SCHEDULE 14A
Information Required In Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. _____)
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Shuffle Master, Inc.
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<PAGE>
SHUFFLE MASTER, INC.
March 17, 2000
TO: THE SHAREHOLDERS OF SHUFFLE MASTER, INC.
You are cordially invited to the Annual Meeting of Shareholders of
Shuffle Master, Inc. to be held on Friday, April 14, 2000, at Shuffle Master
Gaming, 1106 Palms Airport Drive, Las Vegas, Nevada, at 10:00 a.m., Pacific
Daylight Time. I encourage you to attend. Whether or not you plan to attend the
meeting, I urge you to complete and sign the accompanying Proxy and return it in
the enclosed envelope. Also attached for your review are the formal Notice of
Annual Meeting and Proxy Statement.
On behalf of your Board of Directors and employees, thank you for
your continued support of Shuffle Master, Inc.
Very truly yours,
/s/ Joseph J. Lahti
Joseph J. Lahti
CHAIRMAN OF THE BOARD
<PAGE>
SHUFFLE MASTER, INC.
1106 Palms Airport Drive
Las Vegas Nevada 89119
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
April 14, 2000
To the Shareholders of Shuffle Master, Inc.:
The Annual Meeting of Shareholders ("Annual Meeting") of Shuffle Master,
Inc. ("Shuffle Master" or the "Company") will be held on Friday, April 14, 2000,
at Shuffle Master Gaming, 1106 Palms Airport Drive, Las Vegas, Nevada, at 10:00
a.m., Pacific Daylight Time, for the following purposes:
1. To elect four directors to hold office until the next Annual Meeting
of Shareholders or until their successors are elected.
2. To consider a shareholder proposal expected to be presented by
Herman Jacobs.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only shareholders of record at the close of business on March 1, 2000, are
entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof.
TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE SIGN, DATE AND RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING IN PERSON.
By Order of the Board of Directors,
/s/ Gary W. Griffin
Gary W. Griffin
SECRETARY
March 17, 2000
Las Vegas, Nevada
<PAGE>
SHUFFLE MASTER, INC.
1106 PALMS AIRPORT DRIVE
LAS VEGAS, NEVADA 89119
-----------------------------
PROXY STATEMENT
-----------------------------
ANNUAL MEETING OF SHAREHOLDERS
APRIL 14, 2000
This Proxy Statement is furnished to holders of shares of Common
Stock of Shuffle Master, Inc., as of March 1, 2000, in connection with the Board
of Directors' solicitation of the enclosed Proxy for the Annual Meeting of
Shareholders. A shareholder giving a Proxy may revoke it at any time prior to
the Annual Meeting by filing written notice of the termination of the
appointment with an officer of the Company, by attending the Annual Meeting and
voting in person, or by filing a new written appointment of a Proxy with an
officer of the Company. The revocation of a Proxy will not affect any vote taken
prior to such revocation. This Proxy Statement was first mailed to shareholders
on or about March 17, 2000.
All properly executed proxies received at or prior to the meeting
will be voted at the meeting. If a shareholder directs how a Proxy is to be
voted with respect to the business coming before the meeting, the Proxy will be
voted in accordance with the shareholder's direction. If a shareholder does not
direct how a Proxy is to be voted, it will be voted IN FAVOR OF election of the
nominees listed as directors in this Proxy Statement and AGAINST the shareholder
proposal expected to be made at the Annual Meeting and described in this Proxy
Statement.
At the close of business on March 1, 2000, the record date for the
Annual Meeting, there were 7,140,393 shares of Common Stock outstanding. Each
share of Common Stock is entitled to one vote on each matter properly coming
before the meeting. Cumulative voting for the directors is not permitted.
The cost of making this solicitation, including preparation and
mailing of the Notice of Annual Meeting, Proxy and Proxy Statement, and the
costs incurred by brokerage houses and other custodians, nominees and
fiduciaries for forwarding documents to shareholders will be paid by the
Company. In certain instances, officers of the Company may make special
solicitations of proxies either in person or by telephone. The Company will pay
expenses incurred in connection with these solicitations.
<PAGE>
ELECTION OF DIRECTORS
The Bylaws of the Company provide that the shareholders may decrease
the number of directors; provided, however, that the number may be increased by
resolution of the Board of Directors. The number of directors was set at four at
the Annual Meeting of Shareholders held on March 17, 1999, and has not changed
since such date. No action will be taken at the Annual Meeting regarding the
number of directors.
Directors are elected to serve a one-year term, and will serve until
the next Annual Meeting of Shareholders, or until their successors have been
duly elected and qualified. The affirmative vote of the holders of a majority of
the outstanding shares of Common Stock present in person or by proxy at the
Annual Meeting and entitled to vote is required to elect directors. Abstentions
are treated as present and entitled to vote and broker non-votes are treated as
not present and not entitled to vote. The Board of Directors recommends a vote
FOR electing the nominees for directors as set forth below.
