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EX-23 - INDEPENDENTLY REGISTERED PUBLIC ACCOUNTING FIRM CONSENT - SHFL entertainment Inc.ex23.htm
EX-21 - SUBSIDIARIES LISTING - SHFL entertainment Inc.ex21.htm
EX-31.1 - T. PARROTT 302 CERTIFICATION - SHFL entertainment Inc.ex31_1.htm
EX-31.2 - L. FOX 302 CERTIFICATION - SHFL entertainment Inc.ex31_2.htm
EX-32.1 - T. PARROTT 906 CERTIFICATION - SHFL entertainment Inc.ex32_1.htm
EX-32.2 - L. FOX 906 CERTIFICATION - SHFL entertainment Inc.ex32_2.htm


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

FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended October 31, 2009
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 of Incorporation or Organization)
 
(IRS Employer Identification No.)
 
 
 
1106 Palms Airport Drive, Las Vegas
NV
89119
(Address of Principal Executive Offices)
(State)
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (702) 897-7150

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.01 par value per share
The NASDAQ Stock  Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x
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 o  No o 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendments to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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:
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 Act).  Yes o No x
 
The aggregate market value of voting Common Stock held by non-affiliates of the Registrant on April 30, 2009 was approximately $204,369,097.
 
As of January 11, 2010, 53,608,873 shares of Common Stock of the Registrant were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference information from the Registrant’s Proxy Statement for its Annual Meeting of Shareholders to be held on March 26, 2010 (“Fiscal 2009 Proxy Statement”) to be filed with the SEC within 120 days of the end of the fiscal year covered by this report.
 


 
 

 

SHUFFLE MASTER, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED OCTOBER 31, 2009
 
TABLE OF CONTENTS
 
 
 
Page
     
 
Forward Looking Statements
 
 
Part I
 
Item 1.
5
Item 1A.
18
Item 1B.
25
Item 2.
25
Item 3.
26
Item 4.
26
 
Part II
 
Item 5.
27
Item 6.
29
Item 7.
30
Item 7A.
65
Item 8.
66
Item 9.
104
Item 9A.
104
Item 9B.
107
 
Part III
 
Item 10.
108
Item 11.
108
Item 12.
108
Item 13.
108
Item 14.
108
 
Part IV
 
Item 15.
109


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled, “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this Form 10-K. 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. Although we currently believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-K, 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 expectations include, but are not limited to, the following:

·
We are dependent on our intellectual property and trade secrets and we may be unable to protect our intellectual property and trade secrets from infringement, misappropriation, or claims of infringement or invalidity. Additionally, changes in the patent laws could adversely affect the validity or enforceability of one or more of our patents;

·
the gaming industry is highly regulated and we must adhere to various regulations and maintain our licenses to continue our operations.  Failure to obtain and/or maintain our licenses could be disruptive to our business and could adversely affect our operations;

·
a continued downturn in general worldwide economic conditions or in the gaming industry or a reduction in demand for gaming may adversely affect our results of operations.  As a result, the market price of our common stock may decline;

·
our domestic and global growth and ability to access capital markets are subject to a number of economic risks;

·
risks that impact our customers may impact us;

·
economic, political, legal and other risks associated with our international sales and operations could adversely affect our operating results;

·
litigation may subject us to significant legal expenses, damages and liability and is inherently unpredictable and risky;

·
our products currently in development may not achieve commercial success and if we are unable to maintain a competitive technological position, we may suffer a material adverse effect on our business, results of operations or financial condition;

·
we compete in a single industry and our business may suffer if our products become obsolete or demand for them decreases, including without limitation, a result of the downturn in the gaming industry;

·
any disruption in our manufacturing processes, any significant increases in manufacturing costs or any inability to manufacture a sufficient number of our products to meet demand could adversely affect our business and operating results;

·
the products in each of our segments may experience losses due to technical difficulties or fraudulent activities;

·
we operate in a very competitive business environment and if we do not adapt our approach and our products to meet this demand, our business, results of operations or financial condition could be adversely impacted;

·
we are dependent on the success of our customers and are subject to industry fluctuations;

·
certain market risks may affect our business, results of operations and prospects;

·
we are exposed to interest rate and foreign currency risk;

·
we could face considerable business and financial risk in implementing acquisitions;

·
if our products contain defects, our reputation could be harmed and our operating results and financial results could be adversely effected;

·
we may not be able to attract, retain, or motivate the management or employees necessary to remain competitive in our industry;


·
we may be unable to adequately comply with public reporting requirements;

·
our continued compliance with our financial covenants in our Senior Secured Credit Facility is subject to many factors, some of which are beyond our control and if we are unable to remain compliant under our financial covenants, our results of operations could be adversely affected by servicing costs;

·
the restrictive covenants in our Senior Secured Credit Facility may limit our ability to finance future operations or capital needs or engage in other business activities that may be in our interest; and

·
our business is subject to quarterly fluctuation.

In addition, refer to the “Risk Factors” section 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.


PART I
(In thousands, except units, per unit/seat amounts and square footage)

ITEM 1. BUSINESS

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 Minnesota corporation formed in 1983. We conducted our initial public offering and became a NASDAQ-listed public company in 1992. Our corporate offices are located at 1106 Palms Airport Drive, Las Vegas, Nevada 89119 and our telephone number is 702-897-7150.
 
We maintain an Internet website at www.shufflemaster.com and we make available on the website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after filing such material electronically with the Securities and Exchange Commission. We also provide a variety of other information on our website including all of our press releases. We have included our website address in this filing only as a textual reference. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K.
 
We specialize in providing casino and other gaming customers with products and services that enhance their gaming floors by improving profitability, productivity and security, as well as offering popular cutting-edge gaming entertainment content and technology. We operate through four business segments: Utility, Proprietary Table Games (“PTG”), Electronic Table Systems (“ETS”) and Electronic Gaming Machines (“EGM”). Our four business segments are summarized as follows:

Utility. Our Utility segment develops products for our customers that enhance table game speed, productivity, profitability and security. We introduced the first successful automatic card shuffling equipment to the gaming industry and we continue to develop and market a full complement of automatic card shufflers for use with the vast majority of card-based table games placed in casinos and other gaming locations, including our own proprietary table games. We are working on the development of next generation shufflers and technological advancements in the areas of card recognition and remote diagnostics, among other developments. Currently, our Utility segment revenue is derived substantially from the lease and sale of our automatic card shufflers and associated service revenue. We also offer chip sorting products that simplify the handling of gaming chips on high volume roulette tables. Additionally, we have acquired or are developing products to gather data and to enable casinos to track table game play such as our i-Shoe Auto card reading shoe, our i-Score baccarat viewer that displays current game results and trends and our Deck Checker® card deck checking device.  These products are intended to cost-effectively provide casinos and our other customers with data on table game play for security and marketing purposes, which in turn allows them to increase their profitability.

Proprietary Table Games.   We develop and deliver proprietary titles that enhance our casino and other gaming customers’ table game operations. Products in this segment include our live and electronic proprietary table games as well as progressive upgrades and proprietary features added to public domain games such as poker, baccarat, pai gow poker and blackjack table games. We believe we currently have the most popular proprietary table game titles in the world, as our current proprietary table games titles include twelve of the top fifteen most popular proprietary titles in the world (by revenue) as of October 31, 2009.
 
We intend to broaden our PTG content through development and acquisition. By enhancing the value of our existing proprietary table games in the marketplace with side bets, add-ons and progressives and by increasing our footprint with new titles, we hope to increase our domestic market penetration and expand further into international markets. We also intend to expand the domestic presence of our proprietary titles on electronic platforms such as our Table Master® and i-Table.  We also plan to continue to install proprietary progressives and side bets on public domain table games in addition to our proprietary table games. Additionally, to maximize the reach of our broad intellectual property portfolio, we have licensed several of our popular proprietary table game titles to a variety of other companies including Delta Rangers, Inc. that offer, where legal, play-for-real internet gaming.  Internet gaming is not legal in the United States.

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 the Table Master, Vegas Star®, Rapid Table Games and the newly developed i-Table platforms.  Our Table Master and some of our Vegas Star products feature a virtual dealer which enables us to offer table game content in markets where live table games are not permitted, such as 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.  Our newly developed i-Table platform combines an electronic betting interface with a live dealer who deals physical cards from a Shuffle Master card reading shoe or shuffler which is designed to dramatically improve game speed and security while reducing many operating expenses associated with live tables.


Electronic Gaming Machines.  Our EGM segment develops and delivers our PC-based video slot machines into select markets, primarily in Australia and, to a lesser extent, Asia and Latin America.  Through our Australian subsidiary Stargames Limited (“Stargames”), we offer an extensive 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 Drifting Sands, Ninja, iChing, Kelly Country, Deep Sea Dollars, Cuba, Galapagos Wild, Sunset on the Serengeti and Lonesome George, as well as the Pink Panther and Grand Central progressive links.

For additional information about our segments, including segment revenue, operating income (loss) and assets, see “Item 6. Selected Financial Data,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” included in this Form 10-K.
 
The table below presents our product lines and the percentage of total revenue from continuing operations contributed by each product line in the fiscal years ended October 31:

   
Percentage of Total Revenue
 
Product Segment
 
2009
   
2008
   
2007
 
Utility
    40.0 %     42.5 %     43.9 %
Proprietary Table Games
    21.6 %     20.3 %     18.5 %
Electronic Table Systems
    12.4 %     14.5 %     15.5 %
Electronic Gaming Machines
    26.0 %     22.6 %     22.0 %
Other revenue
    0.0 %     0.1 %     0.1 %
      100.0 %     100.0 %     100.0 %


OUR STRATEGY

We are proud of the products that we develop and market and believe we can have continued growth and expansion. To that end, we have devised and are implementing the following ongoing strategic plan:

Develop a true “strategic partner” relationship with our customers

Our first strategic goal focuses on partnering with our customers, not only to provide enhanced efficiencies, maximize security and maximize profitability on the casino floor, but also work diligently to develop innovative products that anticipate and respond to their needs. To demonstrate our top strategic initiative, we rolled out a 12 Point Pledge that outlines our commitment to our customers:

 
We will be a strategic partner to our customers.
 
We will work diligently to meet our customers’ needs.
 
We will provide solutions, not just products.
 
We will never forget: we’re in the business of fun.
 
We will foster trust from the very first handshake.
 
We will provide innovative products.
 
We will be tireless in our pursuit of excellence.
 
We will provide answers, not excuses.
 
We will set a high bar for service.
 
We will identify creative ways to improve our customers’ performance.
 
We will collaborate with our customers to fuel their profitability.
 
We will know we’ve reached our full potential when we’ve enabled our customers to reach theirs.

Continued emphasis on leasing versus selling

We intend to continue executing this strategy primarily in North America although we will encourage leasing programs in other parts of the world.

Continued development of technology to drive new products across all product lines

This strategic initiative includes our card reading shoes and shufflers, shuffler interface with table systems, live and electronic table game progressive systems and the development of new titles for all of our e-Table platforms on a worldwide basis.

Value engineering to reduce manufacturing costs across all product lines

Our focus is currently on savings attributable to component parts, product redesign and lower cost manufacturing opportunities.

Continued commitment to reduce expenses throughout the Company without compromising the quality of our products or service

Our goal is to reduce expenses through cost savings initiatives as well as thoroughly examining our infrastructure to improve our operating margins without compromising the quality of our products or service.

This ongoing strategic plan assists us in defining and implementing our specific product strategies for the future, which in no particular order are:

·
To focus on developing, manufacturing and marketing products that increase the speed, profitability, productivity and security of our casino and other customers in their table game operations.

·
To develop and market shufflers with advanced features and capabilities, such as optical card recognition and deck validation, to replace older generation shufflers and to further penetrate domestic and foreign markets.

·
To broaden our PTG segment by developing or acquiring additional table game content to increase our penetration of casino customers' table game operations. In addition, our analysis has shown that there exists a strong correlation between proprietary table game growth and demand for automatic shufflers.

·
To develop a variety of felt-based and e-Table solutions to increase revenue from existing assets in the field by adding new proprietary features such as progressives and side bets.

·
To market our e-Table platforms to provide a cost-effective brand extension of our PTG content to existing casino and new casino customers and to explore other venues in which the platforms could be reasonably modified to fulfill market demands.


·
To continue our commitment to develop new and exciting titles for our EGM products, allowing us to maintain our niche product offering.

·
To develop or acquire patents, licenses and other intellectual property both to broaden our product offerings and to vigorously protect our patents and products from potential infringement.


OUR UTILITY SEGMENT

Since our founding, we have developed and marketed products that include a combination of technology to enhance the speed, productivity, security and profitability of the table game operations of our customers. Our automatic card shufflers were the first such products.  We believe that our customers are seeking to increase the operating returns of their table game operations.

Our Shuffler Products. We currently market a complete range of shufflers, including single deck, batch and continuous shufflers. Single deck shufflers that deliver randomized hands of cards such as our i-Dealand ACE® shufflers are generally used on proprietary table games such as our own Three Card Poker® and Ultimate Texas Hold ‘Em® games. Additionally, we offer a single deck/double deck batch shuffler, the Deck Mate®, for use on live stakes poker tables and single or double deck blackjack games.  For multiple deck “shoe” games such as Blackjack, Blackjack variants, Baccarat and Casino War® we offer the one2six® family of continuous shufflers.  For casinos that prefer to shuffle “shoe” games in a batch shuffler, we offer the MD2® with card recognition.  Shuffled batches of cards may then be delivered to one of our secure card reading i-Shoe and i-Shoe Auto shoes.

Our shufflers significantly reduce the opportunity for card manipulation by dealers, resulting in increased security. By allowing cards to be shuffled continuously or in frequent batches, our shufflers reduce or eliminate card counting and shuffle tracking. Because our shufflers shuffle one or more decks while a game is being played, down-time related to dealer shuffling is also significantly reduced, with the potential for a corresponding increase in playing time and win for the casino.

Our latest single-deck shuffler, the i-Deal, combines a number of enhanced features such as optical card recognition technology, card re-sorting, a new ergonomic design with flush mount load and a programmable multi-game function to enhance game security and provide cost savings for the casino.

Our Chip Sorting Machines. Our chip sorting machines simplify the handling of gaming chips, which increases the productivity and security on roulette tables.

Intelligent Table Systems ("ITS") and other Utility Products. We have acquired and are developing technology to enable casinos and other customers to track and analyze play on their table games.

Our existing Utility products are the following:
ACE®
Deck Mate®
i-Deal
MD2®
one2six®
one2six Plus
Easy Chipper C
Chipmaster
i-Score
i-Shoe Auto
i-Verify
MD2® Workstation

OUR PROPRIETARY TABLE GAMES SEGMENT

Our Proprietary Table Games and Other Proprietary Features. Our PTG segment includes our live and electronic proprietary table games, progressive table games with bonusing options and proprietary side bets. We are continuously developing new table games to complement our existing offerings and to extend our penetration of proprietary table games on the casino floor.

Our more popular titles, including progressive table games with bonusing options and proprietary side bets are listed below in four categories; premium titles, side bets, add-ons and progressives.  The combination of premium titles and side bets represents the equivalent of casino floor space (“real estate”) while add-ons and progressives generate incremental revenue on existing casino floor space.

Premium titles:
Caribbean Stud®
Casino War®
Crazy 4 Poker®
Four Card Poker®
Fortune Three Card Poker
Let It Ride®
Let It Ride Bonus®
Mississippi Stud


Texas Hold'Em Bonus®
Three Card Poker®
Ultimate Texas Hold ‘Em ®

Side bets:
Bet the Set "21"®
Dragon Bonus®
Fortune Pai Gow Poker®
King’s Bounty blackjack
Royal Match 21®
Sharp Shooter

Add-ons:
Bad Beat Bonus bets
Three Card Poker Bonus bets

Progressives:
Progressive bonus bets


OUR ELECTRONIC TABLE SYSTEMS SEGMENT

Our Electronic Table Systems. Our ETS products are e-Table platforms developed for multi-player use. We have developed or acquired other technology or platforms to deliver our proprietary table game content or public domain games on multi-player terminals. Some of our e-Table products enable us to offer table game content in markets where live table games are not permitted, such as racino, video lottery and arcade markets. We are developing these e-Table platforms to enable the marketing and deployment of our table game content into previously unpenetrated international and domestic casino, racino and other gaming markets.

