Shuffle Master Inc.

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Shuffle Master Inc.

1106 Palms Airport Drive
Las Vegas, Nevada 89119-3730
U.S.A.
Telephone: (702) 897-7150
Fax: (702) 270-5161
Web site: http://www.shufflemaster.com

Public Company
Incorporated: 1983
Employees: 224
Sales: $48.0 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: SHFLy
NAIC: 339999 All Other Miscellaneous Manufacturing; 541511 Custom Computer Programming Services

Shuffle Master Inc. develops, produces, and sells automatic card shuffling machines (shufflers) and gaming products, including table games, slot machine game software, and slot machine operating system software for the gaming industry. The company’s strategy for growth entails the development or acquisition of innovative gaming products and systems—such as productivity enhancing equipment, new table and slot games, and slot game technology—with the intention of marketing these worldwide. The company operates within a gaming industry that is found in 32 states and numerous countries worldwide. Casino gaming has grown dramatically since the early 1990s, and the Shuffle Master believes that the North American and international markets for gaming-related products will continue to expand. The company’s shuffler products are suitable for the vast majority of card-based table games, which the company also develops, markets, and licenses to casinos and other lawful gaming establishments. In North, Central, and South America, Shuffle Master sells and services its shuffler, table game, and slot products through its own direct sales force and service department. In selected international jurisdictions, the company markets its products through its international distributor, Technical Casino Supplies, Ltd. Shuffle Master is subject to jurisdictional licensing requirements concerning the marketing of its products and must obtain approval for all of its products.

Company Origins

John Breeding, a former truck driver, founded Shuffle Master in 1983 with the aim of developing and marketing automatic card shufflers. Breeding invented the idea of automatic card shufflers after reading an article in the Wall Street Journal about casino card counters. In 1989, the company developed its first single-deck shuffler and sold its first automatic shuffling machine to Bally’s Casino in Las Vegas in January 1992. That same year, Shuffle Master also went public. The company’s shuffling machines, designed for table card games for the gaming industry, offered several benefits, primarily increased productivity and security. The shufflers provided for more playing time by shuffling one or more card decks while a game was being played. The company’s single-deck shuffler worked by automatically shuffling a deck of playing cards and depositing the deck into a holding tray. While the first deck was being dealt, the machine would shuffle a second deck and move it into the holding tray.

Pursuing Product Diversification in the Early 1990s

Soon after the success of its first single-deck card shuffler, the company began producing variations of the system, including a multi-deck system for use with four, six, or eight decks of cards, primarily for blackjack table games. Introduced in 1995, the multi-deck shuffler operated much like the single-deck unit in shuffling a second deck of cards while the first was being played. The company also introduced a model designed for hand-held dealing and another model that shuffled and counted out the cards to be distributed by the dealer while a second deck was being shuffled. The latter model proved especially popular with gaming establishments and was frequently used for well-known card games, including the company’s own Let It Ride game.

Shuffle Master received approval for its basic Let It Ride game from the Nevada Gaming Control Board in August 1993 and began licensing it to casinos in October. By 1996, the Let It Ride game had received approval for play in seventeen states and five Canadian provinces. The game comprised a patented five card stud poker game in which players were paid according to a fixed payout schedule. Because of its popularity, the company introduced another version called Let It Ride: The Tournament, a five card stud poker table game. The game quickly became an establishment specialty after winning approval from the Nevada Gaming Control Board in June 1995. By the end of October 1996, the company had installed the game in more than 100 casinos in Nevada, Mississippi, and Connecticut. In 1995, the company also signed an agreement with Bally Gaming International, Inc. to produce a video version of Let It Ride, known as Let It Ride Bonus Video. The company introduced the video version in early 1997 after indications that the Let It Ride The Tournament game was declining in popularity due to its high leasing costs to casinos and low returns to players. The company provided the game’s video version to casinos at reduced cost and designed it to offer players more liberal pay tables for bonus bets.

Marketing Alliances in the Late 1990s

To further position itself in the higher-margin game business, Shuffle Master signed an agreement with master game designer Mark Yoseloff in 1996. Yoseloff was the developer of consumer versions of Pac Man and Donkey Kong. The agreement enabled the company to acquire Yoseloff’s personal game library. Yoseloff became a consultant to the company from August 1996 to July 1997. In August 1997, he became Shuffle Master’s executive vice-president and head of the New Games Division. The joint venture produced Five Deck Frenzy, a video poker game that the company introduced in 1996. In August 1996, the company also established a joint marketing alliance with International Game Technology (IGT) with the aim of marketing the video version of Let It Ride. Under the terms of the agreement, profits were to be split 50/50. In September 1996, the agreement was modified to include Five Deck Frenzy.