All nominees have consented to serve if elected. If any nominee
becomes unable to serve, the persons named as proxies may exercise their
discretion to vote for a substitute nominee. The name, age, business experience
and offices held by each nominee for director are as follows:
Name Age Company Position Director Since
- ---- --- ---------------- --------------
Joseph J. Lahti 39 Chairman of the Board, President and 1993
Chief Executive Officer
Mark L. Yoseloff 53 Executive Vice President and Director 1997
Patrick R. Cruzen 52 Director 1997
Thomas A. Sutton 62 Director 1994
JOSEPH J. LAHTI has served as Executive Vice President since
December 1993, President since October 1995, Chief Executive Officer since June
1996 and Chairman of the Board since October 1997. From 1989 through December
1993, Mr. Lahti was President of McQuillan Lahti Wilcox, Inc., a financial
management firm. Mr. Lahti also holds the position of President of J.L.
Holdings, Inc., a real estate acquisition, asset management and financial
consulting company.
DR. MARK L. YOSELOFF has been Executive Vice President of the
Company since August 1997 and was appointed to the Company's Board of Directors
in November 1997. From August 1996 to July 1997, Dr. Yoseloff served as
consultant to the Company. From May 1996 through the present, Dr. Yoseloff has
held the position of President of Well Suited, LLC. Dr. Yoseloff also holds the
position of President of Visual Communications Consultants, Inc. (d/b/a/
Advanced Gaming Concepts), a company he founded in August 1993. Dr. Yoseloff
held the positions of President of Recognition, Inc. and Vice President of Clear
Images, Inc. from March 1987 to August 1993.
PATRICK R. CRUZEN was appointed to the Company's Board of Directors
in August 1997. Mr. Cruzen has been the Chief Executive Officer of Cruzen &
Associates, a consulting and executive search firm for the gaming industry,
since September 1996. From June 1994 to September 1996, Mr. Cruzen was President
of Grand Casinos, Inc. Mr. Cruzen held the position of Senior Vice President at
the MGM Grand Hotel in Las Vegas from September 1990 to May 1994.
THOMAS A. SUTTON was employed by Borden, Inc. from 1972 to 1992,
most recently serving as Vice President Planning-Pasta Group. Since 1992, Mr.
Sutton has managed his personal investments.
2
<PAGE>
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended October 31, 1999, the Board of
Directors held meetings on five occasions. All Board members attended at least
75% of the meetings.
Standing committees of the Board of Directors include the Audit
Committee, the Compensation Committee and the Option Committee.
The Audit Committee includes Messrs. Cruzen and Sutton and is
responsible for recommending the appointment of the independent auditors for the
Company, reviewing the scope of the audit, examining the auditor's reports,
making appropriate recommendations to the Board of Directors as a result of such
review and examination, and making inquiries into the effectiveness of the
financial and accounting functions and internal controls of the Company. The
Audit Committee met three times in fiscal 1999.
The Compensation Committee includes Messrs. Cruzen and Sutton and is
responsible for recommending to the Board of Directors the compensation of the
executive officers of the Company. The Compensation Committee met three times in
fiscal 1999.
The Option Committee includes Messrs. Cruzen and Sutton and is
responsible for recommending individual stock option grants to the Board of
Directors. The Option Committee met three times in fiscal 1999.
EXECUTIVE OFFICERS
In addition to Joseph J. Lahti and Mark L. Yoseloff, whose
biographies were listed previously, Gary W. Griffin serves as an executive
officer of the Company.
GARY W. GRIFFIN has been the Vice President of Finance for the
Company since June 1997, Chief Financial Officer since November 1997 and
Secretary since February 1998. Mr. Griffin joined the Company in April 1996 as
Vice President of Financial Relations and Corporate Development. From January
1995 to March 1996, Mr. Griffin was self-employed as a consultant. From August
1988 through December 1994, Mr. Griffin was employed by Ecolab Inc., first as
Director of Corporate Development and later as Controller of the Textile Care
Division.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, certain officers and persons holding ten percent of the
Company's Common Stock to file reports regarding their ownership, acquisitions
and dispositions of the Company's Common Stock with the Securities and Exchange
Commission. All executive officers and directors filed reports as required
during the year ended October 31, 1999.
3
<PAGE>
SHAREHOLDER PROPOSAL
INTRODUCTION
SET FORTH BELOW IS A SHAREHOLDER PROPOSAL EXPECTED TO BE PRESENTED
BY SHAREHOLDER HERMAN JACOBS. THIS PROPOSAL IS INCLUDED IN THE PROXY STATEMENT
IN ACCORDANCE WITH THE RULES OF THE SECURITIES AND EXCHANGE COMMISSION AND IS
NOT ENDORSED BY THE BOARD OF DIRECTORS. THIS PROPOSAL AND THE STATEMENT OF
HERMAN JACOBS IN SUPPORT OF THE PROPOSAL ARE QUOTED BELOW. THE COMPANY ASSUMES
NO RESPONSIBILITY FOR THE CONTENT OF THESE MATERIALS. THE NUMBER OF SHARES WHICH
HE HOLDS WILL BE PROMPTLY FURNISHED BY THE COMPANY TO ANY SHAREHOLDER WHO
REQUESTS SUCH INFORMATION BY MAIL OR TELEPHONE. THE BOARD OF DIRECTORS
RECOMMENDS THAT SHAREHOLDERS VOTE AGAINST APPROVAL OF THIS PROPOSAL.
