, the patent holder appealed this finding to the Macau Courts. On or about January 20, 2010, over our objection, the judge considering the patent holder’s appeal found that his appeal was timely filed.  

On or about February 2010, we filed an appeal (the “First SMAL Appeal”) to this decision.  On or about March 2010, the judge declined to forward the First SMAL Appeal to a higher Macau Court. We filed a further appeal (the “Second SMAL Appeal”) to have the higher Macau court hear the First SMAL Appeal.   On June 2, 2010, the Judge denied the patent holder’s request to open a criminal proceeding and decided that the investigation should remain dismissed against SMAL and its directors.  The patent holder has subsequently appealed the June 2, 2010, decision to a higher Macau court, which appeal has not yet been heard.  In the event the patent holder’s appeal is successful, it is likely that legal proceedings will be commenced against SMAL and its directors in Macau relating to this patent, although, at this time, no such proceedings have been commenced. Such proceedings, if initiated, would be for patent infringement, which we understand is a criminal matter in Macau.  The Company does not carry insurance with respect to this matter.  We believe that the claim is without merit and we intend to continue to defend this matter vigorously.

On May 4, 2012, the patent holder along with a company apparently controlled by the patent holder (collectively the "patent holders") requested that the Macau Court enjoin us and certain other exhibitors from infringing the patent holders' patents during the G2E Asia Gaming Show held May 22 through May 24.  On May 15, 2012, the Macau Court signed a written decision enjoining us and certain other exhibitors from infringing these patents, even though the court decision did not specifically identify which of our products at the G2E Asia Gaming Show would allegedly infringe such patents.  On May 22, 2012, Macau Customs instructed the Company to cover our Rapid Table Games™ Multi Game product at the G2E Asia Gaming Show and we complied.  On May 23, 2012, we received Court approval to post a bond of approximately $0.1 million in substitution of the injunction and to permit us to display the Rapid Table GamesTM Multi Game product. Notwithstanding that on May 23, 2012, we displayed the Rapid Table Games™ Multi Game product on the advice of our Macau counsel following the Macau Court allowing us to post a bond, we believe that Macau government officials are investigating the timing of lifting of the cover off the Rapid Table GamesTM Multi Game product and whether such action may give rise to any alleged criminal charges against SMAL or its officers. The patent holders are required to file civil action for patent infringement and to attempt to claim other alleged damages within ten days from the date of service of the injunction. As with the other claim, we believe that all of these claims are entirely without merit and we intend to continue to vigorously defend this matter.
 
 
18

 
 
Wright Matter – On November 7, 2009, Sam Wright was playing a Vegas Star ® craps machine at the Harrah’s Casino New Orleans.  Mr. Wright played a game that ended in a losing result.  After the game concluded, as a result of a malfunction, a false credit meter value of approximately $42.0 million appeared on the machine.  On or about April 2010, we received notice that Mr. Wright had filed a patron dispute with the Louisiana State Police Gaming Division.    In October 2010, the Louisiana State Police Gaming Division concluded in regard to the patron dispute that there was no violation of state law, rule or internal control. Mr. Wright was unsuccessful in the patron dispute.

In November 2010, Mr. Wright filed a Petition for Damages (the “Wright Complaint”) with the Civil District Court for the Parish of Orleans, State of Louisiana, naming  the Company, Jazz Casino Company, LLC d/b/a Harrah’s New Orleans Casino and Harrah’s New Orleans Management Company (collectively, “Harrah’s) as defendants.  The Petition claimed damages of approximately $43.0 million plus possible treble damages, attorneys’ fees and costs.  The Company could have had possible indemnity obligations to Harrah’s if a judgment had been entered.   In February 2011, all defendants answered the Petition and removed the case to the United States District Court for the Eastern District of Louisiana.   On February 2012, the Company attended a Court ordered settlement conference, in which the Wright Complaint and the Declaratory Relief Complaint (discussed below) were settled between the parties without admission of liability by either the Company or Harrah’s.  Effective May 8, 2012, the Wright Compliant and the Declaratory Relief Complaint were dismissed with prejudice.

Axis Surplus Insurance Company (“Axis”) was the Company’s insurance carrier with respect to the Wright Complaint.  In November 2011, we filed a Complaint for Declaratory Judgment (the “Declaratory Relief Complaint”) in the United States District Court for the Eastern District of Louisiana against Axis seeking, pursuant to our policy (a) Axis to provide full policy coverage and defense; (b) Axis to pay all legal fees and expenses incurred by us in the defense of the Wright Complaint; and (c) Axis to make all reasonable efforts to protect us from risk of excess judgment.  The Declaratory Relief Complaint was dismissed with prejudice as discussed above.
 
 
19

 
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995
 
This Form 10-Q contains forward-looking statements. We consider such statements to be made under the safe harbor created by the federal securities laws to which we are subject. In some cases, you can identify forward-looking statements by the following words: “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology intended to identify performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Examples of such forward looking statements include, without limitation, statements about or relating to the following:

 
· 
Business strategies, including with respect to development of new or enhanced products, investment of capital to maximize returns and build our economic engine, and our focus on leasing structures for commercialization of certain products to increase returns and gross margins;

 
· 
Expectations regarding the potential acquisition of Ongame Networks Ltd., (“Ongame”) including the expected timing of consummation of, potential benefits of and sources of cash to fund such acquisition;

 
· 
Increasing our Proprietary Table Games content through development or acquisitions of new proprietary titles;

 
· 
Expectations of increases in gross margins and revenues from leasing of certain products;

 
· 
The growth opportunities and revenue potential from our i-Table®, i-Table Roulette™ and MD3™ Shuffler products;

 
· 
The benefits of our products;

 
· 
Continued volatility in sales revenue from our Utility segment;

 
· 
Expected increases in leasing revenue in the Utility segment, driven by the MD3TM shuffler, with the majority of upgrade placements expected to be leases;

 
· 
Expectations to begin revenue generation from Vegas StarTM Live Roulette;

 
· 
Expectations that Electronic Gaming Machines revenues will continue to come from sales of EGMs in Australia;

 
· 
Expected growth of additional international markets, including Asia and Latin America;

 
· 
Expectations of Equinox™ placement in 2012 exceeding 2011 levels;

 
· 
Cash and capital resources being sufficient to satisfy requirements for working capital, capital expenditures, debt service and other liquidity requirements of existing operations for at least the next 12 months;

 
· 
Company expectations with respect to outstanding litigation;

 
· 
Growing capital expenditures in proportion to revenue as a result of our leasing model extending into more capital-intensive products; and

 
· 
Expectations with respect to foreign currency exchange rate fluctuation risk.

Although we currently believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us, as well as our projections of the future, about which we cannot be certain. Forward-looking statements reflect and are subject to inherent known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Risk factors that could cause actual results to differ materially from those expressed or implied by our forward-looking statements include, but are not limited to, the following:

 
· 
Failure to maintain our regulatory licenses or obtain new licenses where necessary;

 
· 
Legislative and regulatory changes that impact us or our customers;
 
 
20

 
 
 
· 
Non-compliance with the covenants in our senior secured credit agreement, including as a result of factors that are beyond our control;

 
· 
Delays or inability to meet the closing conditions for the Ongame acquisition;

 
· 
High volatility or extreme changes in foreign currency exchange rates;

 
· 
Difficulties or delays in, or being prevented from, carrying out acquisitions and subsequent integration of acquired businesses;

 
· 
Difficulties in maintaining and protecting our intellectual property rights;

 
· 
Potential infringement of the intellectual property rights of third parties;

 
· 
Adverse outcomes with respect to litigation regarding intellectual property, including our payment of damages, constraints on our business and operations and invalidation of our intellectual property;

 
· 
Involvement in other legal proceedings, and adverse outcomes with respect to such proceedings which could have a materially adverse effect on our business or prospects;

 
· 
Disruption or delays in our or our suppliers’ manufacturing processes that could prevent us from meeting demand for our products;

 
· 
Revenue losses in any of our business segments due to technical difficulties or fraudulent activities experienced by end users;

 
· 
Inability to obtain market acceptance of products currently in development;

 
· 
Inability to maintain a competitive technological position with respect to our competitors and competitive products;

 
· 
Lower than expected revenues from our transition in certain products to a lease-based commercialization model;

 
· 
Decreased demand for our products, including as a result of developments with respect to competitive products;

 
· 
Adverse economic conditions in the gaming industry, which is our sole industry of focus; and

 
· 
Adverse developments with respect to economic, political, legal and other risks associated with our international sales and operations.

In addition, refer to the “Risk Factors” section in Part II, Item 1A of this Form 10-Q, as well as the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended October 31, 2011, as filed with the Securities and Exchange Commission on January 5, 2011, and as incorporated by reference in Part II, Item 1A of this 10-Q, for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure that the forward-looking statements will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, these statements should not be regarded as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by each of these cautionary statements above.
 
The following discussion should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” in the Form 10-K and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in October and the associated quarters of those fiscal years.
 
 
21

 
 
Overview
 
We are a leading global gaming supplier committed to making gaming more fun for players and more profitable for operators through product innovation, and superior quality and service.  We operate in legalized gaming markets across the globe and provide state-of-the-art, value-add products in four distinct segments: Utility products, which include automatic card shufflers and roulette chip sorters; Proprietary Table Games (“PTG”), which include live table games, side bets and progressives as well as our newly introduced i-Gaming, which features online versions of our table games, social gaming and mobile applications; Electronic Table Systems (“ETS”), which include various e-Table game platforms; and Electronic Gaming Machines (“EGM”), which include video slot machines.  Each segment's activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of a distinct product line.  Our products are manufactured at our headquarters and manufacturing facility in Las Vegas, Nevada, at our Australian headquarters in Milperra, New South Wales, Australia, as well as outsourced, for certain sub-assemblies in the United States, Europe and Asia.

See Note 1 to our Condensed Consolidated Financial Statements for a more detailed discussion of our four segments.

On March 5, 2012, through our wholly-owned subsidiary Shuffle Master International, Inc., we entered into a definitive agreement to acquire Ongame, a limited liability company incorporated and existing under the laws of Gibraltar, from bwin.party services (Austria) GmbH (“Seller”). Ongame is one of the world’s largest business to business online poker providers.

The acquisition is subject to completion of certain conditions, including the continued material accuracy of the parties’ representations and warranties; the performance of and compliance with all covenants in the definitive agreement; and the receipt of required regulatory approvals.  The closing of the transaction is expected to occur not more than nine months following execution of the definitive agreement.
 
Strategy
 
We believe we enhance our customer and shareholder value through our execution of the following strategic priorities:

 
· 
An unwavering commitment to create innovative solutions and services for casino operators and compelling gaming experiences for players through enhanced customer centricity.

 
· 
Reinforce our relationships with our customers by providing enhanced efficiencies, security and profitability on the casino floor. We continue to work toward developing innovative products that anticipate and respond to their needs.

 
· 
Maintain a cost-conscious mindset, promote a lean culture, and serve as prudent stewards of shareholder capital.

 
· 
Seek long-term profitability and sustainability through our recurring revenue model. We plan to continue to invest capital in our lease business to maximize our return and build on our economic engine.

 
· 
Foster the spirit of invention and the commitment to innovation that is at the heart of our success.  With nearly 2,500 patents, trademarks and copyrights granted and pending, our pipeline for new intellectual property is robust. We believe our intellectual property collectively represents one of the strongest portfolios in the industry and our success depends upon our ability to preserve and protect these core assets.

 
· 
Capitalize on emerging markets and the worldwide proliferation of gaming.  A large part of our success in fiscal 2011 was turning opportunities into achievements.  As new markets continue to emerge across the globe and as existing gaming markets continue to evolve, we strive to make the most of every opportunity that arises.
 
 
·
Sound balance sheet management to fuel growth through:
 
o
continued investment in our recurring revenue model, global intellectual property and research and development (“R&D”). We believe this will promote growth on the Company’s top and bottom line without relying on the introduction of significant new markets;
 
o
continued examination of acquisitions.  We are seeking opportunities that are accretive to earnings, have strong existing recurring revenues, and merit our efforts of integration; and
 
o
use of our financial resources to improve our return to shareholders through continued deleveraging.
 
·  
Promote and foster internal staff development and deepen our bench strength.  We know our success is directly attributable to the caliber of our workforce and we remain committed to each and every employee’s development.  We will continue to set the talent bar high.

·  
Drive margin improvement across all product categories. Our overall gross margin has shown continuous improvement over the past three fiscal years.  We plan to continue our process improvement initiatives and uncover additional operational efficiencies.

·  
Capitalize on opportunities created from existing online gaming markets and prepare ourselves for the potential legalization of Internet gambling in the United States.  The gaming landscape is quickly evolving and we will strive to be a leading content-provider in this arena.  We believe online gaming represents a significant opportunity for our future growth.
 
 
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We are focused on our customers and on value-creation for our shareholders.  We seek to maintain continuous improvement while keeping innovation at the core of our success.  We believe that continued execution of our strategic plan is the best method to foster the growth of our business in fiscal 2012.

Sources of Revenue
 
We derive our revenue from the lease, license and sale of our products and by providing service to our leased and in some cases, previously sold units. Consistent with our strategy, we have a continuing emphasis on leasing or licensing our products.  When we lease or license our products, we generally negotiate month-to-month fixed fee contracts, or to a lesser extent, enter into participation arrangements whereby casinos pay us a fee based on a percentage of net win.  Product lease contracts typically include parts and service. When we sell our products, we offer casinos a choice between a cash sale or to a lesser extent, long-term financing. We also offer a majority of our products for sale with an optional parts and service contract.

Currently, Utility segment revenue is derived substantially from our automatic card shufflers. In addition to leasing shufflers, we also sell and service them. In the PTG segment, the majority of games placed are licensed to our customers on month-to-month license arrangements, which provides us with monthly royalty revenue. In the ETS segment, we derive revenue from leases, sales and service contracts. In the EGM segment, we derive revenue from selling the full EGM complement, as well as game conversion kits.  Upon the acquisition of Ongame, we will begin consolidating their results of operations which will include revenues from licensing the use of Ongame’s business-to-business online poker platform.

The following points should be noted as they relate to each of our segments:

Utility

 
· 
We expect to continue increasing lease revenues in our Utility segment within the United States.  One of the current growth drivers for this segment has been the Ace® shuffler upgrade initiative. We expect the next revenue driver to be our new MD3 shuffler.  The MD3 is our next generation upgrade for the legacy MD series shufflers. As the MD1 reaches its end of life where replacement parts will no longer be available, our strategy is to encourage our customers to upgrade the MD1 shufflers, both leased and previously sold, with the MD3 shuffler. The majority of these placements are expected to be leases.

 
· 
We expect to continue seeing volatility in sales revenue in our Utility segment outside the United States.  While we encourage leasing outside the United States, a large majority of our international Utility product placements historically have been sales.  We are starting to see increased lease activity in international markets such as Australia, Asia and Latin America. Growth drivers for the Utility segment outside the United States are new jurisdictional openings, such as the new openings in Singapore and the Philippines during fiscal 2010, as well as the expansion of existing markets such as Macau. In the current year, we have seen an increase in the demand for our shufflers in Macau, particularly the MD3.

Proprietary Table Games

 
· 
Majority of our PTG segment revenue is derived from royalties and leases.  While we have a strong leasing presence in the United States, we are constantly looking to expand our proprietary table games in other parts of the world where the current penetration of proprietary table games is lower.  With the opening of new casino markets in Asia, we have recently seen some successes with new lease placements of our premium table games as well as progressives and side bets.

 
· 
Although the majority of our PTG revenue comes from our premium table games, we also offer a number of progressive upgrades and side bets.  These products are available for our own proprietary table game titles as well as public domain games such as poker, blackjack, baccarat and pai gow poker.  These progressives and side bets, offered almost exclusively through leases, are providing a growing share of our total PTG revenue.

 
· 
We also pursue opportunities to place PTG products in new properties and jurisdictions in the United States.  As noted above, several states have approved live table games over the past year, and we have seen significant placements of our table game products in those new jurisdictions.
 
 
23

 
 
 
· 
We intend to increase our PTG content through development and acquisition of new proprietary titles. By increasing our footprint with new titles, we hope to increase our domestic market penetration and expand further into international markets.

 
· 
We intend to seek enforcement against parties that infringe our intellectual properties for Internet gaming in legalized markets where legal systems and availability of cost-effective remedies are available to us.

Electronic Table Systems

 
· 
Although we continually pursue opportunities to increase lease revenues in our ETS segment within the United States, we have seen some of our leased ETS products returned from those same markets as some states have approved live table games.  While this has caused some setbacks in the growth of our domestic ETS business, we have been able to return some of these products to service in other markets such as Latin America.  However, the new placements are not yet performing to the same revenue and profitability levels as the units that were removed.

 
· 
Through development of new products and enhancements of our existing products we expect to generate revenue and growth for the ETS segment.  New products include the following:
 
The new i-Table® and i-Table Roulette™ combine an electronic betting interface with a live table game and graphically-enhanced central display screens.  We expect these products to provide us with growth opportunities in domestic and international markets if they achieve customer acceptance;
 
In Australia and Asia, we have begun generating revenue from placements of our new multi-game feature on Rapid Table Games®, which offers enhanced live statistics at the touch of a button and betting can be conducted across multiple games.

Electronic Gaming Machines

 
· 
Our EGM segment is primarily a sales model and we expect to continue to realize substantially all of our EGM revenues from sales of EGMs in our primary market, Australia.

 
· 
Initial deliveries of Equinox began in July 2010, and we experienced record placements during the fourth quarter of fiscal 2011, as Equinox gained broader market acceptance. While we would not expect to see this record growth continue indefinitely, we expect Equinox placements in fiscal 2012 will continue above 2011 levels.

 
· 
A portion of our EGM revenue base comes from conversions of existing units to new game titles.  We are continually developing new titles for our existing machines, and installation of these new titles provides us with an ongoing source of conversion revenue.

 
· 
We are pursuing opportunities for sales growth in additional jurisdictions in Australia.  We also expect growth in additional international markets such as Asia and Latin America. Initial installations into Asia began during the third quarter 2011, of which a majority was Equinox and in the current year we have placed units in Mexico and Latin America.

Expenses
 
Our direct expenses primarily include cost of products sold, depreciation of leased assets, and amortization of product-related intangible assets, service, manufacturing overhead, shipping and installation.  Indirect expenses include other costs directly identified with each segment, such as R&D, product approval costs, product-related litigation expenses, amortization of patents and other product-related intellectual property, sales commissions and other directly-allocable sales expenses.  We continue to expend significant R&D efforts on the development of our newer generation shuffler products, such as the MD3 and one2six® Plus, our i-Shoe® Auto card recognition products, as well as other table accessories, such as the i-Shoe® and the i-Scoredisplay. With our expansion into the e-Table markets, we continue to spend significant R&D dollars on developing and implementing new gaming mediums, such as the i-Table®, our newest e-Table that combines a variety of our products to create an exciting new table game experience. We are also spending increased R&D dollars on the new Equinox EGM cabinets and related game content.  Upon the acquisition of Ongame, we will begin consolidating their results of operations, which will include cost of sales, selling, general and administrative expenses, as well as research and development.
 
The amounts classified as unallocated corporate expenses consist primarily of costs related to overall corporate management and support functions. These include costs related to executive management, accounting and finance, general sales support, legal and compliance costs, office expenses and other amounts for which allocation to specific segments is not practicable.
 
 
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Gross Margin

The number and mix of products placed and the average lease or sales price are the most significant factors affecting our gross margins. Our continuing emphasis on leasing versus selling, the shift in product mix, timing of installations and related upfront installation charges, as well as changes in non-cash depreciation and amortization expenses attributable to our acquisitions, impact our margins.

In general, lease gross margin is greater than the sales gross margin for the same products. However, total gross profit from leasing is lower in a given reporting period than those of a sale due to the much higher price of a sale versus a lease.  A number of factors impact gross margins, including the number and mix of products placed and the average lease or sales price of those products. For example, in our PTG segment, premium table games warrant a higher average lease price than a PTG add-on such as a felt side-bet or a progressive. For Utility products, when a new shuffler is introduced into the market, we use introductory lease pricing. After the introductory pricing period expires, the price generally increases to the monthly “list” lease price, which we believe will increase future revenues because most customers keep the products beyond the introductory pricing period. Accordingly, we anticipate that gross margins will increase under our lease model.

We occasionally record inventory adjustments related to obsolescence or declines in the net realizable value of some products.  While those adjustments occur in the normal course of business, it can cause negative pressure on our margins. We also occasionally dispose of leased assets that are no longer in service and are no longer usable.

In addition to the lease versus sale strategy, we expect to see continual improvement in our gross margins through value engineering to reduce manufacturing costs. Our focus is currently on savings attributable to component parts, product redesign and lower cost manufacturing opportunities within each of our segments.
 
 
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The following table presents our various revenues and expenses as a percentage of revenue:
 
CONSOLIDATED STATEMENTS OF OPERATIONS

   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Dollars in thousands)
 
Revenue:
                                               
Utility
  $ 24,990       37.8 %   $ 19,172       32.0 %   $ 44,606       36.5 %   $ 36,533       35.2 %
Proprietary Table Games
    11,954       18.1 %     10,546       17.6 %     25,629       21.0 %     21,772       21.0 %
Electronic Table Systems
    6,866       10.4 %     11,797       19.7 %     15,130       12.4 %     19,928       19.2 %
Electronic Gaming Machines
    22,244       33.7 %     18,368       30.7 %     36,742       30.1 %     25,465       24.6 %
                                                                 
Total revenue
    66,054       100.0 %     59,883       100.0 %     122,107       100.0 %     103,698       100.0 %
Cost of revenue
    23,565       35.7 %     23,789       39.7 %     43,797       35.9 %     38,436       37.1 %
                                                                 
Gross profit
    42,489       64.3 %     36,094       60.3 %     78,310       64.1 %     65,262       62.9 %
Selling, general and administrative
    19,804       30.0 %     17,060       28.5 %     36,984       30.3 %     33,261       32.1 %
Research and development
    7,925       12.0 %     6,883       11.5 %     15,452       12.7 %     12,799       12.3 %
                                                                 
Income from operations
    14,760       22.3 %     12,151       20.3 %     25,874       21.1 %     19,202       18.5 %
Other income (expense):
                                                               
Interest income
    174       0.3 %     126       0.2 %     313       0.3 %     252       0.2 %
Interest expense
    (378 )     (0.6 %)     (671 )     (1.1 %)     (855 )     (0.7 %)     (1,372 )     (1.3 %)
Other, net
    (146 )     (0.2 %)     (1,118 )     (1.9 %)     29       0.0 %     (961 )     (0.9 %)
Total other income (expense)
    (350 )     (0.5 %)     (1,663 )     (2.8 %)     (513 )     (0.4 %)     (2,081 )     (2.0 %)
                                                                 
Income from operations before tax
    14,410       21.8 %     10,488       17.5 %     25,361       20.7 %     17,121       16.5 %
Income tax provision
    4,675       7.1 %     2,542       4.2 %     7,977       6.5 %     4,371       4.2 %
Net income
  $ 9,735       14.7 %   $ 7,946       13.3 %   $ 17,384       14.2 %   $ 12,750       12.3 %
 
 
26

 
 
The following table provides additional information regarding our revenue, gross profit and gross margin:
 
REVENUE AND GROSS MARGIN
 
   
Three Months Ended
April 30,
   
Percentage
   
Six Months Ended
April 30,
   
Percentage
 
   
2012
   
2011
   
Change
   
2012
   
2011
   
Change
 
   
(Dollars in thousands)
 
Revenue:
                                   
Leases and royalties
  $ 26,947     $ 24,264       11.1 %   $ 52,900     $ 47,840       10.6 %
Sales and service
    39,107       35,619       9.8 %     69,207       55,858       23.9 %
Total
  $ 66,054     $ 59,883       10.3 %   $ 122,107     $ 103,698       17.8 %
                                                 
Cost of revenue:
                                               
Leases and royalties
  $ 9,427     $ 8,354       12.8 %   $ 18,378     $ 15,536       18.3 %
Sales and service
    14,138       15,435       (8.4 %)     25,419       22,900       11.0 %
Total
  $ 23,565     $ 23,789       (0.9 %)   $ 43,797     $ 38,436       13.9 %
                                                 
Gross profit:
                                               
Leases and royalties
  $ 17,520     $ 15,910       10.1 %   $ 34,522     $ 32,304       6.9 %
Sales and service
    24,969       20,184       23.7 %     43,788       32,958       32.9 %
Total
  $ 42,489     $ 36,094       17.7 %   $ 78,310     $ 65,262       20.0 %
                                                 
Gross margin:
                                               
Leases and royalties
    65.0 %     65.6 %             65.3 %     67.5 %        
Sales and service
    63.8 %     56.7 %             63.3 %     59.0 %        
Total
    64.3 %     60.3 %             64.1 %     62.9 %        
 
 
Three months ended April 30, 2012 compared to three months ended April 30, 2011

Revenue

Our revenue for the three months ended April 30, 2012 increased $6.2 million over the same prior year period, primarily due to the following:
 
 
· 
Increase of $3.5 million in our sales and service revenue:
 
Increase in shuffler sales in Asia and to new casino openings in the United States;
 
Increase in our EGM segment driven by a substantial increase in sold units due to the continued popularity of our Equinox cabinet, the
introduction of our new Super Topbox for the Equinox cabinet, as well as our expansion into the Victoria, Australia market; and
 
Offset by decreased revenue in our ETS segment primarily driven by decreases in the number of seats sold.

 
· 
Increase of $2.7 million in our leases and royalties revenue was primarily due to our strategic focus on leasing:
 
Increased PTG lease and royalty revenue due to a 27.2% increase in units on lease; and
 
Increased Utility lease revenue due to a 13.5% increase in shuffler units on lease, driven by MD3®, primarily in the United States and Asia.
 
 
· 
Impact of foreign currency fluctuations:
 
Total revenue was positively impacted by approximately $0.6 million due to the exchange effect of a weakening U.S. dollar.

Gross margin

Our gross margin for the three months ended April 30, 2012 increased 400 basis points (“bps”) to 64.3% as compared to the same prior year period, reflecting the following:
 
 
· 
Increased segment margin performance:
 
Utility was favorably impacted by increases in the number of shufflers sold and increased average sales price;
 
Increased margins in the PTG segment were driven primarily by an increase in the number of units on lease; and
 
EGM was favorably impacted by increases in the number of units sold and increased average sales prices.
 
 
27

 
 
 
· 
Partially offset by ETS which was unfavorably impacted by reductions in the number of units sold and average sales prices; and

 
· 
Impact of foreign currency fluctuations:
 
Total gross profit was positively impacted by approximately $0.3 due to the exchange effect of a weakening U.S. dollar.

Six months ended April 30, 2012 compared to six months ended April 30, 2011

Revenue

Our revenue for the six months ended April 30, 2012 increased $18.4 million over the same prior year period, primarily due to the following:
 
 
· 
Increase of $13.3 million in our sales and service revenue:
 
Increase in our EGM segment driven by a substantial increase in sold units due to the continued popularity of our Equinox cabinet, the introduction of our new Super Topbox for the Equinox™ cabinet, as well as our expansion into the Victoria, Australia market;
 
Increase in shuffler sales in Asia and to new casino openings in the United States;
 
$2.3 million in settlement and license fees from online operators driven by our strategy to protect and license our intellectual property; and
 
Offset by decreased revenue in our ETS segment primarily driven by decreases in the number of seats sold.

 
· 
Increase of $5.1 million in our leases and royalties revenue was primarily due to our strategic focus on leasing:
 
Increased Utility lease revenue due to a 13.5% increase in shuffler units on lease, primarily in the United States and Asia; and
 
Increased PTG lease and royalty revenue due to a 27.2% increase in units on lease.
 
 
· 
Impact of foreign currency fluctuations:
 
Total revenue was positively impacted by approximately $1.6 million due to the exchange effect of a weakening U.S. dollar.

Gross margin

Our gross margin for the six months ended April 30, 2012 increased 120 bps to 64.1% as compared to the same prior year period, reflecting the following:
 
 
· 
Increased segment margin performance:
 
Increased margins in the PTG segment were driven primarily by settlement and license fees of $2.3 million from online operators with little associated direct costs and an increase in the number of units on lease; and
 
EGM was favorably impacted by increases in the number of units sold and increased average sales prices.

 
· 
Partially offset by ETS which was unfavorably impacted by reductions in the number of units sold and decrease in average sales prices.

 
· 
Impact of foreign currency fluctuations:
 
Total gross profit was positively impacted by approximately $1.0 due to the exchange effect of a weakening U.S. dollar.
 
 
28

 

The following table provides additional information regarding our operating expenses:
 
OPERATING EXPENSES
 
   
Three Months Ended
April 30,
   
Percentage
   
Six Months Ended
April 30,
   
Percentage
 
   
2012
   
2011
   
Change
   
2012
   
2011
   
Change
 
   
(Dollars in thousands)
 
                                     
Selling, general and administrative
  $ 19,804     $ 17,060       16.1 %   $ 36,984     $ 33,261       11.2 %
Percentage of revenue
    30.0 %     28.5 %             30.3 %     32.1 %        
                                                 
Research and development
  $ 7,925     $ 6,883       15.1 %   $ 15,452     $ 12,799       20.7 %
Percentage of revenue
    12.0 %     11.5 %             12.7 %     12.3 %        
                                                 
Total operating expenses
  $ 27,729     $ 23,943       15.8 %   $ 52,436     $ 46,060       13.8 %
Percentage of revenue
    42.0 %     40.0 %             42.9 %     44.4 %        
 
 
Three months ended April 30, 2012 compared to three months ended April 30, 2011

Selling, general & administrative (“SG&A”) expenses:

SG&A expenses increased $2.7 million for the three months ended April 30, 2012, as compared to the same prior year period. This increase primarily reflects the following:

 
· 
Ongame acquisition related expenses:
 
Ongame acquisition and due diligence expenses and related professional fees of approximately $1.5 million.

 
· 
Compensation expense:
 
Increase of approximately $1.2 million in payroll and related expenses, partially driven by hiring of several executive level positions during fiscal 2011, including our Chief Executive Officer, our General Counsel and our Chief Strategy Officer, as well as sales and profit driven compensation expenses due to increased revenue during the three months ended April 30, 2012, as compared to the prior year period.

Research & development (“R&D”) expenses:

The following projects have been the focus of our R&D efforts during the three months ended April 30, 2012:

 
· 
EGM:
 
R&D efforts were spent on developing additional new EGM titles for the Equinox cabinet and to support ongoing business growth and geographic expansion into Asia.

 
· 
ETS:
 
Expenses primarily related to the development of updated ETS products including Table Master®, Rapid Table Games® and Vegas Star® as well as ongoing development of i-Table® and i-Table Roulette™.

 
· 
Utility:
 
Expenses primarily related to development of next generation shufflers, as well as ongoing development of our existing Utility products.

 
· 
PTG
 
Ongoing enhancements to the successful progressive offering to our table game titles including the development of our Operator Wide Area Progressive (“O-WAP”); and
 
Development of online platforms and versions of our table games for online, social gaming and mobile applications.
 
 
29

 
 
Six months ended April 30, 2012 compared to six months ended April 30, 2011

Selling, general & administrative (“SG&A”) expenses:

SG&A expenses increased $3.7 million for the six months ended April 30, 2012, as compared to the same prior year period. This increase primarily reflects the following:

 
· 
Compensation expense
 
Increase of approximately $2.3 million in payroll and related expenses, partially driven by hiring of several executive level positions during fiscal 2011, including our Chief Executive Officer, our General Counsel and our Chief Strategy Officer, as well as sales and profit driven compensation expenses due to increased revenue during the three months ended April 30, 2012, as compared to the prior year period.
 

 
· 
Ongame acquisition related expenses:
 
Ongame acquisition and due diligence expenses and related professional fees of approximately $1.5 million.

Research & development (“R&D”) expenses:

The following projects have been the focus of our R&D efforts during the six months ended April 30, 2012:

 
· 
EGM:
 
R&D efforts were spent on developing additional new EGM titles for the Equinox cabinet and to support ongoing business growth and geographic expansion into Asia.

 
· 
ETS:
 
Expenses primarily related to the development of updated ETS products including Table Master®, Rapid Table Games® and Vegas Star® as well as ongoing development of i-Table® and i-Table Roulette™.

 
· 
Utility:
 
Expenses primarily related to development of next generation shufflers, as well as ongoing development of our existing Utility products.

 
· 
PTG
 
Ongoing enhancements to the successful progressive offering to our table game titles including the development of our O-WAP; and
 
Development of online platforms and versions of our table games for online, social gaming and mobile applications.
 
 
30

 
 
The following table provides additional information regarding our depreciation and amortization expenses:
 
DEPRECIATION AND AMORTIZATION EXPENSES
 
   
Three Months Ended
April 30,
   
Percentage
   
Six Months Ended
April 30,
   
Percentage
 
   
2012
   
2011
   
Change
   
2012
   
2011
   
Change
 
    (Dollars in thousands)        
Gross margin:
                                   
 Depreciation
  $ 3,107     $ 2,597       19.6 %   $ 5,962     $ 5,007       19.1 %
 Amortization
    1,482       1,722       (13.9 %)     2,871       3,349       (14.3 %)
 Total
    4,589       4,319       6.3 %     8,833       8,356       5.7 %
                                                 
Operating expenses:
                                         
 Depreciation
    939       1,017       (7.7 %)     1,883       1,990       (5.4 %)
 Amortization
    852       779       9.4 %     1,681       1,530       9.9 %
 Total
    1,791       1,796       (0.3 %)     3,564       3,520       1.3 %
                                                 
Total:
                                               
 Depreciation
    4,046       3,614       12.0 %     7,845       6,997       12.1 %
 Amortization
    2,334       2,501       (6.7 %)     4,552       4,879       (6.7 %)
 Total
  $ 6,380     $ 6,115       4.3 %   $ 12,397     $ 11,876       4.4 %
 
 
Depreciation expense is primarily comprised of depreciation associated with products leased and held for lease and to a lesser extent depreciation of property, plant and equipment. Amortization expense is primarily comprised of amortization associated with intellectual property and customer relationships.

Three months ended April 30, 2012 compared to three months ended April 30, 2011

Total depreciation and amortization included in gross margin increased 6.3% in the three months ended April 30, 2012 as compared to the same prior year period. Increased depreciation in gross margin is attributable to increases in leased assets. Decreased amortization in gross margin is due to reduced amortization of intangible assets in our Utility, ETS and EGM segments as the underlying intangible assets reached the end of their estimated useful lives.

Total depreciation and amortization included in operating expenses decreased 0.3% in the three months ended April 30, 2012 as compared to the same prior year period. Depreciation expenses decreased as various assets reached the end of their estimated useful lives. The increase in amortization expenses relates primarily to amortization of the intellectual property acquired under the purchase agreement with Newton Shuffler, LLC during prior year period.