In late 1997, company founder and CEO John Breeding retired for health reasons and was replaced by Joseph Lahti. Under Lahti, the company continued to pursue marketing alliances and product diversification. As a result, in September 1997, the company signed a second development and marketing alliance with IGT. The agreement provided for the company’s games to be programmed on IGT’s video and slot machines and for both parties to split the profits. In addition, the agreement provided for the company to receive 100 percent of the revenues from casinos that licensed its games using IGT machines. In October 1998, the agreement was cancelled and replaced with a new licensing arrangement. Under the new agreement, IGT received royalties for Shuffle Master games that ran on IGT machines. IGT also provided the company with software support and training. At the same time, the company signed a separate game marketing agreement with Anchor Gaming to market and service a table game version of Anchor’s Double Down Stud. In addition, in April 1998 the company entered into a marketing agreement with Bally Gaming to develop and sell a video slot machine version of Let’s Make a Deal, the popular and long-running television show hosted by Monty Hall. The agreement was later amended in August 2000 to make the license of intellectual property nonexclusive. The agreement provided that the company receive a preferential share of the game net operating profits and the rights to sell Let’s Make A Deal slot machines back to Bally at the company’s adjusted net book value.

As a result of pursuing product diversification, by October 1998 the company was marketing several video slot machines, including Let It Ride Bonus Video, Five Deck Frenzy, and Five Deck Poker. The company also had other video products in the market test stage, such as Video Mah Jong, MultiBingo, and Doors to Riches. In December 1998, the company announced that two of its new video slot game software products, Multi-Bingo and Doors to Riches, were approved for installation by the Nevada Gaming Control Board. In December 1998, the company reported revenue of $27.1 million compared to $28.7 million for fiscal 1997. Fiscal 1998 results stemmed primarily from a $2.65 million pre-tax charge resulting from the consolidation of its Minneapolis operations with those of its Las Vegas office and from a write off of part of its older shuffler product inventory due to the development of its next generation shuffler product, the ACE.

In 1999, the company formally introduced its new ACE single deck shuffler system, which substantially replaced the older single deck shufflers in casinos across the country. Unlike the older single deck models, which mechanically mimicked a hand shuffle, the ACE system sorted cards into shelves on a vertically moving elevator in random order according to computer generated instructions. The ACE unit was smaller, had fewer moving parts, required less service, was easily programmable by casino personnel for a variety of single deck games, and could track and display the hands that were played for the casino operator. The company, however, had trouble marketing its new Three Stooges slot machine stemming from concerns that the game lured children. The company also developed its new MD series of multi-deck card shufflers that could simultaneously shuffle two to eight decks of cards primarily for blackjack or mini-baccarat table games. In 2000, the company introduced its next generation of multiple deck card shufflers, the King, which shuffled cards continuously, making card counting virtually impossible. The King was designed primarily for blackjack and other multi-deck table games. In addition, as part of the its aggressive product diversification program, the company introduced three new table games—Bahama Bonus, 3 Way Action, and Wild Hold’em Stud. The new table games joined the company’s existing line of successful specialty table games that included Let It Ride Bonus and Three Card Poker.

Company Perspectives:

Shuffle Master specializes in providing innovative, high-quality products and services to the casino industry. These include card shufflers, table games and table gaming equipment, slot games and operating system software for slot machines. The Company’s service, sales, and marketing efforts extend to most of the regulated gaming jurisdictions worldwide.

Growth in the 2000s

In May 2000, the company signed a development and distribution agreement with the Sierra Design Group (SDG) with the aim of further commercializing Shuffle Master’s gaming rights in The Three Stooges. The revenue sharing agreement provided for the company to develop a Three Stooges themed video game for the Native American casinos in the state of Washington for use on SDG’s gaming machines and systems. In addition, the company received approval from the Nevada Gaming Control Board to market its newest video slot game, Press Your Luck. According to Shuffle Master CEO Joseph L. Lahti, the game’s approval marked a significant milestone for the company. The control board’s approval signified the first time that a stand alone, PC-based operating system useable in multiple gaming machine platforms had been allowed in Nevada. The approval also meant the company could market its own games using the operating system. In July 2000, Shuffle Master signed agreements with IGT to produce video slot games based on three well known television shows—Let’s Make a Deal, The Three Stooges, and The Honeymooners. The company’s impressive rate of growth cast it into the spotlight as Forbes Magazine named Shuffle Master one of America’s 200 best small companies for the second year in a row. At the same time, Shuffle Master promoted Mark Yoseloff to the position of president, with Joseph Lahti continuing in the positions of chairman and CEO. For fiscal year 2000, the company reported record revenue of $38.9 million compared to $28.9 million in 1999.