Our existing ETS products are the following:
i-Table
Rapid Table Games
Table Master®
Vegas Star®

OUR ELECTRONIC GAMING MACHINES (“EGM”) SEGMENT

Our Electronic Gaming Machines.  We offer an extensive selection of video slot titles developed for select markets primarily in Australia and, to a lesser extent, Asia and Latin America.  Featuring a wide variety of denominations and configurations, EGMs can be configured as a network of machines or as stand-alone units. EGM titles are offered in the ergonomic eStar cabinet and are available on both the dependable Stargames PC3 operating platform and more recently the PC4 operating platform. The PC4 operating platform features enhanced audiovisual capabilities as well as greater capacity to integrate with technical advancements expected in the coming years.

At Stargames' headquarters, the slot cabinets are designed and assembled and the gaming content is developed for the various Australian and international jurisdictions where these machines are sold. These games are developed to function on a multitude of operating protocols including SAS, X Series, QCOM, VLC and ASP. Some popular titles for our EGMs include Drifting Sands, Ninja, iChing, Kelly Country, Deep Sea Dollars, Cuba, Galapagos Wild, Sunset on the Serengeti and Lonesome George, as well as the Pink Panther and Grand Central progressive links.

Stargames also licensed content from and paid royalties to WMS Industries Inc. (“WMS”), a U.S. slot manufacturer. This agreement was limited to the Australian and New Zealand markets and terminated on January 31, 2008.  Except for several titles, the rights expired in mid 2009, and we have no minimum royalty obligations with respect to those titles.


OTHER SEGMENT INFORMATION

Customers and marketing. We market our products to casinos and other legal gaming establishments around the world with our direct domestic and international sales force and several domestic and international distributors and/or representatives. We also market several of our e-Table products to a variety of gaming venues not permitted to offer live table games, such as racinos and other legal gaming establishments around the world. We currently maintain sales and marketing offices on six continents and have relationships with various distributors worldwide.

We believe the quality and breadth of our customer base is a strong testament to the effectiveness and quality of our product offerings, technological innovation and customer service. Our customer base includes the leading casino operators on all six continents that allow casino style gaming, including operators in leading established gaming markets such as the United States, Canada, Latin America, Macau, Singapore, Malaysia, Australia, Europe and Africa. Moreover, our customer base includes all of the top 20 global gaming companies measured by annual revenues. Our customers include, among others, Harrah's Entertainment, MGM Mirage, Mohegan Tribal Gaming Authority, Las Vegas Sands Corp., Crown Ltd., Wynn Resorts, Limited, Sociedade de Jogos de Macau S.A., Genting Groups, Galaxy Entertainment Group Limited, The Rank Group and Sun International Resorts.

Our products and the locations in which we may sell them are subject to the licensing and product approval requirements of various national, state, provincial and tribal jurisdictional agencies that regulate gaming around the world.  See “Business—Gaming Regulation” section below.  We both lease and sell our products, although we implemented a strategy to continue our emphasis on leasing versus selling, predominantly in the United States.  When we lease our products, we generally negotiate a month-to-month operating lease or license for our products for a fixed fee, or to a lesser extend, enter into participation arrangements whereby casinos pay a fee to us based on a percentage of net win. When we sell certain of our products, we sometimes offer our customers a choice between a sale or a longer-term sales-type lease or other financing arrangements, depending on the needs of each customer. We service the products we sell and lease with those on lease including a service contract. We also offer service packages to customers who purchase products from us.

Competition. We compete with other gaming products and supply companies for space on the casino customer's floor, as well as for our customer's capital spending. With respect to our Utility segment, namely shufflers and other gaming equipment, we compete on this basis as well as on the basis of offering a complete line of shufflers, product reliability, a superior service network, the strength of our intellectual property and the breadth of our sales, regulatory and distribution channels. Other companies may develop and market shufflers and seek to develop and obtain regulatory approvals of additional shuffler products. Our shufflers also compete against hand shuffling, which remains the most common shuffling option on casino card games around the world. Finally, since the need for our shufflers is dependant upon the casino’s use of live table games, our shufflers also compete against any products that live table games compete against.   We cannot provide assurances that a competitive product will not gain substantial placements or that a competitive product or hand shuffling will cause price erosion of our shufflers in the future.  As it relates to our Easy Chipper C and Chipmaster roulette chip sorting products, competition is primarily limited to the Chipper Champ Plus and the more current Chipper Champ 2, both sold by TCSJohnHuxley. Competition with our i-Shoe card reading shoe is predominantly limited to Angel Co. Ltd.'s Angel Eye® card reading shoe and the Bee Electronic Baccarat Dealing Shoe (U.S. Playing Card Company).

With respect to our PTG segment, in addition to companies such as International Game Technology (“IGT”), Bally Technologies, Inc. (“Bally”), Aristocrat Gaming (“Aristocrat”) and WMS Industries Inc. (“WMS) that primarily market slot machines, we also compete with both non-proprietary table games such as blackjack and several companies which primarily develop and license proprietary table games. Some of those competitors' widely known proprietary table game titles include Galaxy Gaming's Lucky Ladies, Emperor's Challenge, Masque Publishing's Spanish 21®, DEQ Systems EZ Baccarat, Prime Table Games and Gaming Entertainment. Additionally, competition with our progressive bet system for table games includes DEQ Systems. Competition in this segment is particularly based on price, brand recognition, player appeal and the strength of underlying intellectual property. Smaller developers and vendors are more able to participate in developing and marketing table games, compared to other gaming products, because of the lower cost and complexity associated with the development of these products and a generally less stringent regulatory environment. We compete on these bases, as well as on the strength of our extensive sales, service and distribution channels. We have been able to increase our placements of table games not only because of the general growth of table games, but also by displacing other table game products. In the future, table game competitors as well as slot machine companies could market table games that might displace our products.

With respect to our ETS segment, there are numerous other companies that manufacture and/or sell e-Tables that are similar to the games in our ETS segment. These companies include, but are not limited to, TCSJohnHuxley, Aristocrat, Interblock (member of Elektroncek Group), Aruze Corporation (“Aruze”), Novomatic Industries (“Novomatic”), IGT, PacificNet Inc. (“PacificNet”), PokerTek, Inc. (“PokerTek”) and TableMAX Holdings (“TableMAX”). Our e-Tables, as well as those of other companies, also compete for casino floor space with live table games and EGMs.  One of our competitive strengths in this segment is the ability to offer our proprietary table game titles on various e-Table platforms.

Our EGM segment is part of a highly competitive international slot market. The Australasian market reflects other worldwide markets insofar as most of the major international manufacturers have a presence there. The major competitors to our EGM products in these markets are Aristocrat, IGT, Bally, WMS, Konami Gaming, Inc. (“Konami”), Aruze and Ainsworth Game Technology (“Ainsworth”).  In Asia, these competitors are also active along with further competition from myriad of European slot manufacturers.


Finally, some of our product segments may compete against each other for space on the casino floor.

Product supply. We obtain most of the parts for our products from outside suppliers, including both off-the-shelf items as well as components manufactured to our specifications. We also manufacture a small number of parts in-house that are used both for product assembly and for servicing existing products. We generally perform warehousing, quality control, final assembly and shipping ourselves from our facilities in both Las Vegas and Sydney, Australia, although small inventories are maintained and repairs are performed by our field service employees.

Additionally, some of our products are manufactured by subcontract manufacturers, located in Desplaines, Illinois, Phoenix, Arizona and Salzburg, Austria, all of which also inventory and ship these products. We believe that our sources of supply for components and raw materials are adequate and that alternative sources of materials are available.

Research and development (“R&D”).  We employ a staff of electrical, mechanical and software engineers, graphic artists and game developers to support, improve and upgrade our existing shufflers, to develop new shufflers, to develop technology and game content for our PTG, e-Table platforms and EGM products and to develop and explore other potential table-related products.  We perform the majority of our research and development ourselves in the U.S. and in Australia. We also conduct research and development through the use of a foreign, third party developer for certain of our international product offerings.

We believe that one of our strengths is identifying new product opportunities and developing new products, therefore we expect to continue to spend a significant portion of our annual revenues on research and development, including the acquisition of intellectual property from third parties.  Total R&D expense was $17,349, $18,474 and $17,337 for fiscal 2009, 2008 and 2007, respectively.


INTELLECTUAL PROPERTY

We believe that our patents, trademarks, licenses, copyrights and trade secrets are significant assets that provide us with a competitive advantage and are critical to our future profitability and growth. We protect our investment in research and development by seeking patent and trademark protection for our technologies. We also acquire and license patents and other intellectual property from third parties. Infringement claims, patent invalidity or expiration, license non-renewal, failure to stop infringers, inadequacy of patent and other intellectual property coverage, delays in using our intellectual property to develop products or the costs of protecting our intellectual property and changes to the intellectual property laws could adversely affect our future results of operations and our financial position.

Patents. We own numerous United States and international patents and applications related to our existing products and methods, future products that have not yet been introduced, potential product modifications and improvements and to products we do not currently sell.  Some of the patents (primarily our game play method patents) we own are issued only in the United States.  A majority of the technology is internally developed, however, some of our technology has been purchased and is licensed.

Most of the patents that we own have a life of 20 years from the filing date of the first non-provisional patent application in a family of patents.  While some of our older owned game patents expire in the next 3-5 years and some older technology shuffler patents expire in 2014, the majority of our patents, including those with our newest technology, expire thereafter.  Under the laws of the United States, when a patent expires, a competitor would be legally able to make, use, offer to sell or sell the invention claimed in the patent.  We believe that the expiration of any of our patents prior to 2015 will not have a material adverse effect on our business. A number of our licensed patents expired in 2009, but the expirations have not and are not expected to materially affect our business. We also have numerous patent applications pending for our existing, planned and potential products. No assurance can be given that any such patents will be issued, or that the patents we currently hold or have licensed or any new patents that we acquire are, will be, or will remain valid, will provide any competitive protection for our products, or will adequately cover our competitors' products. We may decide to sell in the ordinary course of business patents that we no longer continue to believe are strategic to our business.

Trademarks. We own numerous United States and international trademark registrations and common law trademarks. Some of the more important marks include: Shuffle Master, Incorporated®, the Shuffle Master 4-square logo®, ACE, Deck Mate, i-Deal, MD1®, MD2, one2six, Deck Checker, Easy Chipper C, i-Shoe, i-Shoe Auto, Bet the Set “21”, Blackjack Press®, Caribbean Stud, Casino War, Crazy 4 Poker, Dragon Bonus, Fortune Blackjack®, Fortune Pai Gow Poker, Four Card Poker®, Jackpot Baccarat, Let It Ride, Let It Ride Bonus, Let It Ride The Tournament, Mississippi Stud®, Royal Match 21, Texas Hold ‘Em Bonus®, Three Card Poker, Ultimate Texas Hold' Em Bonus®, i-Table, Table Master, Rapid Table Games and Vegas Star.  We believe that our trademarks and trade dress are an important component of the brand identity of our products. We also license trademarks from others.

Intellectual property licenses. We obtain licenses to intellectual property from third parties. These licenses are subject to various conditions and restrictions and typically involve us paying royalties on a fixed or unit basis. While we do not believe that any of these current license agreements are in jeopardy of being terminated, we can make no assurance that all of these license agreements will remain in effect or that such licenses can be extended under terms favorable to us.

In addition, when we license our products to our customers, we also license the right to use our intellectual property to casino customers. We typically earn license royalties on a periodic basis. We do not license our intellectual property to other gaming equipment suppliers, except occasionally as part of a cross-license arrangement.

We granted a multiple game license to Delta Rangers, Inc. for the play of a number of our proprietary table games on legalized internet gaming sites outside of the United States.

Other intellectual property. In addition to patents, we also own intellectual property in the form of copyrights (registered and unregistered), trademarks (registered and unregistered), trade dress and as trade secrets. No assurance can be given that we will be successful in maintaining the confidentiality of our trade secrets and other proprietary information. Costs associated with defending and pursuing infringement claims can be substantial. In the absence of valid and enforceable patent, copyright, trademark or trade secret protection, we would be vulnerable to competitors who could lawfully copy our products and technology.

Product-related agreements. We are a party to certain cross-licensing agreements. Under these agreements, we have certain rights to third party intellectual property. There are no royalty obligations with respect to any of these agreements that are material to our results of operations. Further, none of the royalties that we receive from these agreements are material to our results of operations.

Infringement and litigation. We do not believe that any of our products, methods or technologies infringes the valid and enforceable patents or other intellectual property rights of others. However, we have been and are subject to litigation claiming that we have infringed the rights of others and that certain of our patents and other intellectual property are invalid or unenforceable. We have also brought actions against others to protect our rights. For a discussion of these cases see “Item 3. Legal Proceedings” and Note 15 in “Item 8. Financial Statements and Supplementary Data”, included in this Form 10-K.


GAMING REGULATION

Overview. We are subject to a wide range of complex gaming laws and regulations in over 200 jurisdictions, both foreign and domestic, in which we are licensed or have applications pending. Jurisdictions require us to be licensed, our key personnel to be found suitable, qualified or licensed and our products to be reviewed and approved before placement. Additionally, gaming laws and regulations of most jurisdictions provide that beneficial owners of 5% or more of our common stock are subject to reporting procedures and may be subject to licensure that includes suitability investigations and submission of personal and financial information as required, unless the owner is eligible for and obtains an exemption or waiver. Under certain circumstances, an “Institutional Investor,” as such term is defined by certain gaming jurisdictions' statutes or regulations, who acquires more than 5%, may apply for a waiver of the suitability requirement. Generally, gaming jurisdictions may permit an Institutional Investor to hold up to 15% upon a showing that they meet the jurisdiction's definition of an “Institutional Investor” and certification as to their passive investment intent. Furthermore, most jurisdictions have ongoing reporting requirements for certain transactions and are concerned with our accounting practices, internal controls, business relationships and the fair operation of our products. Gaming regulatory requirements vary from jurisdiction to jurisdiction and licensing, approvals and processes related to findings of suitability, qualifications or licenses, our products, key personnel and certain shareholders can be lengthy and expensive.

General regulatory licensing and approvals. We intend to maintain our existing licenses and to seek the necessary licenses, approvals, qualifications and findings of suitability for us, our products and our management personnel in new jurisdictions where we anticipate sales or leasing opportunities. We have never been denied a license, permit or approval necessary to do business in any jurisdiction, nor had a license suspended or revoked. However, there can be no assurance that new licenses, approvals, qualifications or findings of suitability will be obtained or that our existing licenses will not be revoked, suspended or conditioned. If a license, approval, qualification or finding of suitability is required by a regulatory authority and we fail to seek or do not receive the necessary license, qualification or finding of suitability, then we may be prohibited from distributing our products for use in the respective jurisdiction or may be required to provide our products through other licensed entities at a reduced profit to us. There can also be no assurance that we will be able to obtain the necessary approvals for our products as they are developed. In addition, changes in legislation or in judicial or regulatory interpretations could occur which could adversely affect us.

We are licensed as a manufacturer and distributor of gaming devices, an operator of inter-casino linked systems and a slot route operator in Nevada. We are a gaming-related casino service industry licensee in New Jersey and hold supplier, manufacturer and distributor licenses in numerous other jurisdictions throughout North America and elsewhere. Due to variations in jurisdictional regulatory transaction reporting, as well as manufacturer, distributor and product licensing requirements, only the specifics of Nevada gaming law requirements are provided below as being representative of gaming regulation to which we are subject in other jurisdictions.