PROPOSAL
It is recommended by Mr. Jacobs that the shareholders APPROVE a
proposal to request that the Board of Directors institute annual net income
after-tax targets in order for current senior executives to be awarded
authorized stock options under the 1993 Stock Option Plan.
<TABLE>
<CAPTION>
Number of Shares to be awarded
------------------------------
Fiscal Year Net Income After-Tax Target by Board in total to all
----------- --------------------------- ------------------------
Ending (only reflecting recurring earnings) current senior executives
------ ------------------------------------ -------------------------
<S> <C> <C>
October 31, 2000 $7,000,000 70,000
October 31, 2001 $8,000,000 80,000
</TABLE>
STATEMENT IN SUPPORT OF PROPOSAL
In November 1993, the Company adopted the 1993 Stock Option Plan in
order to "align executive officers long-term interests with those of
shareholders by creating a direct incentive for executive officers to increase
shareholder value." Since that time, the following events have occurred:
1. At the March 1994 Annual Meeting of Shareholders, the shareholders
approved the 1993 Stock Option Plan and authorized 525,000 shares
for issuance to executive officers and employees.
2. Between the 1994 Annual Meeting and the 1996 Annual Meeting, the
price of the stock appreciated from $7 1/4 on or about March 4,
1994, to $9 7/8 on or about March 8, 1996. At the March 1996 Annual
Meeting, the shareholders approved an amendment to the Stock Option
Plan to authorize an additional 200,000 shares for issuance to
executive officers and employees.
3. Although the stock price of Shuffle Master has been virtually
dormant while the stock market has been booming, the Board of
Directors recommended in both March 1998 and March 1999 that the
shareholders approve amendments to the Stock Option Plan to
authorize an additional 235,000 and 250,000 shares, respectively,
for distribution to executive officers and employees. Both
amendments were approved.
Since March 1994, stock option grants representing 1,210,000 shares
of common stock, constituting over 16% of the total number of outstanding shares
as of November 30, 1999, have been authorized to be granted and have
substantially all been granted to executive officers and employees.
4
<PAGE>
This latest authorizing and granting of stock options was
unwarranted given the poor financial performance of the Company and the stock
price. In particular, fiscal year 1998 saw net income drop by more than 30%,
from $5,122,000 to $3,343,000, and earnings per share dropped from $0.47 to
$0.34, even with a decrease in the amount of shares outstanding. In fact,
Shuffle Master executives were not even awarded a bonus in fiscal year 1998 as
the Company did not meet its financial objectives.
As an experienced businessman, I believe in and understand the value
of stock options and approve of awarding stock options as a way to incentivize
employees to work harder and more efficiently to improve the overall
productivity and bottom line of the Company. However, the awarding of stock
options should be directly tied to the earnings performance of the Company.
It is recommended that the earnings targets set forth above be
directly tied to the number of stock options that can be granted and issued to
all current senior executives at the Company.
THE COMPANY'S RESPONSE
The Board of Directors recommends that Mr. Jacobs' proposal be
rejected.
The Board believes that the Company's executive compensation
programs are well within normal practices and ranges for comparable companies
within our industry, and believes that these programs provide an appropriate
balance of long and short-term incentives.
Further, in its review of Mr. Jacobs' proposal, the Board has
concluded that the proposal makes assumptions and draws conclusions that do not
fairly or completely describe the performance of the Company or recognize the
fairness of its well constructed executive compensation plans. The Board also
believes that the proposal recommends a plan that cannot be practically
implemented.
The Board's recommendation to vote AGAINST Mr. Jacobs' proposal is
based on the following:
1. MR. JACOBS' PROPOSAL REQUIRES THAT STOCK OPTION GRANTS BE BASED ON
SHORT-TERM FINANCIAL PERFORMANCE, RATHER THAN BE GRANTED AS
INCENTIVES TO ENCOURAGE LONG-TERM FINANCIAL PERFORMANCE AND
EXECUTIVE RETENTION. THE COMPANY UTILIZES THE LATTER APPROACH.
The Board believes that cash bonuses based on challenging objectives
serve best as the primary motivator for "improving overall
productivity and bottom line profitability," while stock options
serve best to reward executives for making correct long-term
decisions, thus aligning the executive's interest with the
shareholders' interest.