Six months ended April 30, 2012 compared to six months ended April 30, 2011

Total depreciation and amortization included in gross margin increased 5.7% in the six months ended April 30, 2012 as compared to the same prior year period. Increased depreciation in gross margin is attributable to increases in leased assets. Decreased amortization in gross margin is due to reduced amortization of intangible assets in our Utility, ETS and EGM segments as the underlying intangible assets reached the end of their estimated useful lives.

Total depreciation and amortization included in operating expenses increased 1.3% in the six months ended April 30, 2012 as compared to the same prior year period. Depreciation expenses decreased as various assets reached the end of their estimated useful lives. The increase in amortization expenses relates primarily to amortization of the intellectual property acquired under the purchase agreement with Newton Shuffler, LLC during prior year period.

 
31

 
 
INCOME TAXES

Three months ended April 30, 2012 compared to three months ended April 30, 2011

The effective income tax rate from continuing operations for the three months ended April 30, 2012 increased to 32.4% during the three months ended April 30, 2012, as compared to 24.2% in the prior year period. This increase primarily reflects the following:

·     Nondeductible expenses recorded in the current period for transaction costs related to the Ongame acquisition and related expenses;

·     Beneficial U.S. R&D tax credit in the prior year period which was not reinstated in the current year period; and

·     Changes in valuation allowances.

Six months ended April 30, 2012 compared to six months ended April 30, 2011

The effective income tax rate from continuing operations for the six months ended April 30, 2012 increased to 31.5% during the six months ended April 30, 2012, as compared to 25.5% in the prior year period. This increase primarily reflects the following:

·     Nondeductible expenses recorded in the current period for transaction costs related to the Ongame acquisition and related expenses;

·     Beneficial U.S. R&D tax credit in the prior year period which was not reinstated in the current year period; and

·     Changes in valuation allowances.

 
32

 
 
SEGMENT OPERATING RESULTS  
 
Utility Segment Operating Results

Three months ended April 30, 2012 compared to three months ended April 30, 2011

   
Three Months Ended
April 30,
   
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
   
(In thousands, except for units and per unit amounts)
 
Utility Segment Revenue:
                       
Lease
  $ 11,579     $ 10,275     $ 1,304       12.7 %
Sales - Shuffler
    10,257       5,252       5,005       95.3  
Sales - Chipper
    292       360       (68 )     (18.9 )
Service
    1,758       1,684       74       4.4  
Other
    1,104       1,601       (497 )     (31.0 )
Total sales and service
    13,411       8,897       4,514       50.7  
Total Utility segment revenue
  $ 24,990     $ 19,172     $ 5,818       30.3 %
                                 
Utility segment gross profit
  $ 16,154     $ 11,584     $ 4,570       39.5 %
Utility segment gross margin
    64.6 %     60.4 %                
                                 
Utility segment operating income
  $ 14,202     $ 9,858     $ 4,344       44.1 %
Utility segment operating margin
    56.8 %     51.4 %                
                                 
                                 
Shuffler unit information:
                               
Lease units, end of period(1)
    8,261       7,278       983       13.5 %
Average monthly lease price
  $ 467     $ 471     $ (4 )     (0.8 %)
                                 
Sold units during the period
    653       355       298       83.9 %
Average sales price
  $ 15,708     $ 14,794     $ 914       6.2 %
                                 
Chipper unit information:
                               
Lease units, end of period(1)
    195       202       (7 )     (3.5 %)
                                 
Sold units during the period
    17       18       (1 )     (5.6 %)
Average sales price
  $ 17,176     $ 20,000     $ (2,824 )     (14.1 %)
 
(1) Certain unit information as of April 30, 2011 has been amended to reflect an immaterial adjustment to the beginning units as of October 31, 2008. No changes were made to revenue.

Our Utility segment revenue the three months ended April 30, 2012 increased $5.8 million as compared to the same prior year period, primarily due to the following:

·    A 95.3% increase in shuffler sales revenue:
o  
An increase of 83.9% in the number of units sold, driven primarily by increased shuffler sales in Asia and shuffler sales in the United States primarily to new casinos opening and replacement of previously sold shufflers; and
o  
An increase of 6.2% in shuffler average sales price driven by changes in the mix of shuffler models sold.

·    A 12.7% increase in lease revenue:
o  
An increase in the number of MD2 units on lease in Asia and MD3 units on lease in the United States; and
o  
Placements of the newly introduced MD3 shuffler, which accounted for the majority of our new lease placements during the quarter.  The MD3lease base has grown to over 500 units as of the end of the quarter.

Utility gross profit increased 39.5% year over year and utility gross margin increased 420 bps to 64.6% as compared to the same prior year period primarily related to the following:

·      The overall increase in total revenues as noted above;

·    Offset by depreciation on the newly-installed leased shufflers that was proportionally higher than the increase in lease revenue.

 
33

 
 
Utility operating income increased 44.1% for the three months ended April 30, 2012 as compared to the same prior year period, and operating margin increased 540 bps to 56.8%.  These changes primarily related to the changes described in gross profit and gross margin above.

Six months ended April 30, 2012 compared to six months ended April 30, 2011

   
Six Months Ended
April 30,
 
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
   
(In thousands, except for units and per unit amounts)
 
Utility Segment Revenue:
                       
Lease
  $ 22,872     $ 20,281     $ 2,591       12.8 %
Sales - Shuffler
    15,450       9,692       5,758       59.4  
Sales - Chipper
    460       473       (13 )     (2.7 )
Service
    3,466       3,312       154       4.6  
Other
    2,358       2,775       (417 )     (15.0 )
Total sales and service
    21,734       16,252       5,482       33.7  
Total Utility segment revenue
  $ 44,606     $ 36,533     $ 8,073       22.1 %
                                 
Utility segment gross profit
  $ 27,337     $ 22,432     $ 4,905       21.9 %
Utility segment gross margin
    61.3 %     61.4 %                
                                 
Utility segment operating income
  $ 23,652     $ 19,086     $ 4,566       23.9 %
Utility segment operating margin
    53.0 %     52.2 %                
                                 
                                 
Shuffler unit information:
                               
Lease units, end of period(1)
    8,261       7,278       983       13.5 %
Average monthly lease price
  $ 461     $ 464     $ (3 )     (0.6 %)
                                 
Sold units during the period
    1,002       619       383       61.9 %
Average sales price
  $ 15,419     $ 15,658     $ (239 )     (1.5 %)
                                 
Chipper unit information:
                               
Lease units, end of period(1)
    195       202       (7 )     (3.5 %)
                                 
Sold units during the period
    24       23       1       4.3 %
Average sales price
  $ 19,167     $ 20,565     $ (1,398 )     (6.8 %)
 
(1) Certain unit information as of April 30, 2011 has been amended to reflect an immaterial adjustment to the beginning units as of October 31, 2008. No changes were made to revenue.

Our Utility segment revenue for the six months ended April 30, 2012 increased $8.1 million as compared to the same prior year period, primarily due to the following:

·    A 59.4% increase in shuffler sales revenue:
o  
An increase of 61.9% in the number of units sold, driven primarily by increased shuffler sales in Asia and shuffler sales in the United States primarily to new casinos opening and replacement of previously sold shufflers.

·    A 12.8% increase in lease revenue:
o  
An increase in the number of MD2 units on lease in Asia and MD3 units on lease in the United States; and
o  
Placements of the newly introduced MD3 shuffler, which accounted for the majority of our new lease placements during the year to date period.  The MD3lease base has grown to over 500 units as of the end of the quarter.

Utility gross profit increased 21.9% year over year and utility gross margin remained relatively consistent as compared to the same prior year period primarily related to the following:

·     The overall increase in total revenues as noted above;

·    Offset by depreciation on the newly-installed leased shufflers that was proportionally higher than the increase in lease revenue.

 
34

 
 
Utility operating income increased 23.9% for the six months ended April 30, 2012 as compared to the same prior year period, and operating margin remained relatively consistent.  These changes primarily related to the changes described in gross profit and gross margin above.

Proprietary Table Games Segment Operating Results

Three months ended April 30, 2012 compared to three months ended April 30, 2011

   
Three Months Ended
April 30,
   
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
   
(In thousands, except for units and per unit amounts)
 
                         
PTG segment revenue:
                       
Royalties and leases
  $ 11,732     $ 10,370     $ 1,362       13.1 %
Sales
    139       73       66       90.4  
Service
    36       30       6       20.0  
Other
    47       73       (26 )     (35.6 )
Total sales and service revenue
    222       176       46       26.1  
Total PTG segment revenue
  $ 11,954     $ 10,546     $ 1,408       13.4 %
                                 
PTG segment gross profit
  $ 9,818     $ 8,405     $ 1,413       16.8 %
PTG segment gross margin
    82.1 %     79.7 %                
                                 
PTG segment operating income
  $ 6,736     $ 7,385     $ (649 )     (8.8 %)
PTG segment operating margin
    56.3 %     70.0 %                
                                 
                                 
PTG unit information (1):
                               
 Premium units, end of period
    2,667       2,391       276       11.5 %
 Side bet units, end of period
    2,488       1,905       583       30.6 %
 Progressive units, end of period
    1,108       724       384       53.0 %
 Add-on units, end of period
    319       154       165       107.1 %
Total revenue generating lease base
    6,582       5,174       1,408       27.2 %
                                 
Average monthly lease/license price
  $ 594     $ 668     $ (74 )     (11.1 %)
                                 
Sold during period
    2       6       (4 )     (66.7 %)
Average sales price
  $ 35,500     $ 12,167     $ 23,333       191.8 %
(1) Certain unit information as of April 30, 2011 has been amended to reflect an immaterial adjustment to the beginning units as of October 31, 2008. No changes were made to revenue.

Total PTG segment revenue for the three months ended April 30, 2012 increased $1.4 million as compared to the same prior year period, primarily due to the following:

·  
A 13.1% increase in royalties and leases revenue:
o  
Increased placements of premium table games in the United States, primarily Ultimate Texas Hold ‘Em® and Mississippi Stud®;
o  
Increased placements of progressive units in the United States, primarily Three Card Poker Progressive, Fortune Pai Gow Poker® Progressive and Ultimate Texas Hold ‘Em® Progressive;
o  
Increased placements of side bets in the United States, primarily Fortune Pai Gow Poker® and the acquisition of the Fire Bet® side bet during the prior quarter; and
o  
Offset by an 11.1% decrease in average monthly lease/license price due to the change in mix of table game units on lease.

·  
A 90.4% increase in PTG sales revenue:
o  
Driven primarily by $0.07 million settlement and license fees from online operators for prior use of our intellectual property; and
o  
Sales of table games remained relatively flat year over year and the average sales price increased due to the mix of table game units sold.

 
35

 
 
PTG gross profit increased 16.8% year over year. PTG gross margin increased by 240 bps to 82.1% as compared to the same prior year period.  The increase in gross profit and gross margin primarily related to the following:

·  
The overall increase in total revenues.

PTG operating income decreased 8.8% year over year and operating margin decreased 1,370 bps to 56.3% as compared to the same prior year period.  The decrease in operating income and operating margin primarily related to the following:

·  
An increase in R&D costs associated with the development of games and platforms for online, social gaming, and mobile devices by SHFL InteractiveSM; and

·  
Offset by the increase in gross margin and gross profit referred to above.

Six months ended April 30, 2012 compared to six months ended April 30, 2011

   
Six Months Ended
April 30,
   
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
   
(In thousands, except for units and per unit amounts)
 
                         
PTG segment revenue:
                       
Royalties and leases
  $ 23,055     $ 20,661     $ 2,394       11.6 %
Sales
    2,389       894       1,495       167.2  
Service
    65       57       8       14.0  
Other
    120       160       (40 )     (25.0 )
Total sales and service revenue
    2,574       1,111       1,463       131.7  
Total PTG segment revenue
  $ 25,629     $ 21,772     $ 3,857       17.7 %
                                 
PTG segment gross profit
  $ 21,360     $ 17,667     $ 3,693       20.9 %
PTG segment gross margin
    83.3 %     81.1 %                
                                 
PTG segment operating income
  $ 16,641     $ 15,760     $ 881       5.6 %
PTG segment operating margin
    64.9 %     72.4 %                
                                 
                                 
PTG unit information (1):
                               
 Premium units, end of period
    2,667       2,391       276       11.5 %
 Side bet units, end of period
    2,488       1,905       583       30.6 %
 Progressive units, end of period
    1,108       724       384       53.0 %
 Add-on units, end of period
    319       154       165       107.1 %
Total revenue generating lease base
    6,582       5,174       1,408       27.2 %
                                 
Average monthly lease/license price
  $ 584     $ 666     $ (82 )     (12.3 %)
                                 
Sold during period
    2       19       (17 )     (89.5 %)
Average sales price
  $ 35,500     $ 47,053     $ (11,553 )     (24.6 %)
 
 (1) Certain unit information as of April 30, 2011 has been amended to reflect an immaterial adjustment to the beginning units as of October 31, 2008. No changes were made to revenue.

Total PTG segment revenue for the six months ended April 30, 2012 increased $3.9 million as compared to the same prior year period, primarily due to the following:

·  
A 11.6% increase in royalties and leases revenue:
o  
Increased placements of premium table games in the United States, primarily Ultimate Texas Hold ‘Em® and Mississippi Stud®;
o  
Increased placements of progressive units in the United States, primarily Three Card Poker Progressive, Fortune Pai Gow Poker® Progressive and Ultimate Texas Hold ‘Em® Progressive; and
o  
Increased placements of side bets in the United States, primarily Fortune Pai Gow Poker® and the acquisition of the Fire Bet® side bet during the period; and
o  
Offset by a 12.3% decrease in average monthly lease/license price due to the change in mix of table game units on lease.
 
·  
A 167.2% increase in PTG sales revenue:
o  
Driven by $2.3 million settlement and license fees from online operators in line with our strategy to protect and license our intellectual property; and
 
 
36

 
o  
Offset by an 89.5% decrease in sold units, driven primarily by our strategic focus on leasing versus sales.  The prior year period included sales of premium table games, primarily Three Card Poker and Let it Ride Bonus® lifetime licenses related to a new casino opening in Las Vegas.  Average sale price declined due to the change in mix of table game units sold.

PTG gross profit increased 20.9% year over year. PTG gross margin increased by 220 bps to 83.3% as compared to the same prior year period.  The increase in gross profit and gross margin primarily related to the following:

·  
The overall increase in total revenues; and

·  
The settlement and license fees from online operators described above partially offset by the decrease in the sale of table game lifetime licenses.

PTG operating income increased 5.6% year over year, although the operating margin decreased 750 bps to 64.9% as compared to the same prior year period.  The increase in operating income primarily related to the following:

·  
The increase in gross margin and gross profit referred to above.

The decrease in operating margin is primarily related to the following:

·  
An increase in R&D costs associated with the development of games and platforms for online, social gaming, and mobile devices by SHFL InteractiveSM; and

·  
Offset by the increase in gross margin and gross profit referred to above.

Electronic Table Systems Segment Operating Results

Three months ended April 30, 2012 compared to three months ended April 30, 2011
 
   
Three Months Ended
April 30,
   
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
   
(In thousands, except for units and per unit/seat amounts)
 
ETS segment revenue:
                       
Royalties and leases
  $ 3,512     $ 3,514     $ (2 )     (0.1 %)
Sales
    1,368       6,846       (5,478 )     (80.0 %)
Service
    152       145       7       4.8 %
Other
    1,834       1,292       542       42.0 %
Total sales and service revenue
    3,354       8,283       (4,929 )     (59.5 %)
Total ETS segment revenue
  $ 6,866     $ 11,797     $ (4,931 )     (41.8 %)
                                 
ETS segment gross profit
  $ 2,684     $ 4,837     $ (2,153 )     (44.5 %)
ETS segment gross margin
    39.1 %     41.0 %                
                                 
ETS segment operating income
  $ (838 )   $ 1,719     $ (2,557 )     (148.7 %)
ETS segment operating margin
    (12.2 %)     14.6 %                
                                 
ETS unit information:
                               
                                 
Rapid Table Games®, Table Master® and Vegas Star®:
                               
Lease seats, end of period (1)
    2,339       2,360       (21 )     (0.9 %)
Average monthly lease price
  $ 488     $ 444     $ 44       9.9 %
                                 
Sold during the period
    82       307       (225 )     (73.3 %)
Average sales price
  $ 16,683     $ 22,300     $ (5,617 )     (25.2 %)
                                 
i-Table®:
                               
Lease units, end of period (1)
    54       36       18       50.0 %
 
 
(1) Certain unit information as of April 30, 2011 has been amended to reflect an immaterial adjustment to the beginning units as of October 31, 2008.  i-Table® seats are reported separately as units rather than seats to conform to the current presentation. No changes were made to revenue.

 
37

 
 
Total ETS segment revenue for the three months ended April 30, 2012 decreased $4.9 million as compared to the same prior year period, primarily due to the following:

·  
An 80.0% decrease in sales revenue:
o  
Decrease of 97.8% in Rapid Table Games® seats sold.  The prior year included sales to large casino customers in Australia and Asia;
o  
A 73.3% decrease in the number of Vegas Star® seats sold.  Sales were primarily in Australia and the prior year sales were to large casino customers;
o  
Decrease of 25.0% in the number of Table Master® seats sold in the United States; and
o  
Additionally decreased by a 25.2% reduction in average sales price driven by discounts on units sold in Latin America and a decrease of sales in Australia, which carry a higher average sales price.

·  
Impact of foreign currency fluctuations:
o  
Total revenue was positively impacted by approximately $0.1 million due to the exchange effect of a weakening U.S. dollar.

·  
Offset by an increase of 42.0% in other revenue, driven by increased sales of peripherals and conversion kits.

ETS gross profit decreased 44.5% year over year.  ETS gross margin decreased 190 bps to 39.1% as compared to the same prior year period.  These decreases are due to the following:

·  
The decrease in sales revenue as noted above;

·  
The decrease in average sales price as noted above; and

·  
Offset by increased sales of peripherals and conversion kits at higher margins.

ETS operating income decreased 148.7% for the three months ended April 30, 2012 as compared to the same prior year period.  ETS operating margin decreased 2,680 bps for the three months ended April 30, 2012 as compared to the same prior year period. These decreases in both operating income and operating margin primarily related to the following:

·  
The decreases in gross profit and gross margin as noted above; and

·  
An increase in R&D costs associated with the development of ETS products as described in the research and development expense section above. The ETS segment is in an investment phase as described in the research and development expense section above.
 
 
38

 

Six months ended April 30, 2012 compared to six months ended April 30, 2011
 
   
Six Months Ended
April 30,
   
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
   
(In thousands, except for units and per unit/seat amounts)
 
ETS segment revenue:
                       
Royalties and leases
  $ 6,768     $ 6,708     $ 60       0.9 %
Sales
    5,751       10,771       (5,020 )     (46.6 %)
Service
    301       280       21       7.5 %
Other
    2,310       2,169       141       6.5 %
Total sales and service revenue
    8,362       13,220       (4,858 )     (36.7 %)
Total ETS segment revenue
  $ 15,130     $ 19,928     $ (4,798 )     (24.1 %)
                                 
ETS segment gross profit
  $ 6,813     $ 9,487     $ (2,674 )     (28.2 %)
ETS segment gross margin
    45.0 %     47.6 %                
                                 
ETS segment operating income
  $ (121 )   $ 3,532     $ (3,653 )     (103.4 %)
ETS segment operating margin
    (0.8 %)     17.7 %                
                                 
ETS unit information:
                               
                                 
Rapid Table Games®, Table Master® and Vegas Star®:
                               
Lease seats, end of period (1)
    2,339       2,360       (21 )     (0.9 %)
Average monthly lease price
  $ 470     $ 466     $ 4       0.9 %
                                 
Sold during the period
    294       480       (186 )     (38.8 %)
Average sales price
  $ 19,561     $ 22,440     $ (2,879 )     (12.8 %)
                                 
i-Table®:
                               
Lease units, end of period (1)
    54       36       18       50.0 %
 
 
(1) Certain unit information as of April 30, 2011 has been amended to reflect an immaterial adjustment to the beginning units as of October 31, 2008.  i-Table® seats are reported separately as units rather than seats to conform to the current presentation. No changes were made to revenue.

Total ETS segment revenue for the six months ended April 30, 2012 decreased $4.8 million as compared to the same prior year period, primarily due to the following:

·  
A 46.6% decrease in sales revenue:
o  
A 63.9% decrease in the number of Vegas Star® seats sold.  The prior year included sales to large casino customers primarily in Australia;
o  
Decrease of 72.7% in the number of Table Master® seats sold as the prior year included significant sales to individual regional casinos in the United States;
o  
A 12.8% reduction in average sales price driven by discounts on refurbished units sold in Asia and discounts on units sold in Latin America and a decrease of sales in Australia, which carry a higher average sales price; and
o  
Offset by an increase of 39.7% in Rapid Table Games® seats sold in Australia, totaling approximately $3.1 million.

·  
Impact of foreign currency fluctuations:
o  
Total revenue was positively impacted by approximately $0.4 million due to the exchange effect of a weakening U.S. dollar.

·  
Offset by an increase of 6.5% in other revenue, driven by increased sales of peripherals and conversion kits.

ETS gross profit decreased 28.2% year over year.  ETS gross margin decreased 260 bps to 45.0% as compared to the same prior year period.  These decreases are due to the following:

·  
The decrease in sales revenue as noted above;

·  
The decrease in average sales price as noted above; and

·  
Offset by increased sales of peripherals and conversion kits at higher margins.

 
39

 
 
ETS operating income decreased 103.4% for the six months ended April 30, 2012 as compared to the same prior year period.  ETS operating margin decreased 1,850 bps for the six months ended April 30, 2012 as compared to the same prior year period. These decreases in both operating income and operating margin primarily related to the following:

·  
The decreases in gross profit and gross margin as noted above; and

·  
An increase in R&D costs associated with the development of ETS products as described in the research and development expense section above. The ETS segment is in an investment phase as described in the research and development expense section above.

Electronic Gaming Machines Segment Operating Results

Three months ended April 30, 2012 compared to three months ended April 30, 2011
 
   
Three Months Ended
April 30,
   
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
   
(In thousands, except for units/seats and per unit/seat amounts)
 
                         
EGM segment revenue:
                       
Lease revenue
  $ 124     $ 103     $ 21       20.4 %
Sales
    20,728       17,158       3,570       20.8  
Service
    27       22       5       22.7  
Other
    1,365       1,085       280       25.8  
Total sales and service revenue
    22,120       18,265       3,855       21.1  
Total EGM segment revenue
  $ 22,244     $ 18,368     $ 3,876       21.1 %
                                 
EGM segment gross profit
  $ 13,833     $ 11,268     $ 2,565       22.8 %
EGM segment gross margin
    62.2 %     61.3 %                
                                 
EGM segment operating income
  $ 10,394     $ 8,393     $ 2,001       23.8 %
EGM segment operating margin
    46.7 %     45.7 %                
                                 
EGM unit information:
                               
Lease units, end of period
    351       17       334       1,964.7 %
                                 
Sold during period
    1,044       969       75       7.7 %
Average sales price
  $ 19,854     $ 17,707     $ 2,147       12.1 %
 
 
Total EGM segment revenue for the three months ended April 30, 2012 increased $3.9 million as compared to the same prior year period, primarily due to the following:

·  
A 20.8% increase in sales revenue:
o  
Driven by a 7.7% increase in units sold;
o  
The increase in units sold is the result of the popularity of our new Equinox cabinet, the introduction of our new Super Topbox for the Equinox cabinet, as well as our expansion into the Victoria, Australia market in the current year; and
o  
A 12.1% increase in average sales price reflecting higher sales prices for Equinox units.

·  
Impact of foreign exchange fluctuations:
o  
Total revenue was positively impacted by approximately $0.6 million due to the exchange effect of a weakening U.S. dollar.

·  
An increase of 25.8% in other revenue, driven by an increase in sales of conversion kits and other parts and peripherals.

·  
We are starting to generate revenue from machines on lease and from participation arrangements in Mexico and Latin America.

EGM gross profit increased 22.8% year over year, and EGM gross margin increased 90 bps to 62.2%. The increase in gross profit and gross margin primarily related to the following:

·  
The increase in EGM sales revenues as noted above, driven primarily by the increase in units sold and the increase in average sales price;

 
40

 
 
·  
Increased sales of conversion kits and other parts and peripherals at higher margins; and

·  
Offset by import duties and freight expenses to place machines on lease in Mexico and Latin America

EGM operating income increased 23.8% for the three months ended April 30, 2012 as compared to the same prior year period.  EGM operating margin also increased 100 bps for the three months ended April 30, 2012 as compared to the same prior year period. The increases in operating income and operating margin primarily related to the following:

·  
The increases in total EGM revenue and gross profit as noted above.

Six months ended April 30, 2012 compared to six months ended April 30, 2011

   
Six Months Ended
April 30,
   
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
   
(In thousands, except for units/seats and per unit/seat amounts)
 
                         
EGM segment revenue:
                       
Lease revenue
  $ 205     $ 189     $ 16       8.5 %
Sales
    33,910       23,294       10,616       45.6  
Service
    32       32       -       -  
Other
    2,595       1,950       645       33.1  
Total sales and service revenue
    36,537       25,276       11,261       44.6  
Total EGM segment revenue
  $ 36,742     $ 25,465     $ 11,277       44.3 %
                                 
EGM segment gross profit
  $ 22,800     $ 15,676     $ 7,124       45.4 %
EGM segment gross margin
    62.1 %     61.6 %                
                                 
EGM segment operating income
  $ 16,247     $ 10,157     $ 6,090       60.0 %
EGM segment operating margin
    44.2 %     39.9 %                
                                 
EGM unit information:
                               
Lease units, end of period
    351       17       334       1,964.7 %
                                 
Sold during period
    1,705       1,292       413       32.0 %
Average sales price
  $ 19,889     $ 18,029     $ 1,860       10.3 %
 
Total EGM segment revenue for the six months ended April 30, 2012 increased $11.3 million as compared to the same prior year period, primarily due to the following:

·  
A 45.6% increase in sales revenue:
o  
Driven by a 32.0% increase in units sold;
o  
The increase in units sold is the result of the popularity of our new Equinox cabinet, the introduction of our new Super Topbox for the Equinox cabinet, as well as our expansion into the Victoria, Australia market in the current year and to a lesser extent increased placements in Asia; and
o  
A 10.3% increase in average sales price reflecting higher sales prices for Equinox units.

·  
Impact of foreign exchange fluctuations:
o  
Total revenue was positively impacted by approximately $1.2 million due to the exchange effect of a weakening U.S. dollar.

·  
An increase of 33.1% in other revenue, driven by an increase in sales of conversion kits and other parts and peripherals.

·  
We are starting to generate revenue from machines on lease and from participation arrangements in Mexico and Latin America.


EGM gross profit increased 45.4% year over year, and EGM gross margin increased 50 bps to 62.1%. The increase in gross profit and gross margin primarily related to the following:

·  
The increase in EGM sales revenues as noted above, driven primarily by the increase in units sold and the increase in average sales price;

 
41

 
 
·  
Increased sales of conversion kits and other parts and peripherals at higher margins; and

·  
Offset by import duties and freight expenses to place several machines on lease in Mexico and Latin America

EGM operating income increased 60.0% for the six months ended April 30, 2012 as compared to the same prior year period.  EGM operating margin also increased 430 bps for the six months ended April 30, 2012 as compared to the same prior year period. The increases in operating income and operating margin primarily related to the following:

·  
The increases in total EGM revenue and gross profit as noted above.

 
42

 
 
LIQUIDITY AND CAPITAL RESOURCES
 
Our primary historical source of liquidity and capital resources has been cash on hand, cash from operations and various forms of debt. We use cash to fund growth in our operating assets, including inventory and products leased and held for lease and to fund new products through both research and development and strategic acquisitions of businesses and intellectual property. Based on past performance and current expectations, we believe these resources will satisfy our needs for working capital, capital expenditures, debt service, and other liquidity requirements associated with our existing operations for the next 12 months.

Our Senior Secured Revolving Credit Facility contains three financial maintenance covenants: a Total Leverage Ratio, Senior Leverage Ratio and an Interest Expense Coverage Ratio.  Under the facility, we are required to maintain a Total Leverage Ratio, as defined therein, of not more than 3.75 to 1.0.  Our Total Leverage Ratio as of April 30, 2012 was 0.28 to 1.0.  Furthermore, we are required to maintain a Senior Leverage Ratio, as defined therein, of not more than 3.0 to 1.0 until October 31, 2013 and not more than 2.75 to 1.00 after October 31, 2013. Our Senior Leverage Ratio as of April 30, 2012 was 0.26 to 1.0. We are also required to maintain an Interest Coverage Ratio, as defined therein, in excess of 3.0 to 1.0 at the end of any fiscal quarter. Our Interest Coverage Ratio as of April 30, 2012 was 50.19 to 1.0.

Cash and cash equivalents at our foreign subsidiaries were $18.3 million as of April 30, 2012 and $17.5 million as of October 31, 2011. We constantly evaluate our cash position in each territory and look for ways to efficiently deploy capital to markets where it is most needed.

The closing of the Ongame acquisition is expected to occur not more than nine months following execution of the definitive agreement (the “Closing”).  As consideration for the acquisition of Ongame and its subsidiaries, and if the closing conditions for the acquisition are met or waived, we are obligated to pay €19.5 million in cash, subject to certain adjustments, at closing.  We may also become obligated to pay up to €10 million in additional cash within five years of closing contingent upon the commencement of legalized, real-money online poker in the United States. occurring, if at all, within five years of closing as described in Note 11 to our Condensed Consolidated Financial Statements included in this Form 10-Q.  We expect to fund the acquisition with cash on hand and availability on the Senior Secured Revolving Credit Facility.


Working capital.  The following summarizes our cash, cash equivalents and working capital:

   
April 30,
2012
   
October 31,
2011
   
Increase
(Decrease)
   
Percentage
Change
 
    (In thousands, except ratios)              
                         
Cash and cash equivalents
  $ 22,964     $ 22,189     $ 775       3.5 %
Working capital
  $ 75,820     $ 67,120     $ 8,700       13.0 %
Current ratio
 
3.1 : 1
   
2.8 : 1
                 
 
 
CASH FLOWS SUMMARY
 
 
   
Six Months Ended
April 30,
   
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
   
(In thousands)
             
                         
Net cash provided by operating activities
  $ 20,604     $ 16,510     $ 4,094       24.8 %
Net cash used in investing activities
    (19,974 )     (18,468 )     1,506       8.2 %
Net cash provided by (used in) financing activities
    (695 )     8,861       9,556       107.8 %
Effects of exchange rates
    840       92       748       813.0 %
Net change in cash and cash equivalents
  $ 775     $ 6,995                  
 
 
43

 
 
Capital Expenditures. Significant items included in cash flows related to capital expenditures are as follows:

   
Six Months Ended
April 30,
   
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
   
(In thousands)
       
                         
Payments for products leased and held for lease
  $ (6,706 )   $ (7,263 )   $ (557 )     (7.7 %)
Purchases of property and equipment
    (4,240 )     (2,001 )     2,239       111.9 %
Purchases of intangible assets
    (4,103 )     (6,145 )     (2,042 )     (33.2 %)
Total capital expenditures
  $ (15,049 )   $ (15,409 )                
 
Operating

Cash flows provided by operating activities increased $4.1 million for the six months ended April 30, 2012 compared to the same prior year period, primarily due to following:

·  
Strong operating performance led to an increase in net income of  $4.6 million and the difference in non-cash items year over year provided an increase of additional $3.0 million;

·  
A decrease in cash used for inventory of $1.4 million. We experienced reduction in our inventory balance compared to the prior year period as a result of a formal emphasis on inventory management to reduce manufacturing cost and strong revenue performance. As a result, inventory turns increased from 2.4 times as of April 30, 2011 to 3.3 times as of April 30, 2012;

·  
Offset by a decrease of $5.7 million in prepaid income taxes.

Investing

Cash used in investing activities increased $1.5 million for the six months ended April 30, 2012 compared to the same prior year period, primarily due to following:

·  
An increase of $2.2 million in cash used to purchase land for corporate facilities in Las Vegas, Nevada; and

·  
A decrease of $2.8 million in proceeds from sale of leased assets.

Offset by following:

·  
Purchase of intangible assets during the six months ended April 30, 2012 decreased by $2.0 million. Current year purchases related primarily to the acquisition of licenses to be used in our EGM segment; and

·  
Acquisition of intellectual property and games which were recorded as a business acquisition for accounting purposes were $5.5 million during the six months ended April 30, 2012 compared with the acquisition of Newton Shuffler, LLC for $6.5 million in the prior year period.

Financing

Cash flows used in financing activities increased $9.6 million for the six months ended April 30, 2012 compared to the same prior year period, primarily due to following:

·  
Cash used for debt payments on our Revolver, net of draws, was $16.0 million as compared to a net draw of $6.5 million during the six months ended April 30, 2011; and

·  
Offset by increased proceeds from issuance of common stock of $12.5 million, due to an increased weighted average exercise price of options exercised and an increase in the number of options exercised in the current period compared to the prior year period.
 
 
44

 
 
Indebtedness (See Note 4 of our Notes to Condensed Consolidated Financial Statements)

$200.0 million senior secured revolving credit facility. On October 29, 2010, we entered into a senior secured credit agreement (the “Senior Secured Revolving Credit Facility”) with Wells Fargo Securities, LLC and Banc of America Securities LLC, as joint lead arrangers and joint lead bookrunners, Bank of America, N.A. as syndication agent and Union Bank, N.A. as documentation agent. The Senior Secured Revolving Credit Facility provides for senior secured credit facilities in an aggregate principal amount of $200.0 million consisting of a 5-year revolving credit facility (the “Revolver”) in an aggregate principal amount of $200.0 million with a sub-facility for letters of credit of $25.0 million, a sub-facility for multicurrency borrowings in Euros, Australian dollars and Canadian dollars of $25.0 million, and a sub-facility for swing line loans of $20.0 million, each on customary terms and conditions. The Senior Secured Revolving Credit Facility includes an option to increase the Revolver to $300.0 million, which would require syndication approval.

Loans under the Revolver (other than Swing Line Loans, as defined) bear interest at the Base Rate, as defined, or LIBOR, as elected by us. Base Rate interest is calculated at the Base Rate plus the applicable margin and the Base Rate is the highest of:
 
·      the Federal Funds Rate plus .50%;

·      the prime commercial lending rate of the Administrative Agent, as defined; and
 
·      the one month LIBOR rate for such day plus 2.00%.
 
Swing Line Loans bear interest at the Base Rate plus the applicable margin. Our effective interest rate as of April 30, 2012 was 2.0%. Borrowings under the Revolver may be used for working capital, capital expenditures and general corporate purposes (including share repurchases).

As of April 30, 2012, the amount drawn under the Revolver was $21.4 million and after considering restrictive financial covenants under the Senior Secured Revolving Credit Facility, we had approximately $178.6 million of available remaining credit under the Revolver. The Revolver matures on October 29, 2015.
 