Nevada regulatory matters. We are subject to the Nevada Gaming Control Act (the “Nevada Act”) and to the licensing and regulatory control of the Nevada State Gaming Control Board (the “Nevada Board”), the Nevada Gaming Commission (the “Nevada Commission”) and various local, city and county regulatory agencies (collectively, the “Nevada Gaming Authorities”).

The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the character of persons having any direct or indirect involvement with gaming to prevent unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) application of appropriate accounting practices and procedures; (iii) maintenance of effective control over the financial practices and financial stability of licensees, including procedures for internal controls and the safeguarding of assets and revenues; (iv) record-keeping and reporting to the Nevada Gaming Authorities; (v) fair operation of games; and (vi) the raising of revenues through taxation and licensing fees.

We are registered with the Nevada Commission as a publicly traded corporation and are licensed as a manufacturer and distributor of gaming devices, an operator of inter-casino linked systems and a slot route operator. Such licenses are not transferable and require periodic payment of fees. The Nevada Gaming Authorities may limit, condition, suspend or revoke a license, registration, approval or finding of suitability for any cause deemed reasonable by such licensing agency. If it were determined that we violated gaming laws, then the approvals and licenses we hold could be limited, conditioned, suspended or revoked and we, and the individuals involved, could be subject to substantial fines for each separate violation of the gaming laws at the discretion of the Nevada Commission. Each type of gaming device, slot game, slot game operating system, table game or associated equipment manufactured, distributed, leased, licensed or sold in Nevada must first be approved by the Nevada Board and, in some cases, the Nevada Commission. We must regularly submit detailed financial and operating reports to the Nevada Board. Certain loans, leases, sales of securities and similar financing transactions must also be reported to or approved by the Nevada Commission.

Certain officers, directors and key employees are required to be found suitable by the Nevada Commission and employees associated with gaming must obtain work permits which are subject to immediate suspension under certain circumstances. An application for suitability may be denied for any cause deemed reasonable by the Nevada Commission. Changes in specified key positions must be reported to the Nevada Commission. In addition to its authority to deny an application for a license, the Nevada Commission has jurisdiction to disapprove a change in position by an officer, director or key employee. The Nevada Commission has the power to require licensed gaming companies to suspend or dismiss officers, directors or other key employees and to sever relationships with other persons who refuse to file appropriate applications or whom the authorities find unsuitable to act in such capacities.


The Nevada Commission may also require anyone having a material relationship or involvement with us to be found suitable or licensed, in which case those persons are required to pay the costs and fees of the Nevada Board in connection with the investigation. We customarily reimburse such costs and fees. Any person who acquires more than 5% of any class of our voting securities must report the acquisition to the Nevada Commission. Any person who becomes a beneficial owner of more than 10% of any class of our voting securities is required to apply for a finding of suitability. Under certain circumstances, an “Institutional Investor,” as such term is defined in the regulations of the Nevada Commission, which acquires more than 10% but not more than 15% of any class of our voting securities, may apply to the Nevada Commission for a waiver of such finding of suitability requirements, provided the Institutional Investor holds the voting securities for investment purposes only. (It should be noted that in many other states the requirement of a suitability finding or of a licensure applies to any holder of 5% or more of our stock, unless the owner is eligible for and obtains an exemption.) The Nevada Commission has amended its regulations pertaining to Institutional Investors to temporarily allow an Institutional Investor to beneficially own more than 15%, but not more than 19%, if the ownership percentage results from a stock repurchase program. These Institutional Investors may not acquire any additional shares and must reduce their holdings within one year from constructive notice of exceeding 15%, or must file a suitability application. An Institutional Investor will be deemed to hold voting securities for investment purposes only if the voting securities were acquired and are held in the ordinary course of business as an Institutional Investor and not for the purpose of causing, directly or indirectly, the election of a majority of our board of directors, any change in our corporate charter, bylaws, management, policies or operations, or any of our gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding our voting securities for investment purposes only.

Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission may be found unsuitable based solely on such failure or refusal. The same restrictions apply to a record owner if the record owner, when requested, fails to identify the beneficial owner. Any security holder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a gross misdemeanor. We are subject to disciplinary action if, after we receive notice that a person is unsuitable to be a security holder or to have any other relationship with us, we: (i) pay that person any dividend or interest upon our voting securities; (ii) allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; or (iii) give remuneration in any form to that person. If a security holder is found unsuitable, then we may be found unsuitable if we fail to pursue all lawful efforts to require such unsuitable person to relinquish his or her voting securities for cash at fair market value.

The Nevada Commission may also, in its discretion, require any other holders of our equity securities or any holders of our debt securities to file applications, be investigated and be found suitable to own our debt or equity securities. The applicant security holder is required to pay all costs of such investigation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the regulations of the Nevada Commission, we may be sanctioned, including the loss of our approvals, if, without the prior approval of the Nevada Commission, we: (i) pay to the unsuitable person any dividends, interest or any distribution whatsoever; (ii) recognize any voting right by such unsuitable person in connection with such securities; (iii) pay the unsuitable person remuneration in any form; or (iv) make any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.

We are required to maintain a current stock ledger in Nevada which may be examined by the Nevada Commission at any time and to file with the Nevada Commission, at least annually, a list of our shareholders. The Nevada Commission has the power to require our stock certificates to bear a legend indicating that the securities are subject to the Nevada Act and the regulations of the Nevada Commission. However, to date, the Nevada Commission has not imposed such a requirement on us.

We may not make certain public offerings of our securities, without the prior approval of the Nevada Commission. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful.

On December 20, 2007, the Nevada Commission granted us prior approval to make public offerings for a period of two years, subject to certain conditions (the “Shelf Approval”). At this time we have applied to the Nevada Commission for a new Shelf Approval, which application we anticipate will be considered for action by the Nevada Board and the Nevada Commission on either February 3, 2010 or March 3, 2010 and February 18, 2010 or March 18, 2010, respectively.  While we know of no reason why our application for a new Shelf Approval would not be granted at that time, we cannot provide assurance that a new Shelf Approval will be granted by the Nevada Commission at that time or at all. If granted, the Shelf Approval may be rescinded for good cause without prior notice upon the issuance of an interlocutory stop order by the Chairman of the Nevada Board. The Shelf Approval if granted, will not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful.


Changes in control of us through merger, consolidation, acquisition of assets, management or consulting agreements or any form of takeover cannot occur without prior investigation by the Nevada Board and approval by the Nevada Commission. Entities seeking to acquire control of us must satisfy the Nevada Board and the Nevada Commission concerning a variety of stringent standards prior to assuming control of us. The Nevada Commission may also require controlling shareholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process of the transaction.

Approvals are required from the Nevada Commission: (i) before we can make exceptional repurchases of voting securities above the current market price and (ii) before a corporate acquisition opposed by management can be consummated.

We have formally adopted a compliance plan and appointed a compliance committee in accordance with Nevada Commission requirements. Our compliance committee meets quarterly and is responsible for implementing and monitoring our compliance with regulatory matters. This committee also reviews information and reports regarding the suitability of potential key employees or other parties who may be involved in material transactions or relationships with us.

Federal registration. As a manufacturer and distributor of gaming devices, we are registered pursuant to and have complied with the Federal Gambling Devices Act of 1962 (the “Federal Act”). In order to manufacture, sell, deliver, or operate our gaming devices, we must renew our federal registration annually and comply with its various record-keeping and equipment identification requirements. The Federal Act makes it unlawful for a person or business entity to manufacture, deliver, receive, operate, lease or sell gaming devices in interstate or foreign commerce unless that person or entity has first registered with the Attorney General of the United States. Violation of the Federal Act may result in seizure and forfeiture of the equipment, as well as other penalties.

Native American gaming regulation. Gaming on Native American lands is governed by the Federal Indian Gaming Regulatory Act of 1988 (“IGRA”) and specific tribal ordinances and regulations. Class III gaming, as defined under IGRA, also generally requires a Tribal-State Compact, which is a written agreement between a specific tribe and the respective state. This compact authorizes the type of Class III gaming activity and the standards, procedures and controls under which the Class III gaming activity must be conducted. The National Indian Gaming Commission (“NIGC”) has oversight authority over gaming on Native American lands and generally monitors tribal gaming including the establishment and enforcement of required minimum internal control standards. Each Tribe is sovereign and must have a tribal gaming commission or office established to regulate tribal gaming activity to ensure compliance with IGRA, NIGC and its Tribal-State Compact. We have complied with each of the numerous vendors licensing and specific product approval and shipping notification requirements imposed by Tribal-State Compacts and enforced by tribal and/or state gaming agencies under IGRA in the Native American lands in which we do business.

Other jurisdictions. We have obtained or are in the process of obtaining all licenses/permits required by jurisdictions having legalized gaming. In general, such requirements are similar to Nevada in that there are company approvals as well as individual licensing and product approvals.

Product approvals. Each of our products is subject to extensive testing and reviews by multiple state, jurisdictional or third party laboratories. The detail and extent of the review generally depends upon the classification of the product by the respective gaming authority as a new game, game variation, associated equipment, gaming equipment or gaming device. Associated equipment is equipment that is not classified as a gaming device or gaming equipment but due to its integral relationship to the conduct of licensed gaming, regulatory authorities have discretion to require manufacturers and distributors of such associated equipment to meet licensing or suitability requirements prior to or concurrently with the use of such equipment in the respective jurisdiction. The time required for product testing can be extensive and is subject to a wide range of formal and informal standards that can lead to great uncertainty as to the length of the regulatory approval process. Additionally, product testing is subject to changing standards, as a result of which, we may be required to upgrade or revise our products.


OTHER BUSINESS INFORMATION

Customer service. As part of our strategy to maintain and expand our market position, we have made a commitment to maintain a high level of service to our customers. We have numerous field service centers in the United States as well as at most of our foreign locations. Within our service areas, we provide regular corrective and preventative maintenance service and on-demand repair service for our leased equipment, provide service training to our customers and provide back-up units to our lessees. For casinos that purchase our products, we offer service contracts providing service benefits similar to those of leased units or parts-only warranty contracts.

Significant customer sales, foreign sales and foreign assets. For fiscal 2009, 2008 and 2007, sales to customers outside the United States accounted for approximately 50%, 53% and 55% of consolidated revenue; and no individual customer accounted for more than 10% of consolidated revenue in each of those years. As of October 31, 2009, approximately 25% of our revenues are in our EGM segment, which revenues relate primarily to outside the U.S. As of October 31, 2009, approximately 62% of our long-lived assets, including goodwill and acquired intangible assets, were outside the U.S. As of October 31, 2009 and 2008, no single customer balance exceeded 10% of our net trade accounts receivable. As of October 31, 2009, one customer exceeded 10% of our net investment in sales-type lease and notes receivable. This customer has a well-established history of payments to Shuffle Master as well as a credit rating that supports the credit line they have been extended. There was no single customer with a balance in excess of 10% of our net investment in sales-type leases and notes receivable for the year ended 2008. Additional information regarding our foreign sales and long-lived assets by geographic region is included in Note 14 in “Item 8. Financial Statements and Supplementary Data”, included in this Form 10-K

Seasonality and business fluctuations. Quarterly revenue and net income may vary based on the timing of the opening of new gaming jurisdictions, the opening or closing of casinos or the expansion or contraction of existing casinos, gaming regulatory approvals or denial of our products and corporate licenses, the introduction of new products, the seasonality of customer capital budgets, or fluctuation in general economic conditions. Historically, our operating results have been lowest in our first fiscal quarter ending January 31, primarily due to the seasonality of customer capital budgets as well as the December holiday season.

Employees. As of October 31, 2009, we had approximately 640 employees.  We are not subject to any collective bargaining agreements and we believe that our environment will continue to be union free.


ITEM 1A. RISK FACTORS
 
RISKS RELATED TO OUR BUSINESS
 
We are dependent on our intellectual property and trade secrets and we may be unable to protect our intellectual property and trade secrets from infringement, misappropriation, or claims of infringement or invalidity.

The gaming industry is characterized by the use of various forms of intellectual property to entertain. We are dependent upon patented technologies, trademarked brands and proprietary information for our business. We endeavor to protect our intellectual property rights and our products through a combination of patent, trademark, trade dress, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements.

We have numerous patents and trademarks and we utilize patent protection in the United States relating to certain existing and proposed processes and products. We cannot assure you that all of our existing patents would be found valid or enforceable or will continue to be valid or enforceable, or that any pending patent applications will be approved. Our competitors have in the past challenged, are currently challenging and may in the future challenge the validity or enforceability of certain of our patents. The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Competitors may infringe our patents and we may not have adequate resources or there may be other reasons we do not enforce our patents. Our patents may not adequately cover a competitor's products.  The future interpretation by courts of United States laws regarding the validity of patents could negatively affect the validity or enforceability of our current or future patents.

We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we generally require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that these agreements are fully enforceable or will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, it could have a material adverse effect on our business.

We rely on our trademarks, trade names, trade dress, copyrights and brand names to distinguish our products from the products of our competitors. We have registered or applied to register many of these trademarks. Our trademark applications may not be approved and/or all of the above intellectual property may not remain valid or enforceable. We may not be able to build and maintain goodwill in our trademarks or other intellectual property. We cannot assure you that any trademark, copyright, issued patent or other types of intellectual property will provide competitive advantages for us. Third parties may oppose our trademark applications or challenge our use of the trademarks. Our trademarks may become so well known by the public that their use becomes generic and they lose trademark protection. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources towards advertising and marketing new brands. Further, our competitors may infringe our trademarks or other intellectual property and we may not have adequate resources or there may be other reasons we do not enforce our trademarks or other types of intellectual property.

Because of the differences in foreign patent, trademark, trade dress, copyright and other laws concerning proprietary rights, our intellectual property frequently does not receive the same degree of protection in foreign countries as it would in the United States. Our failure to possess, obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition.

We also face the risk that it may be claimed that we have infringed, or now infringe, or could in the future infringe third parties' intellectual property rights and could be sued for the same. We have many competitors in both the United States and foreign countries, some of which have substantially greater resources and have made substantial investments in competing technologies. Some competitors have applied for and obtained and may in the future apply for and obtain, patents that may prevent, limit or otherwise interfere with our ability to make and sell our products. Any royalty, licensing or settlement agreements, if required, may not be available to us on acceptable terms or at all.

Significant litigation regarding intellectual property rights exists in our industry. We have in the past made, are currently making and may in the future make, enforcement claims against third parties and third parties have in the past made, are currently making and may in the future make, claims of infringement, invalidity or enforceability against us or against our licensees or manufacturers in connection with their use of our technology. For more information, see “Item 3. Legal Proceedings” and Note 15 in “Item 8. Financial Statements and Supplementary Data”, included in this Form 10-K.  A successful challenge to or invalidation of one of our patents or trademarks, a successful claim of infringement by a third party against us, our products, or one of our licensees in connection with the use of our technology, or an unsuccessful claim of infringement made by us against a third party or its products could adversely affect our business or cause us financial harm. We are currently in litigation over various intellectual property matters. Any claims -- whether with or without merit -- could:


·
be expensive and time consuming to defend;

·
cause one or more of our patents to be ruled or rendered unenforceable or invalid;

·
cause us to cease making, licensing or using products that incorporate the challenged intellectual property;

·
require us to redesign, reengineer or rebrand our products;

·
divert management's attention and resources;

·
require us to pay significant amounts in damages;

·
require us to enter into royalty, licensing or settlement agreements in order to obtain the right to use a necessary product, process or component;

·
limit our ability to bring new products to the market in the future; or

·
cause us by way of injunction to have to remove products on lease and/or stop selling or leasing new products.