The Board believes that Mr. Jacobs' proposal confuses the elements
of the Company's executive compensation program and puts them at
cross-purposes. The proposal would require the achievement of
short-term goals as the criteria for awarding long-term
compensation. Using Mr. Jacobs' proposal as a model, stock options
would only be granted as the result of successful short-term
decision-making. No consideration would be given to long-term
objectives until after the short-term results had been achieved. By
linking consecutive annual awards to short-term performance, the
proposal would significantly skew decision making to a short-term
orientation.
In the "Report of Compensation Committee on Executive Compensation,"
found on page 10 of this Proxy Statement, the Compensation Committee
details its philosophy and the primary elements of the Company's
executive compensation program.
5
<PAGE>
2. THE PROPOSAL DOES NOT CONSIDER THE CHRONOLOGY OF THE GRANTING OF
OPTIONS UNDER THE PLAN, AND MISCHARACTERIZES THE GRANTING OF OPTIONS
AS "UNWARRANTED" AND THE COMPANY'S FINANCIAL PERFORMANCE AS "POOR".
Fact #1: Quoted directly, the proposal states that:
"Since March 1994, stock option grants representing 1,210,000 shares
of common stock, constituting over 16% of the total number of
outstanding shares as of November 30, 1999, have been authorized to
be granted and have substantially all been granted to executive
officers and employees."
Mr. Jacobs' analysis represents that the stock option grants through
November 30, 1999 represent over 16% of the outstanding shares. This
percentage, while accurate today, is misleading since it measures
the combined effect of two unrelated actions - that of granting
stock options and that of repurchasing approximately 34% of the
Company's outstanding shares (through November 30, 1999). With
respect to option grants, the cumulative percentage granted under
the Plan through November 30, 1999 totaled 10.3%, measured by
summing the percents granted at the approximate time of each grant.
While the number of stock options outstanding as a percentage of
total shares (commonly referred to as "overhang") has increased over
time, such increase has been primarily as a result of the Company's
open-market repurchase of 4,226,000 shares of stock for $34,237,000
through the first quarter of fiscal 2000. Calculated either way
(based upon the number of shares outstanding at the time of grant,
or today) the total overhang is within the norms of other companies.
Further, Mr. Jacobs' focus on the overhang percent does not
recognize two important benefits of the Company's stock option
grants. First, all stock options were granted with an exercise price
equal to or greater than the market price of the Company's common
stock. The average exercise price of options awarded since March
1994 is approximately $8.85 per share, and recipients only benefit
from an increase in the market price of the Company's stock over the
grant price. Second, stock options, when exercised, result in
capital inflows to the Company. For example, if all 1,210,000 of the
options under the Plan were granted and exercised at $8.85 per
share, the Company would receive over $10.7 million of new capital.
Fact #2: The proposal states that the latest authorization and
granting of stock options is unwarranted given the stock price and
poor financial performance of the Company, with particular reference
to fiscal 1998.
When the Company's shareholders received the Proxy Statement asking
them to approve the increase in the number of shares authorized
under the Plan, they simultaneously received the Company's Annual
Report, which clearly showed the Company's 1998 financial
performance of which Mr. Jacobs complains. The shareholder approval,
at last year's Annual Meeting of Shareholders, was by more than 90%
of the shares voting.
The Company's recent profitability, as measured by operating margins
and the Company's return on equity, adjusted for singular, strategy
based expenses, has been among the best in the gaming supply
industry. The Company's financial performance has recently been
strong enough for it to earn recognition by Forbes magazine as one
of the 200 best-managed small public companies in America.
6
<PAGE>
The Company's stock has languished in recent years despite solid
financial performance. This incongruity reflects the divergence in
market valuation between large capitalization stocks, particularly
in the technology sector, and small and micro-capitalization stocks.
While the Board wishes the Company could affect such broad shifts in
market valuations, it cannot.
3. THE PROPOSAL AS WRITTEN IS DIFFICULT TO IMPLEMENT.
Mr. Jacobs' proposal language contains practical limitations that
make it difficult to be implemented. Mr. Jacobs fails to define
basic elements of the proposal to indicate who would be covered and
when. Specifically, the phrase "current senior executives" is
undefined.
Finally, the recurring net income targets and stock option award
levels have been arbitrarily selected by one individual who is
unfamiliar with Company operations or strategy. Such arbitrary
determinations are de-motivational for executive management and
negate the extensive compensation analysis performed by the
Compensation Committee of the Board.
THE BOARD RECOMMENDS A VOTE AGAINST MR. JACOBS' PROPOSAL.