 
45

 
 
CAPITAL RESOURCES
 
Excluding any significant acquisitions of businesses, we believe our existing cash, investments, debt financing and projected cash flow from future operations will be sufficient to fund our operations, long-term obligations, capital expenditures, and new product development for at least the next 12 months. Projected cash flows from operations are based on our estimates of revenue and expenses and the related timing of cash receipts and disbursements. If actual performance differs from estimated performance, projected cash flows could be positively or negatively impacted.
 
DEBT, OTHER LONG-TERM LIABILITIES AND CONTRACTUAL OBLIGATIONS

Our contractual obligations have not changed materially from the amounts disclosed in our Form 10-K as of October 31, 2011.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have material off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States. Our critical accounting policies are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Critical Accounting Policies and Estimates” in our Form 10-K for the year ended October 31, 2011.  
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risks, which arise during the normal course of business from changes in interest rates and foreign exchange rates. A discussion of our primary market risks is presented below.

Interest rate risk. As of April 30, 2012, we had approximately $21.4 million of variable rate debt. Assuming a 1% change in the average interest rate as of April 30, 2012, our annual interest cost would change by approximately $0.2 million.

Foreign currency risk. We are exposed to foreign currency exchange rate risk inherent in our leases and sales commitments, anticipated leases and sales, anticipated purchases and assets, liabilities and debt denominated in currencies other than the U.S. dollar. We transact business in numerous countries around the world using numerous currencies, of which the most significant to our operations for the three and six months ended April 30, 2012 and 2011, were the Australian dollar and the Euro.  We settle inter-company trade balances, which results in the recognition of foreign currency fluctuations.  We expect that a significant portion of the volume of our business will continue to be denominated in foreign currencies. As such, we expect our cash flows and earnings to continue to be exposed to the risks that may arise from fluctuations in foreign currency exchange rates.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted  under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(b) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the design and operating effectiveness as of April 30, 2012, of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of April 30, 2012. 
 
Changes in Internal Control Over Financial Reporting
 
There have been no changes in our internal control over financial reporting that occurred during the three and six months ended April 30, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
46

 
 
PART II
 
ITEM 1. LEGAL PROCEEDINGS
 
For information on Legal Proceedings and significant developments in any of the cases disclosed in our Form 10-K for the year ended October 31, 2011, see Note 11 to our Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
 
For a complete description of the facts and circumstances surrounding material litigation to which we are a party, see our Form 10-K for the year ended October 31, 2011.
 
ITEM 1A. RISK FACTORS
 
Except as set forth below, a complete description of certain factors that may affect our future results and risk factors is set forth in our Form 10-K under Part I, Item 1A. The text of such risk factors, as updated with the disclosure herein, is incorporated herein by reference.  For the three and six months ended April 30, 2012, there were no material changes to our risk factors except as set forth below in this Part II, Item 1A.

 
Completion of our acquisition of Ongame Network Ltd. is subject to many conditions and, if these conditions are not satisfied or waived, such acquisition will not be completed. Failure to complete the acquisition could have material and adverse effects on our business and the trading price of shares of our common stock.
 
The completion of our potential acquisition, referred to as the Acquisition, of Ongame Network Ltd ("Ongame"), pursuant to the terms of the Share Sale and Transfer Agreement, dated as of March 5, 2012 (the "Agreement"), and between us and bwin.party services (Austria) GMBH (the "Seller"), is subject to many conditions which must be satisfied or waived in order to complete such Acquisition. These conditions include the continued material accuracy of the parties’ representations and warranties; the performance of, and compliance with, all covenants in the Agreement; the execution and delivery of ancillary documents; obtaining the various third party and governmental approvals and consents required by the Agreement; and the absence of the occurrence of any events that constitute a material adverse change affecting Ongame. The Agreement will expire unless the completion of the Acquisition has occurred within nine months of execution of the Agreement. Either we or the Seller may terminate the Agreement at any time prior to the closing upon the other party’s uncured material breach of any covenant under the Agreement. Additionally, we may terminate the Agreement at any time prior to the closing upon a material adverse change affecting Ongame or if the concerns of any applicable gaming regulatory authority over our relationship with Seller, Ongame or any individuals associated with Ongame cannot be addressed in a manner that permits us from consummating the Acquisition and continuing the operations of Ongame without jeopardizing any of our or Ongame’s gaming licenses or regulatory approvals.
 
If the Acquisition is not completed on a timely basis, or at all, our ongoing business may be adversely affected. Additionally, in the event the Acquisition is not completed, we will be subject to a number of risks including the potential decline in the market price of our common stock.
 
If our acquisition of Ongame Network Ltd. is completed, we may be unable to successfully integrate Ongame’s businesses with ours on a timely basis or at all.
 
If the Acquisition is completed, we will be required to devote significant management attention and resources to integrating the business practices and operations of Ongame with ours. Potential difficulties we may encounter as part of the integration process include the following:
 
·  
delays in the integration of management teams, strategies, operations, products and services;

·  
diversion of the attention of each company's management as a result of the Acquisition;

·  
differences in business backgrounds, corporate cultures and management philosophies that may delay successful integration;

·  
the ability to retain key employees necessary to effectively manage or otherwise operate Ongame;
 
 
47

 
 
·  
the ability to create and enforce uniform standards, controls, procedures, policies and information systems, including difficulty integrating systems of internal controls over financial reporting and other financial and administrative functions;

·  
complexities associated with managing Ongame, including the challenge of integrating complex systems, technology, networks and other assets of Ongame into those of ours in a seamless manner that minimizes any adverse impact on customers, contactors, employees and other constituencies;

·  
Ongame may have potential unknown liabilities that could require us to expend significant amounts of capital or otherwise harm our overall business;

·  
addressing issues raised by additional regulatory burdens associated with the business of Ongame, including with respect to domestic and international internet gaming and other gaming regulations, both with respect to the operations of Ongame and with respect to our business overall;

·  
unforeseen increased expenses or delays associated with the Acquisition, including one-time cash costs to integrate Ongame beyond current estimates; and

·  
the disruption of, or the loss of momentum in, our or Ongame’s ongoing businesses,
 
any of which could adversely affect each company's ability to maintain relationships with customers, contractors, employees and other constituencies or our and Ongame’s ability to achieve any benefits of the Acquisition or could reduce our earnings or otherwise adversely affect our business and financial results following the completion of the Acquisition.  
 
We will expend an amount of our cash resources and incur additional indebtedness under our senior secured credit facility to pay the cash consideration for the Acquisition and related fees and expenses, which could adversely affect our resources available for operations.
 
We expect to finance the cash consideration of the Acquisition through a combination of existing cash balances and our Senior Secured Credit Facility described in Note 4 to our Condensed Consolidated Financial Statements. The cost of acquiring Ongame pursuant to the Agreement (including the consideration payable to the Seller for the Acquisition, as well as fees, costs and expenses associated with the negotiation and consummation of the Acquisition and the integration of Ongame with our operations) represents a portion of our cash resources and a portion of the amount of funds we have available to us under the Senior Secured Credit Facility. Use of these resources for the acquisition of Ongame could have an adverse impact on our cash available to fund operations or for use for other purposes.
 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
   
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Program
   
Maximum Value of Shares That May Yet Be Purchased Under the Stock Buyback Program (1)
 
February 1 through February 29, 2012
   
-
   
$
-
     
-
   
$
21,077
 
March 1 through March 31, 2012
   
-
     
-
     
-
     
21,077
 
April 1 through April 30, 2012
   
-
     
-
     
-
     
21,077
 
Total
   
-
   
$
-
     
-
         
 
(1) In September 2006, our board of directors authorized a stock buyback program for up to $30.0 million of the Company’s shares; as of April 30, 2012, $21.1 million remained outstanding under our board authorization.  We cancel shares that we repurchase.  Although we generally prioritize bank debt reduction over share repurchases we may consider share repurchases when there are anomalies in the share value created by, but not limited to, market conditions.
 
 
48

 
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.
 
ITEM 5. OTHER INFORMATION

Item 5.02(e). On March 15, 2012, the Board of Directors of Shuffle Master, Inc. approved the following annual base salaries and bonus targets, effective February 25, 2012, for the named executive officers of the Company as follows:

·  
Michael Gavin Isaacs, Chief Executive Officer: $0.5 million annual base salary and 100% target bonus;
·  
David B. Lopez, Executive Vice President and Chief Operating Officer: $0.4 million annual base salary and 60% target bonus;
·  
Linster W. Fox, Executive Vice President, Chief Financial Officer and Secretary: $0.3 million annual base salary and 60% target bonus;
·  
Louis J. Castle, Chief Strategy Officer: $0.3 million annual base salary and 60% target bonus;
·  
Roger Snow, Executive Vice President: $0.3 million annual base salary and 60% target bonus; and
·  
Kathryn S. Lever, Executive Vice President and General Counsel: $0.3 million annual base salary and 60% target bonus.
 
 
49

 
 
ITEM 6.  EXHIBITS

3.1
Articles of Incorporation of Shuffle Master, Inc. as amended July 15, 1992 (Incorporated by reference to exhibit 3.2 in our Annual Report on Form 10-K for the year ended October 31, 1995).
3.2
Articles of Amendment to Articles of Incorporation of Shuffle Master, Inc., effective January 14, 2005 (Incorporated by reference to exhibit 3.2 to our Annual Report on Form 10-K, filed January 13, 2005).
3.3
Articles of Correction of Articles of Amendment of Articles of Incorporation of Shuffle Master, Inc., effective March 15, 2005 (Incorporated by reference to exhibit 3.1 to our Current Report on Form 8-K, filed March 18, 2005).
3.4
Amended and Restated Bylaws of Shuffle Master, Inc., effective April 4, 2011 (Incorporated by reference to exhibit 3.4 to our Current Report on Form 8-K, filed April 8, 2011).
4.1
Registration Rights Agreement dated May 13, 2004, by and between Casinos Austria AG on the one hand and Shuffle Master, Inc. on the other hand (Incorporated by reference to exhibit 10.2 in our Quarterly Report on Form 10-Q for the quarter ended April 30, 2004).
10.1
Share Sale and Transfer Agreement, dated as of March 5, 2012, by and between bwin.party services (Austria) GMBH and Shuffle Master International, Inc.

31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS
XBRL Instance**
101.SCH
XBRL Taxonomy Extension Schema**
101.CAL
XBRL Taxonomy Extension Calculation**
101.DEF
XBRL Taxonomy Extension Definition**
101.LAB
XBRL Taxonomy Extension Labels**
101.PRE
XBRL Taxonomy Extension Presentation**

*           Exhibits 32.1 and 32.2 are furnished to accompany this report on Form 10-Q but shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise and shall not be deemed incorporated by reference into any registration statements filed under the Securities Act of 1933.

**         XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. 
 
 
50

 
 
SIGNATURES
 
Pursuant to the requirements of 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 4, 2012  
       
 
/s/ MICHAEL GAVIN ISAACS   
  Michael Gavin Isaacs  
  Chief Executive Officer  
  (Principal Executive Officer)  
     
  /s/ LINSTER W. FOX   
  Linster W. Fox  
  Chief Financial Officer  
  (Principal Financial Officer)  
 
 
 
51
EX-10.1 2 ex10-1.htm EXHIBIT 10.1 ex10-1.htm
EXHIBIT 10.1
 

EXECUTION VERSION



SHARE SALE AND TRANSFER AGREEMENT


ENTERED INTO BY AND BETWEEN


BWIN.PARTY SERVICES (AUSTRIA) GMBH
Marxergasse 1B / Untere Viaduktgasse 4, 1030 Vienna
AUSTRIA

AS SELLER


AND


SHUFFLE MASTER INTERNATIONAL, INC.
1106 Palms Airport Drive, Las Vegas, Nevada 89119

AS PURCHASER



DATED
March 5 2012
 
 
-1-

 

Table of Contents
 
1. Interpretation   6
1.1 Definitions   6
1.2 Schedules   18
1.3 Information   19
1.4 Headings   19
1.5 Knowledge   19
2. SALE AND TRANSFER OF SHARES   19
3. CONSIDERATION, SECURED FUNDING   20
3.1 Purchase Price   20
3.2 Purchase Price Adjustment   21
3.3 Default Interest   28
3.4 No Right to Set-Off   28
3.5 Parent Guarantees   28
3.6 Network Security Deposits   28
4. WARRANTIES OF SELLER   29
5. GENERAL MATTERS RELATING TO WARRANTIES and covenants   29
5.1 General   29
5.2 Specific Other Aspects of Claims   32
5.3 No Double Remedies   36
6. WARRANTIES OF PURCHASER   36
6.1 Due incorporation   36
6.2 Authority   36
6.3 No violation   37
6.4 Funding   37
6.5 No antitrust clearances   37
6.6 Expiration   37
7. CONDITIONS PRECEDENT TO CLOSING   38
7.1 Conditions Precedent   38
7.2 Long-Stop Date   42
7.3 Efforts to Fulfil the Conditions Precedent   42
8. PRE-CLOSING COVENANTS   43
8.1 Conduct   43
8.2 Regulatory Filings; Other Actions   46
                
 
-2-

 
 
8.3 Advice of Changes   48
8.4 Continued Access to Information   49
8.5 No Other Negotiations   49
8.6 Tax Matters   50
9. CLOSING   51
9.1 Closing Date   51
9.2 Documents to be executed or delivered and actions to be taken   51
9.3 Right to Rescind   55
10. Post-Closing Covenants   58
10.1 Exoneration   58
10.2 Post-Closing Measures   58
10.3 Patent License Agreement   58
10.4 Restrictions on Use of Business Customer Data   58
11. ANNOUNCEMENTS   60
12. PAYMENTS, COSTS AND EXPENSES   60
12.1 Costs of agreement   60
12.2 Costs of transaction   60
13. GOVERNING LAW   61
14. ARBITRATION   61
14.1 Arbitration agreement   61
14.2 Exceptions from venue   61
14.3 Scope of arbitration clause   61
14.4 Costs of arbitration   61
14.5 Specific performance, injunctive relief   62
14.6 Applicable law   62
15. MISCELLANEOUS   62
15.1 Amendments   62
15.2 No assignment   62
15.3 Nomination right   62
15.4 Severability   63
15.5 Entire agreement   63
15.6 Notices   64
 
 
-3-

 

List of Schedules
 
 Schedule 1.1-B    Kahnawake Migration Activities
 Schedule 3.1    Working Capital and Net Debt
 Schedule 3.5-A   Parent Guarantee - Purchaser
 Schedule 3.5-B      Parent Guarantee - Seller
 Schedule 4        Warranties of Seller
 Schedule 4 Part 4.2     List of Subsidiaries and share capital of Subsidiaries
 Schedule 4 Part 7     Material Contracts
 Schedule 4 Part 12     List of Insurances
 Schedule 4 Part 14   Unaudited Financial Statements
 Schedule 7.1.6      Governmental Authority Consents
 Schedule 7.1.7  Third Party Consents
 Schedule 7.1.7  Gaming Regulatory Measures (Gaming Permits)
 Schedule 7.1.7          Gaming Regulatory Measures (License Surrenders)
 Schedule 7.1.8     Gaming Regulatory Measures (Dissociations)
 Schedule 7.1.8    Gaming Regulatory Measures (Notices of Dissociation)
 Schedule 7.1.8    Gaming Regulatory Measures (Amended Contracts)
 Schedule 7.1.8    Gaming Regulatory Measures (Filtered Jurisdictions)
 Schedule 9.2(f)      Transition Services Agreement
 Schedule 9.2(g)        Tax Deed
 Schedule 10.3       License Agreement
 
 
-4-

 

THIS SHARE SALE AND TRANSFER AGREEMENT (the "Agreement") is entered into by and between the following Persons (as defined below):

(1)
bwin.party services (Austria) GmbH is a limited liability company incorporated and existing under the laws of Austria, having its registered office and principal place of business in Vienna, Austria and business address Marxergasse 1B / Untere Viaduktgasse 4, 1030 Vienna, Austria, registered with the Commercial Court of Vienna under the registration number FN 351580 f (the "Seller");

and

(2)
Shuffle Master International, Inc. is a corporation incorporated and existing under the laws of Nevada, having its registered office and principal place of business in Nevada and business address at 1106 Palms Airport Drive, Las Vegas, Nevada 89119 (the "Purchaser").

PREAMBLE

WHEREAS, Ongame Network Ltd. is a limited liability company incorporated and existing under the laws of Gibraltar, having its registered office and principal place of business in Gibraltar and business address at Suite 1 2nd Floor International House, 16 Bell Lane, Gibraltar and registered with the Registrar of Companies in Gibraltar under the registration number 89063 (the "Company");

WHEREAS, the Company operates a B2B online poker business (the "Business"). Pursuant to this Agreement, the Seller wishes to sell and the Purchaser wishes to purchase the entire issued share capital of the Company and thereby acquire Business;
 
 
-5-

 

WHEREAS, the Company (i) directly owns 100 % (one hundred per centum) of the shares in Ongame Services AB, a limited liability company incorporated and existing under the laws of Sweden, having its registered office and principal place of business in Stockholm and business address at Västra Järnvägsgatan 3, 111 64 Stockholm registered with the Swedish Companies Registration Office under the registration number 556851-7824 ("Ongame Services") and (ii) indirectly, through Ongame Services, owns 100 % (per centum) of the shares in Ongame Markets AB, a limited liability company incorporated and existing under the laws of Sweden, having its registered office and principal place of business in Stockholm and business address at Västra Järnvägsgatan 3, 111 64 Stockholm registered with the Swedish Companies Registration Office under the registration number 556725-7745 ("Ongame Markets")"; further, the Company (iii) directly owns 99,9 % and indirectly, through Ongame Services an additional 0,1%, of the shares, together constituting 100% (per centum) of the shares in Ongame Markets Malta Plc, a limited liability company incorporated and existing under the laws of Malta, having its registered office and principal place of business in Ta' Xbiex, Malta and business address at Suite A, Dolphin Court A (Office 6304), Embassy Way, Ta' Xbiex XBX1071, Malta registered with the Maltese Companies Registration Office under the registration number C 54283 ("Ongame Markets Malta"; the Company's shares in Ongame Services, Ongame Markets and Ongame Markets Malta are hereinafter together referred to as the "Subsidiary Shares").

WHEREAS, the Company has an authorised share capital of EUR 25,000 (euro twenty-five thousand), which is divided into 25,000 ordinary shares of EUR 1 (euro one) each, 350 of which have been allotted and issued to the Seller and all of which are fully paid-up, thereby corresponding to a fully paid-up share capital contribution by the Seller to the Company of EUR 350 (euro three hundred fifty) (the "Shares");

WHEREAS, the Purchaser is engaged in the business of, among other things, leasing, licensing and selling proprietary games, gaming platforms and gaming equipment;

WHEREAS, the Purchaser desires to purchase all (but not only some) of the Shares, and the Seller wishes to sell all of the Shares on the terms and conditions set forth herein;

WHEREAS, the Seller and the Company have furnished the Purchaser with the requisite legal, financial, commercial and technical documents and information in the process of a due diligence review of the Group Companies prior to the date hereof;

NOW THEREFORE, the Purchaser and the Seller hereby agree as follows:

1.
INTERPRETATION

1.1
Definitions

In this Agreement, the following words and expressions shall have the meanings set opposite them below:
 
 
-6-

 

"ABGB" means the Austrian Civil Code as amended from time to time;

"Adjustment Amount" means the amount to be calculated in accordance with section 3.2;

"Access Restrictions" has the meaning ascribed to it in schedule 4 section 8.2;

"Affiliate" means with respect to any specified Person, any other Person that, directly or indirectly, is controlled by, controls or is under common control with such first Person. For purposes of this definition, ‘control’ shall include (i) the ownership of 50% or more of the legal or beneficial interest in any Person; or (ii) the legal power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; or (iii) the ability to appoint, directly or indirectly, the majority of its directors or executive officers; or (iv) the ability to exercise, directly or indirectly, a majority of the votes exercisable at a general meeting; or (v) the right to receive, directly or indirectly, a majority of the proceeds arising from: (a) any declaration of a dividend; or (b) a distribution arising in the course of winding up, whether solvent or insolvent, or any return of capital to shareholders or members; and the expressions ‘controlled’ and ‘controls’ shall be construed accordingly;

"Agreement" means this Share Sale and Transfer Agreement including its Preamble and Schedules, which form an integral part hereof;

"Alternative Transaction" means any commitment, agreement or transaction involving or providing for the possible disposition of all or any substantial portion of any Group Company’s business, assets or capital stock, whether by way of merger, consolidation, sale of assets, sale of stock, stock exchange, tender offer and/or any other form of business combination;

"Articles of Association" means the articles of association of the Company as last amended on 20 June 2007;

"Asset Transfer Agreement" means the asset transfer agreement dated 29 July 2011, as amended on 17 August 2011, entered into between bwin Games and Ongame Services pursuant to which all assets and liabilities relating to bwin Games' B2B business have been transferred to Ongame Services;
 
 
-7-

 

"Audited Financial Statements" has the meaning ascribed to it in section 7.1.11.

"Auditor Statement" means the statement by the Company's Auditor indicating the Adjustment Amount;

"Basket" has the meaning ascribed to it in section 5.2.3(b).
 
 
"Blocked Jurisdictions" has the meaning ascribed to it in section 8.2 of schedule 4;

"Business" has the meaning ascribed to it in the second WHEREAS clause of this Agreement;

"Business Day" means any day other than a day which is a Saturday, Sunday or a statutory or public holiday in Austria and Gibraltar;

"Business Customer" means any licensed business entity other than the Seller that offers access to online poker play through a website or other telecommunication facilities to Customers that interoperate with the online poker platform operated by the Company as part of the Business;

"bwin Games" means bwin Games AB, a limited liability company incorporated and existing under the laws of Sweden, having its registered office and principal place of business in Stockholm and business address at Västra Järnvägsgatan 3, 111 64 Stockholm registered with the Swedish Companies Registration Office under the registration number 556232-3567;

"Claim" means any claim of the Purchaser against the Seller pursuant to section 5;

"Claim Notice" has the meaning ascribed to it in section 5.1.3;

"Closing" has the meaning ascribed to it in section 9.1;

"Closing Date" has the meaning ascribed to it in section 9.1;
 
 
-8-

 

"Closing Notice" has the meaning ascribed to it in section 7.1.8(a);

"Company" has the meaning ascribed to it in the first WHEREAS clause of this Agreement;

"Company's Auditor" means KPMG AB or BDO International Limited, as appointed pursuant to the shareholder's meeting of the Company on or after the Closing Date under Gibraltar law;

"Conditions Precedent" has the meaning ascribed to it in section 7.1;

"Contingent Consideration" has the meaning ascribed to it in section 3.1;

"Consulting and Cooperation Agreement" means the Consulting and Cooperation Agreement by and between ElectraWorks Ltd. and the Company and entered into on the Signing Date;

"Current Assets" shall mean the sum of net accounts receivable, Group Receivables Trading Balances, tax authority accounts, prepaid expenses and accrued income, and other current receivables and assets, but excluding cash at bank and on hand, receivables of the Group Companies pursuant to the CQR Agreement and processor clearing accounts, each as prepared on a consistent basis and measured and calculated using the same accounting principles, practices, methodologies and policies in accordance with International Financial Reporting Standards. For the avoidance of doubt, Current Assets shall exclude any Group Balances, amounts deposited with Governmental Authorities in connection with Gaming Approvals or applications, and the Stockholm Office Security Deposit.

"Current Liabilities" shall mean the sum of accounts payable, payroll and social security liabilities, provisions, accruals and deferred income, and other current liabilities, but excluding Network Security Deposits, payables of the Group Companies pursuant to the CQR Agreement, merchant clearing accounts, and bettors' clearing accounts, each as prepared on a consistent basis and measured and calculated using the same accounting principles, practices, methodologies and policies in accordance with International Financial Reporting Standards. For the avoidance of doubt, Current Liabilities shall include all obligations to pay ordinary course bonus or other payments to directors, officers, employees to the extent not reflected in Net Debt or elsewhere in this Agreement, together with the employer portion of any employment Taxes payable in respect of the foregoing, all accrued in accordance with International Financial Reporting Standards. For the avoidance of doubt, Current Liabilities shall not include any amounts relating to any Group Balances.
 
 
-9-

 

"Customer" means any individual in receipt of gaming services from a Business Customer;

"Decrease" has the meaning ascribed to it in section 3.2.8;

"Disclosure Letter" means the letter issued by the Seller to the Purchaser delivered concurrently herewith containing certain information on the Group, which information qualifies the Warranties;

"Dissociation" has the meaning ascribed to it in section 7.1.8(b);

"Encumbrance" means and includes any claim, charge, mortgage, pledge, security, lien, option, easement, lease, hypothecation, right to acquire, right of pre-emption, right of conversion, priority, assignment or other third party rights, retention of title, right of first refusal or security interest or other similar third party rights or arrangement of any kind or nature whatsoever, unless provided by statutory laws, regulations or the Articles of Association;

"Estimated Net Debt" has the meaning ascribed to it in section 3.2.10;

"Estimated Working Capital" has the meaning ascribed to it in section 3.2.10;

"Fairly Disclosed" means that the matter or information has been disclosed to the Purchaser (i) in the Disclosure Letter or (ii) in this Agreement (including any Schedules thereto), so as to make any prudent purchaser experienced in transactions of this nature and extent, such as the Purchaser, aware of the existence of any fact or circumstance which would qualify to such extent a Seller's Warranty;
 
 
-10-

 

"Fundamental Warranties" means the Warranties given by the Seller pursuant to sections 1 (Authority), 2 (No Violation), 3 (Title) and 4 (Share Capital of and Quota in Company) of Schedule 4;

"Gaming Issue" means Purchaser has been advised by a Gaming Regulatory Authority that the consummation of the transactions contemplated by this Agreement is a cause of concern for such Gaming Regulatory Authority and that such consummation may impact such Purchaser’s or any of Purchaser’s Affiliates’ suitability to continue to hold a Gaming Approval or to receive a Gaming Approval (to the extent Purchaser or such Affiliate is in the process of seeking a Gaming Approval) from such Gaming Regulatory Authority or may otherwise jeopardise its standing as a licensee, which in all cases could result in a significant adverse consequence for the Purchaser or any of its Affiliates (as determined in good faith by the Purchaser);

"Gaming Regulatory Authority" means those international, national, state, local, tribal and other governmental, regulatory and administrative authorities, agencies, boards and officials responsible for or regulating gaming or gaming activities in any jurisdiction;

"Gaming Approvals" means, as applicable, all required approvals, authorizations, licenses, permits, consents, findings of suitability, registrations, exemptions and waivers of or from any Gaming Regulatory Authority;

"Governmental Authority" means any national, federal, regional, state, local tribal, Native American or other governmental body, agency, instrumentality, commission, department, court, ministry, regulatory, self-regulatory, or similar authority or organisation, including governmental authorities of the European Union and including gaming regulatory authorities;

"Group Balances" means any receivables or payables due from or to the Seller or any of its Affiliates, except for Group Receivables Trading Balances.

"Group Receivables Trading Balances" means, if and only to the extent that any underlying trading balances due to any Group Company from bwin.party digital entertainment plc or any of its Affiliates, arising from activity undertaken by bwin.party digital entertainment plc’s or its Affiliates’ customers and labels, is not separately identified in a nominal ledger account, the aggregate amount owed under invoices issued by any Group Company to bwin.party digital entertainment plc or any of its Affiliates for such activity during the preceding calendar month.
 
 
-11-

 

"Group" or "Group Companies" means the Company and the Affiliates controlled by it, being Ongame Services, Ongame Markets and Ongame Markets Malta, and "Group Company" means any one of them;

"Hurdle" has the meaning ascribed to it in section 5.2.3(a);

"Specifically Indemnifiable Matter" means any fact, matter, event or circumstance set forth in the Disclosure Letter that is expressly identified as a "Specifically Indemnifiable Matter";

"Increase" has the meaning ascribed to it in section 3.2.8;

"Initial Adjustment Amount" has the meaning ascribed to it in section 3.2.10;

"Initial Purchase Price" has the meaning ascribed to it in section 3.1;

"IPR" means patents, trademarks, service marks, design rights, trade dress, copyright (including copyright in computer software), database rights and rights in know-how, customer lists, supplier lists, proprietary processes and algorithms, in each case, whether registered or unregistered, anywhere in the world, including applications therefor;

"Kahnawake Migration Activities" shall be the activities described on Schedule 1.1-B, involving (i) the migration of all Business Customer data (including but not limited to poker player data, wagering transaction data, wagering settlement data and wagering account debiting/crediting data) from computer servers or other equipment located on any property or premises subject to the jurisdiction of the Kahnawake Gaming Commission to computer servers or equipment in Gibraltar, and (ii) the disposition by all Group Companies of all right, title and interest in or to any computer servers or other equipment located on any property or premises subject to the jurisdiction of the Kahnawake Gaming Commission;
 
 
-12-

 

"Kahnawake Permits" has the meaning ascribed to it in schedule 4 section 8.1;

"LIBOR" means the British Bankers Association Interest Settlement Rate for the relevant currency and period displayed on the appropriate page of the Reuters screen. If the agreed page is replaced or service ceases to be available, the rate shall be the rate offered by leading banks in the London interbank market as reported by any publicly available source of similar market data;

"License Agreement" has the meaning ascribed to it in section 10.3;

"License Surrenders" has the meaning ascribed to it in section 8.2(b)(i);

"Long-Stop Date" has the meaning ascribed to it in section 7.2;

"Loss" means all losses (including, without limitation, lost profits), liabilities, damages (including, without limitation, damages adequately attributable or reasonably proximate to the triggering event or circumstances), costs (including, without limitation, legal costs and expenses for professional advisors), quantifiable diminution in value, charges, expenses, actions, fines, penalties, proceedings, claims, remediation, clean-up and removal costs and demands (in each case calculated on a Euro for Euro basis) suffered or sustained by the Purchaser or by any Group Company;

"Material Adverse Change" means the occurrence of a change, effect or event having a Material Adverse Effect;

"Material Adverse Effect" means an individual or cumulative adverse change in or effect on (other than a change or effect directly or indirectly caused by or otherwise attributable to Purchaser’s breach of this Agreement or any other action by Purchaser that violates any applicable law, rule or regulation) the business, customers, customer relations, operations, assets, properties or liabilities of any Group Company individually, or the sum of such adverse changes relating to the Group Companies in the aggregate, which (i) is, or is reasonably expected to have, an effect on the business, properties, working capital, condition (financial or otherwise), assets, properties or liabilities of such Group Company or the Group with an economic effect tantamount to a reduction of the net present value of the Group in excess of EUR 3,500,000 in the aggregate. The Parties agree that any dispute over the magnitude of the reduction of the net present value of the Group attributable to such change or effect shall be resolved by an independent accountant selected pursuant to Section 3.2.7; (ii) prevents Seller from consummating the sale and transfer of Shares hereunder; or (iii) prevents (other than as a result of any restrictions or limitations imposed upon Purchaser by any gaming regulatory authority under whose jurisdiction Purchaser operates) Purchaser from continuing the conduct of each Group Company’s operations following the Closing in substantially the same manner in which it is conducted on the Signing Date and on the Closing Date except as otherwise expressly contemplated by this Agreement;
 
 
-13-

 

"Material Contracts" means all contracts to which any Group Company is a party or by which any Group Company is bound that (i) continues for a mandatory period of more than one year from the date hereof and cannot be terminated on one month's or less notice without penalty, (ii) requires payments by any Group Company or a counter party, in the aggregate, in excess of EUR 50,000 or its equivalent, or (iii) pertains to the lease of any real estate in which greater than 25% of the aggregate number of employees of the Group regularly work, or (iv) is in another way material to the undisturbed conduct of the Group Companies' business;

"Necessary IPR" has the meaning ascribed to it in schedule 4 part 11;

"Net Debt" has the meaning ascribed to it in section 3.2.10;

"Normalised Working Capital" has the meaning ascribed to it in section 3.2.10;

"Notice of Disagreement" has the meaning ascribed to it in section 3.2.5;

"Ongame Markets" has the meaning ascribed to it in the third WHEREAS clause of this Agreement;

"Ongame Markets Malta" has the meaning ascribed to it in the third WHEREAS clause of this Agreement;

"Ongame Services" has the meaning ascribed to it in the third WHEREAS clause of this Agreement;

"Party" means any one of the Seller or the Purchaser, and "Parties" means all of them;
 
 
-14-

 

"Pension Commitment" means an obligation, liability or commitment (a) to pay a retirement pension, disability pension, pension to surviving dependents or similar pensions to present or former employees or (b) to financially contribute to any insurance, pension fund, plan, trust or similar institution which, in turn, has assumed obligations, liabilities or commitments of the nature described in sub-clause (a) above vis-à-vis its participants or beneficiaries; provided that an obligation of the employer under applicable social security or similar laws to make regular and recurring contributions to social security institutions shall not fall within the definition of Pension Commitments, and provided further that an obligation to pay severance payment shall not constitute a Pension Commitment;

"Permits" has the meaning ascribed to it in Schedule 4 section 8;

"Person" means any individual, firm, company, entity, government (including agencies, departments, bureaus, boards, divisions and instrumentalities thereof), trustee, receiver, liquidator, state, regional authority, municipality or agency of a state or any joint venture, association, partnership (whether or not having separate legal personality) and unless specified otherwise, includes its successors and permitted assignees;

"Pre-Closing Straddle Period" shall mean the portion of the Straddle Period ending on the Closing Date;

"Pre-Closing Straddle Period Taxes" shall mean Taxes which accrue in the Pre-Closing Straddle Period. For all purposes of this Agreement, in order to apportion appropriately any Taxes relating to a Straddle Period, the portion of any Taxes that are allocable to the Pre-Closing Straddle Period shall be (a) in the case of income Taxes and all other Taxes that are not imposed on a periodic basis, the amount that would be payable if the taxable year or period ended on the Closing Date based on an interim closing of the books and (b) in the case of any Taxes that are imposed on a periodic basis, the amount of such Taxes for the relevant period multiplied by a fraction the numerator of which shall be the number of calendar days from the beginning of the period up to and including the Closing Date and the denominator of which shall be the number of calendar days in the entire period;
 
 
-15-

 

"Pre-Closing Tax Period" shall include any Tax period ending on or before the Closing Date, including the Pre-Closing Straddle Period;

"Pre-Closing Taxes" shall mean any Taxes of any Group Company relating or attributable to any Pre-Closing Tax Period and, for the avoidance of doubt, any Pre-Closing Straddle Period Taxes, regardless of when a return is required to be filed or such Taxes paid;

"Purchase Price" shall mean the Initial Purchase Price, as adjusted pursuant to this Agreement, together with the Contingent Consideration;

"Purchaser" has the meaning ascribed to it in paragraph (2) above;

"Purchaser’s Auditor" has the meaning ascribed to it in section 3.2.2;

"Reduction in Force" has the meaning ascribed to it in section 8.1(m);

"Responsible Managers" has the meaning ascribed to it in section 1.5;

"Restricted Period" has the meaning ascribed to it in section 10.4;

"Rules" has the meaning ascribed to it in section 14.1;

"Seller" has the meaning ascribed to it in paragraph (1) above;

"Seller’s Auditor" has the meaning ascribed to it in section 3.2.2;

"Settled Claim" has the meaning ascribed to it in section 5.1.3(a);

"Shares" has the meaning ascribed to it in the fourth WHEREAS clause of this Agreement;

"Signing Date" means the date of execution of this Agreement by the Parties;

"Specified Claims" shall mean Claims relating to Specified Warranties;
 
 
-16-

 

"Specified Warranties" means the Warranties given by the Seller pursuant to sections 8.2 (Enforcement of Access Restrictions), 11 (IPR) and 13.2 (Sufficiency of Assets) of Schedule 4;

"Stockholm Office Security Deposit" has the meaning ascribed to it in section 9.2(a);

"Straddle Period" shall mean a taxable period beginning on the day following the last complete Tax period ended before the Closing Date and ending after, the Closing Date;

"Subsidiary Shares" has the meaning ascribed to it in the third WHEREAS clause of this Agreement;

"Tax" or "Taxes" means (a) all kinds of taxes whether direct or indirect and whether levied by reference to income, profits, gains, asset values, turnover, added value or other reference, including, all transfer taxes (such as stamp duties, capital transfer tax, real estate transfer tax etc) and (b) all statutory, governmental, state, provincial, local governmental or municipal impositions, duties (including customs duties), contributions (including, without limitation, social security contributions, other wage or salary related duties, contributions to statutory interest groups such as the chambers of commerce and their subdivisions), in each case ((a) and (b)), whenever and wherever imposed and whether imposed by way of a withholding or deduction for account of tax or otherwise and any interest, late interest or penalties thereon;

"Tax Deed" means the tax covenant to be executed at the Closing in the form of schedule 9.2(g);

"Third Party Claim" has the meaning ascribed to it in section 5.2.7;

"Third Party Expenses" has the meaning ascribed to it in section 0;

"Transition Services Agreement" has the meaning ascribed to it in subsection 9.2(f);
 
 
-17-

 

"Triggering Event" means the date after which both (A) the federal government (or any branch, department or agency thereof) of the United States and/or any state of the United States (or any branch, department or agency thereof) authorises a Person to commence the offering of real money online poker play to members of the general public residing in a state of the United States and (B) such Person has commenced operations of such online poker play pursuant to a license granted pursuant to the laws, rules or regulations specifically regulating such online poker play. For purposes of the foregoing, the following shall not constitute "real money online poker play": (i) online poker authorised by any Native American jurisdiction, (ii) online poker "play for fun" or online poker that does not involve the wagering of cash, (iii) online poker conducted on a beta, test or otherwise provisional basis, (iv) online poker operated by any Governmental Authority, (v) online poker conducted pursuant to laws, rules or regulations under which the Purchaser and each Group Company are de jure ineligible (only for so long as such ineligibility continues) to receive the requisite license, consent or approval to supply B2B or B2C real money online poker, unless such ineligibility is a consequence of the acquisition of the Shares by the Purchaser from the Seller and related transactions contemplated by this Agreement;

"Unaudited Financial Statements" has the meaning ascribed to it in Schedule 4 Part 14;

"Unlimited Claims" shall mean Claims involving fraud or Wilful Breach and Claims relating to Fundamental Warranties;

"Wilful Breach" shall mean, with respect to any Warranty or covenant, an action or omission (including a failure to cure circumstances or the wilful concealment of information) that the breaching party knows is or would constitute a breach of such Warranty or covenant or any intentional breach or any Warranty or covenant;

"Warranty" means a representation and warranty given, in the case of the Seller pursuant to section 4 or, in the case of the Purchaser pursuant to section 6 and Warranties means all of the respective representations and warranties of a Party together; and

"Working Capital" has the meaning ascribed to it in section 3.2.10.
 