In addition, the gaming industry is characterized by the rapid development of new technologies, which requires us to continuously introduce new products using these technologies and innovations, as well as to expand into new markets that may be created. Therefore, our success depends in part on our ability to continually adapt our products and systems to incorporate new technologies and to expand into markets that may be created by new technologies. However, to the extent technologies are protected by the intellectual property rights of others, including our competitors, we may be prevented from introducing products based on these technologies or expanding into markets created by these technologies. If the intellectual property rights of others prevent us from taking advantage of innovative technologies, our financial condition, operating results or prospects may be harmed.

The gaming industry is highly regulated and we must adhere to various regulations and maintain our licenses to continue our operations.  Failure to obtain and/or maintain our licenses could be disruptive to our business and could adversely affect our operations.

We and our products are subject to extensive regulation under federal, state, local and foreign laws, rules and regulations of the jurisdictions in which we do business and our products are used. These laws, rules and regulations generally concern the responsibility, financial stability, character and suitability of our officers, directors, major stockholders, key personnel or business partners in gaming operations, including makers of gaming equipment such as ourselves. In many jurisdictions, shareholders owning greater than 5% of our shares must be licensed under applicable gaming regulations unless they qualify for and are able to obtain an exemption or waiver from licensing in those jurisdictions. Some jurisdictions empower their regulators to investigate participation by licensees in gaming outside their jurisdiction and require access to periodic reports concerning gaming activities. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions. Licenses, approvals or findings of suitability may be revoked, suspended or conditioned. We may not be able to obtain or maintain all necessary registrations, licenses, permits or approvals. We cannot assure you that the licensing process will not result in delays or adversely affect our operations and our ability to maintain key personnel, or that complying with these regulations will not increase our costs. For a summary of gaming regulations that affect our business, see “Item 1. Business–Gaming Regulation”, included in this Form 10-K.

We will also become subject to regulation in any other jurisdiction where our customers operate in the future. To expand into any such jurisdiction, we may need to be licensed, obtain approvals of our products and/or seek licensure of our officers, directors, major stockholders, key personnel or business partners. If we fail to seek, do not receive or receive a revocation of a license in a particular jurisdiction for our games, hardware or software, we would not be able to sell or place on a leased or participation basis our products in that jurisdiction.

In addition, legislative and regulatory changes may affect demand for or place limitations on the placement of our products. Such changes could affect us in a variety of ways. Legislation or regulation may introduce limitations on our products or opportunities for the use of our products and could foster competitive games or technologies at our or our customers' expense. For example, current regulations in a number of jurisdictions where our customers operate limit the amount of space allocable to our products and substantial changes in those regulations may adversely affect demand for our products. Our business will also suffer if our products became obsolete due to changes in laws or the regulatory framework.

Legislative or regulatory changes negatively impacting the gaming industry as a whole or our customers in particular could also decrease the demand for our products. Opposition to gaming could result in restrictions or even prohibitions of gaming operations in any jurisdiction or could result in increased taxes on gaming revenues. Tax matters, including changes in state, federal or other tax legislation or assessments by tax authorities could have a negative impact on our business. A reduction in growth of the gaming industry or in the number of gaming jurisdictions or delays in the opening of new or expanded casinos could reduce demand for our products. Changes in current or future laws or regulations or future judicial intervention in any particular jurisdiction may have a material adverse effect on our existing and proposed foreign and domestic operations. Any such adverse change in the legislative or regulatory environment could have a material adverse effect on our business, results of operations or financial condition.


A continued downturn in general worldwide economic conditions or in the gaming industry or a reduction in demand for gaming may adversely affect our results of operations.  As a result, the market price of our common stock may decline.

Our business operations are affected by international, national and local economic conditions. The current recession and continued downturn in the general economy, or in a region constituting a significant source of our customers, or a reduction in demand for gaming, may harm the health of casino operators and our other customers and consequently result in fewer customers leasing or purchasing our products, which would adversely affect our results.

General worldwide economic conditions continue to be unfavorable. These conditions continue to make it difficult for our customers and us to accurately forecast and plan future business activities and they continue to cause our domestic and foreign customers to slow their spending on both our lease- and sales-based products.  We cannot predict the effect or duration of this economic slowdown or the timing or strength of a subsequent economic recovery, worldwide or in the gaming industry. If the domestic and foreign markets for our products significantly deteriorate due to these macroeconomic effects, our business, financial condition and results of operations will likely be materially and adversely affected and the market price of our common stock may decline.

The gaming industry has been notably impacted by the general economic downturn.  Additionally, due to recent disruptions in the financial markets, gaming operators have been less able to secure financing for development projects and have scaled back such projects considerably.  Clients have made significant cuts in expenditures, including layoffs of workers and management employees as well as delayed expansions or new openings.   Current economic conditions may cause both our domestic and international clients to decrease their expenditures on gaming equipment and our financial condition, results of operations and stock price may be negatively affected thereby.

Our domestic and global growth and ability to access capital markets are subject to a number of economic risks.

Financial markets in the United States, Europe and Asia continue to experience disruption, including, among other things, diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. It is possible that the disruption in financial markets will continue or even that there will be a further deterioration in financial markets and confidence in major economies.

These financial market conditions affect our business in a number of ways. The current tightening of credit in financial markets adversely affects the ability of our customers to obtain financing for purchases and operations and could result in a decrease in or cancellation of lease and sale orders for our products and services.  Current financial market conditions could also affect our ability to raise funds in the capital and bank lending markets.  Our senior secured credit facility (the “Senior Secured Credit Facility”), which consists of a $65,000 term loan (the “Term Loan”) and $100,000 revolving credit facility (the “Revolver”), both of which mature on November 30, 2011. If economic conditions do not improve by such time, we might not be able to refinance such facilities on favorable economic terms, or at all.

Risks that impact our customers may impact us.

If fewer players visit our customers' facilities, if such players have less disposable income to spend at our customers' facilities or if our customers are unable to devote resources to purchasing and leasing our products, there could be an adverse effect on our business. Such risks that affect our customers include, but are not limited to:

·
adverse economic and market conditions in gaming markets such as those being currently experienced, including recession, economic slowdown, higher interest rates, higher airfares and higher energy and gasoline prices;

·
global geopolitical events such as terrorist attacks and other acts of war or hostility;

·
natural disasters such as major fires, floods, hurricanes and earthquakes; and

·
concerns about H1N1 (Swine) virus, influenza or contagious illnesses.

Economic, political, legal and other risks associated with our international sales and operations could adversely affect our operating results.

Since we sell or lease our products worldwide, our business is subject to risks associated with doing business internationally. Our sales to customers outside the United States, primarily Canada, Europe and Australasia accounted for approximately 50% of our consolidated revenue from continuing operations for fiscal 2009. Accordingly, our future results could be harmed by a variety of factors, including:


·
changes in foreign currency exchange rates;

·
exchange controls;

·
changes in regulatory requirements, such as, without limitation, caps on the number of table games in locations such as Macau;

·
changes in a specific country's or region's political or economic conditions;

·
tariffs, other trade protection measures and import or export licensing requirements;

·
potentially negative consequences from changes in tax laws or application of such tax laws;

·
difficulty in staffing and managing widespread operations;

·
changing labor regulations;

·
requirements relating to withholding taxes on remittances and other payments by subsidiaries;

·
different regimes controlling the protection of our intellectual property and the ability for us to repossess our equipment or products in the event of a lease default;

·
restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions;

·
restrictions on our ability to repatriate dividends from our subsidiaries; and

·
the intellectual property laws in certain foreign countries provide for criminal penalties for actions that would be civil penalties in the United States and such criminal penalties may affect all of our gaming licenses.

Our international operations are affected by global economic and political conditions. Changes in economic or political conditions in any of the countries in which we operate could result in exchange rate movement, new currency or exchange controls or other restrictions being imposed on our operations.

We also have agreements with casinos in Native American jurisdictions, which may subject us to sovereign immunity risks and could subject us to additional compliance costs.

Litigation may subject us to significant legal expenses, damages and liability and is inherently unpredictable and risky.

We are currently engaged in litigation on a variety of matters, including, in particular, several suits regarding our intellectual property rights and related anti-trust and trade practice issues. For information on our current material litigation and our assessments, see “Item 3. Legal Proceedings” and Note 15 in “Item 8. Financial Statements and Supplementary Data”, included in this Form 10-K. Our assessment of each matter may change based on future unknown or unexpected events, or we may simply be wrong. Litigation requires the expenditure of significant time and resources and is inherently unpredictable and risky. We are unable at this time to estimate the likely outcome of pending litigation. An adverse judgment or injunction in any pending or future litigation could have a material impact on our business operations, intellectual property, results of operations or financial position.

Our products currently in development may not achieve commercial success and if we are unable to maintain a competitive technological position, we may suffer a material adverse effect on our business, results of operations or financial condition.

We have a number of products in various stages of development. We believe that our future success will depend in large part upon our ability to enhance our existing products and to develop, introduce and market new products and improvements to our existing products. As a result, we expect to continue to make significant investments in product development, as needed. Our development of products is dependent on factors such as reaching definitive agreements with third parties, obtaining requisite governmental approvals, having the necessary financial and other resources and the performance and financial and operational viability of various third parties.

Future technological advances in the gaming products industry may result in the availability of new products or increase the efficiency of existing products. However, we may not be able to finance capital expenditures for new technologies that are more cost-effective or create superior products.  Existing, proposed or as yet undeveloped technologies may render our current technology less profitable or less viable and we may not have available the financial and other resources to compete effectively against companies possessing such technologies.


While we are pursuing and will continue to pursue product development opportunities, we cannot assure you that such products will come to fruition or become successful. Furthermore, a number of those products are being tested and we cannot provide any definite date by which they will be commercially available. These products may not prove to be commercially viable and even if they do, we may not be able to obtain the various gaming licenses necessary to distribute them to our customers. Additionally, subsequent to the commercial introduction of such products, we may experience operational problems that could delay or defeat the ability of such products to generate revenue or operating profits. Future operational problems could increase our costs, delay our plans or adversely affect our reputation or our sales of other products which, in turn, could have a material adverse effect on our success. We cannot predict which of the many possible future products, if any, will meet evolving industry standards and consumer demands. Should we be unable to adapt to such technological changes, offer such products on a timely basis or establish or maintain a competitive position, we may suffer a material adverse effect on our business, results of operations or financial condition.

We compete in a single industry and our business may suffer if our products become obsolete or demand for them decreases, including without limitation, as a result of the downturn in the gaming industry.

We derive substantially all of our revenues from leasing, licensing, selling and other financing arrangements of products for the gaming industry. The gaming industry is currently suffering from a significant downturn, with several casinos announcing layoffs and major reductions in spending. Because of this downturn, our business may materially suffer if our products become obsolete or if use of our products decreases. Additionally, if table games are particularly affected by this market downturn, we may also materially suffer.  Our operating lease agreements with our customers are typically month-to-month and provide for termination upon 30 days' prior notice by either party.  Accordingly, consistent demand for and satisfaction with our products by our customers is critical to our financial condition and future success and problems, defects or dissatisfaction with our products could cause us to lose customers or revenues from leases with minimal notice. Additionally, our success depends on our ability to keep pace with technological advances in our industry and to adapt and improve our products in response to evolving customer needs and industry trends. If demand for our products weakens due to lack of market acceptance, technological change, competition, regulatory changes, or other factors, it could have a material adverse effect on our business, results of operations or financial condition.

Any disruption in our manufacturing processes, any significant increase in manufacturing costs or any inability to manufacture a sufficient number of our products to meet demand could adversely affect our business and operating results.

We manufacture our products at our headquarters and manufacturing facility in Las Vegas, Nevada, as well as our facility in Milperra, New South Wales, Australia. We also outsource the manufacturing of certain of our sub-assemblies in the United States, Europe and Australasia. Should any of these manufacturing processes be disrupted, we cannot provide assurance that we would be able to timely remedy such disruption. In such a case, we may be unable to produce a sufficient quantity of our products to meet the demand of our customers. In addition, manufacturing costs may increase significantly and we may not be able to successfully recover these cost increases with increased pricing to our customers. Either case could have an adverse impact on our business, results of operations or financial condition.

The products in each of our segments may experience losses due to technical difficulties or fraudulent activities.

Our success partly depends on our ability to avoid, detect, replicate and correct software and hardware errors and fraudulent manipulation of our systems. We incorporate security features into the design of our gaming products in order to prevent us or our patrons from being defrauded. To the extent any of our gaming products or software experience errors or fraudulent manipulation, our customers may replace our products and services with those of our competitors. In addition, the occurrence of errors in, or fraudulent manipulation of, our gaming products or software may give rise to claims for lost revenues and related litigation by our customers and may subject us to investigation or other action by gaming regulatory authorities, including suspension or revocation of our gaming licenses and disciplinary action, which may lead to a material adverse effect on our business, results of operations or financial condition. Further, in the event of such issues with our gaming products or software, substantial engineering and marketing resources may be diverted from other areas to rectify the problem.

We operate in a very competitive business environment and if we do no adapt our approach and our products to meet this demand, our business, results of operations or financial condition could be adversely impacted.

There is intense competition in the gaming products industry, which is characterized by dynamic customer demand and rapid technological advances. We must continually adapt our approach and our products to meet this demand and match these technological advances and if we cannot do so, our business, results of operations or financial condition may be adversely impacted. Conversely, the development of new competitive products or the enhancement of existing competitive products in any market in which we operate could have an adverse impact on our business, results of operations or financial condition.  Due to the downturn in the economy in general and particularly in the gaming industry, we may not be able to adapt to the market adequately.  If we are unable to remain dynamic in the face of changes in the market, it could have a material adverse effect on our business, results of operations or financial condition.


In general, we compete with other gaming and entertainment products for space on the casino customers’ floor, as well as for our customers' capital and operational spending. Our shufflers also compete with hand shuffling. Some of the larger gaming supply companies with whom we compete are IGT, Bally, WMS and Aristocrat. New competitors may also enter our key markets.

In the Utility segment, namely shufflers and other gaming equipment, we compete with hand shuffling and other shuffler providers. Additionally, other companies may develop, “reverse engineer,” or market shufflers and seek to develop and obtain regulatory approvals of additional shuffler products. A competitive product may gain substantial placements or cause price erosion of our shufflers in the future.  Casinos may choose to shift from automatic to hand shuffling which would cause price erosion of our shufflers. Several companies also manufacture and sell chipper products which are competitive with our Easy Chipper® product line. Competition with our i-Shoe card reading shoe is predominantly limited to Angel Co. Ltd.'s Angel Eye card reading shoe and the Bee Electronic Baccarat Dealing Shoe (U.S. Playing Card Company).

With respect to our PTG segment, in addition to companies such as IGT, Bally, Aristocrat and WMS that primarily market slot machines, we also compete with both non-proprietary table games such as blackjack and several companies which primarily develop and license proprietary table games. Some of those competitors’ widely known proprietary table game titles include Galaxy Gaming's Lucky Ladies, Emperor's Challenge, Masque Publishing's Spanish 21, DEQ Systems EZ Baccarat, Prime Table Games and Gaming Entertainment. Additionally, competition with our progressive bet system for table games is predominantly limited to DEQ Systems. Competition in this segment is particularly based on price, brand recognition, player appeal and the strength of underlying intellectual property. Smaller developers and vendors are more able to participate in developing and marketing table games, compared to other gaming products, because of the lower cost and complexity associated with the development of these products and a generally less stringent regulatory environment.  In the future, slot manufacturers, as well as table game competitors or others could market table games that might displace our products.

With our continued expansion, we have increased our ETS segment to expand our e-Table platforms. This product line has significant competition, perhaps more than our traditional Utility and PTG segment product offerings. There are numerous other companies that manufacture and/or sell e-Table games, which are similar to our Table Master, Vegas Star and Rapid Table Games. These companies include, but are not limited to, Elektroncek (also known as Interblock), Aruze, PacificNet, Novomatic, IGT and TableMAX. Our e-Tables, as well as those of other companies, also compete for casino floor space with live table games and EGMs.