7
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued for
services rendered in all capacities to the Company during the fiscal years ended
October 31, 1999, 1998 and 1997, for the Chief Executive Officer and two other
executive officers serving at October 31, 1999, whose compensation earned in
fiscal 1999 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Fiscal -------------------- ------------ All Other
Name and Principal Position Year Salary Bonus Options Compensation
- ----------------------------- ------- ------- -------- ------------ -------------
($) ($) (#) ($)
<S> <C> <C> <C> <C> <C>
Joseph J. Lahti 1999 236,250 113,000 -- 4,000
Chairman of the Board, 1998 236,250 -- 75,000 --
President and 1997 231,000 91,000 41,904 --
Chief Executive Officer
Gary W. Griffin 1999 149,000 71,000 25,000 (2) 3,000
Chief Financial Officer, 1998 130,000 -- 45,000 --
Vice President of 1997 115,000 45,000 30,000 --
Finance and Secretary
Mark L. Yoseloff (1) 1999 110,000 75,000 20,000 (2) 1,000
Executive Vice President 1998 100,000 -- 45,000 --
1997 23,000 20,000 40,000 --
</TABLE>
- --------------------
(1) Dr. Yoseloff began employment with the Company as an executive
officer during fiscal 1997.
(2) Annual option grants are typically made prior to the end of each
fiscal year; however, in 1999 the options shown were granted on
November 4, 1999, just after the close of fiscal 1999.
8
<PAGE>
OPTION GRANTS DURING THE FISCAL YEAR ENDED OCTOBER 31, 1999
The following table sets forth information with respect to each
option granted to the executive officers named in the Summary Compensation Table
during the fiscal year ended October 31, 1999:
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Percentage of Total Price Appreciation for Option
Options Granted to Term (2)
Options Employees During Exercise Expiration -----------------------------
Name Granted(1) Fiscal Year Price Date 10% 5%
- ---------------- ---------- ------------------- ----------- ---------- -------------- ------------
(#) (%) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Joseph J. Lahti -- -- -- -- -- --
Gary W. Griffin 25,000 10.1 8.50 11/03/09 134,000 339,000
Mark L. Yoseloff 20,000 8.1 8.50 11/03/09 107,000 271,000
</TABLE>
(1) Annual option grants are typically made prior to the end of each
fiscal year; however, in 1999 the options shown were granted on
November 4, 1999, just after the close of fiscal 1999.
(2) The compounding assumes a ten-year exercise period for all option
grants. These amounts represent certain assumed rates of
appreciation, based on Securities and Exchange Commission rules.
Actual gains, if any, on stock option exercises are dependent on the
future performance of the Common Stock, overall stock market
conditions, and continued employment of the option holder through
the vesting period. The amounts reflected in this table may not
necessarily be achieved.
AGGREGATE OPTIONS EXERCISED IN THE FISCAL YEAR ENDED OCTOBER 31, 1999
AND OPTION VALUES AT OCTOBER 31, 1999
The following table sets forth certain information regarding options
to purchase shares of Common Stock exercised during the Company's fiscal year
ended October 31, 1999, and the number and value of options to purchase shares
of Common Stock held as of October 31, 1999, by the executive officers named in
the Summary Compensation Table:
<TABLE>
<CAPTION>
Value of Unexercised
Number of Number of Options In-the-Money
Shares at October 31, 1999 Options at October 31, 1999(2)
Acquired Value --------------------------- ------------------------------
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
(#) ($) (#) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Joseph J. Lahti(3) -- -- 204,827 103,334 96,067 37,501
Gary W. Griffin -- -- 55,245 64,755 21,543 34,172
Mark L. Yoseloff -- -- 66,666 63,334 35,366 25,184
</TABLE>
(1) Value Realized is the difference between the closing price per share
on the date of exercise, and the option price per share, multiplied
by the number of shares acquired upon exercise of the option.
(2) Value of Unexercised In-the-Money Options is the difference between
the closing price per share of $8.875 at October 31, 1999, and the
exercise price per share multiplied by the number of shares subject
to options.
(3) A grant of 40,000 options to Mr. Lahti in fiscal 1996 included
vesting limitations with regard to a loan advanced to Mr. Lahti, as
discussed under "Certain Relationships and Related Party
Transactions." Although the 40,000 options granted have met the time
requirements of the vesting schedule, the exercise of these options
remains restricted until the loan is repaid to the Company. These
options are included as unexercisable at October 31, 1999.
9
<PAGE>
COMPENSATION OF DIRECTORS
The Board has elected to compensate outside directors with a one
thousand dollar ($1,000) quarterly payment and with stock option grants pursuant
to the Company's Outside Directors' Option Plan ("Director's Plan"). Each
Director who is not an employee of the Company is entitled to receive an annual
non-discretionary grant of options to purchase three thousand shares (3,000) of
common stock after each annual meeting of shareholders. In addition, the Board
can make discretionary grants to outside Directors under the Director's Plan. In
January 2000, the Board made a discretionary grant under the Director's Plan of
an option to purchase five thousand shares (5,000) of the Company's common stock
to each of its outside Directors. The exercise price of the options is equal to
the closing price of the Company's common stock on the date of grant. The
options are immediately exercisable and expire the earlier of seven (7) years
from the date of grant or thirty (30) days after leaving the Board.