 
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1.2
Schedules

The Preamble and the Schedules attached hereto form an integral part of the Agreement.

1.3
Information

Any reference to books, records or other information means, in any form, including, but not limited to, paper, electronically-stored data, magnetic media, film and microfilm.

1.4
Headings

The headings in this Agreement are for the purpose of convenience only and do not affect its interpretation and are to be ignored in construing its terms.

1.5
Knowledge

Wherever reference is made to the knowledge of the Seller in this Agreement (or to a matter that a Seller is aware of or to expressions of like impact), such reference shall be interpreted and understood as the actual knowledge of Peter Bertilsson, Peter Messner, Olivia Gorajewski and Martin Lerby or any member of the Seller's or any Group Company’s management board at any time during the thirty (30) day period prior to the date of this Agreement (the "Responsible Managers"), the knowledge that each Responsible Manager would reasonably be expected to obtain in the course of diligently performing his or her duties for the Group Companies and the knowledge that each Responsible Manager would reasonably be expected to have after conducting a reasonable inquiry of all relevant employees of the Group Companies who such Responsible Managers should reasonably believe would have actual knowledge of the matters represented.

2.
SALE AND TRANSFER OF SHARES

2.1
Upon the terms and conditions of this Agreement, the Seller hereby sells and transfers the Shares to the Purchaser and the Purchaser hereby purchases and accepts the transfer of the Shares from the Seller, upon the terms and conditions of this Agreement, with effect as of Closing.
 
 
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2.2
The Seller herewith grants its approval to the sale and transfer of the Shares as contemplated in section 2.1 above.

2.3
The transfer of the Shares agreed herein takes place with effect as of Closing having been accomplished pursuant to section 9.2. No further document, declaration or deed needs to be executed in order to effect the transfer of the Shares at Closing.

2.4
The Shares are sold and transferred with all rights and obligations attaching to them under Gibraltar law and the Articles of Association, including all rights to dividends in relation to the Shares for all periods as from the Closing Date onwards.

3.
CONSIDERATION, SECURED FUNDING

3.1
Purchase Price

As consideration for the sale and the transfer of the Shares, the Purchaser shall pay to the Seller EUR 19,500,000 plus or minus (as provided in the definition of Initial Adjustment Amount in section 3.2.10) the Initial Adjustment Amount less the absolute value of the Estimated Net Debt (the "Initial Purchase Price").

The Initial Purchase Price shall be paid on the Closing Date free and clear of any cost, commission or other deduction (except for such costs which are imposed on the Seller by its bank for receipt of the funds in the Seller's accounts) by transfer to Seller's bank account communicated by the Seller to the Purchaser at least five (5) Business Days prior to the Closing Date.

As additional consideration for the sale and the transfer of the Shares, the Purchaser shall pay to the Seller the following additional consideration (the "Contingent Consideration"), if and only if the Triggering Event occurs on or before 1,826 days following the Closing Date, in the amount set forth below:

Period in which Triggering Event occurs
Contingent Consideration
On or before 730 days following the Closing Date
EUR 10,000,000
On or after 731 days following the Closing Date and on or before 1,095 days following the Closing Date
EUR 7,000,000
On or after 1,096 days following the Closing Date and on or before 1,461 days following the Closing Date
EUR 5,000,000
On or after 1,462 days following the Closing Date and on or before 1,826 days following the Closing Date
EUR 3,000,000
 
 
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No Contingent Consideration will be paid if the Triggering Event does not occur on or before 1,826 days following the Closing Date. The Contingent Consideration shall be paid not later than thirty (30) days following the date on which the Triggering Event occurs free and clear of any cost, commission or other deduction (except for such costs which are imposed on the Seller by its bank for receipt of the funds in the Seller's accounts) by transfer to the Seller's account set forth in this section 3.1 (or such other account which may be notified to the Purchaser by the Seller from time to time but not later than ten (10) days prior to the due date of the Contingent Consideration). The Contingent Consideration shall become due and payable once and only once, if at all.

3.2
Purchase Price Adjustment

3.2.1
As soon as reasonably possible following the Closing Date, the Initial Purchase Price shall be adjusted by an amount (the "Adjustment Amount") as determined by the Company's Auditor in the Auditor Statement as per any deviations of Working Capital on the Closing Date from Estimated Working Capital and any deviations of Net Debt on the Closing Date from Estimated Net Debt, determined as provided below.

If Working Capital on the Closing Date is more than EUR 250,000 greater than Normalised Working Capital, the "Actual Working Capital Increase" shall be the amount by which Working Capital on the Closing Date is more than EUR 250,000 greater than Normalised Working Capital and the Actual Working Capital Decrease shall be EUR 0 (nil).
 
If Working Capital on the Closing Date is more than EUR 250,000 less than Normalised Working Capital, the "Actual Working Capital Decrease" shall be the amount by which Working Capital on the Closing Date is more than EUR 250,000 less than Normalised Working Capital and the Actual Working Capital Increase shall be EUR 0 (nil).
 
 
-21-

 
 
If Working Capital on the Closing Date is neither more than EUR 250,000 greater than Normalised Working Capital nor more than EUR 250,000 less than Normalised Working Capital, the "Actual Working Capital Increase" and the "Actual Working Capital Decrease" shall be EUR 0 (nil).
 
The Adjustment Amount shall be determined as follows:
 
increase by
the amount (if any) by which the Actual Working Capital Increase exceeds the Estimated Working Capital Increase;
the amount (if any) by which the absolute value of the Estimated Working Capital Decrease exceeds the absolute value of the Actual Working Capital Decrease;
decrease by
the amount (if any) by which the Estimated Working Capital Increase exceeds the Actual Working Capital Increase;
the amount (if any) by which the absolute value of the Actual Working Capital Decrease exceeds the absolute value of the Estimated Working Capital Decrease;
increase by
the amount of the difference between the absolute value of the Net Debt on the Closing Date and the absolute value of Estimated Net Debt (if Net Debt on the Closing Date is greater than Estimated Net Debt);
decrease by
the amount of the difference between the absolute value of the Net Debt on the Closing Date and the absolute value of Estimated Net Debt (if Net Debt on the Closing Date is less than Estimated Net Debt)

For the avoidance of doubt, with respect to references to Net Debt and Estimated Net Debt above, a negative number with a lesser absolute value is greater than a negative number with a greater absolute value (e.g., -11 is greater than -12).
 
Any individual position reflected in the Auditor Statement shall be expressed in Euros and, to the extent recorded in the books and records of the Group Companies in currencies other than Euros, be converted at the exchange rate published by the European Central Bank at http://www.ecb.int/stats/exchange/eurofxref/html/index.en.html on the relevant reference date.
 
 
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3.2.2
The Company's Auditor shall inform the Parties in the Auditor Statement about the Adjustment Amount. The Auditor's Statement shall be delivered to the Parties within 30 (thirty) Business Days after the Closing Date. The Parties shall procure that the Company's Auditor, as well as one auditor designated by the Purchaser (the "Purchaser’s Auditor" which may be the same as the Company’s Auditor) and one auditor designated by the Seller (the "Seller’s Auditor"), are each given all such assistance and access to books and records as they may reasonably request in writing.

3.2.3
The Auditor Statement shall be prepared on the basis of management accounts and closing balance sheet as per the Closing Date.

3.2.4
Unless within a period of 20 (twenty) Business Days after receipt of the Auditor's Statement, either Party notifies the other Party in writing of any disagreement or difference of opinion relating to the Auditor's Statement, the Parties shall be deemed to have accepted the Auditor's Statement as accurate.

3.2.5
If, within the period of 20 (twenty) Business Days referred to in the paragraph 3.2.3 above, either Party has any disagreement or difference of opinion relating to the Auditor's Statement, it shall serve notice to the other Party ("Notice of Disagreement") stating the nature and quantum of the proposed adjustments to the Auditor's Statement and the reasons for the same.

3.2.6
If the Seller and the Purchaser are able to resolve such disagreement or difference of opinion within 30 (thirty) Business Days of the date that the Notice of Disagreement is deemed to be served, the Parties shall be deemed to have accepted as accurate the Auditor's Statement as adjusted to the extent necessitated by the Parties’ resolution. If the Seller and the Purchaser are unable to reach an agreement within 30 (thirty) Business Days of the date that any Notice of Disagreement is deemed to be served, the matter in dispute shall on the application of either the Seller or the Purchaser be referred to the decision of an independent accountant, together with the position of the Purchaser’s Auditor with respect to each proposed adjustment and the position of the Seller’s Auditor with respect to each proposed adjustment, with the request that the independent accountant shall, within 30 (thirty) Business Days of receiving the reference, make, with respect to each proposed adjustment, in light of any views expressed by the Seller and the Purchaser, its own independent determination of such adjustments which reflect the financial position of the Group at the Closing. The Seller and the Purchaser shall procure that the independent accountant is given all such assistance and access to books and records as it may reasonably request. The decision of the independent accountant shall, in the absence of fraud or manifest error, be final and binding on all Parties. The Parties to this Agreement hereby waive any and all claims against the independent accountant with respect to the contents of its decision.
 
 
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3.2.7
The independent accountant shall be appointed by the President for the time being of the Gibraltar Society of Chartered and Certified Accountants upon request of either the Seller or the Purchaser. The costs of the independent accountant shall be borne by the Parties in accordance with the degree of their success as determined by the independent accountant. The Parties shall instruct the independent accountant at the outset to determine the apportionment of his costs at the conclusion of the matter in accordance with this principle.

3.2.8
Provided that the Adjustment Amount is negative, then the Initial Purchase Price shall be reduced accordingly (the "Decrease") and, provided that the Adjustment Amount is positive, then the Initial Purchase Price shall be increased accordingly (the "Increase").

3.2.9
In the event of a Decrease, the Seller shall pay to the Purchaser, and in the event of an Increase, the Purchaser shall pay to the seller the Adjustment Amount within 10 (ten) Business Days following the date on which such amount is agreed upon by the Parties or, in case of disagreement, the decision of the independent accountant becomes final and binding on them. The Adjustment Amount shall be payable in EUR, in irrevocable and immediately available funds with value date on the date of the wire transfer to the bank account set forth in section 3.1 (in the event of an Increase) or communicated in writing by the recipient of the Adjustment Amount to the respective other Party at least five (5) Business Days prior to the payment date.

3.2.10
For purposes of this section 3.2, the "Initial Adjustment Amount" means an amount as calculated below:
 
 
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(a)
where Estimated Working Capital is more than EUR 250,000 greater than Normalised Working Capital, the amount by which Estimated Working Capital is more than EUR 250,000 greater than Normalised Working Capital, such amount to be expressed as a positive number (the "Estimated Working Capital Increase"; and the Estimated Working Capital Decrease shall be EUR 0 (nil)); or
 
(b)
where Estimated Working Capital is more than EUR 250,000 less than Normalised Working Capital, the amount by which Estimated Working Capital is more than EUR 250,000 less than Normalised Working Capital, such amount to be expressed as a negative number (the "Estimated Working Capital Decrease"; and the Estimated Working Capital Increase shall be EUR 0 (nil)); or
 
(c)
where Estimated Working Capital is neither more than EUR 250,000 greater than Normalised Working Capital nor more than EUR 250,000 less than Normalised Working Capital, EUR 0 (nil) in which case the Estimated Working Capital Increase and the Estimated Working Capital Decrease shall be EUR 0 (nil),

and where such amount is a positive number, such amount shall be added to EUR 19,500,000 as part of the calculation of the Initial Purchase Price set out in the first sentence of section 3.1 and where such amount is a negative number, the absolute value of such amount shall be subtracted from EUR 19,500,000 as part of the calculation of the Initial Purchase Price set out in the first sentence of section 3.1.

"Estimated Net Debt" means the Seller’s good faith estimate of Net Debt as of the Closing, as set forth in a written statement delivered to the Purchaser not later than three Business Days prior to the Closing.

"Estimated Working Capital" means the Seller’s good faith estimate of Working Capital as of the Closing, as set forth in a written statement delivered to the Purchaser not later than three Business Days prior to the Closing.

 
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"Net Debt" means the aggregate net debt of the Business, including the line items set out in Schedule 3.1 with an asterisk in the column captioned "Net Debt" (together with any similar or equivalent accounts created in the future) and including the following: cash at bank and on hand, receivables of the Group Companies pursuant to the CQR Agreement, processor clearing accounts, receivables from Seller or any of its Affiliates, payables to Seller or any of its Affiliates, Network Security Deposits, payables of the Group Companies pursuant to the CQR Agreement, merchant clearing accounts, bettors' clearing accounts. For the avoidance of doubt, Net Debt shall include the following items, if required to be accrued in accordance with International Financial Reporting Standards at Closing:

(a) all Group Balances;

(b) all extraordinary bonuses conditioned upon continued employment ("Retention Bonuses") payable to current or former employees or consultants of any Group Company that become due and payable prior to, concurrent with or immediately following the Closing, but shall exclude any such payments that become due and payable after the Closing and other than immediately following the Closing;

(c) all extraordinary bonuses payable to employees or consultants of any Group Company with regard to the Kahnawake Migration Activities to the extent not previously paid;

(d)              all extraordinary payments to Poker Core employees or consultants to the extent not previously paid;

(e)              all Pre-Closing Termination Costs to the extent not previously paid and any Pre-Closing Termination Costs that are payable after the Closing greater than EUR 35,000 or such higher amount as may be agreed in writing with the Purchaser prior to Closing;

(f) all obligations (including the principal amount thereof or, if applicable, the accreted amount thereof and the amount of accrued and unpaid interest thereon) of the Group Companies, whether or not represented by bonds, debentures, notes or other securities (whether or not convertible into any other security), for the repayment of money borrowed, whether owing to banks, financial institutions, on equipment leases or otherwise;
 
 
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(g) all deferred indebtedness of the Group Companies for the payment of the purchase price of property or assets purchased (other than current accounts payable incurred in the ordinary course of business);

(h) all obligations of the Group Companies to pay rent or other payment amounts under a lease which is required to be classified as a capital lease or a liability on the face of a balance sheet prepared in accordance with International Financial Reporting Standards;

(i) all outstanding reimbursement obligations of the Group Companies with respect to letters of credit, bankers’ acceptances or similar facilities issued for the account of any Group Company;

(j) all guaranties, endorsements, assumptions and other contingent obligations of the Group Companies in respect of, or to purchase or to otherwise acquire, indebtedness of others; and

(k) all premiums, penalties, fees, expenses, breakage costs and change of control payments required to be paid or offered in respect of any of the foregoing on prepayment (regardless if any of such are actually paid), as a result of the consummation of the transactions contemplated by this Agreement.

For the avoidance of doubt, cash as included in Net Debt shall exclude amounts deposited with Governmental Authorities in connection with Gaming Approvals or applications, and the Stockholm Office Security Deposit.

"Normalised Working Capital" means EUR 500,000 (such amount having been agreed by the Parties).

"Working Capital" means the aggregate working capital of the Business comprising the sum of Current Assets and Current Liabilities, including the line items set out in Schedule 3.1 with an asterisk in the column captioned "Working Capital" (together with any similar or equivalent accounts created in the future).
 
 
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3.3
Default Interest

If any sum due for payment in accordance with this Agreement is not paid on the due date for payment, the Party in default shall pay default interest at three months LIBOR plus 500 bps per annum (but not less than 7% per annum) on that sum from but excluding the due date to and including the date of actual payment, to the respective other Parties. Any such default interest shall be calculated and compounded with the principal amount due and outstanding on a daily basis.

3.4
No Right to Set-Off

Subject to the following sentence, any right of the Parties to set-off and/or withhold payments due under this Agreement is hereby expressly waived and excluded. The Purchaser shall be entitled to set-off and/or withhold payments due under this Agreement provided that the relevant claim is a Settled Claim.

3.5
Parent Guarantees

Each Party, prior to or at the Signing Date, shall deliver to the respective other Party a parent guarantee issued by Shuffle Master, Inc. in the case of the Purchaser and by bwin.party digital entertainment plc in the case of the Seller, covering all of the relevant Party's obligations hereunder, to the benefit of the respective other Party in form and substance as set out in Schedule 3.5.

3.6
Network Security Deposits

In this section 3.6, the following definition shall apply:

"Network Security Deposits" means any funds deposited with any Group Company (or any Person nominated by them) by Business Customers to be held by or on behalf of any Group Company and which are so held as security against any Business Customer's failure to pay funds into the Business which would be required to facilitate the operation of an orderly network.
 
 
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3.6.1
The Seller will indemnify the Purchaser from and against the amount by which the amount of Network Security Deposits taken into account in the calculation of Net Debt is less than the actual amount of Network Security Deposits owed by the relevant Group Companies to the relevant Business Customers.  Seller’s indemnification obligation pursuant to this section 3.6.1 shall be limited to the sum of the Initial Purchase Price (as adjusted pursuant to section 3.2) plus any portions of the Contingent Consideration received by the Seller.

4.
WARRANTIES OF SELLER

The Seller hereby represents and warrants to the Purchaser that, subject to the limitations set out in section 6, the statements set forth in Schedule 4 are true and accurate as of the Signing Date, as of the date of the Closing Notice and as of the Closing Date, unless Fairly Disclosed.

5.
GENERAL MATTERS RELATING TO WARRANTIES AND COVENANTS

5.1
General

5.1.1
The Seller does not represent or make any other representation or warranty other than set forth in section 4. The Seller shall not be liable for any other representation or warranty, expressed or implied, or for the absence of the existence of any other circumstances, matters or events relating to the Shares and the Group Companies, each of their respective businesses or any other matters. The Purchaser confirms that it does not rely on any other representations or warranties from the Seller than the Warranties set forth in section 4 of this Agreement.
 
 
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5.1.2
Subject to the provisions of this Agreement, the Seller shall indemnify the Purchaser or, at the Purchaser's sole discretion, the relevant Group Company from and against any Loss which the Purchaser or any of the Group Companies suffer as result of (i) any breach of a Warranty or of any covenant of the Seller contained in this Agreement, (ii) any Specifically Indemnifiable Matter, or (iii) the failure of Seller to obtain the third party consent expressly set forth in Schedule 7.1.7 (Third Party Consents). Except as expressly provided in this Agreement, this indemnification shall be the sole remedy of the Purchaser against the Seller for any breach of a Warranty made herein by the Seller. For the purpose of a claim under this clause 5.1.2 the Purchaser shall not be required to demonstrate that the Seller was at fault and the Seller shall have no defence on the basis of the absence of fault. With respect to any fine imposed on or third party claim made against any Group Company as a result of any violation of any gaming-related order, judgment, decree, law, rule, or regulation by Seller or any Group Company, which violation occurred both prior to the Closing and following the Closing, the amount of such fine imposed on or third party claim made against any Group Company subject to Seller’s indemnification obligation shall be limited to the portion of such fine imposed on or third party claim made against any Group Company that is directly related to such violation prior to the Closing, where such apportionment shall take into account, if applicable, (i) the relative periods of time prior to the Closing and following the Closing during which such violation persisted, (ii) the relative quantity of discrete violations, transactions or revenues derived as a result of such violation prior to the Closing and following the Closing, or (iii) such other equitable considerations as are appropriate to effect a reasonable apportionment. Any disputes as to such apportionment shall be settled by arbitration pursuant to section 14.

5.1.3
If the Purchaser gains knowledge of a Claim, the Purchaser shall give the Seller written notice describing in reasonable detail the basis for such Claim within thirty (30) Business Days thereof (a "Claim Notice"). The Claim Notice shall not limit in any way the Purchaser’s rights or remedies and may be updated at any time by the Purchaser’s delivery of an updated Claim Notice. Upon delivery of a Claim Notice, the following shall apply:

 
(a)
If the breach of Warranty or covenant is capable of remedy in kind, the Seller shall, at its sole and unfettered discretion, be entitled to remedy in kind such breach, at its sole cost and expense, within 30 days after the date on which such Claim Notice is served on the Seller or amended. Such breach shall only be deemed to have been remediated if Seller’s actions put the Purchaser into the same position as had there been no breach of such Warranty or covenant. Upon remediation in kind of such breach, the Claim Notice shall be deemed withdrawn. Alternatively, the Seller may accept a Claim by delivering to the Purchaser a notice of acknowledgement within 30 days after the date on which the Claim Notice is served on the Seller. Upon receipt of such notice, the Purchaser shall be entitled to recovery of the full amount of any Loss subject to the Claim and such Claim shall be deemed settled (a "Settled Claim"). The full amount of Loss suffered or sustained in connection with a Settled Claim shall be recoverable, regardless of any materiality or Material Adverse Effect qualification of the breached Warranty or covenant.
 
 
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(b)
In the case the Seller does not acknowledge or, if the breach of Warranty or covenant is capable of remedy in kind, remedy a Claim within 30 days after the date on which the Claim Notice is served on the Seller, the Seller and the Purchaser shall attempt in good faith to agree upon the rights of the Parties with respect to the Claim, provided that the Parties may limit their disclosures to each other pursuant to good faith efforts to preserve the attorney-client privilege or any other applicable privileges. If the Parties reach agreement with respect to a pending Claim, a memorandum setting forth such agreement shall be signed by the Parties and any portion of the Claim covered by such agreement that is resolved in the Purchaser’s favour shall become a Settled Claim. If no such agreement is reached after a period of thirty (30) days, then the Purchaser may demand arbitration of the matter and the matter shall be settled by arbitration pursuant to section 14. The decision of the arbitral tribunal shall be final and binding upon the Parties and any portion of the Claim that is resolved in the Purchaser’s favour shall become a Settled Claim.

 
(c)
The Purchaser shall have the right to recover the amount of any Settled Claim directly from the Seller, which the Seller shall pay to the Purchaser within thirty (30) days of written demand therefor, or by set-off against the Contingent Consideration, at the Purchaser’s option.

5.1.4
The amount of any Claim shall in no event exceed the amount required to put the Purchaser into the same position as had there been no breach of such Warranty or covenant.

5.1.5
Where the Seller has made a payment to the Purchaser in relation to any Claim and the Purchaser actually recovers (whether by insurance, payment, discount, credit, relief or otherwise) from a third party a sum which indemnifies or compensates the Purchaser (in whole or in part) in respect of the liability or Loss which was the subject of such Claim, the Purchaser shall (i) promptly notify the Seller of the fact and provide such information as the Seller may reasonably require and (ii) pay to the Seller as soon as practicable after receipt a portion of the amount recovered from the third party (net of taxation and less any reasonable costs of recovery) equal to the amount paid to the Purchaser by the Seller in relation to such Claim. The Purchaser shall not be required to take any action to seek recovery from any third party. To the extent that the relevant Group Company is entitled to recover from any third party a sum which indemnifies or compensates the Purchaser (in whole or in part) in respect of the liability or Loss which was the subject of such Claim, the Group Company shall, at its option, either (i) take all reasonable steps or proceedings as may be necessary to achieve such recovery or (ii) assign to Seller such entitlement for nil consideration.
 
 
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5.1.6
The Seller shall not be liable for any Claims to the extent that it would not have arisen but for, or to the extent that it has been increased (but only the amount of such increase) or not reduced (but only the amount of such absence of reduction) as a result of, any voluntary act, omission or transaction carried out before Closing by any Group Company at the written direction or written request of the Purchaser.

5.2
Specific Other Aspects of Claims

5.2.1
Limitation in Time

 
(a)
The Seller’s liability in relation to any Claim shall be reduced or excluded, if and to the extent that the Purchaser failed to comply with its obligations under clause 5.1.3, first sentence, and such failure has impaired the ability of the Seller to avoid or mitigate the Loss of the Purchaser or the Group Companies.

 
(b)
Claims based on a breach of any of the Warranties pursuant to section 4 of this Agreement, other than breaches involving fraud or Wilful Breach shall become time-barred (a) with the expiration of eighteen (18) months after the Closing Date and (b) in case of breach of any of the Warranties pursuant to Schedule 4 section 6 (Taxes) with the expiration of three (3) months after expiry of the statute of limitation period applicable to the relevant Tax, unless a Claim has been properly initiated in accordance with this section 5 by the Purchaser no later than such date. No specific limitation in time (other than any resulting from applicable law) applies to the Fundamental Warranties or any Claims based on any breach involving fraud or Wilful Breach. Claims subject to a Claim Notice delivered by the Purchaser to the Seller on or before the aforementioned dates of expiry shall survive until such Claims have been resolved.
 
 
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5.2.2
Due Diligence having taken place

The Purchaser has been given the possibility to conduct a comprehensive due diligence on the Group Companies and their business prior to entering into this Agreement, as a result of which the Parties have agreed on the wording of specific Warranties of the Seller as set forth in section 4 above. Notwithstanding the foregoing, neither any Warranty nor any Claim shall be deemed to be qualified, limited or otherwise affected in any way by any investigation conducted by or on behalf of the Purchaser prior to entering into this Agreement or by the fact that the Purchaser (i) had knowledge of any fact, matter, event or circumstance, whether before or after execution of this Agreement or (ii) waived or is deemed to have waived any condition to the Closing, except as expressly provided in this Agreement.

5.2.3
Limitation of Seller's Liability in Amount

 
(a)
Other than for Unlimited Claims, Seller shall not be liable for any individual Claim unless the liability in respect of such Claim exceeds EUR 20,000 in which event the Seller shall be liable for the full amount and not merely the excess over EUR 20,000 ("Hurdle"). For the purpose of this paragraph the amount of Claims resulting from the same or similar facts, matter, event or circumstance shall be added together.

 
(b)
Other than for Unlimited Claims, Seller shall not be liable for any Claim unless the aggregate amount of the liability of the Seller for all such Claims exceeds EUR 125,000 in which event the Seller shall be liable for the full amount and not merely the excess over EUR 125,000 ("Basket"). Any Claims not exceeding the Hurdle shall be calculated towards (and thus reduce) the Basket.

 
(c)
Other than for Unlimited Claims or Specified Claims, Seller's liability for breach of any of the Warranties pursuant to section 4 of this Agreement shall be limited to 20% (per centum) of the sum of the Initial Purchase Price (as adjusted pursuant to section 3.2) plus any portions of the Contingent Consideration previously received by the Seller. Seller’s liability for breach of any of the Specified Warranties pursuant to section 4 of this Agreement shall be limited to 50% (per centum) of the sum of the Initial Purchase Price (as adjusted pursuant to section 3.2) plus any portions of the Contingent Consideration previously received by the Seller.
 
 
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(d)
Other than Claims involving fraud or Wilful Breach, Claims for breach of or non-compliance with any of the Fundamental Warranties shall be limited to the sum of the Initial Purchase Price (as adjusted pursuant to section 3.2) plus any portions of the Contingent Consideration previously received by the Seller. None of the aforegoing limitations shall apply to Claims involving fraud or Wilful Breach which shall be unlimited.

5.2.4
Further Limitations

 
(a)
The Seller shall not be liable in respect of any Claim to the extent that such Claim is attributable to, or such Claim is increased as a result of, any legislation not in force on the Closing Date or to any change of law, regulation, directive, requirement or administrative practice.

 
(b)
The Seller shall not be liable for any Claim to the extent that such Claim arises or is increased as a result of any change made after the Closing Date in any accounting or taxation policies or practice, or the length of any accounting period for tax purposes.

 
(c)
The Seller shall not be liable for any Claim to the extent that such Claim arises or is increased as a result of any action by any Group Company between the Signing Date and the Closing Date at the Purchaser’s express written request.

5.2.5
Disclosure

Except with respect to Specifically Indemnifiable Matters, the Seller shall not be liable for any Claim in respect of any fact, matter, event or circumstance to the extent that such fact, matter, event or circumstance has been Fairly Disclosed.

5.2.6
Obligation to Mitigate

Following the Closing, Purchaser shall, in accordance with any applicable obligations under the ABGB, be responsible to mitigate any Loss or damage which it may suffer in consequence of any breach by the Seller of the terms of the Agreement or any fact, matter, event or circumstance giving rise to a Claim subject to the following sentence. Purchaser's responsibility to mitigate (as set out in the preceding sentence) shall not include any obligation to take any action in excess of that required by the applicable provisions of the ABGB, including incurring any out-of-pocket expense unless advanced by the Seller.
 
 
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5.2.7
Procedure for Third Party Claims

If the Purchaser receives written notice of any claim or potential claim by a third party (a "Third Party Claim") that the Purchaser reasonably believes may result in a Claim against the Seller hereunder, the Purchaser shall:

 
(a)
promptly (and in any event within ten (10) Business Days of it) give notice of the Third Party Claim to the Seller and ensure that the Seller and its representatives are given all reasonable information and facilities to investigate it, subject to the Purchaser’s right to limit its disclosures pursuant to good faith efforts to preserve the attorney-client privilege or any other applicable privileges;

 
(b)
not (and ensure that each of the Group Companies shall not) admit liability or make any agreement or compromise in relation to the Third Party Claim without prior written approval of the Seller. The Seller shall give its approval (such approval not to be unreasonably withheld) or disapproval within ten (10) Business Days from receipt of such notice, otherwise approval by the Seller shall be deemed given; the Purchaser may compromise or settle any Third Party Claim in its sole and absolute discretion; provided, that except with the approval of the Seller or the deemed approval by the Seller, no settlement or compromise of such Third Party Claim shall be determinative of the amount of any Claim against the Seller;

 
(c)
(subject to the Purchaser or any of the Group Companies being indemnified by the Seller against all reasonable out of pocket costs and expenses incurred in respect of that Third Party Claim) ensure that it and its Affiliates shall (i) consult with the Seller regarding the Purchaser's decision to avoid, resist, dispute, appeal, compromise or defend the Third Party Claim, provided that the Purchaser shall have the right in its sole discretion to conduct the defence of or compromise of the Third Party Claim, and (ii) permit the Seller (if it elects to do so and at its expense) to participate in, but not determine or conduct, all proceedings and/or negotiations arising in connection with the Third Party Claim; and (iii) provide copies of all pleadings, notices and communications with respect to the Third Party Claim subject to the Purchaser’s right to limit its disclosures pursuant to good faith efforts to preserve the attorney-client privilege or any other applicable privileges.
 
 
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Any Claim that the Purchaser may otherwise have arising from a Third Party Claim shall be reduced or excluded, if and to the extent that the Purchaser failed to comply with its obligations set forth above and such failure has impaired the ability of the Seller to avoid or mitigate the Loss of the Purchaser or the Group Companies.

5.3
No Double Remedies

The Purchaser shall not be entitled to recover more than once in respect of the same Loss suffered. If any single Loss suffered by the Purchaser results in the breach of multiple Warranties, the Purchaser shall have the right to select which Warranty it wishes to assert a Claim with respect to.

6.
WARRANTIES OF PURCHASER

The Purchaser herewith represents and warrants to the Seller that:

6.1
Due incorporation

The Purchaser is an entity duly organized and validly existing under the laws of Nevada and has full requisite power and authority to carry on its business as it is currently conducted.

6.2
Authority

The Purchaser has all requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder and, subject to the conditions as provided in this Agreement, to consummate the transactions contemplated by this Agreement and to perform all of the Purchaser's obligations under this Agreement in particular the obligation to timely pay the consideration pursuant to section 3.
 
 
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6.3
No violation

Neither the execution, delivery nor performance of this Agreement by the Purchaser nor the consummation of the transactions contemplated hereby will conflict with, or result in any violations of, the articles of incorporation or by-laws of the Purchaser.