Our EGM segment competes for casino floor space with products of other gaming suppliers. The international slot environment is competitive. The Australasia market reflects other worldwide markets as most of the major international manufacturers have a presence there. The major competitors in these markets are IGT, Bally, Aristocrat, WMS, Konami, Aruze and Ainsworth. In Asia, these competitors are also active along with further competition from myriad European slot manufacturers.

Finally, some of our product segments may compete against each other for space on the casino floor.

We are dependent on the success of our customers and are subject to industry fluctuations.

Our success depends on our customers leasing or buying our products to expand their existing operations, replace existing gaming products or equip a new casino. Any slowdown in the replacement cycle as a result of the current downturn in the gaming industry may negatively impact our operations.

Additionally, to the extent existing or potential customers choose to allocate capital to expenditures other than gaming products, such as real estate acquisitions, hotel furnishings, restaurants and other improvements, or generally to reduce expenditures, particularly in response to the current downturn in the gaming industry, we may suffer a material adverse effect on our business, results of operations or financial condition.

Certain market risks may affect our business, results of operations and prospects.

In the normal course of our business, we are routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest rate movements, fluctuating commodities markets, higher labor costs, increased fuel prices, collectability of receivables and recoverability of residual values on leased assets such as those in certain international markets. Further, some of our customers may experience financial difficulties, possibly as a result of the current downturn in the gaming industry, or may otherwise not pay accounts receivable when due, resulting in increased write-offs. Material losses may be incurred in these areas in the future.

We are exposed to interest rate and foreign currency risk.

The indebtedness under the Revolver and Term Loan has variable rates of interest, which exposes us to the risk of increased interest rates. As of October 31, 2009, we had approximately $93,000 of variable rate debt. Assuming a 1% change in the average interest rate as of October 31, 2009, our annual interest cost would change by approximately $930.


We are exposed to foreign currency exchange rate risk inherent in our lease and sales commitments, anticipated leases and sales, anticipated purchases of inventory in foreign jurisdictions and assets, liabilities and debt denominated in currencies other than the U.S. dollar. We transact business in numerous countries around the world in a variety of foreign currencies.  Fluctuations in the value of the Euro, the Australian dollar, the Pataca or the Rand may adversely affect our results of operations, of which the most significant to our operations for fiscal 2009 were the Australian dollar and the Euro. We expect that a significant portion of the volume of our business will continue to be denominated in foreign currency and because our financial results are reported in U.S. dollars, if we generate sales or earnings in other currencies, the translation of those results into U.S. dollars can result in a significant increase or decrease in the amount of those sales or earnings. 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.

We could face considerable business and financial risk in implementing acquisitions.

As part of our overall growth strategy, we have in the past acquired and will continue to seek to acquire, complementary products, assets and businesses. We regularly engage in discussions with respect to and investigate possible acquisitions. Future acquisitions could result (and past acquisitions have resulted) in potentially dilutive issuances of equity securities, significant expenditures of cash, the incurrence of debt and contingent liabilities and an increase in amortization expenses, which could have (and have, in the past, had) a material adverse effect upon our business, financial condition and results of operations.

The risks associated with acquisitions could have (and have, in the past, had) a material adverse effect upon our business, financial condition and results of operations. We may not be successful in consummating future acquisitions on favorable terms or at all or that any future acquisition will work out as we expect.

Our past acquisitions and any other future potential acquisitions may not produce the revenues, earnings or business synergies that we anticipate and may not perform as expected for a variety of reasons, including:

·
in the integration of the operations, financial reporting, technologies, products and personnel, including those caused by national, geographic and cultural differences;

·
risks of entering markets in which we have no or limited prior experience;

·
difficulties in the use, development or sale of intellectual property or future or present products;

·
the potential loss of employees;

·
currency fluctuations or changes in exchange rates in connection with sales to customers and the purchase of inventory in foreign currencies;

·
diversion of management's attention away from other business concerns;

·
expenses of any undisclosed or potential legal liabilities;

·
difficulties in staffing and managing worldwide operations; and

·
impairments in acquired assets.

Any one or a combination of these factors may cause our revenues or earnings to decline.

If our products contain defects, our reputation could be harmed and our operating results and financial results could be adversely affected.

Some of our products are complex and may contain undetected defects. The occurrence of defects or malfunctions in one or more of our products could result in financial losses for our customers and in turn termination of leases, cancellation of orders, product returns and diversion of our resources, and could additionally result in lost revenues, civil damages and regulatory penalties, as well as possible rescission of product approvals. Any of these occurrences could also result in the loss of or delay in market acceptance of our products and loss of placements.

We may not be able to attract, retain, or motivate the management or employees necessary to remain competitive in our industry.
 
The competition for qualified personnel in the gaming industry is intense.  Our future success depends on the retention and continued contributions of our key management, finance, marketing, development, technical and staff personnel, many of whom would be difficult or impossible to replace.  Our success is also tied to our ability to recruit additional key personnel in the future. We may not be able to retain our current personnel or recruit any additional key personnel required.  The loss of services of any of our personnel or our inability to recruit additional necessary key personnel could have a material adverse effect on our business, financial condition, results of operations and prospects.


We may be unable to adequately comply with public reporting requirements.

If we cannot maintain and execute adequate internal controls over financial reporting or implement required new or improved controls that provide reasonable assurance of the reliability of the financial reporting and preparation of our financial statements for external use, or we simply make an error in compiling our financial results, we may suffer harm to our reputation, fail to meet our public reporting requirements on a timely basis or be unable to properly report on our business and the results of our operations.  Failure to meet reporting requirements on a timely basis could cause a default under our Senior Secured Credit Facility and accordingly inhibit our ability to borrow on available credit on our Revolver.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in this Form 10-K. Additionally, the inherent limitations of internal control over financial reporting may not prevent or detect all misstatements or errors, regardless of the adequacy of those controls.
 
Our continued compliance with our financial covenants in our Senior Secured Credit Facility is subject to many factors, some of which are beyond our control and if we are unable to remain compliant under our financial covenants, our results of operations could be adversely affected by servicing costs.

If our operating results decline, we may need to seek an amendment to our existing facility or refinance the indebtedness outstanding under such facility. Depending on the debt market conditions at the time such an amendment or refinancing is necessary, it is possible that such amendment or refinancing could lead to a significant increase in debt service costs and interest expense, or result in additional restrictions being put on our operations.  In such a circumstance, if we are unable to obtain an amendment or refinancing, then we may be forced to file for bankruptcy protection or allow proceedings to take place whereby the lender’s security interests are exercised.

The restrictive covenants in our Senior Secured Credit Facility may limit our ability to finance future operations or capital needs or engage in other business activities that may be in our interest.

The agreement governing the Revolver and Term Loan imposes and the terms of any future indebtedness may impose, operating and other restrictions on us. Such restrictions will affect and in many respects limit or prohibit, among other things, our ability to take certain actions. The terms of the agreement may make it difficult to obtain financing in the future for working capital, capital expenditures, acquisitions and other purposes.  See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in this Form 10-K for further details.

See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations —Contractual Obligations and Off-Balance Sheet Arrangements” included in this Form 10-K for years beyond 2009.

Our business is subject to quarterly fluctuation.

Historically, our operating results have been lowest in our first fiscal quarter ending January 31, primarily due to the seasonality of customer capital budgets and the December holiday season. Our quarterly operating results may vary based on the timing of the opening of new gaming jurisdictions, the opening or closing of casinos, the expansion or contraction of existing casinos, approval or denial of our products and corporate licenses under gaming regulations, the introduction of new products, the mix of domestic versus international sales and the mix of lease and royalty revenue versus sales and service revenue. As a result, our operating results could be volatile, particularly on a quarterly basis.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Properties. We lease facilities in various locations throughout North America for office, research and development, warehouse and service totaling approximately 105,000 square feet to support our American operations.  Our corporate headquarters, as well as our research and development and manufacturing, are located in Las Vegas, Nevada and account for 76,000 square feet.

We lease facilities in various locations throughout Australia and New Zealand, totaling approximately 54,000 square feet for office, service and warehouse space to support our Australasia operations.  In addition, we own an approximately 59,000 square foot facility in Milperra, New South Wales, Australia that we use for research and development and manufacturing space for our e-Table and EGM products.

We lease facilities in Vienna, Austria, totaling approximately 14,000 square feet for office, warehouse and apartment rental space to support our European operations.


We lease approximately 6,000 square feet facilities in Macau, China and Singapore, China for office and warehouse space to support our Asia operations.

We lease an approximately 3,000 square feet facility in Johannesburg, South Africa for office and warehouse space to support our Africa operations.

We believe that our existing properties are suitable and adequate for our current needs and that additional facilities/space are available to us to support expansion, if required.

ITEM 3. LEGAL PROCEEDINGS
 
For information on Legal Proceedings, see Notes 15 and 16 in “Item 8. Financial Statements and Supplementary Data” included in this Form 10-K.
 
Litigation is inherently unpredictable and risky. Our current assessment of each matter may change based on future unknown or unexpected events. If any litigation were to have an adverse result that we did not expect, there could be a material impact on our results of operations or financial position. 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, except as may be required by applicable law, statute or regulation. We believe that the final disposition of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of our security holders during the fourth quarter of fiscal 2009.


PART II
(In thousands, except per share amounts)
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Stock Listing.  Our common stock is traded on The NASDAQ Stock Market under the symbol SHFL. As of January 8, 2010, we had approximately 250 shareholders of record. There are a significantly greater number of shareholders whose shares are held in street name. Based on information we collected as of January 8, 2010, we estimate that we have approximately 12,540 beneficial holders in total. The following table sets forth quarterly high and low prices for trades of our common stock during fiscal 2009 and 2008:
 
   
2009
   
2008
 
   
High
   
Low
   
High
   
Low
 
First Quarter
  $ 5.43     $ 2.50     $ 14.04     $ 7.77  
Second Quarter
    4.12       1.97       10.24       4.50  
Third Quarter
    7.63       3.72       8.38       3.93  
Fourth Quarter
    9.90       6.67       5.89       2.60  

The closing price of our common stock on January 11, 2010, was $8.68 per share.
 
Dividend Policy.  We have not paid dividends on our common stock and certain covenants in our Revolver and Term Loan restrict our ability to pay dividends or make other distributions with respect to our equity securities.
 
Transfer Agent.  Our stock transfer agent and registrar is Wells Fargo Bank Minnesota, N.A., Shareowner Services, 161 North Concord Exchange, South St. Paul, Minnesota 55075, (800) 468-9716.


Performance Graph. The following graph compares a shareholder’s cumulative total return for the last five fiscal years, assuming $100 invested at October 31, 2004, with the reinvestment of all dividends, as if such amounts had been invested in: (i) our common stock; (ii) the stocks included in the S&P Small Cap 600 Index: (iii) the stocks included in the NASDAQ Index Composite; (iv) the stocks included in the Dow Jones U.S. Gambling Index; and (v) an index of selected issuers in our industry, or Peer group, composed of IGT, Aristocrat, WMS, Bally and PGIC.
 
 
Company Name / Index
 
Investment Value as of October 31,
 
   
2004
   
2005
   
2006
   
2007
   
2008
   
2009
 
                                     
Shuffle Master, Inc.
    100.00       90.38       99.71       48.75       13.76       27.83  
S&P Smallcap 600
    100.00       115.27       133.83       149.28       100.85       106.46  
NASDAQ Composite
    100.00       107.75       122.18       146.93       86.70       104.97  
Dow Jones US Gambling
    100.00       102.41       143.34       208.84       61.50       76.61  
Peer Group
    100.00       93.94       139.17       148.80       54.08       79.78  


ITEM 6. SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA

The following summary consolidated financial data should be read in conjunction with and is qualified by reference to, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” included in this Form 10-K.  The consolidated statements of operations data for the years ended October 31, 2009, 2008, 2007, 2006 and 2005, and the consolidated balance sheet data are derived from our consolidated financial statements. The historical results are not necessarily indicative of future results.
 
   
Year Ended October 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(In thousands, except per share and unit/seat amounts)
 
                               
Summary financial statements (a):
                             
Revenue
                             
Utility
  $ 71,707     $ 80,893     $ 78,457     $ 86,792     $ 67,029  
Proprietary Table Games
    38,697       38,594       33,125       38,316       39,517  
Electronic Table Systems
    22,342       27,461       27,890       16,555       6,022  
Electronic Gaming Machines
    46,598       42,898       39,269       21,090       -  
Unallocated Corporate
    83       160       110       238       292  
                                         
Total revenue
    179,427       190,006       178,851       162,991       112,860  
Cost of revenue
    73,756       79,104       74,985       56,721       29,260  
Gross profit
    105,671       110,902       103,866       106,270       83,600  
Income (Loss)  from continuing operations
    15,459       (10,802 )     16,301       5,339       29,104  
Discontinued operations, net of tax
    -       (1 )     78       (246 )     76  
Net Income (loss)
  $ 15,459     $ (10,803 )   $ 16,379     $ 5,093     $ 29,180  
                                         
Earnings (Loss) per share - continuing operations:
                                       
Earnings (loss) per share, basic (b)
  $ 0.29     $ (0.27 )   $ 0.47     $ 0.15     $ 0.83  
Earnings (loss) per share, diluted (b)
  $ 0.29     $ (0.27 )   $ 0.46     $ 0.15     $ 0.80  
Weighted average shares, basic (b)
    53,120       40,006       34,680       34,585       34,924  
Weighted average shares, diluted (b)
    53,449       40,006       35,276       36,052       36,378  
                                         
Balance Sheet Data (end of year):
                                       
Cash, cash equivalents, and investments
  $ 7,840     $ 5,374     $ 4,392     $ 8,917     $ 34,088  
Total assets
  $ 285,469     $ 261,946     $ 359,767     $ 305,207     $ 193,117  
Total debt
  $ 93,210     $ 125,149     $ 235,011     $ 234,991     $ 165,552  
Total long-term liabilities
  $ 96,109     $ 86,428     $ 233,936     $ 164,367     $ 162,659  
Shareholders' equity
  $ 156,074     $ 102,858     $ 87,634     $ 32,549     $ 13,400  
                                         
Cash Flow Data:
                                       
Cash provided by operating activities
  $ 40,142     $ 44,018     $ 33,048     $ 34,021     $ 34,508  
Cash (used) by investing activities
  $ (9,045 )   $ (5,812 )   $ (33,119 )   $ (104,142 )   $ (6,526 )
Cash (used) provided by financing activities
  $ (30,124 )   $ (37,256 )   $ (3,513 )   $ 65,923     $ (35,027 )

(a)  In September 2007, we purchased PGIC's table games division. Effective February 1, 2006, we acquired Stargames. These acquisitions, in addition to less significant acquisitions, are included in our consolidated financial statements beginning on the effective date of the transactions.

(b)  Earnings per share and weighted average share amounts reflect the effects of our 3 for 2 common share stock splits in January 2005 as well as our equity offering in July 2008 of an additional 20,294 common shares.  For fiscal 2008, the dilution of 75 shares related to our options, restricted stock and contingent convertible notes have not been included in the diluted loss per share computation as their inclusion would be anti-dilutive.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share, unit/seat amounts and product lease/sale prices)

The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources as of October 31, 2009 and 2008 and for the fiscal years ended October 31, 2009, 2008 and 2007. This discussion should be read together with our audited consolidated financial statements and related notes included in “Item 8. Financial Statements and Supplementary Data” included in this Annual Report on Form 10-K (“Form 10-K”).  Some of the information contained in this discussion includes forward-looking statements that involve risks and uncertainties; therefore our "Special Note Regarding Forward-Looking Statements" and "Risk Factors" should be reviewed  for a discussion of important factors that could cause actual results to differ materially from the results described in, or implied by, such forward-looking statements.