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
OVERVIEW AND PHILOSOPHY
The Compensation Committee of the Board of Directors (the
"Committee") is composed entirely of outside directors and is responsible for
developing and making recommendations to the Board with respect to the Company's
compensation policies. In addition, the Committee, pursuant to authority
delegated by the Board, recommends on an annual basis the compensation to be
paid to the Chief Executive Officer and each of the other executive officers of
the Company.
It is the intention of the Committee to utilize a
pay-for-performance compensation strategy that is directly related to
achievement of the Company's financial performance and growth objectives. The
primary elements of the executive compensation program are base salary, annual
cash incentives based on performance, and long-term incentives in the form of
stock options. These elements are designed to: (i) provide compensation
opportunities that will allow the Company to attract and retain talented
executive officers who are essential to the Company's success; (ii) provide
compensation that rewards corporate performance and motivates the executive
officers to achieve corporate strategic objectives; and (iii) align the
interests of executive officers with the long-term interests of shareholders
through stock-based awards.
BASE SALARY
Base salaries of the Company's executive officers are intended to be
competitive with the median base salaries paid by other corporations engaged in
business similar to the Company, such as suppliers to the gaming industry. Base
salaries are determined for executive officer positions using compensation
surveys, taking into account variables such as geography, job comparability,
size of each corporation and its industry. In addition to base salary, executive
officers are eligible to participate in the Company's employee benefit plans on
the same terms as other employees, except that executive officers cannot
participate in the employee-wide profit sharing plan.
INCENTIVE COMPENSATION
The purpose of the annual bonus program is to provide a short-term,
direct financial incentive in the form of an annual cash bonus to executive
officers if the Company achieves a targeted level of financial performance. Each
executive officer is eligible to receive a cash bonus determined by a formula
proposed by the Committee and approved by the Board of Directors. Incentive
compensation is reviewed annually. No bonuses were paid to executive officers in
fiscal 1999. The Committee may also
10
<PAGE>
provide cash bonus opportunities to executive officers based upon meeting
specific operational objectives. Performance bonuses were earned by executives
based on fiscal 1999 performance and paid in December 1999.
LONG-TERM INCENTIVES
The 1993 Stock Option Plan is the basis of the Company's long-term
incentive plan for executive officers and other key employees. The objective of
this plan is to align executive officers' long-term interests with those of the
shareholders by creating a direct incentive for executive officers to increase
shareholder value. The option grants allow executive officers to purchase shares
of Company stock at a price equal to the fair market value of the stock on the
date of grant over a term of ten years. However, one third of the options
granted to each of the executive officers in October 1998 was priced at 125% of
the fair market value of the stock on the date of grant. The award of option
grants is consistent with the Company's objective to include in total
compensation a long-term equity interest for executive officers, with greater
opportunity for reward if long-term performance is sustained.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Lahti became Chief Executive Officer of the Company in June
1996, and has also served as its President since October 1995. Mr. Lahti began
employment with the Company as its Chief Operating Officer and Executive Vice
President in December 1993.
Since Mr. Lahti joined the Company, revenues have grown from
$554,000 for fiscal 1993 to $28,926,000 for fiscal 1999, while operating income
increased from an operating loss of $1,217,000 for fiscal 1993 to operating
income of $5,286,000 for fiscal 1999. Fiscal 1999 operating income is stated net
of a $2.75 million charge related to the settlement of the Company's litigation
with Mikohn Gaming Corporation's subsidiary Progressive Games, Inc. ("PGI"). The
settlement included cross-licensing terms that will result in the Company
receiving a total of $2.9 million from Mikohn over the next five years. In
addition to settling the Mikohn/PGI lawsuit, Mr. Lahti also successfully
executed agreements for the acquisition of Three Card Poker(R), a popular new
specialty table game, the rights in the U.S. and Caribbean for Shuffle Master to
distribute certain TCS Group products, and the licensing of Press Your Luck(R)
for video slot game applications. With regard to the Company's core shuffler and
table game product lines, placements (including sold, leased and licensed
products) have shown strong growth over the past six years. The total of
cumulative shufflers sold and shufflers currently on lease as of October 31,
1999, was in excess of 5,700 units, compared to 210 as of the end of fiscal
1993. Table games have increased by 822 units over the same period. During
fiscal 1999, Mr. Lahti presided over the rollout of the ACE(TM) single deck
shuffler and the development of the new continuous multi-deck King(TM) shuffler.
To create additional revenue streams, the Company also began to invest in the
development of a new hardware and software game system for slot machines. The
system should provide game developers a more timely and cost effective means for
game development and should allow casino operators greater flexibility in game
purchasing decisions.
Mr. Lahti's base salary was $236,250 for fiscal 1999. Mr. Lahti
earned a bonus of $113,000 for fiscal 1999 as a result of the achievement of the
financial performance objectives set by the Board. For fiscal 2000, Mr. Lahti's
base salary will increase by 4% to $ 246,000. Additional terms of Mr. Lahti's
compensation package remain under negotiation with the Board of Directors.