6.4
Funding

The Purchaser either has sufficient cash resources or has obtained sufficient and unconditional financing for the consummation of the transaction contemplated by this Agreement, in particular the payment of the Initial Purchase Price and the Contingent Consideration, and either has sufficient cash resources or has taken all measures commercially reasonable to assure financing of payment of the Adjustment Amount, if applicable.

6.5
No antitrust clearances

Neither the execution, delivery or performance of this Agreement by the Purchaser nor the consummation of the transactions contemplated hereby requires any consent, clearance, notification, permission or waiver under the laws, regulations or practices applied by any national or supranational antitrust or merger control authority to which the Purchaser is subject.

6.6
Expiration

The Warranties of the Purchaser and any remedy of the Seller in respect of such Warranties shall expire eighteen (18) months following the Closing.
 
 
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7.
CONDITIONS PRECEDENT TO CLOSING

7.1
Conditions Precedent

(A) The obligation of the Purchaser to consummate the transaction contemplated by this Agreement is subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (the conditions set forth in sections 7.1(A) and 7.1(B) collectively, the "Conditions Precedent"), any of which may be waived in writing by the Purchaser:

7.1.1
Accuracy of Warranties

Each of the Warranties of the Seller set forth in this Agreement shall be true and accurate in all material respects (except for Warranties that are qualified by their terms by materiality or Material Adverse Effect, which Warranties as so qualified shall be true and accurate in all respects) both at the Signing Date and at the date of the Closing Notice as if they had been repeated at the date of the Closing Notice. In the event that the Purchaser (i) had actual knowledge of the falsehood or inaccuracy of any Warranty at the date of the Closing Notice, (ii) waives the Condition Precedent in this section 7.1.1 with respect to such falsehood or inaccuracy, and (iii) proceeds with the Closing hereunder, the Seller shall not have any liability in relation to any Claim in respect of such falsehood or inaccuracy.

7.1.2
Compliance with Covenants

The Seller shall have performed and complied, and with respect to sections 8.1 and 8.2 materially performed and complied, with all covenants and obligations in this Agreement that are required to be performed or complied with by it on or before the date of the Closing Notice.

7.1.3
Kahnawake Migration Activities

All Kahnawake Migration Activities shall have been completed to the reasonable satisfaction of the Purchaser.
 
 
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7.1.4
No Material Adverse Change

No Material Adverse Change shall have occurred.

7.1.5
No Legal Restraints

No Governmental Authority shall have issued, enacted or adopted or threatened to issue, enact or adopt any order, decree, injunction, legislation, action, proceeding, ruling or judgment that (a) prevents the sale and transfer of the Shares as provided hereunder, (b) prevents the enforceability of the key terms and provisions of this Agreement, (c) prevents the continued conduct of each Group Company’s operations following the Closing in the same manner in which it was conducted on the Signing Date and on the Closing Date except as expressly contemplated by this Agreement or (d) prevents the Purchaser or any Group Company from owning, using, controlling or operating any of the products, properties or assets of any Group Company after the Closing Date or seeking a divestiture of any such products, properties or assets. No litigation or proceeding shall have been instituted or be pending against the Seller which could reasonably be expected to have a Material Adverse Effect.

7.1.6
Governmental Authority Consents

There will have been obtained at or prior to the Closing the permits, authorizations and approvals by any gaming Regulatory Authority set forth on schedule 7.1.6 which requires approval of the transactions contemplated by this Agreement and the Services Agreement dated January 12, 2012 between bwin.party management (Gibraltar) Limited and Ongame Network Limited shall remain in full force and effect without any amendment following the Signing Date.

7.1.7
Regulatory Approval; License Surrenders

The relevant Group Companies shall have obtained the permits, authorizations and approvals set forth on schedule 7.1.7 (Gaming Permits). The relevant Group Companies shall have surrendered all licenses or approvals specified on schedule 7.1.7 (License Surrenders).
 
 
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7.1.8
Gaming Regulatory Measures

(a) If and only after all of the other Conditions Precedent to the obligation of the Purchaser have been satisfied or waived, and the Purchaser has provided written notice of the same to the Seller (the "Closing Notice"), the following clauses (b) through (f) of this section 7.1.8 shall constitute the final Condition Precedent to the obligation of the Purchaser. Until such time as all other Conditions Precedent to the obligation of the Purchaser have been satisfied or waived, the following clauses (b) through (f) of this section 7.1.8 shall have no effect.

(b) The relevant Group Companies shall have terminated their contractual relationships and ceased doing business with each of the Persons specified by any Gaming Regulatory Authority having jurisdiction over the Purchaser or any consent, license, permit, grant, franchise, approval, qualification or other authorization held by the Purchaser (each, a "Dissociation"), provided that the Purchaser (i) identifies such Person to the Seller in writing, and (ii) provides the Seller with such explanation as to the reason for the required dissociation, subject to any constraints or limitations on disclosure imposed by such Governmental Authority. The Seller shall indemnify the Purchaser or, at the Purchaser's sole discretion, the relevant Group Company from and against fifty per centum (50%) of any damages, penalties and costs paid after the Closing Date due to such termination of relationships, unless such payment is reflected in the Adjustment Amount, which indemnification shall be limited to 20% (per centum) of the sum of the Initial Purchase Price (as adjusted pursuant to section 3.2) plus any portions of the Contingent Consideration previously received by the Seller.

(c) The relevant Group Companies shall have provided notices of termination or intent not to renew contractual arrangements with the Persons specified on schedule 7.1.8 (Notices of Dissociation).

(d) The contracts with the Persons specified on schedule 7.1.8 shall have been amended in the manner set forth on schedule 7.1.8 (Amended Contracts).

(e) The Partner Agreement dated December 14, 2011 between Ongame Network Ltd. and CQR Payment Solutions GmbH (the "CQR Agreement") shall remain in full force and effect without any amendment following the Signing Date.
 
 
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(f) The relevant Group Companies shall have implemented, or caused its Business Customers to implement (such implementation to be in accordance with the terms of any geo-blocking provisions in the relevant Group Companies’ contracts with such Business Customers, if such provisions exist, and in a commercially reasonable manner otherwise), geo-blocking using a geo-filtering mechanism that ensures to the highest industry standards from time to time that no Customer is accessing the service from an IP address originating from within any of the jurisdictions set forth on schedule 7.1.8 (Filtered Jurisdictions).

7.1.9
FIRPTA Certification

The Seller shall deliver certifications dated not more than 10 days prior to the Closing Date, signed by each of the Group Companies, to the effect that neither the Shares nor any of the shares of the Group Companies are "United States real property interests" within the meaning of Section 897 of the United States Internal Revenue Code.

7.1.10
Reduction in Force

The Reduction in Force shall have been completed.

7.1.11
Delivery of Audited Financial Statements

The Seller shall have delivered to Purchaser the audited financial statements of the Group as of and for the fiscal year ended December 31, 2011 together with all notes thereto and a report thereon by KPMG (the "Audited Financial Statements").

(B) The obligation of the Seller to consummate the transaction contemplated by this Agreement is subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived in writing by the Seller:
 
 
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7.1.12
Accuracy of Warranties

Each of the Warranties of the Purchaser set forth in this Agreement shall be materially true and accurate (without regard to any qualifications therein as to materiality or Material Adverse Effect) both at the Signing Date and at the Closing Date as if they had been repeated at the Closing Date.

7.1.13
No Legal Restraints

No Governmental Authority shall have issued, enacted or adopted or threatened to issue, enact or adopt any order, decree, injunction, legislation, action, proceeding, ruling or judgment that (a) prohibits or renders illegal the sale and transfer of the Shares as provided hereunder, or (b) prevents the enforceability of the key terms and provisions of this Agreement.

7.2
Long-Stop Date

This Agreement shall expire and shall have no further effect on the Parties (except for sections 11 (Announcements), 13 (Arbitration) and 15 (Miscellaneous), which shall continue to apply and further except for liability resulting from the breach of any obligations existing hereunder prior or relating to Closing, which liabilities shall also continue to exist) unless Closing has occurred on or prior to nine (9) months as from the Signing Date (such date, the "Long-Stop Date"), unless the Long-Stop Date is extended by agreement between the Parties.

7.3
Efforts to Fulfil the Conditions Precedent

7.3.1
The Parties shall use their reasonable efforts (which on the part of the Seller includes giving appropriate instructions to the Company) to ensure that all Conditions Precedent will be timely fulfilled and shall co-operate with each other to the extent reasonably required in order to fully effectuate the transactions contemplated herein; provided however that Seller shall not be obligated to take any action that would have a negative impact on Seller’s business (other than the Business).
 
 
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7.3.2
The Purchaser shall promptly notify the Seller sufficiently in advance of any notification, submission, response or other communication (excluding communications of an administrative nature) which it proposes to make or submit to any Governmental Authority; provided this only relates to documentation and information provided to a Governmental Authority which regulates the Purchaser’s or any of its Affiliates’ business and further that the Purchaser shall not be required to provide the Seller with any confidential information or business secrets, such information to be provided to external counsel for the Seller on a counsel-to-counsel basis only. The Purchaser agrees to take due consideration of any reasonable comments which the Seller may have in relation to any such notification, submission, communication or response to a request for further information prior to making the relevant notification, submission, communication or response (provided that any such comments have been made without undue delay by the Seller upon receipt of reasonable notice from the Purchaser). The Purchaser further agrees to keep the Seller fully informed as to the progress of any notification of and the results of all meetings with any Governmental Authority or other persons or bodies which regulates the Purchaser’s or any of its Affiliates’ business or any of the Group Companies (unless prohibited by the authority or other person) in connection with the transactions contemplated herein. Notwithstanding the foregoing, the Purchaser shall have no obligations under this Section 7.3.2 (other than providing the Seller with advance copies and an opportunity to comment on any statements regarding the Seller) with respect to any notification, submission, response or other communication relating to any individual who is an officer, director or employee of the Purchaser or its Affiliates. The Seller and the Purchaser covenant to use their respective reasonable endeavours to procure that the conditions set out under section 7.1 above are fulfilled as soon as reasonably practicable after the Signing Date.

8.
PRE-CLOSING COVENANTS

8.1
Conduct

Except as otherwise provided for in this Agreement, the Seller shall procure to the extent legally possible that, from the Signing Date and until the Closing or termination of this Agreement (whichever is relevant), none of the Group Companies will, without the written consent of the Purchaser (which may include electronic mail from an executive officer of the Purchaser) (which shall not be unreasonably withheld or delayed):

 
(a)
amend or propose to amend its articles of association or by-laws;
 
 
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(b)
split, combine or reclassify any outstanding shares of its registered capital, or declare or pay any dividends or make any other distribution to the holders thereof;

 
(c)
issue or sell any options, warrants, convertible securities or other rights (contingent or otherwise) of any character to purchase, subscribe to, or otherwise acquire any shares in a Group Company, or in any way reclassify any shares of a Group Company;

 
(d)
merge or consolidate with or into any other corporation or change in any manner the rights of its capital stock or the character of its business or pass a resolution relating to voluntary liquidation or winding up or take any action in relation to any of the foregoing.;

 
(e)
acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof or make any equity investments therein;

 
(f)
sell any corporation, partnership or other business organization or material division thereof or any other material asset or right or create an Encumbrance on any of the foregoing or permit such Encumbrance to be created;

 
(g)
other than in the ordinary course of business enter into or modify any Material Contract, lease or agreement or create any Encumbrances on any of its assets;

 
(h)
other than in the ordinary course of business, directly or indirectly, take any action which would cause the Warranties contained herein to become inaccurate in any material respect;

 
(i)
other than in the ordinary course of business consistent with past practice and other than with respect to amounts of less than EUR 75,000 per single incurrence and EUR 150,000 in the aggregate for the period from and including the Signing Date up until and including the Closing Date incur, assume or guarantee any financial debt;
 
 
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(j)
grant any loan or otherwise lend any money with a maturity period exceeding 30 days and EUR 100,000 per single lending, save for money market transactions in the ordinary course of business and consistent with past practice;

 
(k)
materially change any accounting principle or policy other than required by law or recommended by the auditors;

 
(l)
conduct its business other than in compliance with all material applicable laws, except as otherwise conducted as of the Signing Date;

 
(m)
except in the ordinary course of business consistent with past practice, conclude, otherwise change or amend the material terms of employment (including compensation and benefits and entitlement to any payments or benefits following termination of employment) with any employee, hire any new employees or terminate the employment of any employees or increase the compensation, commissions or perquisites payable to any agent of any Group Company, it being understood that (i) the Seller intends to terminate the employment and consultancy of such number of employees and consultants to reduce the total number of full-time working equivalents (including consultants) of the Group to not less than 150 full-time working equivalents (including consultants) and not more than 170 full-time working equivalents (including consultants), (ii) the Seller shall have terminated or taken the requisite measures to terminate (including the service of notice of termination) such number of employees and consultants as of the Closing Date (the "Reduction in Force"), (iii) the Seller agrees to consult with the Purchaser in advance of any such termination and (iv) the Purchaser agrees not to unreasonably withhold consent to any such termination;

 
(n)
other than in the ordinary course of business, terminate or otherwise change or amend the material terms of any of the agreements with Business Customers or material suppliers; or

 
(o)
amend, terminate or waive the due performance of any portion of the Consulting and Cooperation Agreement;
 
 
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(p)
settle any litigation or any other dispute that is not yet in litigation with the value in dispute exceeding EUR 50,000 where the settlement amount to be paid by the relevant Group Company exceeds the respective accrual;
 
(q)
enter into any contract or agreement that grants to a counterparty the right to automatic adjustment of pricing or other terms based upon the pricing or other terms contained in any oral or written agreement; or
 
(r)
agree, orally or in writing, not to compete with any third party or to refrain from engaging in any specified lines of business or business activities, delineated by market segment, jurisdiction or otherwise.

8.2
Regulatory Filings; Other Actions

 
(a)
Subject to the terms and conditions set forth in this Agreement, each of the Parties hereto shall use all reasonable efforts (subject to, and in accordance with, applicable law) to take promptly, or cause to be taken, all actions, and to do promptly, or cause to be done, and to assist and cooperate with the other Parties in doing (subject to the provisions of section 7.3.2), all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated herein, including (i) the obtaining of all necessary actions, waivers, consents and approvals, from Governmental Authorities and the making of all necessary registrations and filings and the taking of all steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any Governmental Authority, (ii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated herein and (iii) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated herein. The Seller and the Purchaser shall use all reasonable efforts to ensure that any such conditions or remedies are removed or reduced.
 
 
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(b)
Subject to the terms and conditions herein provided and without limiting the foregoing:

 
(i)
the Seller shall cause the Company (A) as soon as reasonably possible in view of the progress of the Kahnawake Migration Activities to file such documents and instruments and take such additional actions as may be required by the Kahnawake Gaming Commission to effect the "license surrenders" pursuant to regulation 127 of the Regulations concerning Interactive Gaming of December 2011 and the surrender of all other licenses or approvals as set forth in schedule 7.1.8 (License Surrenders) (collectively, the "License Surrenders"), (B) to commence the Kahnawake Migration Activities and (C) to respond as promptly as practicable to any additional requests for information received from the Kahnawake Gaming Commission or any other jurisdiction relevant to the License Surrenders;
 
 
(ii)
the Seller shall use all reasonable efforts to complete the Kahnawake Migration Activities;

 
(iii)
the Seller shall cause the Company to use all reasonable efforts to cure not later than the Closing Date any violations or defaults under any rules applied by, the Kahnawake Gaming Commission; and

 
(iv)
the Seller shall cause the relevant Group Companies to apply for and use all reasonable efforts (subject to, and in accordance with, applicable law) to obtain the permits, authorizations and approvals set forth on schedule 7.1.8 (Gaming Permits) and will upon notice from the Purchaser of the enactment of any law or applicable legal authority expressly permitting online gaming in any jurisdiction in which a Group Company operates between the Signing Date and the Closing Date consult with the Purchaser regarding the application for any permits, authorizations and approvals of the relevant Governmental Authority, and the provisions of section 7.3.2 shall apply mutatis mutandis to the Seller’s efforts under this section 8.2(b)(iv).
 
(c)
Except to the extent taken into account in the calculation of Net Debt, Seller shall pay in full the amount of any and all Retention Bonuses payable to current or former employees or consultants of any Group Company that become due and payable prior to, concurrent with or immediately following the Closing. Purchaser shall pay or cause the relevant Group Company to pay in full the amount of any and all Retention Bonuses payable to current or former employees or consultants of any Group Company that become due and payable after the Closing and other and than immediately following the Closing.
 
 
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(d)
Except to the extent taken into account in the calculation of Net Debt and except as provided in the following sentence, Seller shall pay in full the costs of any and all severance, continued provision of benefits or other termination costs or liabilities (regardless of whether payable, incurred or provided prior to or after the Closing) associated with any termination of the employment or consultancy of any employee or consultant prior to the Closing, including such employees or consultants as to whom Seller has taken the requisite measures prior to the Closing to terminate, including the service of notice of termination (including but not limited to the Reduction in Force) (“Pre-Closing Termination Costs”). Purchaser shall pay or cause the relevant Group Company to pay in full the costs of any and all severance, continued provision of benefits or other termination costs or liabilities associated with any termination of the employment or consultancy of any employee or consultant after the Closing, and up to EUR 35,000 of Pre-Closing Termination Costs to the extent payable post Closing or such higher amount as may be mutually agreed upon in writing by Purchaser and Seller prior to Closing.
 
(e)
The Seller shall use best efforts to replace prior to Closing the EUR 2,000,000 deposit made by or on behalf of the Company with the National Gaming Commission of Spain in connection with the Company’s application for a Gaming Approval with either (i) a guarantee by the Seller or bwin.party digital entertainment plc that can be assumed by the Purchaser or Shuffle Master, Inc. at the Closing, (ii) a letter of credit issued on behalf of the Seller or bwin.party digital entertainment plc that can be replaced with a letter of credit issued on behalf of the Purchaser or Shuffle Master, Inc. at the Closing, (iii) the posting of a performance bond or other insurance contract by the Seller or bwin.party digital entertainment plc or (iv) an equivalent instrument that can be replaced by the posting of a performance bond or other insurance contract by the Purchaser or Shuffle Master, Inc. at the Closing.

8.3
Advice of Changes

The Seller will promptly advise the Purchaser in writing of (a) any event occurring subsequent to the Signing Date that would render any Warranty of the Seller contained in this Agreement, if made on or as of the date of such event or the Closing Date, untrue or inaccurate, (b) any breach of any covenant or obligation of the Seller pursuant to this Agreement, or (c) any Material Adverse Change.
 
 
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8.4
Continued Access to Information

From and after the Signing Date and through and including the Closing Date, the Seller shall cause each Group Company to allow the Purchaser and its agents reasonable access at reasonable times to the files, books, records, player transaction data (but only in a manner that is not individually-identifying, such as an aggregated or redacted manner), technology, contracts, personnel and offices of each Group Company, including, but not limited to, any and all information relating to each Group Company’s Taxes, commitments, contracts, leases, employees, customers, licenses, liabilities, financial condition and real, personal and intangible property. Access to customers shall in any event be closely coordinated with the Seller and the Purchaser shall only be permitted to contact, directly or indirectly, any customers of the Group Companies subject to a representative of the Seller participating in such communication (such as in the form of participating in meetings or conference calls or otherwise). The Seller shall cause the accountants of each Group Company to cooperate with the Purchaser and its agents in making available all financial information reasonably requested by the Purchaser, including the right to examine all working papers pertaining to all financial statements prepared or audited by such accountants. The Seller’s obligations under this section 8.4 shall be subject to the Seller’s right to limit its disclosures pursuant to good faith efforts to preserve the attorney-client privileges or any other applicable privileges. The Seller shall not be obligated to allow the Purchaser and its agents a degree of access under this section 8.4 that materially exceeds the scope of access provided to the Purchaser and its agents in the course of the Purchaser’s due diligence investigation prior to the Signing Date.

8.5
No Other Negotiations

The Seller will not, and will not authorize, encourage or knowingly permit any director, officer, employee, stockholder, affiliate or agent of any Group Company or any attorney, investment banker or other person on any Group Company’s behalf to, directly or indirectly: (a) solicit, initiate, encourage or knowingly induce the making, submission or announcement of any offer or proposal from any person concerning any Alternative Transaction or take any other action that could reasonably be expected to lead to an Alternative Transaction or a proposal therefor; (b) furnish any information regarding any Group Company to any person (other than the Purchaser) in connection with or in response to any inquiry, offer or proposal for or regarding any Alternative Transaction; (c) participate in any discussions or negotiations with any Person (other than the Purchaser) with respect to any Alternative Transaction; (d) cooperate with, knowingly facilitate or encourage any effort or attempt by any person (other than the Purchaser) to effect any Alternative Transaction; or (e) execute, enter into or become bound by any letter of intent, agreement, commitment or understanding with any person (other than the Purchaser) that is related to, provides for or concerns any Alternative Transaction.
 
 
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8.6
Tax Matters

 
(a)
The preparation and filing of Tax returns of each Group Company shall be done in accordance with the provisions of clause 7 of the Tax Deed. The Seller shall cause each Group Company to pay and discharge all Taxes of each Group Company attributable to returns filed in the Pre-Closing Tax Period before the same shall become delinquent and before penalties accrue thereon.

 
(b)
For purposes of this Agreement, (a) any Taxes relating to a Straddle Period that are levied on a per diem basis shall be attributable to the Pre-Closing Tax Period in an amount equal to the amount of such Taxes for the entire Straddle Period multiplied by a fraction, the numerator of which is the number of days during the Straddle Period that are in the Pre-Closing Tax Period and the denominator of which is the total number of days in the Straddle Period; and (b) any other Taxes relating to a Straddle Period shall be attributable to the Pre-Closing Tax Period as if such Straddle Period had ended on the Closing Date.

 
(c)
Save in respect of any obligation of the Seller to a Group Company as at the Closing Date or any amount payable as at the Closing Date, all Tax sharing, Tax indemnity, Tax allocation, or similar agreements or arrangements with respect to or involving any Group Company shall be terminated as of the Closing Date and, after the Closing Date, neither the Purchaser nor any Group Company shall be bound thereby or have any liability thereunder.

 
(d)
All transfer, documentary, sales, use, excise, stamp, registration and other such Taxes (including all applicable real estate transfer or gains Taxes) and related fees (including any penalties, interest and additions to Tax) incurred in connection with the transactions contemplated by this Agreement, shall be paid by the Purchaser (so long as no Group Company owns real estate in Gibraltar at the Closing Date) or the Seller (if any Group Company owns real estate in Gibraltar at the Closing Date).
 
 
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8.7
Customer Retention Cooperation

The Seller shall provide reasonable cooperation to the Purchaser in its efforts to prepare for the post-Closing retention by the Group Companies of all Business Customers, provided that the Purchaser shall reimburse the Seller for any out-of pocket expenses incurred.  Such reasonable cooperation shall include participating in telephonic or in person meetings with such Business Customers upon the Purchaser’s request with reasonable advance notice, keeping the Purchaser reasonably apprised of communications from or to such Business Customers regarding the post-Closing operation of the Business and matters affecting the post-Closing retention of such Business Customers, referring to the Purchaser inquiries from such Business Customers regarding the post-Closing operation of the Business or the post-Closing retention of such Business Customers, and giving good faith consideration to Purchaser’s requests for assistance in preparing for the post-Closing retention by the Group Companies of such Business Customers.

9.
CLOSING

9.1
Closing Date

On the 10th Business Day ("Closing Date") following the day on which the last of all Conditions Precedent contemplated by this Agreement are either satisfied or waived in writing by the applicable Party, the closing of the transactions contemplated by this Agreement ("Closing") shall take place at the offices of the Company or at such other place as the Parties shall mutually agree.

9.2
Documents to be executed or delivered and actions to be taken
 
 
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At Closing, the Parties shall simultaneously execute and deliver the following documents and take the following actions or cause such actions to be taken simultaneously:

 
(a)
the Initial Purchase Price shall be paid in accordance with section 3.1 and the Purchaser shall reimburse the Seller for (i) up to EUR 600,000 of documented, out-of-pocket expenses incurred by the Seller in the completion of the Kahnawake Migration Activities; (ii) up to EUR 220,000 of documented out-of-pocket expenses incurred by the Seller in the acquisition and development of casino game technology; (iii) up to EUR 831,000 of documented out-of-pocket expenses incurred by the Seller in the acquisition and development of electronic gaming platform technology; (iv) up to such additional amount of capital expenditures requested by the Purchaser after the Signing Date and prior to the Closing Date; (v) such portion of the documented amount of the security deposit (less any offsets applied against such security deposit prior to the Closing Date) deposited with the lessor of the Stockholm office (the "Stockholm Office Security Deposit") that bears the same proportion to the total amount of the deposit that the floor space occupied by the Group at the Closing bears to the total floor space under lease; and (vi) if the replacement contemplated by section 8.2(e) has been completed at or prior to the Closing, the security deposit made by the Group in the amount of EUR 2,000,000 made by or on behalf of the Company with the National Gaming Commission of Spain in connection with the Company’s application for a Gaming Approval.

 
(b)
the officers and the members of the board of directors of each Group Company will irrevocably tender their resignation;

 
(c)
the Parties shall sign a closing memorandum and shall thereby confirm that (i) all Conditions Precedent have been fulfilled or waived in writing by the applicable Party, and (ii) upon receipt of the Initial Purchase Price, the Shares are transferred to the Purchaser;

 
(d)
the Seller shall deliver to the Purchaser or to whom the Purchaser may direct the following documents of the Company THAT IS TO SAY:
 
 
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(i)
minutes of a meeting of the board of directors of the Company held on the Closing Date dealing with the following business:

 
(A)
the acceptance of the resignation of each of the directors of each Group Company (except those nominated by the Purchaser) and the appointment of the Purchaser’s nominees to the board of directors of each Group Company;
 
(B)
the re-appointment of each Group Company's secretary;
 
(C)
the re-appointment of the auditors of each Group Company;
 
(D)
the approval of the share transfer of all the Shares in the Company in favour of the Purchaser or the Purchaser’s nominees; and
 
(E)
the approval of the transfer of the registered office of each Group Company in such manner as the Purchaser shall direct;

 
(ii)
written resignations of all the officers and directors of each Group Company (except those appointed on the nomination of the Purchaser) each confirming that they have no claims or rights of action against any Group Company and that no Group Company is in any way obligated or indebted to them or any of them;

 
(iii)
a duly executed share transfer form in respect of the Shares in favour of the Purchaser or such other person as the Purchaser may direct, together with the relevant share certificates, all original trust documentation (if any) and such waivers and consents as may be required to enable the Purchaser or the Purchaser’s nominee to be registered as the sole legal and equitable owner and holder of the Shares and all other (if any) documents of title in relation to the Shares;

 
(iv)
the certificate of incorporation, memorandum and articles of association of the Company as well as the common seal of the Company and the properly written-up statutory and minute books of the Company together with all other corporate records, documents, books of account and all insurance policies of the Company; and
 
 
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(v)
a written receipt signed by the Seller acknowledging receipt of all amounts due to it by any of the Group Companies and/or renouncing all claims, rights and interest in or against all of the Group Companies of whatever nature existing at the Closing Date (save for any Group Balances at the Closing Date or obligations incurred under this Agreement, the Patent License Agreement, the Transition Services Agreement or the Consulting and Cooperation Agreement);

 
(e)
the Seller shall deliver to the Purchaser or to whom the Purchaser may direct the following documents in respect of each of Ongame Services and Ongame Markets:

 
(i)
written resignations of all the members of the management boards (including the managing director) of each of Ongame Services and Ongame Markets (except those appointed on the nomination of the Purchaser) each confirming that they have no claims or rights of action against Ongame Services and Ongame Markets (as the case may be) and that Ongame Services and Ongame Markets (as the case may be) is in no way obligated or indebted to them or any of them in their capacity as members of the management boards; and

 
(ii)
all documents of title in relation to the Subsidiary Shares.

 
(f)
the Seller and the Purchaser shall have executed and delivered a transition services agreement (the "Transition Services Agreement") in the form attached hereto as schedule 9.2(f).

 
(g)
the Seller and the Purchaser shall have executed and delivered the Tax Deed in the form attached hereto as schedule 9.2(g).

 
(h)
the Seller shall use its reasonable efforts to cause each of Peter Bertilsson, Peter Messner, Martin Lerby, Fredrivk Kjell, Anders Wasterlid and Olivia Gorajewski to have executed and delivered a letter acknowledging that the terms of his or her employment are solely those set forth in their employment agreements in effect at the Signing Date.
 
 
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(i)
if the Seller has succeeded in replacing prior to Closing the EUR 2,000,000 deposit made by or on behalf of the Company with the National Gaming Commission of Spain in connection with the Company’s application for a Gaming Approval with either (i) a guarantee by the Seller or bwin.party digital entertainment plc, (ii) a letter of credit issued on behalf of the Seller or bwin.party digital entertainment plc, (iii) the posting of a performance bond or other insurance contract by the Seller or bwin.party digital entertainment plc or (iv) an equivalent instrument, at the Closing the Purchaser shall either assume such guarantee, replace such letter of credit with a letter of credit issued on behalf of the Purchaser or Shuffle Master, Inc, or replace such performance bond or other insurance contract with a performance bond or insurance contract by the Purchaser or Shuffle Master, Inc.

In addition, the Purchaser and the Seller shall, whether before, on or after the Closing Date, execute and deliver any further instruments, deeds, assignments or assurances and take all other actions that are necessary or desirable to consummate the transactions contemplated by this Agreement and to carry out the purposes and intent of this Agreement.

9.3
Transfer of Shares

Upon fulfilment or waiver in writing by the applicable Party of all Conditions Precedent and all actions according to section 9.2 having been completed, the Shares shall be transferred to the Purchaser without further action by the Parties. On or after the Closing Date, the Purchaser shall cause shareholders meetings and board meetings to be held in Ongame Services and Ongame Markets at which new directors are appointed and company signatures are amended. The Purchaser shall forthwith see to it that these appointments and decisions are registered with the Swedish Companies Registration Office.

9.4
Right to Rescind
 
 
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9.4.1
(a)
If the foregoing provisions of section 9.2 are not fully complied with by the Seller or the Purchaser, as applicable, by or on 10th Business Day following the day on which all Conditions Precedent are either satisfied or waived in writing by the applicable Party, the Purchaser (in the case of non-compliance by the Seller), or the Seller (in the case of non-compliance by the Purchaser) shall be entitled (in addition to and without prejudice to all other rights and remedies available to it including the right to claim Losses) by written notice to the other Parties:

(i)         to rescind this Agreement with immediate effect; or

(ii)        to insist that Closing be effected.

The Purchaser or the Seller may rescind this Agreement with immediate effect upon written notice to the other Party at any time prior to the Closing if such other Party has committed a material breach of any of its covenants in this Agreement and has not cured such material breach prior to twenty (20) Business Days following receipt of written notice of such material breach. In the event of any such rescission, the non-rescinding Party shall reimburse the rescinding Party for up to EUR 1,000,000 of Losses incurred by the rescinding Party in connection with the preparation and execution of this Agreement; any liability of the non-rescinding Party shall be limited to such amount of EUR 1,000,000 and any liability for Losses in excess of this amount shall be excluded.

The Purchaser may rescind this Agreement upon written notice to the Seller at any time prior to the Closing upon the occurrence of a Material Adverse Change following the Signing Date and prior to the Closing Date.

(b)         In the event a Gaming Issue arises, the Parties' agree to cooperate to resolve such issue in accordance with the following procedures, subject to any changes thereto dictated by the applicable Gaming Regulatory Authority:

(i) The Purchaser shall, in good faith, use commercially reasonable efforts to facilitate a meeting among the Seller and the applicable Gaming Regulatory Authority for the purpose of determining whether and how the Seller could address and remedy the Gaming Issue. If the meeting referenced above cannot occur despite good faith efforts, then, absent contrary direction from the applicable Gaming Regulatory Authority, the Purchaser shall inform the Seller of the extent to which such Gaming Regulatory Authority advised how it could address and remedy, if at all, the concerns of such Gaming Regulatory Authority.
 
 
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(ii)        The Parties shall cooperate in good faith to attempt, if permitted by the Gaming Regulatory Authority, to address the concerns of any such Gaming Regulatory Authority with reasonably adequate time to permit the Seller to effectuate a remedy.

(iii)        If (a) after complying with subsections (i) and (ii) above, the Purchaser reasonably determines that it is unlikely that such Gaming Issue will be resolved to the satisfaction of the applicable Gaming Regulatory Authority, and (b) the Purchaser, acting in good faith, makes a determination that (A) the applicable Gaming Issue may result in an investigation or adversary proceeding which challenges the Purchaser’s or any of its Affiliates’ suitability or good standing (including any potential loss of, threatened loss of, the imposition of burdensome terms and conditions on any Gaming Approvals of the Purchaser or any its Affiliates, or other disciplinary action which may cause significant harm to the reputation and standing of Purchaser or any of its Affiliates), and (B) in the event that the meeting referenced in clause (i) above never occurred, the Purchaser shall provide the Seller verification of the Gaming Issue through the following means in order of preference (I) request a writing from such Gaming Regulatory Authority of its position with respect to the Gaming Issue, or request an oral communication from the Gaming Regulatory Authority of its position with respect to the Gaming Issue, or (II) provide a copy of a written confirmation from the Purchaser to such Gaming Regulatory Authority of the Purchaser's understanding of such Gaming Regulatory Authority's guidance or, if advised by qualified outside gaming counsel of the Purchaser that such a confirming letter is not appropriate under the circumstances, provide a letter from such counsel certifying the general nature of the objection and the gravity of the matter, then the Purchaser may rescind this Agreement with immediate effect upon written notice to the Seller at any time prior to the Closing.

9.4.2
In the event of rescission of this Agreement pursuant to section 9.4.1, this Agreement shall expire and shall have no further effect on the Parties (except for sections 11 (Announcement), 13 (Arbitration) and 15 (Miscellaneous), which shall continue to apply and further except for liability resulting from the breach of any obligations existing hereunder prior or relating to the Closing, which liabilities shall also continue to exist without regard to any limitations set forth in section 5 but subject to the limitation in section 9.4.1.
 
 
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9.4.3
If this Agreement is rescinded by one Party, then such rescission shall have effect for the whole Agreement and all Parties.

10.
POST-CLOSING COVENANTS

10.1
Exoneration

Subject to approval of the respective auditors of Ongame Services and Ongame Markets and the Purchaser, at the first annual shareholders meetings of each of Ongame Services and Ongame Markets following the Closing Date, the Purchaser covenants to procure that those board members and the managing directors of Ongame Services and Ongame Markets who have resigned on or before the Closing Date are granted discharge from liability for their administration until the Closing Date (or the earlier date of their resignation).