OVERVIEW

We develop, manufacture and market technology and entertainment-based products for the gaming industry for placement on the casino floor. We specialize in providing casino and other gaming customers with products and services that improve their speed, profitability, productivity and security.  Our products are offered in highly regulated markets, throughout the world.   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 subassemblies in the United States, Europe and Australasia.

Our business is segregated into the following four product segments: Utility, Proprietary Table Games (“PTG”), Electronic Table Systems (“ETS”) and Electronic Gaming Machines (“EGM”). Each segment's activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of a distinct product line.

See “Item 1. Business” included in this Form 10-K for a more detailed discussion of our business, strategy and each of our four segments.

Current Economic Environment
 
The gaming industry in both the United States and abroad has been particularly affected by the downturn in general worldwide economic conditions, which continued to have negative consequences on our results in fiscal 2009 and is likely to continue to have a negative impact in fiscal 2010. The activity in the credit markets and in the broader global economy and financial markets has exacerbated these trends.  Consumer confidence has been significantly impacted, as seen in broader economic trends such as declines in auto and other retail sales, the weakness in the housing market and increased unemployment.

As a result, the outlook for the gaming, travel and entertainment industries both domestically and internationally remains highly uncertain.  Due to recent disruptions in the financial markets, gaming operators have been less able to secure financing for development projects and have scaled back such projects considerably.  Customers have made significant cuts in expenditures, including layoffs of workers and management employees as well as delayed expansions or new openings. These economic conditions may cause both our domestic and international clients to decrease their expenditures on gaming equipment and our financial condition, results of operations and stock price may be negatively affected thereby.

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 a fee to us based on a percentage of net win.  Product lease contracts typically include parts and service. 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 also offer a majority of our products for sale with an optional parts and service contract. A more detailed discussion of our revenue components and related revenue recognition policies is included under the heading “Critical Accounting Policies and Estimates” below.

The following points should be noted as they relate to our strategy to emphasize leasing over selling as this strategy can differ by segment and geography:

·
We expect to continue to increase our lease revenues in our Utility segment within the United States.  Outside of the United States, we expect to continue to realize a large proportion of our Utility revenues from sales rather than leases.  This segment has a planned replacement cycle which, under normal circumstances, will typically drive a certain level of sales activity in any one period.

·
Our lease model is strongest in our PTG segment.  While we have strong leasing in the United States, we are looking to expand our proprietary table games in other parts of the world where the current penetration of proprietary table games is lower.


·
We expect to continue to increase our lease revenues in our ETS segment within the United States.  Outside of the United States, we expect to continue to realize a large proportion of our ETS revenues from sales rather than leases.

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

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, which provides us with 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 and conversion kits which allow existing EGM terminals to be converted to other games on the PC3 and PC4 platform.

Expenses

Our direct expenses primarily include cost of products sold, depreciation of leased assets, 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 consume significant R&D efforts on the development of our newer generation shuffler products, such as the i-Deal and one2six Plus, our card recognition products, as well as other table accessories, such as the i-Shoe and i-Score. 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.  Finally, we have incurred significant R&D expense related to the operating system upgrades from the PC3 to the PC4 platforms for Vegas Star, Rapid Table Games and EGMs. We expect to continue to spend a significant portion of our annual revenue on R&D.

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.

During 2009, we undertook a cost cutting initiative to reduce our operating costs by 10% or approximately $7,000.  We exceeded this goal by reducing our SG&A expenses in excess of $12,300, excluding severance costs of $6,838 and approximately $2,300 due to foreign exchange fluctuations which may not recur in future periods.  Our infrastructure to support our growing global business is expected to remain generally consistent with our existing levels; however, our goal is to maintain the cost cutting discipline to continue to hold down costs to further improve our overall operating margins.

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 increases 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 will be 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, certain proprietary 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. This is consistent with our rollout strategy whereby we provide very favorable lease rates at the inception of a lease to entice the customer to try our new product. 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.

Our leasing strategy is primarily focused in the United States, because many foreign customers prefer to purchase rather than lease product. Lastly, our pricing strategy recognizes that our Utility products are always subject to sales activity as part of our “replacement cycle” whereby we sell our prior generation shufflers before the introduction of our next generation product.

In addition to the lease versus sell strategy, we expect to improve 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.


ACQUISITIONS AND OTHER SIGNIFICANT TRANSACTIONS

Contingent convertible senior notes.  In our third quarter ended July 31, 2008, we engaged in a multi-step refinancing (the “Refinancing”) of our 1.25% contingent convertible senior notes (the “Notes”) which included a Tender Offer whereby we repurchased $89,350 in aggregate principal amount of our Notes at 97.25% of face value. We engaged in the Refinancing because holders of our Notes had the option to require us to repurchase all or a portion of such Notes on April 15, 2009 at 100% of the principal amount of the Notes, plus accrued and unpaid interest.

On December 10, 2008, we purchased $10,000 of our outstanding Notes in a separate open market transaction at a discount.  On April 15, 2009, we purchased an additional $30,250 of our outstanding Notes at face value, representing approximately 99.97% of the aggregate principal amount of the remaining outstanding Notes, resulting in gain on early extinguishment of debt of $163.  The holders of the Notes had an option, pursuant to the terms of the Notes, to require us to purchase, on April 15, 2009, all or a portion of their Notes (the “Put Option”). All Notes validly tendered and not validly withdrawn in the Put Option were accepted for payment and purchased by us and cancelled. We made our regularly scheduled interest payment on April 15, 2009. Accordingly, there was no accrued and unpaid interest remaining through the date of purchase. After giving effect to the purchase of the tendered Notes, $8 aggregate principal amount of the Notes remained outstanding.  We redeemed these Notes pursuant to the terms of the Notes on May 29, 2009 at 100% plus accrued and unpaid interest.  In order to repurchase the Notes, we drew on our $100,000 revolving credit facility (the “Revolver”).

Progressive Gaming International Corporation/International Game Technology Transaction. In January 2009, International Game Technology (“IGT”) entered into an arrangement to acquire substantially all of the assets of Progressive Gaming International Corporation (“PGIC”).  On February 17, 2009, a number of agreements were entered into between us, PGIC and IGT.  These agreements include the Royalty Acceleration Agreement (PGIC and us), the Waiver Agreement (IGT and us) and the Binding Term Sheet (IGT and us).   In part, these agreements addressed certain commitments that were made by us and PGIC in an agreement dated September 26, 2007 to acquire all of PGIC’s Table Game Division (“TGD”) business (the “Purchase Agreement”), including certain worldwide rights and lease contracts for all of PGIC’s table game titles including Caribbean Stud and Texas Hold’ Em Bonus®, as well as the Software Distribution License Agreement (“SDLA”) which provided us a license to use/distribute certain progressive related software on games that were not purchased as part of the TGD.  The Purchase Agreement provided for, in addition to an initial up-front payment, future earn-out payments beginning in calendar 2008, including $3,500 in total non-interest bearing guaranteed minimum payments over a 4-year period, as follows: for each of 2008 and 2009, the guaranteed minimum amounts were $1,000 each year, paid quarterly; and for 2010 and 2011, $750 each year, also paid quarterly.  At the time of the acquisition, we recorded an estimated discounted liability for the minimum consideration due under the Purchase Agreement of $2,922.  Pursuant to the SDLA and as part of the TGD acquisition, we prepaid royalties of $3,000 related to the use of the Casino Jackpot System (“CJS”) and Game Manager software and related table hardware (collectively, the “GMS”).  These prepaid royalties plus an additional $1,750 were to be earned as defined in the agreement on a per progressive unit placement basis. The term of the SDLA was 5 years, with automatic renewal of 5 year increments, unless a non-renewal notice was given by either party ninety days in advance.

The Royalty Acceleration Agreement dated February 17, 2009 relieved us of all future monetary obligations related to the Purchase Agreement as well as any potential additional monies due under the SDLA in excess of the prepaid royalty previously paid.  As a condition for being relieved of any future monies due under the Purchase Agreement and the SDLA, we made a final payment of $960.  Up until February 17, 2009, we had paid PGIC approximately $951 related to minimum consideration due under the Purchase Agreement.

The Binding Term Sheet, which became effective March 6, 2009, absent any other agreement, resolved a dispute between us and IGT as to our rights in certain patents owned at one time by PGIC. This dispute involved other parties as well.  We claimed that we had certain rights in certain patents of PGIC before IGT allegedly received the patents as a result of the foreclosure of PGIC by Private Equity Management (“PEM”).  As to certain patents, IGT’s alleged ownership rights were transferred to us (the “SMI Patents”).  The Term Sheet also provided for IGT to obtain a license to the SMI Patents with certain restrictions in addition to allowing us to license certain patents from IGT which IGT allegedly acquired from PGIC through foreclosure by PEM (“PEM Patents”).  These licenses are not exclusive and are for limited use only.  The Term Sheet also waived our claims of certain rights in other patents that were once owned by PGIC.

As a result of the above agreements, we wrote-off the net book value of approximately $160 related to the covenants not to compete between us and PGIC. In addition, the prepaid royalty related to the SDLA was re-characterized as a lifetime license to be amortized over a 10-year life. The acquired SMI patents were fair valued at $520.  The remaining discounted minimum consideration due under the Purchase Agreement of approximately $2,247 was relieved resulting in a net gain on early extinguishment of $1,798.

Elixir Gaming Technologies Inc. (formerly VendingData Corporation) purchase and settlement agreement.  On March 16, 2009, we entered into an agreement with Elixir Gaming Technologies, Inc. (“Elixir Gaming”) pursuant to which Elixir Gaming sold us their intellectual property related to Elixir Gaming’s card shuffling and card deck checking equipment, including the RandomPlus® shuffler, the ShufflePro shuffler and the DeckChecker.  Also contained in the agreement is a 7-year covenants not to compete clause.  In connection with this acquisition, we also purchased Elixir Gaming’s remaining finished-goods inventory of products in this category. In addition, we also agreed with Elixir Gaming to jointly dismiss all claims with prejudice pertaining to the outstanding patent infringement litigation.  This included the release of our $3,000 cash security, plus accrued interest, that we posted in 2004 in connection with an injunction that we received at that time.


The total consideration paid to Elixir Gaming was $2,800.  Total direct acquisition costs associated with this acquisition was $148.

We expensed the fair value of the effective settlement of the lawsuit.  We determined the fair value of the effective settlement of the lawsuit by taking the difference between the fair values of each identifiable element of the transaction and the total purchase price using the residual method.  The fair value of $400 related to the effective settlement of the lawsuit was immediately charged to selling, general and administrative expenses (“SG&A”).

This transaction was accounted for as an asset purchase; no liabilities were assumed. The following table sets forth the determination of the consideration paid for the asset acquisition:

Effective settlement of lawsuit
  $ 400  
Inventory
    122  
Patents (amortized over a 3 year period to Utility segment cost of goods sold)
    850  
Covenant not to compete (amortized over a 7 year period to Utility segment SG&A)
    1,576  
Total consideration
  $ 2,948  


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. Our accounting policies are more fully described in Note 1 in “Item 8. Financial Statements and Supplementary Data”, included in this Form 10-K.  Some of our accounting policies require us to make difficult, complex and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We periodically evaluate our policies, estimates and related assumptions and base our estimates on historical experience, current trends and expectations of the future. We considered the following critical accounting policies to be the most important to understanding and evaluating our financial results and require the most subjective and complex judgments made by management. We have discussed the development, selection and disclosure of our critical accounting policies and estimates with the Audit Committee of our Board of Directors. Actual results may differ from our estimates under different conditions and assumptions.

Revenue recognition. We recognize revenue when the following criteria are met:

·
persuasive evidence of an arrangement between us and our customer exists;

·
shipment has occurred or services have been rendered;

·
the price is fixed or determinable; and

·
collectability is reasonably assured and/or probable.

We earn our revenue in a variety of ways. We offer our products for lease or sale as well as sell service and warranty contracts for our sold equipment.

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.

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. 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. 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.

Certain of our products contain software and when leasing or selling software we consider whether the software component is incidental to the product as a whole based on the following criteria:


·
Whether the software is a significant focus of the marketing effort or is sold separately.

·
Whether post-contract customer support or PCS (PCS includes the right to receive services or unspecified upgrades/enhancements, or both, offered to users or resellers) is provided.

·
Whether the development and production costs of the software as a component of the cost of the product is incidental.

·
Whether an agreement includes service elements (other than PCS related services), such as training or installation and whether such services are essential to the functionality of the software or whether such software is considered “off-the-shelf” (off-the-shelf software is software that is marketed as a stock item that can be used by customers with little or no customization). Conversely, “core software” requires significant customization of the software in order for the software to be used by the end customer.

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. If an arrangement requires the delivery or performance of multiple elements, we divide deliverables into separate units of accounting if:

·
The delivered items have value to the customer on a stand alone basis;

·
we have objective and reliable evidence of the fair value of the undelivered items; and

·
delivery of any undelivered item is considered probable and substantially in our control.

If these criteria are not met, we do not recognize revenue until all essential elements have been delivered. If the installation of the product is not considered inconsequential and perfunctory, then we defer revenue recognition until installation is complete.

The subjective and complex judgments for revenue recognition typically involve whether collectability is probable, whether fees under an arrangement are fixed or determinable and the identification of specific deliverables under multiple element arrangements. In addition, multiple element arrangements must be analyzed to determine the relative fair value of each element, the amount of revenue to be recognized and the period and conditions under which deferred revenue should be recognized. The ability to establish vendor specific objective evidence of fair value for our products and services also requires judgment by management.

Goodwill and other indefinite lived intangible assets. We review our goodwill for impairment annually in October or when circumstances indicate that the carrying amount of goodwill may not be fully recoverable.  The review is performed at the reporting unit level, which we have determined is the equivalent to our reportable segments. The goodwill impairment test is a two-part test.  In the first step, we selected a discounted cash flow model (income approach) and the Guideline Public Company Model (market approach) to assess the fair values of our reporting units.  These two methodologies were weighted in determining fair values.  The fair value of the reporting unit is then compared to the book value of the reporting unit, including its goodwill. If the fair value is less than the book value, then we would perform a second step to compare the implied fair value of the reporting unit's goodwill to its book value. The implied fair value of the goodwill is determined based on the estimated fair value of the reporting unit less the fair value of the reporting unit's identifiable assets and liabilities. We would record an impairment charge to the extent that the book value of the reporting unit's goodwill exceeds its fair value.

Our income approach analysis is based on the present value of two components: the sum of our three-year projected cash flows and a terminal value assuming a long-term growth rate. The cash flow estimates are prepared based on our business plans for each reporting unit, considering historical results and anticipated future performance based on our expectations regarding product introductions and market opportunities. The discount rates used to determine the present value of future cash flows were derived from the weighted average cost of capital of a group of comparable companies with consideration for the size and specific risks of each our reporting units. The discount rates used for each reporting unit were 13% for our fiscal 2009 test and 16% for our fiscal 2008 test.

As of October 31, 2009 and 2008, our goodwill totaled $74,662 and $60,929, respectively. Our fiscal 2009 annual goodwill impairment test indicated the fair value of each reporting unit was in excess of its carrying value. Inherent in such fair value determinations are significant judgments and estimates, including assumptions about our future revenues, profitability, cash flows and long-term growth rates, as well as our operational plans and our ability to execute such plans and our interpretation of current economic indicators and market valuations.

If our assumptions do not prove correct or economic conditions affecting future operations change, our goodwill could become impaired and result in a material adverse effect on our results of operations and financial position. To illustrate the sensitivity of the fair value calculations on our goodwill impairment test, if the discount rates used for the 2009 analysis increased to 15% for each reporting unit (all other assumptions held constant), the fair value of each reporting unit would still be in excess of their carrying value by at least 50%.


For fiscal 2009, 2008 and 2007, we recorded an impairment charge of $0, $22,137 and $0, respectively.