11
<PAGE>
CONCLUSION
The Committee believes that the executive compensation plan
discussed in this Proxy Statement is consistent with the overall corporate
strategy for continued growth in earnings and shareholder value.
Thomas A. Sutton
Patrick R. Cruzen
MEMBERS OF THE COMPENSATION COMMITTEE
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return
for the last five fiscal years, assuming $100 invested at October 31, 1994, with
the reinvestment of all dividends, as if such amounts had been invested in: (i)
the Company's Common Stock; (ii) the stocks included in the Russell 2000 Index;
and (iii) the stocks of a peer group index. The Company has elected to compare
an investment in its stock to a peer group index rather than a published
industry index because it believes such peer group index includes companies
whose businesses are more similar to that of the Company than any published
index.
[LINE CHART]
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98 10/31/99
Peer Group(1) $100.00 $96.87 $129.93 $119.77 $56.18 $133.44
Russell 2000 Index $100.00 $118.35 $138.00 $178.48 $157.34 $180.74
Shuffle Master, Inc. $100.00 $148.48 $134.85 $95.45 $96.97 $107.58
(1) The peer group index is comprised of the following companies: Acres
Gaming Incorporated; Alliance Gaming Corp.; Casino Data Systems;
Mikohn Gaming Corporation; Paul-Son Gaming Corporation; Silicon
Gaming Inc. (first publicly traded July 1996) and WMS Industries,
Inc.
12
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock
of the Company beneficially owned: (i) by each person known by the Company to be
the beneficial owner of more than 5% of the outstanding shares of Common Stock;
(ii) by each director; (iii) by each executive officer named in the Summary
Compensation Table; and (iv) by all directors and executive officers as a group,
as of March 1, 2000.
Name and Address Shares Beneficially Owned (1)
------------------------------
of Beneficial Owner Number Percent
- -------------------------------------------- ------------ ------------
John G. Breeding and Diane L. Breeding (2) 418,860 5.8%
370 Rockridge Drive
Sedona, Arizona 86336
Joseph J. Lahti 237,128 3.2%
10901 Valley View Road
Eden Prairie, Minnesota 55344
Mark L. Yoseloff (3) 184,666 2.5%
1106 Palms Airport Drive
Las Vegas, Nevada 89119
Gary W. Griffin 58,845 *
10901 Valley View Road
Eden Prairie, Minnesota 55344
Thomas A. Sutton 38,000 *
20330 Knightsbridge Road
Shorewood, Minnesota 55331
Patrick R. Cruzen 20,000 *
6310 Maple Ridge Drive
Excelsior, Minnesota 55331
All directors and executive 538,639 7.1%
officers as a group (5 persons)
- --------------------
* Less than 1%
(1) Shares not outstanding but deemed beneficially owned by virtue of
the individual's right to acquire them through the exercise of stock
options, as of March 1, 2000, or within 60 days of such date, are
treated as outstanding when determining the percent of the
outstanding shares of Common Stock owned by the individual and when
determining the percent owned by the group. Shares related to such
stock options included in the table above are as follows: Joseph J.
Lahti, 204,827 shares; Mark L. Yoseloff, 66,666 shares; Gary W.
Griffin, 55,245 shares; Thomas A. Sutton, 32,000 shares; Patrick R.
Cruzen, 20,000 shares; and all directors and executive officers as a
group, 378,738 shares.
(2) The number of shares beneficially owned by John G. Breeding and
Diane L. Breeding includes 62,667 shares subject to stock options
exercisable within 60 days of March 1, 2000.
(3) The number of shares beneficially owned by Mark L. Yoseloff includes
43,200 shares to be issued under a certain transaction with the
Company. See "Certain Relationships and Related Transactions."
13
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1996, the Board of Directors of the Company approved a
$300,000 loan to Mr. Lahti. These funds were advanced to Mr. Lahti in November
1996. The loan bears interest at seven percent, and is secured by 17,000 shares
of Shuffle Master, Inc. Common Stock which were pledged as collateral. The note
is further secured by a restriction on Mr. Lahti's vesting schedule under his
October 1996 grant of 40,000 options. The restriction requires loan repayment
before vested options can be exercised. As of October 31, 1999, the amount due
including accrued interest was $363,000. The terms of the loan were modified to
extend the due date to November 4, 2002 and provide that all accrued interest be
paid on or before May 1, 2000.