10.2
Post-Closing Measures

After Closing having been completed, the Purchaser shall procure that the directors of the Company shall file the relevant documents with the Registrar of Companies in Gibraltar recording the fact that (i) the Purchaser is, as of the Closing Date, the registered as new shareholder of the Company and, (ii) the composition of the board of directors of the Company has changed providing such details of the resignations and new appointments to the board as well as such other details required by Gibraltar law.

10.3
Patent License Agreement

The Purchaser acknowledges that Ongame Services and ElectraWorks Limited, a company indirectly and wholly-owned by bwin.party digital entertainment plc, have entered into a patent license agreement under which ElectraWorks Limited acquires a royalty-free, non-exclusive and perpetual license to use certain IPR currently held by Group Companies (the "License Agreement") which is attached hereto as Schedule 10.3.

10.4
Restrictions on Use of Business Customer Data
 
 
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From and after the Closing, the Seller shall not use any Business Customer data (including but not limited to poker player identification or contact data, wagering transaction data, wagering settlement data and wagering account debiting/crediting data) to directly or indirectly call upon, solicit, advise, notify or otherwise attempt to do business with any Business Customer or any poker player Customer of any Business Customer other than poker player Customers of Terminated Business Customers through their accounts with such Terminated Business Customers. This section 10.4 shall, however, not prevent the Seller from using Business Customer Data which relate to bwin.party digital entertainment plc or any of its Affiliates in its capacity as Business Customer.

During the period of two (2) years following the Closing Date (the "Restricted Period"), the Seller shall not in any way, directly or indirectly, hire, solicit for hire, induce or attempt to induce any officers, employees, representatives or agents of any of the Group Companies to leave the employ of the Purchaser or such Group Companies or violate the terms of their employment arrangements with the Purchaser or such Group Companies. The Restricted Period applicable to the Seller shall be extended by the length of any period during which it is in breach of the terms of this section 10.4.

The Seller acknowledges that its covenants set forth in this section 10.4 are an essential element of this Agreement and that, but for its agreement to comply with these covenants, the Purchaser would not have entered into this Agreement. In addition, the Seller acknowledges and agrees that the geographic scope of the restrictions set forth in this section 10.4 are reasonable as the business of the Group Companies and any similar competing businesses may be conducted anywhere in the world. The Seller acknowledges that this section 10.4 constitutes an independent covenant that shall not be affected by performance or non-performance of any other provision of this Agreement by the Purchaser. The Seller has independently consulted with its counsel specifically in regards to this section 10.4 and after such consultation agree that the covenants set forth in this section 10.4 are reasonable and proper.

10.5
Return of Deposit with National Gaming Commission of Spain
 
 
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From and after the Closing, the Purchaser shall provide and shall cause the relevant Group Company to provide reasonable cooperation to the Seller in its efforts to effect the replacement contemplated by section 8.2(e), provided that in connection therewith the Seller shall reimburse the Purchaser or the Group Company for any out-of-pocket expenses incurred and the Purchaser shall not be obligated  to take any action or omit to take any action which action or omission would reasonably be expected to jeopardize any Gaming Approval held by the Purchaser or any Group Company, jeopardize any application for a Gaming Approval by the Purchaser or any Group Company, or require any deviation from the conduct of the Business as conducted as of the Signing Date and the Closing Date.  From and after the Closing, the Purchaser shall remit, or cause the relevant Group Company to remit, to the Seller within five (5) Business Days following receipt by the Purchaser or any Group Company from the National Gaming Commission of Spain, the amount of the security deposit (or portion thereof received by the Purchaser or such Group Company) made by the Group prior to the Signing Date with the National Gaming Commission of Spain in connection with the Company’s application for a Gaming Approval.

11.
ANNOUNCEMENTS

Immediately after the execution of this Agreement, the Parties shall issue individual press releases, in the form previously agreed upon between the Parties.

12.
PAYMENTS, COSTS AND EXPENSES

12.1
Costs of agreement

Except as otherwise provided in section 9.4.1, each Party to this Agreement shall pay its own costs and expenses including the fees of its professional advisors in relation to the negotiation of this Agreement and the preparation, execution and carrying into effect of this Agreement and all other documents referred to herein ("Third Party Expenses"); for purposes of the foregoing, any Third Party Expenses of any Group Company incurred prior to the Closing (whether or not invoiced prior to the Closing) shall be deemed to be Third Party Expenses of the Seller.

12.2
Costs of transaction

Except as otherwise provided herein, all costs, duties, transfer taxes and fees resulting from the execution of this Agreement, including, but not limited to notarial fees and registration fees, shall be borne by the Purchaser.
 
 
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13.
GOVERNING LAW

This Agreement and any non-contractual obligations arising out of or in relation to this Agreement shall be governed by, and construed in accordance with, the laws of Austria, without reference to or application of any conflict of law rules. The form of the agreement relating to the transfer of the Shares shall be governed by the laws of Gibraltar.

14.
ARBITRATION

14.1
Arbitration agreement

All disputes, controversies, claims as well as any non-contractual obligations arising out of or in connection with this Agreement, including the breach, termination or invalidity thereof, shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce (the "Rules") by three arbitrators appointed in accordance with the said Rules. The place of arbitration shall be Vienna, Austria. The language of arbitration shall be English, but documents may be presented in German.

14.2
Exceptions from venue

The arbitral tribunal is nevertheless authorized to carry out certain portions of the proceedings, for example meetings, hearing of witnesses, out-of-court viewings and the like, at a location other than the agreed upon place of arbitration, if the arbitrators so determine. The place of arbitration shall not be changed in consequence thereof.

14.3
Scope of arbitration clause

This arbitration clause shall also be applicable for disputes between a Party hereto and a legal successor of the other Party or between the legal successors of all Parties hereto. This arbitration clause shall furthermore be applicable for disputes regarding amendments or additional agreements to this Agreement.

14.4
Costs of arbitration
 
 
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The losing Party in the proceeding shall compensate the prevailing Party for the costs of arbitration, including reasonable legal and other costs incurred by the prevailing Party for the arbitration. The arbitrators may determine the amount of said legal costs without taking any guidelines for fees or disbursements into consideration. In case a Party prevails only partially, the arbitrators are authorized to award a proportionate amount of the costs of arbitration to such Party.
 
14.5
Specific performance, injunctive relief

In addition to any and all other remedies to enforce the claims a Party has under this Agreement, its Schedules and amendments that may be available under this Agreement, each Party shall be entitled to (i) specific performance and (ii) apply for injunctive relief with courts of law having jurisdiction.

14.6
Applicable law

This arbitration clause is governed by and construed in accordance with Austrian law excluding its rules on conflict of laws.

15.
MISCELLANEOUS

15.1
Amendments

This Agreement may not be amended or modified, except by a written document executed by all Parties; however, where any specific form (such as a notarial deed) is required under applicable law, any amendment or modification hereto needs to be made in such form. The compliance with any condition or covenant set forth herein may not be waived, except in writing duly and validly executed by the waiving Party.

15.2
No assignment

This Agreement and any rights and obligations hereunder cannot be transferred or assigned in whole or in part without the prior written consent of all Parties that shall not be unreasonably withheld.

15.3
Nomination right
 
 
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From the date hereof and no later than five (5) Business Days prior to the Closing Date, Purchaser shall, subject to the prior written consent of the Seller, have the right to nominate, an Affiliate of Purchaser to succeed to and be substituted for Purchaser under this Agreement with such effect as if such nominated Affiliate of Purchaser had been named the Purchaser herein, or to specify an Affiliate of Purchaser to directly purchase all or a portion of the shares of any Group Company directly from the holder thereof for such portion of the consideration otherwise payable for the Shares pursuant to section 3 as is specified by the Purchaser. The Seller shall not withhold its consent to such nomination if and so far (i) such Affiliate is a 100% (per centum) subsidiary of the same ultimate parent(s) as the Purchaser, and if there is more than one such ultimate parent, in the same (direct or indirect) proportion,(ii) such Affiliate validly enters into all agreements and arrangements, and assumes all obligations of the Purchaser out of or related to this Agreement, and (iii) the Purchaser remains jointly and severally liable for the full and punctual fulfilment of all obligations out of or related to this Agreement so as to safeguard all rights the Seller has under this Agreement.

15.4
Severability

In case any one or more of the provisions contained in this Agreement shall be invalid, illegal, or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. In lieu of the invalid or inoperable provision, this Agreement shall be applied in a reasonable manner, which, so far as legally permissible, comes as close as possible to the application of what the Parties intended, according to the spirit and purpose of this Agreement.

15.5
Entire agreement

This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof. Except as expressly provided herein and save for the confidentiality agreement entered into between bwin.party digital entertainment plc and ShuffleMaster, Inc. dated 14 September 2011 which shall remain in full force and effect until and including the Closing Date, all prior agreements or understandings, if any, between the Parties or their Affiliates with respect to the Company and the subject matter hereof shall, upon the execution of this Agreement, be null and void.
 
 
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15.6
Notices

All notices, requests, demands and other communications, which are required or may be given under this Agreement shall be exclusively made by (i) e-mail and/or (ii) facsimile (telecopier) and shall be sufficient in all respects if addressed as follows:

If to the Seller, to:
bwin.party services (Austria) GmbH
c/o bwin.party digital entertainment plc
711 Europort
Gibraltar
Attention:         Nigel Birrell
Telephone:        +350 200 78700
Telecopier:        +350 200 48521
e-mail:               nigel.birrell@bwinparty.com

with a copy to:
Brandl & Talos Rechtsanwälte GmbH
Mariahilfer Straße 116
1070 Vienna
Austria
Attention:          Thomas Talos
Telephone:          +43 1 522 5700
Telecopier:          +43 1 522 5701
e-mail:                 talos@btp.at

If to Purchaser, to:
Shuffle Master International, Inc.
Attention:          General Counsel
Telephone:         (702) 492-8880
Telecopier:         (702) 270-5326
e-mail:                klever@shufflemaster.com
 
 
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with a copy to:
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, California 94304-1018
Attention:          Timothy J. Harris
Telephone:         (650) 813-5784
Telecopier:         (650) 251-3781
e-mail:                 tharris@mofo.com
 
 
 
 
Vienna, March 5, 2012

 
 /s/ Gunther Doppler     /s/ Gavin Isaacs    
 bwin.party services (Austria) GmbH           Shuffle Master International, Inc.    
 Name: Gunther Doppler      Name:  Gavin Isaacs    
 Title:  Managing Director         Title:  CEO    
                                                                                                                  
 
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Schedule 4
Warranties of Seller

1.
AUTHORITY AND GOOD STANDING

The Seller has (and will have on the Closing Date) good right, full power and authority to enter into this Agreement and to sell, assign and transfer its Shares to the Purchaser in the manner contemplated herein and to perform all of its obligations under this Agreement. Each Group Company is a company duly organized, validly existing and, where such concept applies, in good standing under the laws of its jurisdiction of formation, each Group Company has the power and authority to own, operate and lease its properties and to conduct its business as conducted as of the Signing Date and the Closing Date. No Group Company is in violation of its constitutional documents. This Agreement and all other agreements contemplated by this Agreement to be executed by the Seller are and will be valid and binding obligations of the Seller enforceable against the Seller in accordance with their respective terms.

2.
NO VIOLATION

The execution by the Seller of this Agreement does not, and the performance by the Seller of its obligations hereunder and the consummation by the Seller of the transactions contemplated hereby will not (i) conflict with or violate the articles of association or other internal governing documents of the Seller or any Group Company, (ii) require any internal authorization, consent or approval of any corporate body of the Seller or any Group Company or any authorization, consent or approval of any Governmental Authority which has jurisdiction over the Seller and the Group Companies other than those that have been obtained, (iii) violate any Permit, law or regulation, governmental, arbitral or court order, judgment or decree applicable to the Seller or any Group Company or any of their respective assets (iv) result in any breach of any contract or agreement to which the Seller or any Group Company is a party or by which the Seller or any Group Company or any of their respective assets is or are bound, or (v) subject any Group Company to any obligation to make any payment to any third party (other than transfer, documentary, sales, use, excise, stamp, registration and other such Taxes) as a consequence of the sale and transfer of Shares hereunder, as a condition to the continued enjoyment of business relations enjoyed by such Group Company prior to the Closing or otherwise. In particular, the Seller has obtained approval by the board of directors of bwin.party digital entertainment plc. No Group Company shall be subject to any Loss as a result of any violation of any order, judgment, decree, law, rule, or regulation by Seller or any Group Company prior to the Closing. Neither the execution, delivery or performance of this Agreement by the Seller nor the consummation of the transactions contemplated hereby requires any consent, clearance, notification, permission or waiver under the laws, regulations or practices applied by any authority (other than national or supranational antitrust or merger control) to which the Seller or any Group Company is subject.
 
 
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3.
TITLE

As of the Closing Date, the Seller has full title to the Shares and, indirectly, to the Subsidiary Shares free and clear of all Encumbrances (other than any Encumbrances under the Articles of Association).

4.
SHARE CAPITAL/QUOTA

4.1
Company

The Company has a registered share capital of EUR 25,000. The Shares owned by the Seller have been validly issued, are fully paid-up and will be fully paid-up as of the Closing Date. There has not been, and there will not have been as of the Closing Date, any unlawful repayment (whether disclosed or undisclosed) of share capital. The Shares represent a 100% (per centum) interest in the Company's registered share capital and in all of the voting rights in the Company's shareholders' meeting. The Company has not issued any equity instruments, or any rights (whether present or contingent), to acquire equity instruments, other than the Shares. Upon the Closing, the Purchaser shall become the sole owner of 100% (per centum) of the authorised share capital of the Company. To the Seller’s knowledge, there is no person who has asserted, and no reasonable basis for the assertion of, any right or entitlement to any equity interest in the Company. None of the Shares are subject to any pre-emptive right, right of first refusal, right of first offer or other rights of third parties that restrict the Seller’s right to transfer the Shares. The Shares have been issued in full compliance with all applicable corporate and securities laws and the Seller’s constitutional documents. Other than the Subsidiary Shares, the Company has no equity or ownership interest, direct or indirect, in or loans to any other business entity. Since inception, the Company has not repurchased, redeemed or otherwise reacquired any of its share capital. There are no voting agreements, proxies or voting trusts applicable to any of the Shares. As of the Closing Date, there shall be no obligation attaching to the Shares to pay any dividends.
 
 
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4.2
Other Group Companies

The Group Companies other than the Company have each a registered share capital as set out opposite the name of each Group Company on Schedule 4 Part 4.2, and each of the Subsidiary Shares represents the respective amount of interest in the relevant Group Companies' registered share capital as set out on Schedule 4 Part 4.2. The relevant Group Companies have not issued any equity instruments, or any rights (whether present or contingent), other than the Subsidiary Shares. Upon the Closing, the Company shall be the direct or indirect owner of 100% (per centum) of the authorised share capital of each of the Group Companies. To the Seller’s knowledge, there is no person who has asserted, and no reasonable basis for the assertion of, any right or entitlement to any equity interest in any Group Company. None of the Subsidiary Shares are subject to any pre-emptive right, right of first refusal, right of first offer or other rights of third parties that restrict the Seller’s right to transfer the Subsidiary Shares. The Subsidiary Shares have been issued in full compliance with all applicable corporate and securities laws and the relevant Group Company’s constitutional documents. Other than as set out on Schedule 4 Part 4.2, none of the Group Companies has any equity or ownership interest, direct or indirect, in or loans to any other business entity. No Group Company is obligated to make any investment in or capital contribution to any other business entity. Since its respective inception, no Group Company has repurchased, redeemed or otherwise reacquired any of its share capital. There are no voting agreements, proxies or voting trusts applicable to any of the Subsidiary Shares.

5.
NO INSOLVENCY

There is no bankruptcy, moratorium, insolvency or similar proceeding pending or, to the knowledge of the Seller, threatened against any Group Company.

6.
TAXES

6.1
Tax Returns Filed, Taxes Paid
 
 
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(a)
Each Group Company has duly, and within the respective time limits, filed all Tax returns, given all notices and supplied all other information required to be supplied to all relevant Tax authorities; all such information was complete and accurate in all material respects and all such returns and notices were complete and accurate in all material respects. Each Group Company has established adequate accruals or reserves for the payment of all unprovided Taxes attributable to the Pre-Closing Tax Period, has made all required estimated Tax payments, and has no liability for Taxes in excess of the amounts paid or accrued and reserved.
 
(b)
All Taxes that have become due and payable for accounting periods ending on or before 30 June 2011 by the Company (whether as tax payer or as a Person liable for Taxes owed by another Person) have been paid as and when the same became due.
 
(c)
No deficiencies for Taxes have been claimed, proposed or assessed or threatened in writing against any Group Company. No Group Company has received any notification from any relevant Tax authority regarding any potential assessment or audit. No Tax return of any Group Company is under audit by any Tax authority and all such past audits have been completed and fully resolved and all Taxes and any penalties or interest determined by such audits to be due have been paid in full. No Group Company assets are subject to any Tax lien. There is not in effect any waiver by any Group Company of any statute of limitations with respect to any Tax or any agreement to any extension of time for the filing of any Tax return which has not been filed, and no Group Company has consented to extend the period in which any Tax may be assessed or collected by any Tax authority.
 
(d)
Each Group Company has timely withheld and remitted or otherwise paid to the relevant Tax authority all required employment and social welfare taxes on all compensation paid to employees and other service providers. Each Group Company has maintained all required records with respect thereto.

6.2
Limitations

With respect to all Taxes due and payable by the Company the foregoing warranties do not apply to the extent that such Tax liabilities
 
 
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(a)
are shown or provided for in the Unaudited Financial Statements as tax accruals or as part of the other accruals for potential tax liabilities deducted from the books and records of the Company; or
 
(b)
can be offset against Tax loss carry forwards that are or were available (including as a result of subsequent Tax audits) in the period to which such Taxes are allocable, whereby any use or reduction caused directly or indirectly by the Purchaser of such Tax loss carry backs or loss carry forwards shall be disregarded (it being understood that Tax losses incurred by any of the Companies after the Closing Date and carried back into any period ending prior to Closing Date are not taken into account).

7.
MATERIAL CONTRACTS

The Seller represents and warrants as of the Signing Date, but not as of the Closing Date, that:

 
(a)
none of the Group Companies is party to any Material Contract other than those listed in Schedule 4 Part 7 of the Disclosure Letter;
 
(b)
with respect to each such Material Contract, none of the respective Group Companies or, to the Seller’s knowledge any counterparty, is in material breach with its obligations thereunder;
 
(c)
each Material Contract is valid, binding and enforceable against the applicable Group Company and, to the knowledge of the Seller, the other party thereto in accordance with its terms and is in full force and effect;
 
(d)
no Group Company has received notice from any counterparty of its intention to cancel or terminate any Material Contract and no Group Company has received notice of any anticipated reduction in the amount of business to be transacted under any Material Contract;
 
(e)
no Group Company has received notice from any Business Customer of any breach or alleged breach of any network liquidity or uptime/availability covenants by which such Group Company is bound; and
 
(f)
no Group Company has received any notice from any Governmental Authority or any assertion by any Person alleging any violation of any competition or antitrust laws.

8.
COMPLIANCE WITH LAWS
 
 
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8.1
Required Permits

Each Group Company holds in full force and effect all material authorizations, permits, approvals, consents, licenses and similar instruments required for the conduct of its business and the ownership of its properties, including without limitation, (i) a remote gambling licence (No 33) issued by the Government of Gibraltar valid for the period 1 July 2011 to 30 June 2012 and (ii) an interactive gaming licence (the "Kahnawake Permit") issued by the Kahnawake Gaming Commission valid until 31 July 2013 (collectively the "Permits"). Each Group Company is in compliance with all Permits. All Permits other than the Kahnawake Permit shall remain in full force and effect on the Closing Date. Neither the Seller nor any Group Company has received any communication from any Governmental Authority that alleges any possible violation of or any possible revocation, withdrawal, suspension, cancellation, termination or modification of any Permit as a result of the consummation of the transactions contemplated by this Agreement. No employee or agent of any Group Company has used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses or made any unlawful payment to government officials or government employees or made any other payment in violation of applicable law.

8.2
Enforcement of Access Restrictions

Each Group Company has enforced against each Business Customer, and each such Business Customer has complied with, the contractual restrictions and obligations set forth in such Group Company’s agreement with such Business Customer and all laws, rules or regulations applicable to such Business Customer’s operations (such contractual restrictions and obligations and laws, rules and regulations, collectively, "Access Restrictions") that are designed to restrict such Business Customer’s marketing, promotion or operating activities in order to comply with the terms of any Permit or any law, rule or regulation applicable to such Group Company or Business Customer. Since January 1, 2007, no Group Company has knowingly permitted any Business Customer to access any business or custom from a Customer located in the United States of America (including its territories and possessions, its states and the District of Columbia). The Disclosure Letter sets forth a list (based upon Seller’s due inquiry of books and records in its possession) of all jurisdictions ("Blocked Jurisdictions"), since January 1, 2007, in which any Group Company has undertaken measures to block the marketing, promotion or operation of the Business. No Group Company has knowingly permitted any Business Customer or any third party on behalf of a Business Customer, to advertise or promote the availability of any product or service utilising the Business in any Blocked Jurisdiction since implementation of the blocking measures related to such Blocked Jurisdiction.
 
 
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8.3
Compliance with Other Laws

As of the Signing Date and as of the Closing Date, the operations of each Group Company are in compliance with all laws, rules and regulations applicable thereto except for such noncompliance that would not reasonably be expected to have a Material Adverse Effect.

8.4
No payment processing services

As of the Signing Date and as of the Closing Date, the Group Companies are not performing any payment processing services that require a license, permit or approval from any financial services or banking regulatory authority.

9.
EMPLOYEES

9.1
No Latent Hiring

No Group Company is under an obligation to employ any former employee or any other Person, save under mandatory provisions of Swedish employment law which could cause such obligations with respect to the individuals set forth in the Disclosure Letter.

9.2
Payment of Employee Compensation

Except for Retention Bonuses provided for in section 8.2(c) of the Agreement, all payments to current or former employees or consultants, whether standard remuneration, bonuses, premiums, severance, salary continuation or payments of any other nature, due and payable by any Group Company to any of its employees have been made.

9.3
Standard Terms
 
 
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Neither the Seller nor any Group Company has promised any employee of any Group Company any payment or other benefit in connection with an actual or proposed termination of his or her employment, or as a consequence of the transactions contemplated hereby. The employment of all employees of the Group Companies is terminable at the will of the respective Group Company, subject to compliance with applicable law. No Group Company is bound by any oral agreement with respect to terms of employment or compensation.

9.4
Labour Conflicts

There are no and there have not been in the three years prior to the Signing Date any labour disputes, strikes, general slowdowns, general work stoppages or lockouts by or with respect to the work force of any Group Company.

9.5
Pension Commitments

No Group Company has made or assumed any Pension Commitments.  No Group Company shall be subject to any Loss as a result of Seller’s benefit policies.

9.6
Termination and Severance Costs

From and after the Closing, no Group Company shall have any obligation or liability to pay any amounts, including but not limited to severance costs or continued provision of benefits, to any current or former employee of any Group Company, except as required under applicable law.

10.
LITIGATION

There are no pending, initiated, or to the Seller’s knowledge, threatened in writing against or involving any Group Company any legal proceedings, whether before ordinary courts, other independent courts, arbitral tribunals, administrative authorities and other Governmental Authorities that, if decided adversely for the relevant Group Company, would have a Material Adverse Effect on the relevant Group Company. There is no judgment, decree, injunction, rule or order of any ordinary courts, other independent courts, arbitral tribunals, administrative authorities and other Governmental Authorities that names any Group Company. To the Seller's knowledge, there do not exist any matters of fact that are likely to result or give cause to initiation of any such proceedings other than those regarding compliance with gaming .
 
 
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11.
IPR

Each Group Company holds full and exclusive title to or valid licenses in respect of the IPR used in the conduct of the Business as conducted on the Signing Date and the Closing Date ("Necessary IPR"), free and clear of all Encumbrances. No Group Company infringes any IPR owned by any third Person in any material way nor are there, to the Seller's knowledge, any matters of fact that is likely to give rise to nullification of any Necessary IPR. To the Seller’s knowledge, no third Person has infringed any Group Company’s rights in any IPR. The Necessary IPR is sufficient to operate the Group Companies' business, taken as a whole, as conducted on the Signing Date and as conducted on the Closing Date. All Necessary IPR is fully transferable and licensable by the respective Group Company without restriction or payment of any kind to any third Person. No Necessary IPR is subject to any proceeding, decree, order, judgment or settlement that restricts in any manner the Group’s use of such Necessary IPR. No Group Company has granted to any third party any ownership interest or right to acquire an ownership interest in any Necessary IPR or the right to access any source codes to computer programs owned by any Group Company. Other than licenses granted to Business Customers or Customers in the ordinary course of the Business, no Group Company has granted any third party any right under any Necessary IPR. Neither the Seller nor any Group Company has received any notice of any assertion that any IPR of any Group Company is invalid or unenforceable against any third Person. To the Seller’s knowledge, no current or former employee or consultant of any Group Company has developed any IPR for any Group Company that is subject to any obligation to assign the rights thereto to any third Person. Each Group Company has secured valid assignments to all Necessary IPR from the service providers who contributed to such IPR, free of any obligation on the part of any Group Company to pay royalties or other consideration thereon or to provide any attribution with respect thereto. Each Group Company has paid all applicable registration or filing fees due and owing for the registration and perfection of Necessary IPR. No Group Company has misrepresented or knowingly failed to disclose any facts or circumstances in any application to register or perfect IPR that would constitute fraud or a misrepresentation or that would otherwise effect the enforceability of any Group Company’s rights in such IPR. No Necessary IPR contains any virus or code intentionally created to access, modify, delete or damage or disable any computer systems and all products distributed by the Group perform, in all material respects, the functions described in any specifications or end user documentation distributed by the Group, free of bugs or programming errors that adversely affect the functionality of such products other than routine bugs or programming errors that reasonably would be expected to be timely corrected in the ordinary course of maintenance and support services provided by the Group.
 
 
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12.
INSURANCES

Each of the Group Companies has the insurances listed in Schedule 4 Part 12 and all such insurances are in full force and effect. The coverage under such policies satisfies all applicable legal requirements for minimum insurance coverage required by the Group Companies in the conduct of the Business. There are no claims pending under any such policies. All premiums due under such policies have been timely paid and each Group Company is in compliance with the terms of each such policy.

13.
TITLE TO ASSETS

13.1
Ownership of Assets

Except for current assets disposed of by each Group Company in the ordinary course of business the Group is the legal and beneficial owner of all assets included in (i) Schedule 3 of the Asset Transfer Agreement, and (ii) the Unaudited Financial Statements.

13.2
Sufficiency of Assets
The Group has good and marketable title to or a valid leasehold interest in all of the assets and properties used in the conduct of the Business as conducted during the six (6) month period preceding the Signing Date (including but not limited to the URL www.holdempoker.com and any similar derivatives thereof, the trade name "Hold ‘Em Poker" and all IPR associated therewith), free and clear of all Encumbrances. Except for any cash required to finance the operations of the Business on an ongoing basis, the assets and properties of the Group as of the Closing Date will include all of the assets used by the Group Companies in the conduct of the Business as of the Signing Date and as of the Closing Date. Except for any cash required to finance the operations of the Business on an ongoing basis, the assets used by the Group Companies in the conduct of the Business at the Signing Date and at the Closing Date, together with the services to be provided by the Seller under the Transition Services Agreement after the Closing Date, shall be sufficient for the continued conduct of the Business following the Closing Date in the same manner as conducted at the Signing Date and at the Closing Date.
 
 
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14.
FINANCIAL STATEMENTS

The unaudited financial statements as of and for the period ended December 31, 2011 set out in Schedule 4 Part 14 (the "Unaudited Financial Statements") are true, accurate and complete and present fairly, in all material respects, the financial position of each of the Group Companies and the results of their respective operations and have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union applied on a consistent basis with prior financial statements of the Seller and the Group Companies and are, in all material respects, consistent with the books and records of the Seller and the Group Companies. All reserves reflected in the Unaudited Financial Statements are adequate for the purposes for which they were established. Except as reflected in the Unaudited Financial Statements, no Group Company has any liabilities (contingent or otherwise) of a nature required to be disclosed in financial statements prepared in accordance with Financing Reporting Standards as adopted by the European Union, other than (a) liabilities incurred in the ordinary course of the Business subsequent to December 31, 2011, and (b) obligations under contracts and commitments incurred in the ordinary course of the Business and not required by Financing Reporting Standards as adopted by the European Union to be reflected in the financial statements, which in either case are not material to the financial condition or operating results of the Group Companies. No Group Company is a guarantor or indemnitor of any indebtedness of any other Person.

The Audited Financial Statements shall be substantially consistent with Unaudited Financial Statements, save for normal and customary adjustments made in connection with audit, which, individually or in the aggregate, do not constitute a material deviation from the financial condition or operating results presented in the Unaudited Financial Statements for the Group as a whole and taking into account the below criteria in the aggregate for all Group Companies (as if on a consolidated basis). For purposes of the foregoing, a five (5) per centum or greater difference in revenue; earnings before interest, taxes, depreciation and amortization; or earnings before interest and taxes shall constitute "a material deviation" for purposes of this part 14.
 
 
-76-

 
 
 
15.
ABSENCE OF CHANGES

From and after the date of the Unaudited Financial Statements, each Group Company has operated its business in the ordinary course, consistent with past practice, and there has not been any:

 
(a)
amendment or change in any constitutional documents of any Group Company;
 
(b)
license, sale, assignment, transfer or other disposition or agreement to do any of the foregoing with respect to any of the assets or properties of any Group Company outside of the ordinary course of business;
 
(c)
damage, destruction or loss of any assets or properties of any Group Company;
 
(d)
declaration, setting aside or payment of any dividend or other distribution to equity holders by any Group Company, any split or combination or recapitalization of any Group Company or any change in the rights or obligations of the share capital of any Group Company;
 
(e)
resignation or termination of employment of any key employee or manager of any Group Company;
 
(f)
material change in the compensation, employee benefits or terms of employment of any employee of any Group Company;
 
(g)
entry into, amendment of, waiver of rights under or termination of any Material Contract (and for purpose of this clause (g) substituting EUR 100,000 for EUR 50,000 in the definition of "Material Contracts") ;
 
(h)
written or oral indication or assertion by any counterparty to a Material Contract of any problem or defect in the performance by any Group Company of its obligations under any Material Contract;
 
(i)
agreement by any Group Company to provide products or services to any third party on an exclusive basis or not to engage in any type of business activity;
 
(j)
to the Seller’s knowledge, commencement of any lawsuit, proceeding or investigation by any Governmental Authority into any Group Company;
 
(k)
change in accounting methods or practices or revaluation of any asset or account of any Group Company;
 
 
-77-

 
 
 
(l)
amendment of any Tax return of any Group Company, making or revocation of any material election relating to Taxes, or settlement or compromise of any claim, action, suit, litigation, proceeding, arbitration, audit or controversy relating to Taxes or consent to waiver or extension of any statute of limitations with respect to any Taxes; or
 
(m)
entry into any agreement, understanding or arrangement (whether or not in writing) to do any of the foregoing.

16.
NO MISLEADING STATEMENTS

Neither this Agreement nor any document or instrument delivered in connection herewith contains any untrue statement of fact or omits to state any fact necessary in order to make the statements contained herein and therein, in light of the circumstances under which such statements were made, not misleading.
 