We review our indefinite lived intangible assets (“tradenames”) for impairment annually in October or when circumstances indicate that the carrying amount of the tradename may not be fully recoverable. We would record an impairment loss if the carrying amount of the indefinite lived intangible asset is not recoverable and the carrying amount exceeds its estimated fair value.

In October 2009, we performed our annual indefinite lived intangible asset impairment analysis for our Stargames and CARD tradenames, which is discussed in Note 6, by comparing the discounted, estimated future cash flows using the income approach as compared to the carrying value of the tradenames and determined that no impairment was indicated.

Other intangible assets. Other intangible assets include intellectual property for games, patents, trademarks, copyrights, licenses, developed technology, customer relationships and non-compete agreements that were purchased separately or acquired in connection with a business combination. All of our significant intangible assets are definite lived and, accordingly, amortized over their expected useful lives which range from 1 to 15 years. We amortize certain of our intangible assets proportionate to the ratio of actual revenue to total actual plus expected revenue from the utilization of the intangible asset. We believe this method reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. For certain other intangibles, such as covenants not to compete, we amortize on a straight-line basis over their useful lives.

Impairment of long-lived assets. We estimate the useful lives of our long-lived assets, excluding goodwill and indefinite lived intangible assets, based on historical experience, estimates of products' commercial lives, the likelihood of technological obsolescence and estimates of the duration of commercial viability for patents, licenses and games.

We review our long-lived assets, excluding goodwill and indefinite lived intangible assets, for impairment whenever events or circumstances indicate the carrying value may not be recoverable or warrant a revision to the estimated remaining useful life.  We would record an impairment loss if the carrying amount of the asset or asset group is not recoverable (as determined by undiscounted cash flows) and the carrying amount exceeds its estimated fair value.  For fiscal 2009, 2008 and 2007 we did not have any such impairment loss.

Inventories.  Inventories are stated at the lower of cost, determined on a first-in-first-out basis, or market.  Cost elements included in work-in-process and finished goods include raw materials, direct labor and manufacturing overhead. We regularly review inventory quantities and update estimates for the net realizable value of inventories. This process includes examining the carrying values of new and used gaming devices, parts and ancillary equipment in comparison to the current fair market values for such equipment (less costs to sell or dispose). Some of the factors involved in this analysis include the overall levels of our inventories, the current and projected sales levels for such products, the projected markets for such products, the costs required to sell the products, including refurbishment costs and importation costs for international shipments and the overall projected demand for products once the next generation of products are scheduled for release.
 
As a result of our ongoing analysis of inventory, we recognized inventory write-downs of $1,523, $72 and $1,415 for fiscal years 2009, 2008 and 2007, respectively.  Additional valuation charges could occur in the future as a result of changes in the factors listed above.

Provisions for bad debts. We maintain provisions for bad debts for estimated credit losses that result from the inability of our customers to make required payments. Provisions for bad debts are estimated based on historical experience and specific customer collection issues. Changes in the financial condition of our customers could result in the adjustment upward or downward in the provisions for bad debts, with a corresponding impact to our operating results.

Income taxes. We recognize deferred tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. The standard requires recognition of a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied. Except for certain foreign net operating losses, we believe that it is more likely than not that our deferred tax assets are fully realizable because of the future reversal of existing taxable temporary differences and future projected taxable income.

In November 2007, we adopted new accounting guidance related to the accounting for uncertainty in income taxes which required the recognition of uncertain tax positions taken or expected to be taken in a tax return, when it is “more likely than not” to be sustained upon examination. This assessment further presumes that tax authorities evaluate the technical merits of transactions individually with full knowledge of all facts and circumstances surrounding the issue.  See Note 13 for additional information.

Share based compensation.  We measure and recognize all share-based compensation, including shares and share-based awards to employees, under the fair value method.  We measure the fair value of share-based awards using the Black-Scholes model.


Compensation is attributed to the periods of associated service and such expense is recognized on a straight-line basis over the vesting period of the awards. Forfeitures are estimated at the time of grant, with such estimate updated when the expected forfeiture rate changes.

In addition, the excess tax benefit from stock-option exercises—tax deductions in excess of compensation cost recognized—is classified as a financing activity.

Contingencies. We assess our exposures to loss contingencies including legal and income tax matters and provide for an exposure if it is judged to be probable and reasonably estimable. If the actual loss from a contingency differs from our estimate, there could be a material impact on our results of operations or financial position. Operating expenses, including legal fees, associated with contingencies are expensed when incurred.

RECENTLY ISSUED ACCOUNTING STANDARDS

In October 2009, the FASB issued two Accounting Standards Updates (“ASU”) providing new revenue recognition guidance with respect to revenue arrangements that include software elements and multiple deliverables. Under the new guidance, tangible products, containing both software and nonsoftware components that function together to deliver a tangible product’s essential functionality, will not be subject to software revenue accounting. This new guidance also establishes a new hierarchy for allocating revenues among multiple deliverables in a multi-element arrangement. In order of preference, revenues will be allocated based on VSOE, third-party evidence, or estimated selling price. Additional disclosures will be required to describe the effects of adoption, including changes in how arrangement consideration is allocated or in the pattern and timing of revenue recognition. This new guidance is effective for fiscal years beginning on or after June 15, 2010, and we have elected to early adopt prospectively for new or materially modified arrangements entered into on or after the beginning of our fiscal 2010. We continue to evaluate the extent to which this new guidance will impact the timing of our revenues and expect many of the Company’s products, such as those in our ETS and EGM segments, will no longer be accounted for as software, allowing for revenue recognition earlier in certain bundled arrangements.

In June 2009, the FASB issued an authoritative guidance for the FASB accounting standards codification and hierarchy of generally accepted accounting principles. The guidance establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. The guidance is effective for interim and annual periods ending after September 15, 2009. The adoption of the guidance did not have a material impact on our consolidated financial statements.

In May 2009, the FASB issued an authoritative guidance for subsequent events, which is effective for interim and annual financial statements ending after June 15, 2009. The guidance establishes general standards of accounting for and disclosure of subsequent events that occur after the balance sheet date. Entities are also required to disclose the date through which subsequent events have been evaluated and the basis for that date. The adoption of the guidance did not have a material impact on our consolidated financial statements. The Company has evaluated subsequent events through the date of issuance, January 14, 2010. See Note 16 for more information.


The following table presents our various items of revenue and expense as a percentage of total revenue:

CONSOLIDATED STATEMENTS OF OPERATION

   
Year Ended October 31,
 
   
2009
   
2008
   
2007
 
   
(In thousands)
 
Revenue:
                                   
Utility
  $ 71,707       40.0 %   $ 80,893       42.5 %   $ 78,457       43.9 %
Proprietary Table Games
    38,697       21.6 %     38,594       20.3 %     33,125       18.5 %
Electronic Table Systems
    22,342       12.4 %     27,461       14.5 %     27,890       15.5 %
Electronic Gaming Machines
    46,598       26.0 %     42,898       22.6 %     39,269       22.0 %
Other
    83       0.0 %     160       0.1 %     110       0.1 %
                                                 
Total revenue
    179,427       100.0 %     190,006       100.0 %     178,851       100.0 %
Cost of revenue
    73,756       41.1 %     79,104       41.6 %     74,985       41.9 %
                                                 
Gross profit
    105,671       58.9 %     110,902       58.4 %     103,866       58.1 %
Selling, general and administrative
    63,647       35.5 %     71,350       37.6 %     61,947       34.6 %
Research and development
    17,349       9.7 %     18,474       9.7 %     17,337       9.7 %
Impairment of goodwill
    -       0.0 %     22,137       11.7 %     -       0.0 %
                                                 
Income (Loss) from operations
    24,675       13.7 %     (1,059 )     (0.6 %)     24,582       13.8 %
Other income (expense):
                                               
Interest income
    860       0.5 %     1,759       0.9 %     1,644       0.9 %
Interest expense
    (5,401 )     (3.0 %)     (6,630 )     (3.5 %)     (7,487 )     (4.2 %)
Other, net
    731       0.4 %     1,261       0.7 %     (4,131 )     (2.3 %)
Total other income (expense)
    (3,810 )     (2.1 %)     (3,610 )     (1.9 %)     (9,974 )     (5.6 %)
Gain on early extinguishment of debt
    1,961       1.1 %     1,773       0.9 %     -       0.0 %
Impairment of investments
    -       0.0 %     (1,560 )     (0.8 %)     -       0.0 %
Equity method investment loss
    -       0.0 %     -       0.0 %     (306 )     (0.2 %)
                                                 
Income (Loss) from continuing operations before tax
    22,826       12.7 %     (4,456 )     (2.4 %)     14,302       8.0 %
Income tax (benefit) provision
    7,367       4.1 %     6,346       3.3 %     (1,999 )     (1.1 %)
                                                 
Income (Loss) from continuing operations
    15,459       8.6 %     (10,802 )     (5.7 %)     16,301       9.1 %
Discontinued operations, net of tax
    -       0.0 %     (1 )     (0.0 %)     78       0.0 %
Net income (loss)
  $ 15,459       8.6 %   $ (10,803 )     (5.7 %)   $ 16,379       9.1 %


The following table provides additional information regarding our revenue, gross profit and gross margin:

REVENUE AND GROSS MARGIN

   
Year Ended October 31,
   
Percentage Change
 
   
2009
   
2008
   
2007
   
09 vs. 08
   
08 vs. 07
 
   
(In thousands)
             
Revenue:
                             
Leases and royalties
  $ 76,258     $ 70,898     $ 56,426       7.6 %     25.6 %
Sales and service
    103,113       118,948       122,315       (13.3 %)     (2.8 %)
Other
    56       160       110       (65.0 %)     45.5 %
                                         
Total
  $ 179,427     $ 190,006     $ 178,851       (5.6 %)     6.2 %
                                         
Cost of revenue:
                                       
Leases and royalties
  $ 24,559     $ 21,866     $ 17,221       12.3 %     27.0 %
Sales and service
    49,197       57,238       57,764       (14.0 %)     (0.9 %)
                                         
Total
  $ 73,756     $ 79,104     $ 74,985       (6.8 %)     5.5 %
                                         
Gross profit:
                                       
Leases and royalties
  $ 51,699     $ 49,032     $ 39,205       5.4 %     25.1 %
Sales and service
    53,916       61,710       64,551       (12.6 %)     (4.4 %)
Other
    56       160       110       (65.0 %)     45.5 %
                                         
 Total
  $ 105,671     $ 110,902     $ 103,866       (4.7 %)     6.8 %
                                         
Gross margin:
                                       
Leases and royalties
    67.8 %     69.2 %     69.5 %                
Sales and service
    52.3 %     51.9 %     52.8 %                
Total
    58.9 %     58.4 %     58.1 %                

RESULTS OF OPERATIONS

Fiscal 2009 compared to Fiscal 2008

Revenue

Our revenue in fiscal 2009 decreased $10,579 over fiscal 2008, primarily due to the following:

·      Impact of foreign currency fluctuations
 
o
The strengthening of the U.S. dollar of 10.0% and 15.0%, respectively, to the Euro and the Australian dollar, resulted in a reduction in revenues of $10,135.  These decreases primarily impacted sales and service revenues in our EGM, ETS and Utility segments

·      Reduction in our sales and service revenues
 
o
A decrease of approximately 21.8% in the Utility segment primarily representing a reduction in sales in the European market. The European market has experienced credit market deterioration, smoking bans and the dissolution of the Russian gaming market due to regulatory changes
 
o
A decrease of approximately 42.2% in the ETS segment due to declines in sales of our Vegas Star and Rapid Table Games products in Australia and our Table Master products in the United States

The decreases were offset by the following increases:

·      Increases in our lease and royalty revenue
 
o
The ETS segment provided the largest increase at 28.8% due to increased Table Master seats on lease
 
o
The Utility segment demonstrated an 8.2% increase due to placements of our i-Deal shuffler
 
o
The PTG segment increased 1.2% due to growth in our Ultimate Texas Hold’em® premium title and Fortune Pai Gow Poker Progressive

·      EGM sales revenue
 
o
A  7.8% increase in revenue driven primarily by the strength of our newer titles and the success of our progressive links, Pink Panther and Grand Central


Gross margin

Our gross margin in fiscal 2009 increased 50 basis points ("bps") bps to 58.9% from fiscal 2008, reflecting the following:

·      Mix of revenue
 
o
A proportionate increase in lease and royalty revenue which generates higher gross margins than sales and service revenue primarily driven by increased placements and average lease prices
 
o
Increased average sales prices, primarily in our Utility segment and EGM segment, on a local currency basis

Offsetting these increases were the following decreases:

·      Impact of foreign currency fluctuations
 
o
The strength of the U.S. dollar negatively impacted margins by 3.1%

·
Write-down for inventory obsolescence
 
o
A decrease in gross margin of approximately 0.8% related to lower of cost or market adjustments primarily on older generation products.  These were mostly in the Utility and ETS Segments.

Fiscal 2008 compared to Fiscal 2007

Revenue

Our revenue in fiscal 2008 increased $11,155 over fiscal 2007, primarily due to the following:

·
Impact of foreign currency fluctuations
 
o
The weakening of the U.S. dollar of 12.1% and 8.1%, respectively, to the Euro and the Australian dollar, resulted in an increase in revenues of $6,018.  These increases occurred primarily in sales and service revenues in our EGM, Utility and ETS segments

·
Increases in lease revenues
 
o
Increases in our PTG revenue generating lease base resulted in a 29.5% increase in PTG royalties. This increase was due in part to the approximate 600 unit installed base that we acquired in connection with the purchase of PGIC’s TGD business
 
o
ETS lease revenue grew 60.1% and Utility lease revenue grew 13.8% due to increases in placements as well as increases in our average monthly lease prices

·
Mix of revenue
 
o
Sales of our EGMs and the associated parts and peripherals increased 9.3% due to the strength of our newer game titles which led to increased average sales prices

The increases were slightly offset by the following decrease:

·
Reduction in sales
 
o
Consistent with our lease strategy, a concerted effort to reduce sales in our Utility, PTG and ETS segments

Gross margin

Our gross margin in fiscal 2008 increased 30 bps to 58.4% from fiscal 2007, reflecting the following:

·
Mix of revenue
 
o
A proportionate increase in lease and royalty revenue which generates higher gross margins than sales and service revenue primarily driven by increased placements and higher average lease prices

This increase was offset by the following:
 
·  
Introductory pricing on our i-Deal shuffler

·  
An increase in non-cash amortization related to the acquisition of the PGIC TGD in late fiscal 2007 and other product-related intangibles of Stargames and CARD, which increased over the prior-year period


The following table provides additional information regarding our operating expenses:

OPERATING EXPENSES

   
Year Ended October 31,
   
Percentage Change
 
   
2009
   
2008
   
2007
   
09 vs. 08
   
08 vs. 07
 
   
(In thousands)
             
                               
Selling, general and administrative
  $ 63,647     $ 71,350     $ 61,947       (10.8 %)     15.2 %
Percentage of revenue
    35.5 %     37.6 %     34.6 %                
                                         
Research and development
  $ 17,349     $ 18,474     $ 17,337       (6.1 %)     6.6 %
Percentage of revenue
    9.7 %     9.7 %     9.7 %                
                                         
Impairment of goodwill
  $ -     $ 22,137       -       (100.0 %)     100.0 %
Percentage of revenue
    0.0 %     11.7 %     0.0 %                
                                         
                                         
Total operating expenses
  $ 80,996     $ 111,961     $ 79,284       (27.7 %)     41.2 %
Percentage of revenue
    45.1 %     58.9 %     44.3 %                

Fiscal 2009 compared to Fiscal 2008

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

SG&A decreased $7,703 in fiscal 2009 as compared to fiscal 2008.  This decrease primarily reflects the following:

·      Impact of foreign currency fluctuations
 
o
Net decreases of approximately $2,262 at our foreign subsidiaries due to the strengthening of the U.S. dollar