Shuffle Master continued to pursue growth opportunities through licensing and cooperative development, manufacturing, and marketing agreements in 2001. In January, the company entered into a licensing and supply agreement with Recreativos Franco, a Spanish corporation and one of the world’s leading manufacturers of slot machines. The agreement granted Shuffle Master rights to use Franco’s extensive library of slot machine games in certain casino territories in non-Native American jurisdictions in the United States and Canada. The agreement provided for the company to use these games on its own proprietary operating system. In April 2001, the company announced its intent to purchase the business and certain assets related to the QuickDraw shuffler product line. The QuickDraw shuffler constituted a multi-deck shuffler that was initially introduced to the casino market in 1996. Shuffle Master also signed licensing agreements for its slot game operating system with Mikohn Gaming Corporation and Fleetwood Manufacturing, Inc. The agreements enabled the licensees to use the company’s operating system to program and operate gaming devices in exchange for a fixed share of the profits. In November 2001, the company also signed a licensing agreement with St. Louisbased Anheuser-Busch, Inc. to develop reel and video slot machines using logos and promotional images of Anheuser-Busch’s leading brand, Budweiser beer. In addition, the company announced that its board of directors renewed authorization for management to repurchase Shuffle Master’s common stock in the open market. As a result, the company repurchased 560,000 shares in the fourth quarter at an average price of $11.45 for $6.4 million. President and new CEO Mark Yoseloff, who replaced Joseph Lahti as chief executive officer, noted the contrast between the recent slide in the company’s stock price and Shuffle Master’s continued prospects for substantial growth. The company intended to pursue a strategy of using excess cash for share repurchases, especially when the gap between Shuffle Master’s current stock price and its long-term appreciation potential widened. Despite the severe economic downturn in 2001, the company again reported record revenues of $48.0 million, an increase of 23 percent over the previous year. The increase in revenue stemmed primarily from the company’s aggressive diversification of its table game business and slot games.

Key Dates:

1983:: Shuffle Master Inc. is founded by John Breeding and is incorporated in Minnesota.
1989:: The company develops its first automatic single-deck shuffler.
1992:: The company goes public, issuing shares of common stock.
1995:: Shuffle Master introduces the first multi-deck shuffler.
1996:: The company forms its first marketing venture with International Game Technology to market its gaming products
1998:: Shuffle Master consolidates its operations in Las Vegas.
2000:: The company signs a development agreement with Sierra Design Group to market its gaming rights in the Three Stooges video game for Native American casinos.
2001:: The company signs a licensing agreement with Anheuser-Busch to develop video slot machines using images of Anheuser-Busch’s flagship brand, Budweiser beer.
2002:: Shuffle Master acquires assets of Casino Software and Services LLC of Las Vegas, Nevada.

In January 2002, the company announced the expansion of the role of Mark Yoseloff, who became the company’s chairman of the board of directors in addition to his duties as CEO. In addition, Mark A. Lipparelli, the company’s executive vice-president, was promoted to president. Joseph Lathti, who had remained with the company as chair of the board after stepping down as CEO, announced his retirement from the board effective February 2, 2000. Under these new changes, the company continued its strategy of forging joint marketing and supply agreements. In February 2002, Shuffle Master signed another in a series of agreements with Bally Gaming for the supply of mechanical reel slot machines for a Budweiser themed game. Under the provisions of the agreement, the company would develop the game concept and Bally would manufacture and program the slot machine to run the game. The agreement also provided that the company would purchase the Bally machines and assume responsibility for marketing and sales. In addition, in July the company announced that it received approval from Gaming Labs International for its Hollywood and Spider-Man themed games. These approvals allowed Shuffle Master to introduce the new slot games into numerous markets, including California, Connecticut, Illinois, Indiana, Iowa, Louisiana, Minnesota, and Missouri. In August, the company also acquired the assets, technology, and products of Casino Software and Services LLC of Las Vegas, Nevada. As part of the acquisition, Oliver Schubert, CEO of Casino Software and Services, joined Shuffle Master as director of product development.

With continuing strong earnings and revenue growth, the company was informed by Standard & Poors that it would replace Visual Networks, Inc. in the S&P SmallCap 600 Index effective April 24, 2002. The company’s addition to the S&P SmallCap 600 Index was reinforced by its record second quarter revenues of $13.4 million, an increase of 8.8 percent over the same period in the previous year. In commenting on the company’s performance, Chief Financial Officer Gerald Koslow noted that Shuffle Master ended the quarter with its strongest balance sheet ever. Fortune Small Business magazine took notice, naming Shuffle Master the nation’s 25th fastest-growing small company in June 2002. The magazine observed that in the previous three years, Shuffle Master’s performance included average earnings per share growth of 67.4 percent, revenue growth of 25.3 percent, and total stock return of 77.2 percent. The company’s growth appeared especially notable amidst the prolonged slide in the stock market and the continuing weakness in the economy. As a result, the company’s business strategy of product diversification and strategic marketing and development alliances seemed to position it well for future growth and profitability.