 
-78-

 

Schedule 4 Part 4.2
List of Subsidiaries and share capital of Subsidiaries

Group Company
Registered share capital
Amount of interest
Ongame Services AB
EUR 11,000
100% (per centum)
Ongame Markets AB
EUR 11,000
100% (per centum)
Ongame Markets Malta Limited
EUR 100,000
100% (per centum)


-79-
EX-31.1 3 ex31-1.htm EXHIBIT 31.1 ex31-1.htm
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
CERTIFICATION
 
I, Michael Gavin Isaacs, certify that:
 
1.           I have reviewed this Quarterly Report on Form 10-Q of Shuffle Master, Inc.;
 
2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.           The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.           The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: June 4, 2012
 
         
/s/ MICHAEL GAVIN ISAACS
       
Michael Gavin Isaacs
       
Chief Executive Officer
   
 
 
 
EX-31.2 4 ex31-2.htm EXHIBIT 31.2 ex31-2.htm
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
CERTIFICATION
 
I, Linster W. Fox, certify that:
 
1.           I have reviewed this Quarterly Report on Form 10-Q of Shuffle Master, Inc.;
 
2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.           The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.           The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: June 4, 2012
 
         
/s/ LINSTER W. FOX
   
 
 
Linster W. Fox
   
 
 
Chief Financial Officer
       
 
 

EX-32.1 5 ex32-1.htm EXHIBIT 32.1 ex32-1.htm
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
 
In connection with the Quarterly Report of Shuffle Master, Inc. (the “Company”) on Form 10-Q for the period ended April 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Gavin Isaacs, Chief Executive Officer, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), that to the best of my knowledge:
 
(1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: June 4, 2012
 
         
/s/ MICHAEL GAVIN ISAACS
       
Michael Gavin Isaacs
       
Chief Executive Officer
   
 
 
EX-32.2 6 ex32-2.htm EXHIBIT 32.2 ex32-2.htm
 
EXHIBIT 32.2
 
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
 
In connection with the Quarterly Report of Shuffle Master, Inc. (the “Company”) on Form 10-Q for the period ended April 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Linster W. Fox, Chief Financial Officer, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), that to the best of my knowledge:
 
(1)           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
  
Date: June 4, 2012
 
         
/s/ LINSTER W. FOX
   
 
 
Linster W. Fox
   
 
 
Chief Financial Officer
       
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DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">Description of business.</font>&#160;&#160;Unless the context indicates otherwise, references to &#8220;Shuffle Master,&#160;Inc.,&#8221; &#8220;we,&#8221; &#8220;us,&#8221; &#8220;our,&#8221; or the &#8220;Company,&#8221; include Shuffle Master,&#160;Inc. and its consolidated subsidiaries.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">We are a leading global gaming supplier committed to making gaming more fun for players and more profitable for operators through product innovation, and superior quality and service.&#160;&#160;We operate in legalized gaming markets across the globe and provide state-of-the-art, value-add products in four distinct segments: Utility products, which include automatic card shufflers and roulette chip sorters; Proprietary Table Games (&#8220;PTG&#8221;), which include live games, side bets and progressives as well as our newly introduced i-Gaming, which features online versions of our table games, social gaming and mobile applications; Electronic Table Systems (&#8220;ETS&#8221;), which include various e-Table game platforms; and Electronic Gaming Machines (&#8220;EGM&#8221;), which include video slot machines.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">We lease, license and sell our products. When we lease or license our products, we generally negotiate a month-to-month operating lease. When we sell our products, we offer our customers a choice between a sale, a longer-term sales-type lease or other long-term financing. We offer our products worldwide in markets that are highly regulated. We manufacture our products at our headquarters and manufacturing facility in Las Vegas, Nevada, as well as at our Australian&#160;headquarters and manufacturing facility in Milperra, New South Wales, Australia. In addition, we outsource the manufacturing of certain of our sub-assemblies in the United States, Europe and Asia.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">Utility</font><font style="DISPLAY: inline; FONT-WEIGHT: bold">.</font>&#160;Our Utility segment develops products for licensed casino operators that enhance table game speed, productivity, profitability and security. Utility products include automatic card shufflers and roulette chip sorters. This segment also includes our i-Shoe<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> Auto card reading shoe that gathers data and enables casinos to track table game play and our i-Score<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#8482;</font> baccarat viewer that displays current game results and trends. These products are intended to cost-effectively provide licensed casino operators and other users with data on table game play for security and marketing purposes, which in turn allows them to increase their profitability.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">Proprietary Table Games.</font>&#160;Our PTG segment develops and delivers proprietary table games that enhance our casino customers' and other licensed operators' table game operations. Products in this segment include our proprietary table games, side bets, add-ons and progressives as well as our newly introduced i-Gaming products, which feature online versions of our table games, social gaming, and mobile applications.&#160;&#160;Our proprietary content and features are also added to public domain games such as poker, baccarat, pai gow poker and blackjack table games and to electronic platforms such as Table Master<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> and i-Table<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font>.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">Electronic Table Systems.</font>&#160;&#160;Our ETS segment develops and delivers various products involving popular table game content using e-Table game platforms. Our primary ETS products are i-Table<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font>, Table Master<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font>, Vegas Star<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> and Rapid Table Games<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font>.&#160;&#160;Our i-Table<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> platform combines an electronic betting interface with a live dealer who deals the cards from our card reading shoe or shuffler that is designed to improve game speed and security while reducing many operating expenses associated with live tables. Our Table Master<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> and Vegas Star<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> products feature a virtual dealer which enables us to offer table game content in both traditional gaming markets and in markets where live table games are not permitted, such as some racinos, video lottery and arcade markets. Our Rapid Table Games<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> product enables the automation of certain components of traditional table games such as data collection, placement of bets, collection of losing bets and payment of winning bets combined with live dealer and game outcomes. This automation provides benefits to both casino operators and players, including greater security and faster speed of play.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">Electronic Gaming Machines</font><font style="DISPLAY: inline; FONT-WEIGHT: bold">.</font>&#160;&#160;Our EGM segment develops and delivers our PC-based video slot machines into select markets, primarily in Australasia.&#160;&#160;We offer a selection of video slot titles which include a range of bonus round options that can be configured as a network of machines or as stand-alone units. In addition to selling the full EGM complement, we sell software conversion kits that allow existing EGM terminals to be converted to other games on the PC3 and PC4 platform. Popular titles for our EGMs include Cats Hats &amp; Bats<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#8482;</font>, Eureka Gold Mine 2<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#8482;</font>, Emerald Fortunes<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#8482;</font> and King of Babylon<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#8482;</font>. In addition, we continue to develop a popular range of games utilizing the Pink Panther<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#8482;</font> brand, under license from Metro-Goldwyn-Mayer Studios, Inc. consumer products.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">Basis of presentation.</font>&#160;&#160;The accompanying Unaudited Condensed Consolidated Financial Statements include the results of operations, financial position and cash flows of Shuffle Master, Inc. and its consolidated subsidiaries. All material intercompany balances have been eliminated. &#160;</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In the opinion of our management, the accompanying Unaudited Condensed Consolidated Financial Statements include all adjustments necessary to fairly state, in all material respects, our results for the periods presented. These Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (&#8220;SEC&#8221;).&#160;&#160;Certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles (&#8220;GAAP&#8221;) have been condensed or omitted pursuant to such rules and regulations.&#160;&#160;These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our 2011 Annual Report on Form 10-K filed with the SEC on January 5, 2012.&#160;&#160;The results of operations for the three and six months ended April 30, 2012 are not necessarily indicative of results to be expected for the entire fiscal year.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">Reclassification.</font> The Company revised its October&#160;31, 2011, condensed consolidated balance sheet to appropriately classify amounts that were previously included within accounts receivable as current investment in sales-type leases and notes receivable. This revision resulted in a $3.2&#160;million increase in the current investment in sales-type leases and notes receivable with a corresponding reduction to accounts receivable. The revision, which the Company determined is not material, had no impact on total current assets, results of operations or cash flows.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">Use of estimates and assumptions.</font>&#160;The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our Condensed Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis. 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Our effective interest rate as of April 30, 2012 was 2.0%. Borrowings under the Revolver may be used for working capital, capital expenditures and general corporate purposes (including share repurchases).</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">As of April 30, 2012, the amount drawn under the Revolver was $21.4 million and after considering restrictive financial covenants under the Senior Secured Revolving Credit Facility, we had approximately $178.6 million of available remaining credit under the Revolver. The Revolver matures on October 29, 2015.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">Covenants.</font> Our Senior Secured Revolving Credit Facility contains three financial maintenance covenants requiring us to maintain a Total Leverage Ratio, as defined therein, of not more than 3.75 to 1.0, a Senior Leverage Ratio, as defined therein, of not more than 3.0 to 1.0 until October 31, 2013 and not more than 2.75 to 1.00 after October 31, 2013 and Interest Expense Coverage Ratio, as defined therein, in excess of 3.0 to 1.0 at the end of any fiscal quarter. 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SHAREHOLDERS&#8217; EQUITY</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">Common stock repurchases.</font> Our board of directors periodically authorizes us to repurchase shares of our common stock.&#160; As of April 30, 2012, $21.1 million remained outstanding under our board authorization.&#160; We cancel shares that are repurchased.&#160; No shares were repurchased during the three and six months ended April 30, 2012.&#160; Although we generally prioritize bank debt reduction over share repurchases we may consider share repurchases when there are anomalies in the share value created by, but not limited to, market conditions.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; 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COMMITMENTS AND CONTINGENCIES</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">Ongame Network Ltd.</font><font style="DISPLAY: inline; FONT-WEIGHT: bold">&#160;</font>On March 5, 2012, through our wholly-owned subsidiary Shuffle&#160;Master International, Inc.,&#160;we entered into a definitive agreement to acquire Ongame Network Ltd., a limited liability company incorporated and existing under the laws of Gibraltar (&#8220;Ongame&#8221;), from bwin.party services (Austria) GmbH (&#8220;bwin.party&#8221;). Ongame is one of the world&#8217;s largest business to business online poker providers.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The acquisition is subject to completion of certain conditions, including the continued material accuracy of the parties&#8217; representations and warranties; the performance of and compliance with all covenants in the definitive agreement; and the receipt of required regulatory approvals.&#160;&#160;The closing of the transaction is expected to&#160;occur not more than nine months following execution of the definitive agreement (the &#8220;Closing&#8221;).&#160;&#160;As consideration for the acquisition of the shares of Ongame, and indirectly the acquisition of Ongame&#8217;s subsidiaries, at the Closing we will pay &#8364;19.5 million (approximately $25.8 million using the translation rate available as of April 30, 2012) in cash, subject to certain adjustments at Closing.&#160;&#160;We may also become obligated to&#160;additionally pay up to &#8364;10 million in cash within five years of Closing contingent upon the commencement of legalized, real-money online poker in the U.S. occurring, if at all,&#160;within five years of Closing.&#160;&#160;The &#8364;10 million (approximately $13.2 million using the translation rate available as of April 30, 2012) contingent payment decreases through the five-year period.&#160;&#160;The contingent payment will be &#8364;10 million if real-money online poker is legalized in the U.S. on or before 730 days following Closing, &#8364;7 million if legalized on or after 731 days following Closing and on or before 1,095 days following Closing, &#8364;5 million on or after 1,096 days following Closing and on or before 1,461 days following Closing, and &#8364;3 million on or after 1,462 days following Closing and on or before 1,826 days following Closing.&#160;&#160;We expect to fund the acquisition with cash on hand and availability on the Senior Secured Revolving Credit Facility.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The obligations of the signatories under the definitive agreement are guaranteed by each party&#8217;s ultimate parent entity to the benefit of the respective other party.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="left"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">Employment agreements.</font>&#160;We have entered into employment agreements with our corporate officers and certain other key employees with durations ranging from one to four years. Significant contract provisions include minimum annual base salaries, healthcare benefits, bonus compensation if performance measures are achieved and non-compete provisions. These contracts are primarily &#8220;at will&#8221; employment agreements, under which the employee or we may terminate employment. If we terminate any of these employees without cause, we are obligated to pay the employee severance benefits as specified in their individual employment agreement. As of April 30, 2012 and October 31, 2011, minimum aggregate severance benefits totaled $7.4 million and $6.6 million, respectively.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="DISPLAY: inline; FONT-WEIGHT: bold">Legal proceedings</font>. In the ordinary course of business, we are involved in various legal proceedings and other matters that are complex in nature and have outcomes that are difficult to predict.&#160;&#160;We record accruals for such contingencies to the extent that we conclude that it is probable that a loss will be incurred and the amount of loss can be reasonably estimated.&#160;&#160;We have not recorded any loss accruals for these contingencies other than as we have considered reasonable for the matters noted below. Our assessment of each matter may change based on future unexpected events.&#160;&#160;An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position.&#160;&#160;Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity, but may be material to the results of operations in any given period.&#160;&#160;We assume no obligation to update the status of pending litigation after the date of this Form 10-Q, except as may be required by applicable law, statute or regulation.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">TableMAX &#8211; In April 2009, TableMAX IP Holdings, Inc. and TableMAX Gaming, Inc. filed a complaint (the &#8220;First Complaint&#8221;) against us in the United States District Court for the District of Nevada.&#160;&#160;This case is a patent infringement claim alleging that our Table Master<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> product infringes U.S. Patents 5,688,174, 6,921,337 and 7,201,661.&#160;&#160;The First Complaint sought injunctive relief and an unspecified amount of damages, including claims for attorneys&#8217; fees, costs, increased damages and disbursements.&#160;&#160;In August 2009, TableMAX Holdings, Inc. and TableMAX Gaming, Inc. voluntarily dismissed the First Complaint.&#160;&#160;On the same date, TableMAX IP Holdings, Inc., TableMAX Gaming, Inc. and Vegas Amusement, Inc. the alleged owner of Patents 5,688,174, 6,921,337 and 7,201,661, (collectively &#8220;TableMAX&#8221;),&#160;filed a new complaint (the &#8220;New Complaint&#8221;) making allegations materially the same as the allegations in the First Complaint.&#160;&#160;In August 2009, TableMAX filed an amended complaint (the &#8220;Second Complaint&#8221;), which superseded and is materially the same as the New Complaint, except that the plaintiffs added a new claim that Table Master<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> infringes U.S. Patent 7,575,512, which was issued on August 18, 2009.&#160;&#160;In August 2009, the plaintiffs filed a Motion for Preliminary Injunction in the Second Complaint that sought to enjoin future sales of our Table Master<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> product.&#160;&#160;In October 2009, the Court denied the Motion for Preliminary Injunction without hearing oral argument and the Court also denied without prejudice various motions for summary judgment that we filed. During the discovery process, TableMAX made new allegations that certain of our Vegas Star<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> products infringe one of the patents in the Second Complaint. In January 2010, TableMAX filed a Second Amended Complaint (the "Third Complaint"), which has materially the same allegations as the Second Complaint, except that it alleges that our Vegas Star<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> product allegedly infringes all of the patents in suit. A document produced in the discovery process appears to limit TableMAX's allegations of infringement regarding our Vegas Star<font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> product to only one of TableMAX's patents in suit.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Court set the Markman hearing for December 2010.&#160; In November 2010, the Court granted our Motion to Stay. The stay was granted because of pending reexamination proceedings before the United States Patent and Trademark Office as to the four patents that are the subject of the lawsuit.&#160;&#160;The reexamination proceedings were initiated as a result of our request. We believe that the final results of the reexamination proceedings will be beneficial to us in future Court proceedings. It is possible that all four reexamination proceedings will conclude in fiscal 2012 and thus the stay may be lifted in fiscal 2012. At present, the case remains stayed.&#160;&#160;We believe that the claim is entirely without merit and we intend to continue to vigorously defend this matter.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Macau Rapid Baccarat <font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> Patent Issue &#8211; On or about June 3, 2009, at the G2E Asia Gaming Show, customs officials from Macau SAR seized a Shuffle Master, Inc. (&#8220;SMI&#8221;) Rapid Baccarat <font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> unit related to a claim by a Macau patent holder of our alleged patent infringement.&#160;&#160;On October 27, 2009, the governmental official in charge of the investigation elected to dismiss the investigation based on a finding that no patent infringement existed based upon the report of the Macau customs officials.&#160;&#160;In November 2009, the patent holder appealed this finding to the Macau Courts. On or about January 20, 2010, over our objection, the judge considering the patent holder&#8217;s appeal found that his appeal was timely filed.&#160;&#160;</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">On or about February 2010, we filed an appeal (the &#8220;First SMAL Appeal&#8221;) to this decision.&#160;&#160;On or about March 2010, the judge declined to forward the First SMAL Appeal to a higher Macau Court. We filed a further appeal (the &#8220;Second SMAL Appeal&#8221;) to have the higher Macau court hear the First SMAL Appeal.&#160;&#160;&#160;On June 2, 2010, the Judge denied the patent holder&#8217;s request to open a criminal proceeding and decided that the investigation should remain dismissed against SMAL and its directors.&#160;&#160;The patent holder has subsequently appealed the June 2, 2010, decision to a higher Macau court, which appeal has not yet been heard.&#160;&#160;In the event the patent holder&#8217;s appeal is successful, it is likely that legal proceedings will be commenced against SMAL and its directors in Macau relating to this patent, although, at this time, no such proceedings have been commenced. Such proceedings, if initiated, would be for patent infringement, which we understand is a criminal matter in Macau.&#160;&#160;The Company does not carry insurance with respect to this matter.&#160;&#160;We believe that the claim is without merit and we intend to continue to defend this matter vigorously.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">On May 4, 2012, the patent holder along with a company apparently controlled by the patent holder (collectively the "patent holders")&#160;requested that the Macau Court enjoin us and certain other exhibitors from infringing&#160;the patent holders'&#160;patents during the G2E Asia Gaming Show held May 22 through May 24.&#160;&#160;On May 15, 2012, the Macau Court signed a written decision enjoining us and&#160;certain other exhibitors&#160;from infringing these patents, even though the court decision did not specifically identify which of our products at the G2E Asia Gaming Show would allegedly infringe such patents.&#160;&#160;On May 22, 2012, Macau Customs instructed the Company to cover our Rapid Table Games&#8482; Multi Game product at the G2E Asia Gaming&#160;Show and we complied.&#160;&#160;On May 23, 2012, we received Court approval to post a bond of approximately $0.1 million in substitution of the injunction and&#160;to permit us to display the Rapid Table Games<font style="FONT-SIZE: 10pt"><font style="FONT-SIZE: 10pt"><font style="FONT-SIZE: 70%; VERTICAL-ALIGN: text-top">TM</font></font></font> <font style="FONT-SIZE: 10pt">Multi Game product.</font>&#160;Notwithstanding that on May 23, 2012, we displayed the Rapid Table Games&#8482; Multi Game product on the advice of our Macau counsel following the Macau Court allowing us to post a bond, we believe that Macau government officials are investigating the timing of lifting of the cover off the&#160;Rapid Table Games<font style="FONT-SIZE: 10pt"><font style="FONT-SIZE: 70%; VERTICAL-ALIGN: text-top">TM</font></font> Multi Game product&#160;and whether such action may give rise to any alleged criminal charges against SMAL or its officers.&#160;The patent holders are required to file civil action for patent infringement and to attempt to claim other alleged damages within ten days from the date of service of the injunction.&#160;As with the other claim, we believe that&#160;all of these claims are&#160;entirely without merit and we intend to continue to vigorously defend this matter.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Wright Matter &#8211; On November 7, 2009, Sam Wright was playing a&#160;Vegas Star <font style="DISPLAY: inline; FONT-SIZE: 10pt">&#174;</font> craps machine at the Harrah&#8217;s Casino New Orleans.&#160;&#160;Mr. Wright played a game that ended in a losing result.&#160;&#160;After the game concluded, as a result of a malfunction, a false credit meter value of approximately $42.0 million appeared on the machine.&#160;&#160;On or about April 2010, we received notice that Mr. Wright had filed a patron dispute with the Louisiana State Police Gaming Division.&#160;&#160;&#160;&#160;In October 2010, the Louisiana State Police Gaming Division concluded in regard to the patron dispute that there was no violation of state law, rule or internal control. Mr. Wright was unsuccessful in the patron dispute.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In November 2010, Mr. Wright filed a Petition for Damages (the &#8220;Wright Complaint&#8221;) with the Civil District Court for the Parish of Orleans, State of Louisiana, naming&#160;&#160;the Company, Jazz Casino Company, LLC d/b/a Harrah&#8217;s New Orleans Casino and Harrah&#8217;s New Orleans Management Company (collectively, &#8220;Harrah&#8217;s) as defendants.&#160;&#160;The Petition claimed damages of approximately $43.0 million plus possible treble damages, attorneys&#8217; fees and costs.&#160;&#160;The Company could have had possible indemnity obligations to Harrah&#8217;s if a judgment had been entered.&#160;&#160;&#160;In February 2011, all defendants answered the Petition and removed the case to the United States District Court for the Eastern District of Louisiana.&#160;&#160;&#160;On February 2012, the Company attended a Court ordered settlement conference, in which the Wright Complaint and the Declaratory Relief Complaint (discussed below) were settled between the parties without admission of liability by either the Company or Harrah&#8217;s.&#160;&#160;Effective May 8, 2012, the Wright Compliant and the Declaratory Relief Complaint were dismissed with prejudice.</font> </div><br/><div style="LINE-HEIGHT: 1.25; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Axis Surplus Insurance Company (&#8220;Axis&#8221;) was the Company&#8217;s insurance carrier with respect to the Wright Complaint.&#160;&#160;In November 2011, we filed a Complaint for Declaratory Judgment (the &#8220;Declaratory Relief Complaint&#8221;) in the United States District Court for the Eastern District of Louisiana against Axis seeking, pursuant to our policy (a) Axis to&#160;provide full policy coverage and defense; (b) Axis to&#160;pay all legal fees and expenses incurred by us in the defense of the Wright Complaint; and (c) Axis to make all reasonable efforts to protect us from risk of excess judgment.&#160;&#160;The Declaratory Relief Complaint was dismissed with prejudice as discussed above.</font> </div><br/> EX-101.SCH 8 shfl-20120430.xsd XBRL TAXONOMY EXTENSION SCHEMA 001 - Statement - Condensed Consolidated Statements of Operations (Unaudited) link:presentationLink link:definitionLink link:calculationLink 002 - Statement - Condensed Consolidated Balance Sheets (Unaudited) link:presentationLink link:definitionLink link:calculationLink 003 - Statement - Condensed Consolidated Balance Sheets (Unaudited) (Parentheticals) link:presentationLink link:definitionLink link:calculationLink 004 - Statement - Condensed Consolidated Statements of Cash Flows (Unaudited) link:presentationLink link:definitionLink link:calculationLink 005 - Disclosure - Note 1 - Descpription of Business and Interim Basis of Presentation link:presentationLink link:definitionLink link:calculationLink 006 - Disclosure - Note 2 - Selected Balance Sheet Data link:presentationLink link:definitionLink link:calculationLink 007 - Disclosure - Note 3 - Intangible Assets and Goodwill link:presentationLink link:definitionLink link:calculationLink 008 - Disclosure - Note 4 - Debt link:presentationLink link:definitionLink link:calculationLink 009 - Disclosure - Note 5 - Shareholders' Equity link:presentationLink link:definitionLink link:calculationLink 010 - Disclosure - Note 6 - Share-Based Compensation link:presentationLink link:definitionLink link:calculationLink 011 - Disclosure - Note 7 - Income Taxes link:presentationLink link:definitionLink link:calculationLink 012 - Disclosure - Note 8 - Earnings Per Share link:presentationLink link:definitionLink link:calculationLink 013 - Disclosure - Note 9 - Fair Value Measurement link:presentationLink link:definitionLink link:calculationLink 014 - Disclosure - Note 10 - Operating Segments link:presentationLink link:definitionLink link:calculationLink 015 - Disclosure - Note 11 - Commitments and Contingencies link:presentationLink link:definitionLink link:calculationLink 000 - Disclosure - Document And Entity Information link:presentationLink link:definitionLink link:calculationLink EX-101.CAL 9 shfl-20120430_cal.xml XBRL TAXONOMY EXTENSION CALCULATION EX-101.DEF 10 shfl-20120430_def.xml XBRL TAXONOMY EXTENSION DEFINITION EX-101.LAB 11 shfl-20120430_lab.xml XBRL TAXONOMY EXTENSION LABELS EX-101.PRE 12 shfl-20120430_pre.xml XBRL TAXONOMY EXTENSION PRESENTATION GRAPHIC 13 image.jpg begin 644 image.jpg M_]C_X``02D9)1@`!`0$`8`!@``#_X0!F17AI9@``34T`*@````@`!`$:``4` M```!````/@$;``4````!````1@$H``,````!``(```$Q``(````0````3@`` M``````!@`````0```&`````!4&%I;G0N3D54('8U+C`P`/_;`$,``0$!`0$! 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Note 4 - Debt
6 Months Ended
Apr. 30, 2012
Debt Disclosure [Text Block]
4. DEBT

Debt consisted of the following:

   
April 30,
2012
   
October 31,
2011
 
   
(In thousands)
 
Revolver
  $ 21,446     $ 37,446  
Other long term debt
    1,805       1,819  
Total Debt
    23,251       39,265  
Less: current portion
    (501 )     (508 )
Total long-term debt
  $ 22,750     $ 38,757  

$200.0 million senior secured revolving credit facility. On October 29, 2010, we entered into a senior secured credit agreement (the “Senior Secured Revolving Credit Facility”) with Wells Fargo Securities, LLC and Banc of America Securities LLC, as joint lead arrangers and joint lead bookrunners, Bank of America, N.A., as syndication agent, and Union Bank, N.A., as documentation agent. The Senior Secured Revolving Credit Facility provides for senior secured credit facilities in an aggregate principal amount of $200.0 million consisting of a 5-year revolving credit facility (the “Revolver”) in an aggregate principal amount of $200.0 million with a sub-facility for letters of credit of $25.0 million, a sub-facility for multicurrency borrowings in Euros, Australian dollars and Canadian dollars of $25.0 million, and a sub-facility for swing line loans of $20.0 million, each on customary terms and conditions. The Senior Secured Revolving Credit Facility includes an option to increase the Revolver to $300.0 million, which would require syndication approval.

Loans under the Revolver (other than Swing Line Loans, as defined) bear interest at the Base Rate, as defined, or LIBOR, as elected by us. Base Rate interest is calculated at the Base Rate plus the applicable margin and the Base Rate is the highest of:

 
·
the Federal Funds Rate plus .50%;

 
·
the prime commercial lending rate of the Administrative Agent, as defined; and

 
·
the one month LIBOR rate for such day plus 2.00%.

Swing Line Loans bear interest at the Base Rate plus the applicable margin. Our effective interest rate as of April 30, 2012 was 2.0%. Borrowings under the Revolver may be used for working capital, capital expenditures and general corporate purposes (including share repurchases).

As of April 30, 2012, the amount drawn under the Revolver was $21.4 million and after considering restrictive financial covenants under the Senior Secured Revolving Credit Facility, we had approximately $178.6 million of available remaining credit under the Revolver. The Revolver matures on October 29, 2015.

Covenants. Our Senior Secured Revolving Credit Facility contains three financial maintenance covenants requiring us to maintain a Total Leverage Ratio, as defined therein, of not more than 3.75 to 1.0, a Senior Leverage Ratio, as defined therein, of not more than 3.0 to 1.0 until October 31, 2013 and not more than 2.75 to 1.00 after October 31, 2013 and Interest Expense Coverage Ratio, as defined therein, in excess of 3.0 to 1.0 at the end of any fiscal quarter. As of April 30, 2012, our Total Leverage Ratio, Senior Leverage Ratio and Interest Expense Coverage Ratio were 0.28 to 1.0, 0.26 to 1.0 and 50.19 to 1.0, respectively.

Guarantors and collateral. The Revolver obligations under our Senior Secured Revolving Credit Facility are guaranteed by each existing and future wholly-owned domestic subsidiary of ours that is not an immaterial subsidiary and are secured by a first priority lien on substantially all of our and our guarantors’ assets.  

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Note 3 - Intangible Assets and Goodwill
6 Months Ended
Apr. 30, 2012
Goodwill and Intangible Assets Disclosure [Text Block]
3. INTANGIBLE ASSETS AND GOODWILL

Amortizable intangible assets.  All of our recorded intangible assets, excluding goodwill and the StargamesTM and CARDTM tradenames, are subject to amortization. We amortize our intangible assets as the economic benefits of the intangible asset are consumed or otherwise used up. Amortization expense was $2.3 million and $2.5 million for the three months ended April 30, 2012 and 2011, respectively and $4.6 and $4.9 million for the six months ended April 30, 2012 and 2011, respectively. Amortization expenses are included in cost of leases and royalties and cost of sales and service, except for customer relationships which are included in selling, general and administrative expenses.

Amortizable intangible assets are comprised of the following:

 
Weighted Average
Useful Life
 
April 30,
2012
   
October 31,
2011
 
     
(In thousands)
 
Amortizable intangible assets:
             
               
Patents, games and products
10 years
  $ 67,756     $ 68,999  
Less: accumulated amortization
      (52,061 )     (52,145 )
        15,695       16,854  
Customer relationships
10 years
    26,715       25,688  
Less: accumulated amortization
      (13,879 )     (12,829 )
        12,836       12,859  
Licenses and other
6 - 9 years
    22,750       18,925  
Less: accumulated amortization
      (8,720 )     (7,581 )
        14,030       11,344  
Total
    $ 42,561     $ 41,057  

The increase in amortizable intangible assets for the six months ended April 30, 2012 relates to our purchase of table games intellectual property and acquisition of licenses to be used in our EGM segment.

Tradenames. Intangibles with an indefinite life, consisting of the Stargames and CARD tradenames, are not amortized, and were $24.6 million and $25.5 million as of April 30, 2012 and October 31, 2011, respectively.

Goodwill.  Changes in the carrying amount of goodwill for the years ended October 31, 2010, 2011 and the six months ended April 30, 2012, are as follows:

Activity by Segment
 
Utility
   
Proprietary
Table Games
   
Electronic
Table Systems
   
Electronic
Gaming Machines
   
Total
 
   
(In thousands)
                         
                               
Goodwill
  $ 42,560     $ 9,326     $ 34,188     $ 11,995     $ 98,069  
Accumulated impairments
    -       -       (22,137 )     -       (22,137 )
Balance as of October 31, 2010
  $ 42,560     $ 9,326     $ 12,051     $ 11,995     $ 75,932  
                                         
Foreign currency translation adjustment
    1,459       -       1,140       1,135     $ 3,734  
Acquisition
    4,799       -       -       -       4,799  
Other
    -       927       -       -       927  
Balance as of October 31, 2011
  $ 48,818     $ 10,253     $ 13,191     $ 13,130     $ 85,392  
                                         
Foreign currency translation adjustment
    (2,635 )     -       (410 )     (408 )   $ (3,453 )
Acquisition
    -       3,000       -       -       3,000  
Other
    -       454       -       -       454  
Balance as of April 30, 2012
  $ 46,183     $ 13,707     $ 12,781     $ 12,722     $ 85,393  

The $3.0 million of additional goodwill in our PTG segment relates to the acquisition of games and intellectual property that were treated as a business acquisition for accounting purposes.

The $0.5 million of additional goodwill in our PTG segment relates to our acquisition of certain assets from Bet Technology, Inc. (“BTI”) in 2004.  In 2004, we recorded an initial estimated liability of $7.6 million for contingent installment payments computed as the excess fair value of the acquired assets over the fixed installments and other direct costs.  In November 2004, we began paying monthly note installments based on a percentage of certain revenue from BTI games for a period of up to ten years, not to exceed $12.0 million.  The final principal and interest payment related to our initial estimated liability of $7.6 million was paid in February 2009 and all payments made subsequently have been recorded as additional goodwill.  As of April 30, 2012, we have paid approximately $11.0 million of the $12.0 million maximum amount.

XML 19 R2.htm IDEA: XBRL DOCUMENT v2.4.0.6
Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Apr. 30, 2012
Apr. 30, 2011
Apr. 30, 2012
Apr. 30, 2011
Revenue:        
Product leases and royalties $ 26,947 $ 24,264 $ 52,900 $ 47,840
Product sales and service 39,107 35,619 69,207 55,858
Total revenue 66,054 59,883 122,107 103,698
Costs and expenses:        
Cost of leases and royalties 9,427 8,354 18,378 15,536
Cost of sales and service 14,138 15,435 25,419 22,900
Gross profit 42,489 36,094 78,310 65,262
Selling, general and administrative 19,804 17,060 36,984 33,261
Research and development 7,925 6,883 15,452 12,799
Total costs and expenses 51,294 47,732 96,233 84,496
Income from operations 14,760 12,151 25,874 19,202
Other income (expense):        
Interest income 174 126 313 252
Interest expense (378) (671) (855) (1,372)
Other, net (146) (1,118) 29 (961)
Total other income (expense) (350) (1,663) (513) (2,081)
Income before income taxes 14,410 10,488 25,361 17,121
Income tax provision 4,675 2,542 7,977 4,371
Net income $ 9,735 $ 7,946 $ 17,384 $ 12,750
Basic earnings per share: (in Dollars per share) $ 0.17 $ 0.15 $ 0.31 $ 0.24
Diluted earnings per share: (in Dollars per share) $ 0.17 $ 0.14 $ 0.31 $ 0.23
Weighted average shares outstanding:        
Basic (in Shares) 55,751 54,374 55,408 54,253
Diluted (in Shares) 56,653 55,010 56,154 54,953
XML 20 R6.htm IDEA: XBRL DOCUMENT v2.4.0.6
Note 1 - Descpription of Business and Interim Basis of Presentation
6 Months Ended
Apr. 30, 2012
Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]
1. DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION

Description of business.  Unless the context indicates otherwise, references to “Shuffle Master, Inc.,” “we,” “us,” “our,” or the “Company,” include Shuffle Master, Inc. and its consolidated subsidiaries.

We are a leading global gaming supplier committed to making gaming more fun for players and more profitable for operators through product innovation, and superior quality and service.  We operate in legalized gaming markets across the globe and provide state-of-the-art, value-add products in four distinct segments: Utility products, which include automatic card shufflers and roulette chip sorters; Proprietary Table Games (“PTG”), which include live games, side bets and progressives as well as our newly introduced i-Gaming, which features online versions of our table games, social gaming and mobile applications; Electronic Table Systems (“ETS”), which include various e-Table game platforms; and Electronic Gaming Machines (“EGM”), which include video slot machines.

We lease, license and sell our products. When we lease or license our products, we generally negotiate a month-to-month operating lease. When we sell our products, we offer our customers a choice between a sale, a longer-term sales-type lease or other long-term financing. We offer our products worldwide in markets that are highly regulated. We manufacture our products at our headquarters and manufacturing facility in Las Vegas, Nevada, as well as at our Australian headquarters and manufacturing facility in Milperra, New South Wales, Australia. In addition, we outsource the manufacturing of certain of our sub-assemblies in the United States, Europe and Asia.

Utility. Our Utility segment develops products for licensed casino operators that enhance table game speed, productivity, profitability and security. Utility products include automatic card shufflers and roulette chip sorters. This segment also includes our i-Shoe® Auto card reading shoe that gathers data and enables casinos to track table game play and our i-Score baccarat viewer that displays current game results and trends. These products are intended to cost-effectively provide licensed casino operators and other users with data on table game play for security and marketing purposes, which in turn allows them to increase their profitability.

Proprietary Table Games. Our PTG segment develops and delivers proprietary table games that enhance our casino customers' and other licensed operators' table game operations. Products in this segment include our proprietary table games, side bets, add-ons and progressives as well as our newly introduced i-Gaming products, which feature online versions of our table games, social gaming, and mobile applications.  Our proprietary content and features are also added to public domain games such as poker, baccarat, pai gow poker and blackjack table games and to electronic platforms such as Table Master® and i-Table®.

Electronic Table Systems.  Our ETS segment develops and delivers various products involving popular table game content using e-Table game platforms. Our primary ETS products are i-Table®, Table Master®, Vegas Star® and Rapid Table Games®.  Our i-Table® platform combines an electronic betting interface with a live dealer who deals the cards from our card reading shoe or shuffler that is designed to improve game speed and security while reducing many operating expenses associated with live tables. Our Table Master® and Vegas Star® products feature a virtual dealer which enables us to offer table game content in both traditional gaming markets and in markets where live table games are not permitted, such as some racinos, video lottery and arcade markets. Our Rapid Table Games® product enables the automation of certain components of traditional table games such as data collection, placement of bets, collection of losing bets and payment of winning bets combined with live dealer and game outcomes. This automation provides benefits to both casino operators and players, including greater security and faster speed of play.

Electronic Gaming Machines.  Our EGM segment develops and delivers our PC-based video slot machines into select markets, primarily in Australasia.  We offer a selection of video slot titles which include a range of bonus round options that can be configured as a network of machines or as stand-alone units. In addition to selling the full EGM complement, we sell software conversion kits that allow existing EGM terminals to be converted to other games on the PC3 and PC4 platform. Popular titles for our EGMs include Cats Hats & Bats, Eureka Gold Mine 2, Emerald Fortunes and King of Babylon. In addition, we continue to develop a popular range of games utilizing the Pink Panther brand, under license from Metro-Goldwyn-Mayer Studios, Inc. consumer products.

Basis of presentation.  The accompanying Unaudited Condensed Consolidated Financial Statements include the results of operations, financial position and cash flows of Shuffle Master, Inc. and its consolidated subsidiaries. All material intercompany balances have been eliminated.  

In the opinion of our management, the accompanying Unaudited Condensed Consolidated Financial Statements include all adjustments necessary to fairly state, in all material respects, our results for the periods presented. These Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our 2011 Annual Report on Form 10-K filed with the SEC on January 5, 2012.  The results of operations for the three and six months ended April 30, 2012 are not necessarily indicative of results to be expected for the entire fiscal year.

Reclassification. The Company revised its October 31, 2011, condensed consolidated balance sheet to appropriately classify amounts that were previously included within accounts receivable as current investment in sales-type leases and notes receivable. This revision resulted in a $3.2 million increase in the current investment in sales-type leases and notes receivable with a corresponding reduction to accounts receivable. The revision, which the Company determined is not material, had no impact on total current assets, results of operations or cash flows.

Use of estimates and assumptions. The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our Condensed Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis. Actual results could differ from those estimates.

Revenue recognition. We recognize revenues when all of the following have been satisfied:

 
·
persuasive evidence of an arrangement exists;

 
·
the price to the customer is fixed and determinable;

 
·
delivery has occurred and any acceptance terms have been fulfilled; and

 
·
collection is reasonably assured.