·      Salaries, benefits and consultants
 
o
Decreased costs of approximately $9,521, excluding cash salary and related benefits severance costs, due to cost rationalization efforts
 
o
Severance costs of $6,838, which primarily related to the retirement of our former CEO and the departure of several senior executives.  The $6,838 of severance costs were primarily comprised of $3,628 of accelerated stock compensation expense and $3,210 of cash salary and related benefits

·      Professional fees
 
o
Decreased legal expenses of $2,214, excluding the effect of the Elixir item discussed below.  Corporate legal expense decreased as a result of lower legal expenses incurred on our shareholder derivative and VendingData II lawsuits, settlement of prior cases, which primarily included MP Games LLC, and decreased costs related to other general corporate matters
 
o
Decreased costs of approximately $1,500 for professional fees, primarily related to reductions in accounting and other professional fees
 
o
Legal charge of $400 related to the Elixir purchase and settlement agreement, which approximates the fair value of the effective settlement related to the previous lawsuit between us and Elixir

Research & development (“R&D”) expenses

R&D expense decreased $1,125 in fiscal 2009 as compared to fiscal 2008.  This decrease primarily reflects:

·
Impact of foreign currency fluctuations
 
o
Net decreases of approximately $1,114 at our foreign subsidiaries due to the strengthening of the U.S. dollars

The following projects have been the focus of our R&D efforts during fiscal 2009:

·
Utility
 
o
Expenses primarily related to finalizing the mechanical, hardware and software development of the i-Shoe Auto featuring optical card recognition and an auto-card feeding mechanism, finalizing hardware and software for the one2six Plus continuous shuffler featuring optical card recognition and developing and improving other Utility products, including developing generic card recognition technology to replace card libraries.  Additional R&D efforts were focused on developing the i-Score Baccarat display system, including new computer hardware


·
PTG
 
o
Expenses primarily related to development of implementing progressives onto existing proprietary games as well as developing or licensing a large variety of new games including Dealer Bluff Six Card Poker
 
o
Additional R&D efforts were spent on developing the Video Progressive Display System (“ViPS”) to support our PTG progressive products

·
ETS
 
o
Expenses primarily related to the final development of the i-Table, our first product that benefited from an emphasis on “globalizing” our research and development by combining resources from our Utility, PTG and ETS segments and utilizing product knowledge from both our U.S. operations as well as our operations in Australia
 
o
Additional R&D efforts were spent on creating and implementing new game content for our Table Master, Vegas Star and Rapid Table Games

·
EGM
 
o
Expenses primarily related to development of new game titles and themes. This was in conjunction with the continued commercialization of existing linked jackpot products, “Pink Panther” and “Grand Central”

Fiscal 2008 compared to Fiscal 2007

SG&A expenses

SG&A increased $9,403 in fiscal 2008 as compared to fiscal 2007.  The increase in SG&A expenses primarily reflects the following:

·
Salaries, benefits and consultants
 
o
Personnel costs increased $6,545, due to staffing our newly established corporate division, adding to the sales and service staff in our Shuffle Master Americas division and expanding into new territories, including South Africa
 
o
Severance costs of approximately $1,023 associated with the departure of a senior executive at our corporate office, in addition to other subsidiary senior management

·
Facility
 
o
Additional costs of $2,413 associated with increased facilities and office-related expenses for our Shuffle Master Asia division

·
Impact of foreign currency fluctuation
 
o
Net increases of approximately $1,978 at our foreign subsidiaries due to the weakening of the U.S. dollar

·
Other
 
o
A write-off of prepaid licensing costs of $1,124, in fiscal 2008 associated with the abandonment of a project

These increases were offset by the following:

·
Total SG&A expenses were offset by a gain of $738 recognized on the sale of our fractional ownership in a Net Jets, Inc. (“Net Jets”) corporate airplane. Effective February 27, 2008, we sold our interest in the airplane. This sale, carried out as part of our strategic initiative to monetize certain non-core assets, resulted in proceeds of approximately $1,309

·
Professional fees
 
o
Corporate legal expense marginally decreased $154, or 2.6%, in fiscal 2008 as compared to fiscal 2007.  Corporate legal expense decreased as a result of lower legal expenses incurred on our pending cases, which primarily included VendingData II and Awada, as well as settlement of prior cases in fiscal 2008, which primarily included MP Games LLC

R&D expenses

R&D expense increased $1,137 in fiscal 2008 as compared to fiscal 2007. The increase is due to the following:

·
Corporate Products Group (“CPG”) was formed in the fourth quarter 2007 and is responsible for overseeing the creation and development of our existing and future product lines as well as overseeing our global products R&D. In fiscal 2008, approximately $1,266 was expended by the newly formed CPG as compared to $233, in fiscal 2007, primarily for general operational purposes

·
Impact of foreign currency fluctuation
 
o
Net increases of approximately $566 at our foreign subsidiaries due to the weakening of the U.S. dollar


The following projects were the focus of our R&D efforts in fiscal 2008:
 
·
Utility
 
o
Expenses primarily related to the development of the i-Deal shuffler and the development of the i-Shoe Auto featuring optical card recognition and an auto-card feeding mechanism
 
o
Expenses related to value engineering of the one2six and future Utility product offerings

·
PTG
 
o
Expenses primarily related to development of content for our progressives for placement onto existing proprietary games such as Fortune Pai Gow Poker Progressive and Three Card Poker Progressive

·
ETS
 
o
Expenses primarily related to the development of Vegas Star Craps, a fully electronic craps game with touch screen roll-of-the-dice capability
 
o
Additional R&D efforts were spent on creating and implementing new video dealers for our Table Master platform

·
EGM
 
o
Expenses primarily related to the continued development of our PC4 platform and development of new game titles and themes
 
o
Additional R&D efforts were focused on continued commercialization of existing linked jackpot products, “Pink Panther” and “Grand Central”

Impairment of goodwill

In October 2008, we performed our annual goodwill impairment analysis.  The goodwill impairment test is a two-part test.  We selected a discounted cash flows model (income approach) and the Guideline Public Company Model (market approach) to assess the fair values of our reporting units.  These two methodologies were weighted in determining a fair value.  Step one of the impairment test compares the fair values of each of our reporting units to their carrying value.  If the fair value is less than the carrying value for any of our reporting units, step two must be completed.  Based on the step one analysis performed, we concluded the fair value was less than the net carrying value of the assets assigned to our ETS reporting unit.  As such, step two of the goodwill impairment test was performed.  Step two required that we allocate the fair value of the ETS segment to all of the assets and liabilities, as if the segment was acquired in a business combination.  The goodwill calculated in step two is then compared to the recorded goodwill, with an impairment charge recorded in the amount that the book value of goodwill exceeds the amount calculated in this step.  Based on the step two analysis performed, we concluded that the goodwill assigned to our ETS segment was impaired as of October 31, 2008.  As such, we recorded an impairment charge related to the goodwill assigned to the ETS segment of $22,137 on our consolidated statements of operation in “Item 8. Financial Statements and Supplementary Data” included in the Annual Report on Form 10-K for fiscal 2008.  No tax benefit is associated with this impairment charge. There was no such charge recorded in fiscal 2009 or 2007.


DEPRECIATION AND AMORTIZATION EXPENSES

   
Year Ended October 31,
   
Percentage Change
 
   
2009
   
2008
   
2007
   
09 vs. 08
   
08 vs. 07
 
   
(In thousands)
             
Gross margin:
                             
Depreciation
  $ 7,312     $ 5,929     $ 5,266       23.3 %     12.6 %
Amortization
    10,481       12,037       9,725       (12.9 %)     23.8 %
Total
    17,793       17,966       14,991       (1.0 %)     19.8 %
                                         
Operating expenses:
                                       
Depreciation
    2,632       2,780       2,833       (5.3 %)     (1.9 %)
Amortization
    3,090       2,694       1,597       14.7 %     68.7 %
Total
    5,722       5,474       4,430       4.5 %     23.6 %
                                         
Total:
                                       
Depreciation
    9,944       8,709       8,099       14.2 %     7.5 %
Amortization
    13,571       14,731       11,322       (7.9 %)     30.1 %
Total
  $ 23,515     $ 23,440     $ 19,421       0.3 %     20.7 %

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, acquired developed technology and customer relationships.

Fiscal 2009 compared to Fiscal 2008

Depreciation and amortization included in gross margin decreased 100 bps in fiscal 2009 as compared to fiscal 2008.  Increased depreciation in gross margin is attributable to increases in leased assets.  Decreased amortization in gross margin is due to the strengthening of the U.S. dollar related to amortization at our foreign subsidiaries.  Depreciation and amortization included in operating expenses increased 4.5% in fiscal 2009 as compared to fiscal 2008. The increase relates primarily to amortization of the covenant not to compete acquired as part of the Elixir Purchase and Settlement Agreement entered into during our second quarter ended April 30, 2009, as well as additions of property, plant and equipment in the normal course of business.

Fiscal 2008 compared to Fiscal 2007

Depreciation and amortization included in gross margin increased 1,980 bps in fiscal 2008 as compared to fiscal 2007.  Increased depreciation in gross margin is attributable to increases in leased assets consistent with our lease strategy.  Increased amortization in gross margin relates to previously acquired intangible assets, including 12 months of amortization related to product specific intangible assets acquired in our PGIC TGD.  Depreciation and amortization included in operating expenses increased 23.6% in fiscal 2008 as compared to fiscal 2007. This increase is attributable to amortization of customer relationships and covenant not to compete related to the PGIC TGD acquisition in the fourth quarter of fiscal 2007.


The following table provides additional information regarding our non-operating expenses:

NON-OPERATING EXPENSES

Other income (expense), gain on early extinguishment of debt, net and impairment of investment

   
Year Ended October 31,
   
Percentage Change
 
   
2009
   
2008
   
2007
   
09 vs. 08
   
08 vs. 07
 
   
(In thousands)
             
Other income (expense)
                             
Interest income
  $ 860     $ 1,759     $ 1,644       (51.1 %)     7.0 %
Interest expense
    (5,401 )     (6,630 )     (7,487 )     18.5 %     11.4 %
Other, net
    731       1,261       (4,131 )     (42.0 %)     130.5 %
Total other income (expense)
  $ (3,810 )   $ (3,610 )   $ (9,974 )     (5.5 %)     63.8 %
                                         
Gain on early extinguishment of debt, net
  $ 1,961     $ 1,773     $ -       10.6 %     100.0 %
                                         
Impairment of investment
  $ -     $ (1,560 )   $ -       100.0 %     (100.0 %)

Fiscal 2009 compared to Fiscal 2008

Total other income (expense) increased $200, or 5.5% in fiscal 2009 as compared to fiscal 2008, primarily due to the following:

·
A decrease in interest expense of $1,229 in fiscal 2009 as compared to fiscal 2008, due to a decrease in total outstanding debt balance and reduced effective interest rates

·
Net foreign currency gains of $825 in fiscal 2009 as compared to net foreign currency gains of $3,356 in fiscal 2008.  This year over year change was caused by foreign currency fluctuations, primarily between the U.S. dollar, the Australian dollar and the Euro during fiscal 2009.  Our foreign subsidiaries engage in activities with us and certain customers in U.S. dollar and other foreign denominated contracts. As of our third quarter of fiscal 2008, we made the decision to begin settling all inter-company trade balances, which has resulted in the recognition of additional foreign currency fluctuations in our consolidated statement of operations

·
Partially offset by a reduction in interest income of $899, in fiscal 2009 as compared to fiscal 2008, due to 50.8% reduction in the total amount of our investment in sales-type leases and notes receivable

Gain on early extinguishment of debt, net relates to the following:

·
Gain on early extinguishment of debt, net of $1,961 and $1,773, respectively, relate to the following:
 
o
Fiscal 2009 includes approximately $1,800 related to the PGIC / IGT agreements entered into in January 2009.  See Acquisitions and Other Significant Transactions for more information
 
o
Fiscal 2008 includes a net gain realized from the early extinguishment of our Notes
 
Fiscal 2008 compared to Fiscal 2007

Total other income (expense) decreased $6,364, or 63.8%, in fiscal 2008 as compared to fiscal 2007, primarily due to the following:

 
·
Net foreign currency gains of $3,356 in fiscal 2008 as compared to net foreign currency losses of $1,336 in fiscal 2007.  This year over year change was caused by foreign currency fluctuations, primarily between the U.S. dollar, the Australian dollar and the Euro during fiscal 2009.  Our foreign subsidiaries engage in activities with us and certain customers in U.S. dollars and other foreign denominated contracts. As of our third quarter of fiscal 2008, we began net settling all inter-company trade balances, which has resulted in the recognition of additional foreign currency fluctuations in our consolidated statement of operations

 
·
A decrease in interest expense of $857 in fiscal 2008 as compared to fiscal 2007.  Interest expense in fiscal 2008 primarily related to interest on our Revolver, Term Loan and Notes.  Interest expense in fiscal 2007 primarily related to interest on our Revolver and our Notes.  Interest expense decreased as the outstanding balance of our Revolver and Notes decreased as well as a decrease in the effective interest rate on the Revolver


Gain on early extinguishment of debt, net relates to the following:

 
·
A net gain of $1,773 was realized from the early extinguishment of our Notes in fiscal 2008, pursuant to the Tender Offer discussed in Note 2 in “Item 8. Financial Statements and Supplementary Data” included in this Form 10-K.  The gain on the early extinguishment of our Notes was net of direct costs associated with the Tender Offer

Impairment of investment in fiscal 2008 related to our investment in Sona Mobile Holdings Corp. (“Sona”), due to the following:

 
·
During our third quarter ended July 31, 2008, we analyzed our cost method investment in Sona and, due to the severity and duration in the decline in fair value, we recorded a $1,486 impairment write-down, as we determined that the investment was other than temporarily impaired.  This impairment write-down represented the difference between our historical book value and fair market value at July 31, 2008.  Additionally, we sold our investment in Sona in the fourth quarter of fiscal 2008 and recorded an additional pre-tax loss of $74 in impairment of investments, net of $65 proceeds received from the sale, for a total of $1,560, which is reflected in the consolidated statement of operations included in “Item 8. Financial Statements and Supplemental Data” in the Form 10-K for fiscal 2008.  There were no such impairment losses recorded during fiscal 2007

INCOME TAXES

   
Year Ended October 31,
   
Percentage Change
 
   
2009
   
2008
   
2007
   
09 vs. 08
   
08 vs. 07
 
   
(In thousands)
             
                               
Income tax provision (benefit)
  $ 7,367     $ 6,346     $ (1,999 )     16.1 %     (417.5 %)
                                         
Effective tax rate
    32.3 %     142.4 %     (14.0 %)                

Our effective income tax rate may fluctuate due to changes in our amount and mix of United States and foreign income (loss), changes in tax legislation, changes in our estimates of federal tax credits, changes in our assessment of uncertainties, as well as accumulated interest and penalties and other deductions.

Fiscal 2009 compared to Fiscal 2008
 
Income tax provision and the respective effective tax rate decreased for fiscal 2009 as compared to fiscal 2008, primarily due to the following:

 
·
For the fiscal year ended October 31, 2008, we recognized no tax benefit on the impairment of $22,137 of goodwill.  Excluding the impact of this goodwill impairment, the effective tax rate for the year ended October 31, 2008 would have been 35.9%

 
·
The decrease in the effective tax rate, excluding the impact of the goodwill impairment, in fiscal 2009 relates primarily to the derecognition of uncertain tax positions

Fiscal 2008 compared to Fiscal 2007

Income tax provision and the respective effective tax rate increased for fiscal 2008 as compared to fiscal 2007, primarily due to the following:

 
·
For the fiscal year ended October 31, 2008, we recognized no tax benefit on the impairment of $22,137 of goodwill.  Excluding the impact of this goodwill impairment, the effective tax rate for the year ended October 31, 2008 would have been 35.9%.  For the fiscal year ended October 31, 2007, a $6,707 decrease to income tax expense and corresponding increase to def