Revenues are reported net of incentive rebates and discounts. Amounts billed prior to completing the earnings process are deferred until revenue recognition criteria are met.

Product lease and royalty revenue — Lease and royalty revenue is earned from the leasing of our tangible products and the licensing of our intangible products, such as our proprietary table games. When we lease or license our products, we generally negotiate month-to-month fixed fee contracts, or to a lesser extent, enter into participation arrangements whereby casinos pay a fee to us based on a percentage of net win.   Lease and royalty revenue commences upon the completed installation of the product. Lease terms are generally cancellable with 30 days' notice.  We recognize revenue from our leases and licenses upon installation of our product on a month to month basis.

Product sales and service revenue — We generate sales revenue through the sale of equipment in each product segment, including sales revenue from sales-type leases and the sale of lifetime licenses for our proprietary table games. Our credit sales terms are primarily 60 days or less.  Financing for intangible property and sales-type leases for tangible property have payment terms ranging generally from 24 to 36 months and are interest-bearing at market interest rates. Revenue from the sale of equipment is recorded in accordance with the contractual shipping terms. Products placed with customers on a trial basis are not recognized as revenue until the trial period ends, the customer accepts the product and all other relevant criteria have been met. If a customer purchases existing leased equipment, revenue is recorded on the effective date of the purchase agreement. Revenue on service and warranty contracts is recognized as the services are provided over the term of the contracts, which are generally one year. Revenue from the sale of lifetime licenses, under which we have no continuing obligation, is recorded on the effective date of the license agreement.

Multiple element arrangements — Some of our revenue arrangements contain multiple deliverables, such as a product sale combined with a service element or the delivery of a future product.  Most of our products and services qualify as separate units of accounting. When vendor specific objective evidence or third-party evidence is not available, the management's best estimate of selling price ("BESP") is the amount we would sell the product or service for individually. The determination of BESP is made based on our normal pricing and discounting practices, which consider multiple factors, such as market conditions, competitive landscape, internal costs and profit objectives. Revenues allocated to future performance obligations elements are deferred and will be recognized upon delivery and customer acceptance.

Fair value measurement disclosure.  In the current quarter, we adopted an Accounting Standards Update (“ASU”) on how to measure fair value and on what disclosures to provide about fair value measurements, which expands disclosure requirements particularly for Level 3 inputs to include following:

·
For fair value categorized in Level 3 of the fair value hierarchy:
     
 
1.
a quantitative disclosure of the unobservable inputs and assumptions used in the measurement,

 
2.
a description of the valuation processes in place (e.g., how the entity decides its valuation policies and procedures, as well as changes in its analyses of fair value measurements, from period to period), and

 
3.
a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs.
     
·
The level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed.

Recently issued accounting standards or updates – not yet adopted

Comprehensive income – In June 2011, FASB issued an ASU on presentation of comprehensive income to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This update changes the requirements for the presentation of other comprehensive income, eliminating the option to present components of other comprehensive income as part of the statement of stockholders' equity, among other items. The guidance requires that all non-owner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.

This ASU will be effective for our first quarter of fiscal 2013 and as the update only requires a change in presentation, we do not expect the update to have a material impact on our financial statements.

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XML 22 R7.htm IDEA: XBRL DOCUMENT v2.4.0.6
Note 2 - Selected Balance Sheet Data
7 Months Ended
Apr. 30, 2012
Supplemental Balance Sheet Disclosures [Text Block]
2. SELECTED BALANCE SHEET DATA

The following provides additional disclosures for selected balance sheet accounts:

   
April 30,
2012
   
October 31,
2011
 
   
(In thousands)
 
Net inventories:
           
Raw materials and component parts
  $ 13,957     $ 12,984  
Work-in-process
    3,874       3,947  
Finished goods
    9,307       7,404  
Total
  $ 27,138     $ 24,335  

   
April 30,
2012
   
October 31,
2011
 
   
(In thousands)
 
Other current assets:
           
Other prepaid expenses
    2,944       2,302  
Other receivables
    2,239       1,271  
Other
    715       718  
Total
  $ 5,898     $ 4,291  

   
April 30,
2012
   
October 31,
2011
 
   
(In thousands)
 
Products leased and held for lease:
           
Utility
  $ 49,426     $ 47,073  
Less: accumulated depreciation
    (33,090 )     (29,891 )
Utility, net
    16,336       17,182  
                 
Proprietary Table Games
    8,623       6,158  
Less: accumulated depreciation
    (3,879 )     (2,496 )
Proprietary Table Games, net
    4,744       3,662  
                 
Electronic Table Systems
    27,298       28,749  
Less: accumulated depreciation
    (15,470 )     (15,571 )
Electronic Table Systems, net
    11,828       13,178  
                 
Electronic Gaming Machines
    2,763       1,266  
Less: accumulated depreciation
    (487 )     (92 )
Electronic Gaming Machines, net
    2,276       1,174  
                 
Total, net
  $ 35,184     $ 35,196  

   
April 30,
2012
   
October 31,
2011
 
   
(In thousands)
 
Accrued and other current liabilities:
       
Accrued compensation
    10,897       13,932  
Accrued taxes
    2,352       2,124  
Other accrued liabilities
    6,638       5,079  
Total
  $ 19,887     $ 21,135  

XML 23 R3.htm IDEA: XBRL DOCUMENT v2.4.0.6
Condensed Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands, unless otherwise specified
Apr. 30, 2012
Oct. 31, 2011
Current assets:    
Cash and cash equivalents $ 22,964 $ 22,189
Accounts receivable, net of allowance for bad debts of $465 and $402 38,952 39,713
Investment in sales-type leases and notes receivable, net of allowance for bad debts of $26 and $44 5,753 5,006
Inventories 27,138 24,335
Prepaid income taxes 6,654 3,279
Deferred income taxes 4,935 4,911
Other current assets 5,898 4,291
Total current assets 112,294 103,724
Investment in sales-type leases and notes receivable, net of current portion and net of allowance for bad debts of $2 and $5 4,857 3,704
Products leased and held for lease, net 35,184 35,196
Property and equipment, net 15,155 12,849
Intangible assets, net 67,193 66,517
Goodwill 85,393 85,392
Deferred income taxes 2,850 3,038
Other assets 2,490 2,467
Total assets 325,416 312,887
Current liabilities:    
Accounts payable 4,415 5,001
Accrued liabilities and other current liabilities 19,887 21,135
Deferred income taxes 89 96
Customer deposits 3,333 3,407
Income tax payable 4,218 2,595
Deferred revenue 4,031 3,862
Current portion of long-term debt 501 508
Total current liabilities 36,474 36,604
Long-term debt, net of current portion 22,750 38,757
Other long-term liabilities 2,849 2,969
Deferred income taxes 2,549 942
Total liabilities 64,622 79,272
Shareholders' equity:    
Common stock, $0.01 par value; 151,368 shares authorized; 55,698 and 54,196 shares issued and outstanding 557 542
Additional paid-in capital 131,188 114,306
Retained earnings 98,222 80,838
Accumulated other comprehensive income 30,827 37,929
Total shareholders' equity 260,794 233,615
Total liabilities and shareholders' equity $ 325,416 $ 312,887
XML 24 R1.htm IDEA: XBRL DOCUMENT v2.4.0.6
Document And Entity Information
3 Months Ended
Apr. 30, 2012
May 31, 2012
Document and Entity Information [Abstract]    
Entity Registrant Name Shuffle Master Inc  
Document Type 10-Q  
Current Fiscal Year End Date --10-31  
Entity Common Stock, Shares Outstanding   55,801,370
Amendment Flag false  
Entity Central Index Key 0000718789  
Entity Current Reporting Status Yes  
Entity Voluntary Filers No  
Entity Filer Category Accelerated Filer  
Entity Well-known Seasoned Issuer No  
Document Period End Date Apr. 30, 2012  
Document Fiscal Year Focus 2012  
Document Fiscal Period Focus Q1  
XML 25 R4.htm IDEA: XBRL DOCUMENT v2.4.0.6
Condensed Consolidated Balance Sheets (Unaudited) (Parentheticals) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Apr. 30, 2012
Oct. 31, 2011
Accounts receivable, allowance for bad debts (in Dollars) $ 465 $ 402
Investment in sales-type leases and notes receivable, allowance for bad debts (in Dollars) 26 44
Investment in sales-type leases and notes receivable, current portion and allowance for bad debts (in Dollars) $ 2 $ 5
Common stock par value (in Dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized 151,368 151,368
Common stock, shares issued 55,698 54,196
Common stock, shares outstanding 55,698 54,196
XML 26 R12.htm IDEA: XBRL DOCUMENT v2.4.0.6
Note 7 - Income Taxes
6 Months Ended
Apr. 30, 2012
Income Tax Disclosure [Text Block]
7. INCOME TAXES

Our effective income tax rate from continuing operations for the three and six months ended April 30, 2012 was 32.4% and 31.5%, respectively. Our effective income tax rate from continuing operations for the three and six months ended April 30, 2011 was 24.2% and 25.5%, respectively. The higher effective income tax rate for the six months ended April 30, 2012 compared to the prior year period is attributable to nondeductible expenses recorded in the current period for transaction costs related to the Ongame (as defined below under Note 11) acquisition and changes in valuation allowances.  Our effective income tax rate may fluctuate due to changes in the amount and mix of domestic and foreign income, changes in tax legislation, changes in valuation allowances and changes in assessments of uncertain tax positions and related accumulated interest and penalties.

XML 27 R11.htm IDEA: XBRL DOCUMENT v2.4.0.6
Note 6 - Share-Based Compensation
6 Months Ended
Apr. 30, 2012
Disclosure of Compensation Related Costs, Share-based Payments [Text Block]
6. SHARE-BASED COMPENSATION

Share-based award plans.  In February 2004, our board of directors adopted and, in March 2004, our shareholders approved the Shuffle Master, Inc. 2004 Equity Incentive Plan (the “2004 Plan”) and the Shuffle Master, Inc. 2004 Equity Incentive Plan for Non-Employee Directors (the “2004 Directors’ Plan”). These approved plans replaced our prior plans and no further options may be granted from the prior plans. Both the 2004 Plan and the 2004 Directors’ Plan provide for the grant of stock options, stock appreciation rights (none issued) and restricted stock. In addition, the 2004 Plan provides for the grant of restricted stock units. Awards granted under the plans (collectively “Awards”) may be granted individually or in any combination. Stock options may not be granted at an exercise price less than the market value of our common stock on the date of grant and may not be subsequently repriced. Equity granted under the 2004 Plan generally vests in equal increments over four years and expires in ten years. Equity granted under the 2004 Directors’ Plan generally vests over periods of one to two years.

The 2004 Plan provides for the grants of Awards to our officers, other employees and contractors. The maximum number of Awards which may be granted is 2.7 million of which no more than 1.9 million may be granted as restricted stock. The 2004 Directors’ Plan provides for the grants of Awards to our non-employee directors. The maximum number of Awards which may be granted is 1.1 million of which no more than 0.8 million may be granted as restricted stock.

In January 2009, our board of directors adopted and, in March 2009, our shareholders approved the Shuffle Master, Inc. 2004 Equity Incentive Plan (as amended and restated on January 28, 2009) (the “Amended 2004 Plan”). The Amended 2004 Plan increased the number of shares available for issuance in addition to other related technical changes. Subject to the Amended 2004 Plan, the aggregate number of shares that may be granted under the Amended 2004 Plan may not exceed 5.2 million shares of which no more than 2.6 million shares may be granted as restricted stock.

As of April 30, 2012, under the Amended 2004 Plan and 2004 Directors’ Plan, there were 0.9 million and 0.2 million shares available for grant, respectively.

A summary of activity related to stock options is presented below:

   
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term
   
Aggregate
Intrinsic
Value
 
   
(In thousands, except per share amount)
 
Outstanding at November 1, 2011
    4,638     $ 14.04              
Granted
    430       12.13              
Exercised
    (1,289 )     10.96              
Forfeited or expired
    (243 )     19.73              
                             
Outstanding at April 30, 2012
    3,536     $ 14.54       5.8     $ 20,837  
                                 
Fully vested and expected to vest at April 30, 2012
    3,491     $ 14.58       5.7     $ 20,557  
                                 
Exercisable at April 30, 2012
    2,369     $ 16.75       4.3     $ 11,941  

There were no stock options granted during the three months ended April 30, 2012 and the weighted average grant date fair value of stock options granted during the six months ended April 30, 2012 was $6.23. The weighted average grant date fair value of stock options granted during the three and six months ended April 30, 2011 was $5.16 and $5.67, respectively.

For the three and six months ended April 30, 2012, 1.0 million and 1.3 million stock options were exercised, respectively. The tax effect/benefit from stock option exercises affected our deferred tax asset or income tax payable as well as our additional paid-in capital by an equal amount and had no effect on our income tax provision. As of April 30, 2012, there was approximately $5.2 million of unamortized compensation expense related to stock options, which expense is expected to be recognized over a weighted-average period of 1.9 years.

A summary of activity related to restricted stock is presented below:

   
Shares
   
Weighted
Average
Grant-Date
Fair Value
   
Remaining
Vesting
Period
   
Aggregate
Intrinsic
Value
 
   
(In thousands, except per share amount)
 
Nonvested at November 1, 2011
    394     $ 10.53              
Granted
    455       12.35              
Vested
    (134 )     11.41              
Forfeited
    (14 )     6.40              
                             
Nonvested at April 30, 2012
    701     $ 11.63       1.86     $ 12,392  
                                 
Expected to vest
    666     $ 11.61       1.82     $ 11,775  

The total value of each restricted stock grant, based on the fair market value of the stock on the date of grant, is amortized to compensation expense over the related vesting period. As of April 30, 2012, there was approximately $7.3 million of unamortized compensation expense related to restricted stock, which expense is expected to be recognized over a weighted-average period of 2.0 years.

Recognition of compensation expense.  The following table shows information about compensation costs recognized:

   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands)
 
Compensation costs:
                       
Stock options
  $ 512     $ 467     $ 1,003     $ 988  
Restricted stock
    605       276       1,046       490  
Total compensation cost
  $ 1,117     $ 743     $ 2,049     $ 1,478  
Related tax benefit
  $ (389 )   $ (260 )   $ (713 )   $ (516 )

Option valuation models require the input of certain assumptions and changes in assumptions used can materially affect the fair value estimate. Expected volatility is based on a combination of implied and historical factors related to our common stock. Expected term represents the estimated weighted-average time between grant date and its exercise date and is based on historical factors. Expected dividend yield is based on our expectation that dividends will not be paid within the average expected life of existing options. Risk free interest rate is based on U.S. Treasury rates appropriate for the expected term. We estimate the fair value of each stock option award on the grant date using the Black-Scholes valuation model incorporating the weighted-average assumptions noted in the following table:

   
Three Months Ended
April 30, 2012
   
Six Months Ended
April 30, 2012
 
Option valuation assumptions:
           
Expected dividend yield
    N/A    
None
 
Expected volatility
    N/A       64.9 %
Risk-free interest rate
    N/A       0.7 %
Expected term
    N/A    
4.5 years
 

XML 28 R15.htm IDEA: XBRL DOCUMENT v2.4.0.6
Note 10 - Operating Segments
6 Months Ended
Apr. 30, 2012
Segment Reporting Disclosure [Text Block]
10. OPERATING SEGMENTS

The following provides financial information concerning our reportable segments of our operations:

   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenue:
                       
Utility
  $ 24,990     $ 19,172     $ 44,606     $ 36,533  
Proprietary Table Games
    11,954       10,546       25,629       21,772  
Electronic Table Systems
    6,866       11,797       15,130       19,928  
Electronic Gaming Machines
    22,244       18,368       36,742       25,465  
    $ 66,054     $ 59,883     $ 122,107     $ 103,698  
Gross profit (loss):
                               
Utility
  $ 16,154     $ 11,584     $ 27,337     $ 22,432  
Proprietary Table Games
    9,818       8,405       21,360       17,667  
Electronic Table Systems
    2,684       4,837       6,813       9,487  
Electronic Gaming Machines
    13,833       11,268       22,800       15,676  
    $ 42,489     $ 36,094     $ 78,310     $ 65,262  
Operating income (loss):
                               
Utility
  $ 14,202     $ 9,858     $ 23,652     $ 19,086  
Proprietary Table Games
    6,736       7,385       16,641       15,760  
Electronic Table Systems
    (838 )     1,719       (121 )     3,532  
Electronic Gaming Machines
    10,394       8,393       16,247       10,157  
Unallocated Corporate
    (15,734 )     (15,204 )     (30,545 )     (29,333 )
    $ 14,760     $ 12,151     $ 25,874     $ 19,202  
Depreciation and amortization:
                               
Utility
  $ 1,899     $ 1,947     $ 3,675     $ 3,199  
Proprietary Table Games
    1,350       1,456       2,603       2,769  
Electronic Table Systems
    1,653       1,705       3,310       3,903  
Electronic Gaming Machines
    345       60       543       128  
Unallocated Corporate
    1,133       947       2,266       1,877  
    $ 6,380     $ 6,115     $ 12,397     $ 11,876  
Capital expenditures:
                               
Utility
  $ 990     $ 2,169     $ 2,210     $ 4,366  
Proprietary Table Games
    664       746       2,204       6,175  
Electronic Table Systems
    506       1,516       2,226       3,077  
Electronic Gaming Machines
    872       67       5,130       67  
Unallocated Corporate
    3,255       794       3,279       1,724  
    $ 6,287     $ 5,292       15,049     $ 15,409  

REVENUE BY GEOGRAPHIC AREA

The following provides financial information concerning our revenues by geographic area:

   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Dollars in thousands)
 
Revenue:
                                               
United States
  $ 28,771       43.6 %   $ 24,345       40.7 %   $ 54,955       45.0 %   $ 50,350       48.6 %
Canada
    2,226       3.4 %     1,882       3.1 %     3,744       3.1 %     3,274       3.2 %
Other North America
    1,125       1.7 %     1,592       2.7 %     2,178       1.8 %     2,360       2.3 %
Europe
    2,440       3.7 %     2,236       3.7 %     4,027       3.3 %     3,642       3.5 %
Australia
    25,293       38.3 %     24,563       41.0 %     43,987       36.0 %     35,514       34.2 %
Asia
    6,016       9.1 %     4,822       8.1 %     12,665       10.4 %     7,776       7.5 %
Other
    183       0.2 %     443       0.7 %     551       0.4 %     782       0.7 %
    $ 66,054       100.0 %   $ 59,883       100.0 %   $ 122,107       100.0 %   $ 103,698       100.0 %

XML 29 R13.htm IDEA: XBRL DOCUMENT v2.4.0.6
Note 8 - Earnings Per Share
6 Months Ended
Apr. 30, 2012
Earnings Per Share [Text Block]
8. EARNINGS PER SHARE

Shares used to compute basic and diluted earnings per share from operations are as follows:

   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net income available to common shares
  $ 9,735     $ 7,946     $ 17,384     $ 12,750  
                                 
Basic
                               
Weighted average shares
    55,751       54,374       55,408       54,253  
                                 
Diluted
                               
Weighted average shares, basic
    55,751       54,374       55,408       54,253  
Dilutive effect of options
    902       636       746       700  
Weighted average shares, diluted
    56,653       55,010       56,154       54,953  
                                 
Basic earnings per share
  $ 0.17     $ 0.15     $ 0.31     $ 0.24  
Diluted earnings per share
  $ 0.17     $ 0.14     $ 0.31     $ 0.23  
                                 
Weighted average anti-dilutive shares excluded from diluted EPS
    1,618       3,417       2,105       3,211  

XML 30 R14.htm IDEA: XBRL DOCUMENT v2.4.0.6
Note 9 - Fair Value Measurement
6 Months Ended
Apr. 30, 2012
Fair Value Disclosures [Text Block]
9. FAIR VALUE MEASUREMENT

We utilize a three level hierarchy that defines the assumptions used to measure certain assets and liabilities at fair value.

Cash and cash equivalents, accounts receivable, the current portion of our investment in sales-type leases and notes receivable are not presented in the table below as their carrying value approximates fair value due to their short term nature.  It is impracticable to estimate the fair value of the long-term portion of our investment in sales-type leases and notes receivable as it is comprised of many insignificant balances, customers with different credit profiles and various interest rates.  The fair value of our Revolver as of April 30, 2012 and October 31, 2011 has been calculated based on market borrowing rates available as of April 30, 2012 and October 31, 2011, respectively, for debt with similar terms and maturities. The following table provides the fair value measurement information about the Company’s long-term debt.

   
Carrying Value
April 30, 2012
   
Fair Value
April 30, 2012
   
Carrying Value
October 31, 2011
   
Fair Value
October 31, 2011
 
Fair Value
Hierarchy
                           
Revolver
  $ 21,446     $ 21,564     $ 37,446     $ 37,679  
Level 2

XML 31 R16.htm IDEA: XBRL DOCUMENT v2.4.0.6
Note 11 - Commitments and Contingencies
6 Months Ended
Apr. 30, 2012
Commitments and Contingencies Disclosure [Text Block]
11. COMMITMENTS AND CONTINGENCIES

Ongame Network Ltd. On March 5, 2012, through our wholly-owned subsidiary Shuffle Master International, Inc., we entered into a definitive agreement to acquire Ongame Network Ltd., a limited liability company incorporated and existing under the laws of Gibraltar (“Ongame”), from bwin.party services (Austria) GmbH (“bwin.party”). Ongame is one of the world’s largest business to business online poker providers.

The acquisition is subject to completion of certain conditions, including the continued material accuracy of the parties’ representations and warranties; the performance of and compliance with all covenants in the definitive agreement; and the receipt of required regulatory approvals.  The closing of the transaction is expected to occur not more than nine months following execution of the definitive agreement (the “Closing”).  As consideration for the acquisition of the shares of Ongame, and indirectly the acquisition of Ongame’s subsidiaries, at the Closing we will pay €19.5 million (approximately $25.8 million using the translation rate available as of April 30, 2012) in cash, subject to certain adjustments at Closing.  We may also become obligated to additionally pay up to €10 million in cash within five years of Closing contingent upon the commencement of legalized, real-money online poker in the U.S. occurring, if at all, within five years of Closing.  The €10 million (approximately $13.2 million using the translation rate available as of April 30, 2012) contingent payment decreases through the five-year period.  The contingent payment will be €10 million if real-money online poker is legalized in the U.S. on or before 730 days following Closing, €7 million if legalized on or after 731 days following Closing and on or before 1,095 days following Closing, €5 million on or after 1,096 days following Closing and on or before 1,461 days following Closing, and €3 million on or after 1,462 days following Closing and on or before 1,826 days following Closing.  We expect to fund the acquisition with cash on hand and availability on the Senior Secured Revolving Credit Facility.

The obligations of the signatories under the definitive agreement are guaranteed by each party’s ultimate parent entity to the benefit of the respective other party.

Employment agreements. We have entered into employment agreements with our corporate officers and certain other key employees with durations ranging from one to four years. Significant contract provisions include minimum annual base salaries, healthcare benefits, bonus compensation if performance measures are achieved and non-compete provisions. These contracts are primarily “at will” employment agreements, under which the employee or we may terminate employment. If we terminate any of these employees without cause, we are obligated to pay the employee severance benefits as specified in their individual employment agreement. As of April 30, 2012 and October 31, 2011, minimum aggregate severance benefits totaled $7.4 million and $6.6 million, respectively.

Legal proceedings. In the ordinary course of business, we are involved in various legal proceedings and other matters that are complex in nature and have outcomes that are difficult to predict.  We record accruals for such contingencies to the extent that we conclude that it is probable that a loss will be incurred and the amount of loss can be reasonably estimated.  We have not recorded any loss accruals for these contingencies other than as we have considered reasonable for the matters noted below. Our assessment of each matter may change based on future unexpected events.  An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position.  Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity, but may be material to the results of operations in any given period.  We assume no obligation to update the status of pending litigation after the date of this Form 10-Q, except as may be required by applicable law, statute or regulation.

TableMAX – In April 2009, TableMAX IP Holdings, Inc. and TableMAX Gaming, Inc. filed a complaint (the “First Complaint”) against us in the United States District Court for the District of Nevada.  This case is a patent infringement claim alleging that our Table Master® product infringes U.S. Patents 5,688,174, 6,921,337 and 7,201,661.  The First Complaint sought injunctive relief and an unspecified amount of damages, including claims for attorneys’ fees, costs, increased damages and disbursements.  In August 2009, TableMAX Holdings, Inc. and TableMAX Gaming, Inc. voluntarily dismissed the First Complaint.  On the same date, TableMAX IP Holdings, Inc., TableMAX Gaming, Inc. and Vegas Amusement, Inc. the alleged owner of Patents 5,688,174, 6,921,337 and 7,201,661, (collectively “TableMAX”), filed a new complaint (the “New Complaint”) making allegations materially the same as the allegations in the First Complaint.  In August 2009, TableMAX filed an amended complaint (the “Second Complaint”), which superseded and is materially the same as the New Complaint, except that the plaintiffs added a new claim that Table Master® infringes U.S. Patent 7,575,512, which was issued on August 18, 2009.  In August 2009, the plaintiffs filed a Motion for Preliminary Injunction in the Second Complaint that sought to enjoin future sales of our Table Master® product.  In October 2009, the Court denied the Motion for Preliminary Injunction without hearing oral argument and the Court also denied without prejudice various motions for summary judgment that we filed. During the discovery process, TableMAX made new allegations that certain of our Vegas Star® products infringe one of the patents in the Second Complaint. In January 2010, TableMAX filed a Second Amended Complaint (the "Third Complaint"), which has materially the same allegations as the Second Complaint, except that it alleges that our Vegas Star® product allegedly infringes all of the patents in suit. A document produced in the discovery process appears to limit TableMAX's allegations of infringement regarding our Vegas Star® product to only one of TableMAX's patents in suit.

The Court set the Markman hearing for December 2010.  In November 2010, the Court granted our Motion to Stay. The stay was granted because of pending reexamination proceedings before the United States Patent and Trademark Office as to the four patents that are the subject of the lawsuit.  The reexamination proceedings were initiated as a result of our request. We believe that the final results of the reexamination proceedings will be beneficial to us in future Court proceedings. It is possible that all four reexamination proceedings will conclude in fiscal 2012 and thus the stay may be lifted in fiscal 2012. At present, the case remains stayed.  We believe that the claim is entirely without merit and we intend to continue to vigorously defend this matter.

Macau Rapid Baccarat ® Patent Issue – On or about June 3, 2009, at the G2E Asia Gaming Show, customs officials from Macau SAR seized a Shuffle Master, Inc. (“SMI”) Rapid Baccarat ® unit related to a claim by a Macau patent holder of our alleged patent infringement.  On October 27, 2009, the governmental official in charge of the investigation elected to dismiss the investigation based on a finding that no patent infringement existed based upon the report of the Macau customs officials.  In November 2009, the patent holder appealed this finding to the Macau Courts. On or about January 20, 2010, over our objection, the judge considering the patent holder’s appeal found that his appeal was timely filed.  

On or about February 2010, we filed an appeal (the “First SMAL Appeal”) to this decision.  On or about March 2010, the judge declined to forward the First SMAL Appeal to a higher Macau Court. We filed a further appeal (the “Second SMAL Appeal”) to have the higher Macau court hear the First SMAL Appeal.   On June 2, 2010, the Judge denied the patent holder’s request to open a criminal proceeding and decided that the investigation should remain dismissed against SMAL and its directors.  The patent holder has subsequently appealed the June 2, 2010, decision to a higher Macau court, which appeal has not yet been heard.  In the event the patent holder’s appeal is successful, it is likely that legal proceedings will be commenced against SMAL and its directors in Macau relating to this patent, although, at this time, no such proceedings have been commenced. Such proceedings, if initiated, would be for patent infringement, which we understand is a criminal matter in Macau.  The Company does not carry insurance with respect to this matter.  We believe that the claim is without merit and we intend to continue to defend this matter vigorously.

On May 4, 2012, the patent holder along with a company apparently controlled by the patent holder (collectively the "patent holders") requested that the Macau Court enjoin us and certain other exhibitors from infringing the patent holders' patents during the G2E Asia Gaming Show held May 22 through May 24.  On May 15, 2012, the Macau Court signed a written decision enjoining us and certain other exhibitors from infringing these patents, even though the court decision did not specifically identify which of our products at the G2E Asia Gaming Show would allegedly infringe such patents.  On May 22, 2012, Macau Customs instructed the Company to cover our Rapid Table Games™ Multi Game product at the G2E Asia Gaming Show and we complied.  On May 23, 2012, we received Court approval to post a bond of approximately $0.1 million in substitution of the injunction and to permit us to display the Rapid Table GamesTM Multi Game product. Notwithstanding that on May 23, 2012, we displayed the Rapid Table Games™ Multi Game product on the advice of our Macau counsel following the Macau Court allowing us to post a bond, we believe that Macau government officials are investigating the timing of lifting of the cover off the Rapid Table GamesTM Multi Game product and whether such action may give rise to any alleged criminal charges against SMAL or its officers. The patent holders are required to file civil action for patent infringement and to attempt to claim other alleged damages within ten days from the date of service of the injunction. As with the other claim, we believe that all of these claims are entirely without merit and we intend to continue to vigorously defend this matter.

Wright Matter – On November 7, 2009, Sam Wright was playing a Vegas Star ® craps machine at the Harrah’s Casino New Orleans.  Mr. Wright played a game that ended in a losing result.  After the game concluded, as a result of a malfunction, a false credit meter value of approximately $42.0 million appeared on the machine.  On or about April 2010, we received notice that Mr. Wright had filed a patron dispute with the Louisiana State Police Gaming Division.    In October 2010, the Louisiana State Police Gaming Division concluded in regard to the patron dispute that there was no violation of state law, rule or internal control. Mr. Wright was unsuccessful in the patron dispute.

In November 2010, Mr. Wright filed a Petition for Damages (the “Wright Complaint”) with the Civil District Court for the Parish of Orleans, State of Louisiana, naming  the Company, Jazz Casino Company, LLC d/b/a Harrah’s New Orleans Casino and Harrah’s New Orleans Management Company (collectively, “Harrah’s) as defendants.  The Petition claimed damages of approximately $43.0 million plus possible treble damages, attorneys’ fees and costs.  The Company could have had possible indemnity obligations to Harrah’s if a judgment had been entered.   In February 2011, all defendants answered the Petition and removed the case to the United States District Court for the Eastern District of Louisiana.   On February 2012, the Company attended a Court ordered settlement conference, in which the Wright Complaint and the Declaratory Relief Complaint (discussed below) were settled between the parties without admission of liability by either the Company or Harrah’s.  Effective May 8, 2012, the Wright Compliant and the Declaratory Relief Complaint were dismissed with prejudice.

Axis Surplus Insurance Company (“Axis”) was the Company’s insurance carrier with respect to the Wright Complaint.  In November 2011, we filed a Complaint for Declaratory Judgment (the “Declaratory Relief Complaint”) in the United States District Court for the Eastern District of Louisiana against Axis seeking, pursuant to our policy (a) Axis to provide full policy coverage and defense; (b) Axis to pay all legal fees and expenses incurred by us in the defense of the Wright Complaint; and (c) Axis to make all reasonable efforts to protect us from risk of excess judgment.  The Declaratory Relief Complaint was dismissed with prejudice as discussed above.

XML 32 R5.htm IDEA: XBRL DOCUMENT v2.4.0.6
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Apr. 30, 2012
Apr. 30, 2011
Cash flows from operating activities:    
Net income $ 17,384 $ 12,750
Adjustments to reconcile net income to cash provided by operating activities:    
Depreciation and amortization 12,397 11,876
Amortization of debt issuance costs and debt discount 238 238
Share-based compensation 2,049 1,478
Provision for bad debts 108 101
Write-down for inventory obsolescence 707 113
Loss (profit) on sale of leased assets (603) (2,379)
Loss (gain) on sale of assets 91 96
Excess tax benefit from exercise of stock options (1,207) (771)
Changes in operating assets and liabilities:    
Accounts receivable and investment in sales-type leases and notes receivable (1,970) (1,221)
Inventories (4,248) (5,668)
Accounts payable and accrued liabilities (2,580) (16,533)
Customer deposits and deferred revenue 4 777
Prepaid income taxes (3,377) 2,305
Income taxes payable 1,466 2,404
Deferred income taxes 2,277 1,340
Other (2,132) 9,604
Net cash provided by operating activities 20,604 16,510
Cash flows from investing activities:    
Proceeds from sale of leased assets 1,029 3,810
Proceeds from sale of assets   76
Payments for products leased and held for lease (6,706) (7,263)
Purchases of property and equipment (4,240) (2,001)
Purchases of intangible assets (4,103) (6,145)
Acquisition of business (5,500) (6,499)
Other (454) (446)
Net cash used in investing activities (19,974) (18,468)
Cash flows from financing activities:    
Proceeds from Revolver 6,000 16,500
Debt payments on Revolver (22,000) (10,000)
Proceeds from issuances of common stock, net 14,128 1,610
Excess tax benefit from exercise of stock options 1,207 771
Other (30) (20)
Net cash provided by (used in) financing activities (695) 8,861
Effect of exchange rate changes on cash and cash equivalents 840 92
Net increase in cash and cash equivalents 775 6,995
Cash and cash equivalents, beginning of period 22,189 9,988
Cash and cash equivalents, end of period $ 22,964 $ 16,983
XML 33 R10.htm IDEA: XBRL DOCUMENT v2.4.0.6
Note 5 - Shareholders' Equity
6 Months Ended
Apr. 30, 2012
Stockholders' Equity Note Disclosure [Text Block]
5. SHAREHOLDERS’ EQUITY

Common stock repurchases. Our board of directors periodically authorizes us to repurchase shares of our common stock.  As of April 30, 2012, $21.1 million remained outstanding under our board authorization.  We cancel shares that are repurchased.  No shares were repurchased during the three and six months ended April 30, 2012.  Although we generally prioritize bank debt reduction over share repurchases we may consider share repurchases when there are anomalies in the share value created by, but not limited to, market conditions.

The timing of our common stock repurchases pursuant to our board of directors’ authorization is dependent on future opportunities and on our views, as they may change from time to time, as to the most prudent uses of our capital resources, including cash and borrowing capacity.

Other comprehensive income. For the three and six months ended April 30, 2012 and 2011, other comprehensive income consisted primarily of foreign currency translation adjustments.  The following table provides information related to other comprehensive income:

   
Three Months Ended
April 30,
   
Six Months Ended
April 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net income (loss)
  $ 9,735     $ 7,946     $ 17,384     $ 12,750  
Currency translation adjustment
    (1,539 )     15,281       (7,102 )     16,101  
Total other comprehensive income (loss)
  $ 8,196     $ 23,227     $ 10,282     $ 28,851  

Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. The Company’s other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.

Additional paid in capital.  For the six months ended April 30, 2012, the activity in additional paid in capital consisted of $14.1 million in proceeds received from stock option exercises and $2.8 million in share-based compensation expense and related tax effect/benefit from stock option activity.

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