In March 1997, the Company purchased certain intellectual property
from Dr. Yoseloff and a company owned by Dr. Yoseloff. The purchase price (the
amount of which is the subject of a confidential treatment filing with the
Securities and Exchange Commission) included amounts previously paid to such
company for certain licensing rights and amounts previously paid to another
company owned by Dr. Yoseloff. The balance of such purchase price is to be paid
by the issuance of 108,000 shares of the Company's Common Stock which were
valued at $8.75 per share, and cash payments (the amount of which is the subject
of a confidential treatment filing with the Securities and Exchange Commission),
both to be made equally over twenty (20) quarterly installments, beginning March
7, 1997. The Company has made all payments required to date under this
agreement. There was no stated interest rate in the agreement. Interest was
imputed for financial statement purposes at seven percent. Under the terms of
this agreement, Dr. Yoseloff will receive additional payments (the amount of
which is the subject of a confidential treatment filing with the Securities and
Exchange Commission) for five years contingent on his continued employment with
the Company.
In a related but separate agreement, Dr. Yoseloff signed a five-year
employment contract with the Company commencing August 1, 1997. Under the terms
of the contract, Dr. Yoseloff will receive a minimum of $100,000 per year in
salary for each of the five years following the beginning of his employment.
TERMINATION OF EMPLOYMENT ARRANGEMENT
In fiscal 1997, the Company entered into a termination of employment
arrangement with Mr. Lahti which, in the event of termination other than for
cause, provides for payment of an amount equal to his then-current base salary
over a one year period commencing on the date of termination. In fiscal 1998,
the Company entered into a termination of employment arrangement with Mr.
Griffin whereby Mr. Griffin will receive nine months of his then-current base
salary in the event of a change of control of the Company.
INDEPENDENT AUDITORS
Representatives of Deloitte & Touche LLP, the Company's independent
auditors for the fiscal year ended October 31, 1999, will be present at the
Annual Meeting. The Board of Directors expects to retain Deloitte & Touche LLP
as the Company's independent auditors for the fiscal year ending October 31,
2000.
14
<PAGE>
SUBMISSION OF SHAREHOLDER PROPOSALS
The rules of the Securities and Exchange Commission permit
shareholders of the Company to present proposals for shareholder action in the
Company's Proxy Statement. Shareholder proposals prepared in accordance with the
proxy rules intended to be presented at the Company's 2000 Annual Meeting must
be received by the Company on or before October 14, 2000.
OTHER BUSINESS
The Board of Directors of the Company does not intend to present any
business at the meeting other than the matters specifically set forth in this
Proxy Statement and knows of no other business to come before the meeting.
By Order of the Board of Directors,
/s/ Gary W. Griffin
Gary W. Griffin
Date: March 17, 2000 SECRETARY
15
<PAGE>
SHUFFLE MASTER, INC.
ANNUAL MEETING OF SHAREHOLDERS
FRIDAY, APRIL 14, 2000
10:00 A.M. PACIFIC DAYLIGHT TIME
SHUFFLE MASTER GAMING
1106 PALMS AIRPORT DRIVE
LAS VEGAS, NEVADA
SHUFFLE MASTER, INC.
1106 PALMS AIRPORT DRIVE, LAS VEGAS, NV 89119 PROXY
- --------------------------------------------------------------------------------
The undersigned hereby appoints Joseph J. Lahti and Mark L. Yoseloff, and each
of them with full power of substitution, his or her proxies to represent and
vote, as designated below, all of the shares of the Common Stock of Shuffle
Master, Inc., registered in the name of the undersigned as of the close of
business on March 1, 2000, with the powers the undersigned would possess if
personally present at the Annual Meeting of Shareholders to be held on Friday,
April 14, 2000, at Shuffle Master Gaming, 1106 Palms Airport Drive, Las Vegas,
Nevada, at 10:00 a.m., Pacific Daylight Time, or at any adjournment thereof,
hereby revoking any proxy or proxies previously given.
(CONTINUED AND TO BE COMPLETED AND SIGNED ON THE REVERSE SIDE)
<PAGE>
<TABLE>
<CAPTION>
\/ PLEASE DETACH HERE \/
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(CONTINUED FROM THE OTHER SIDE)
<S> <C>
1. Election of directors: 01 Joseph J. Lahti 03 Thomas A. Sutton [ ] Vote FOR [ ] Vote WITHHELD
02 Mark L. Yoseloff 04 Patrick R. Cruzen all nominees from all nominees
(except as marked)
THE BOARD RECOMMENDS A VOTE FOR ALL NOMINEES.
----------------------------------------------------
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE,
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.)
----------------------------------------------------
2. To adopt the Shareholder Proposal expected to be presented by Herman Jacobs. [ ] For [ ] Against [ ] Abstain
THE BOARD RECOMMENDS A VOTE AGAINST ADOPTION OF SUCH PROPOSAL.
3. In their discretion, the appointed Proxies are authorized to vote upon such
other business as may properly come before the meeting or any adjournment.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION IS GIVEN, WILL BE VOTED
FOR ALL NOMINEES AND AGAINST THE ADOPTION OF THE SHAREHOLDER PROPOSAL IN ITEM 2.
Address Change? Mark Box [ ] Indicate changes below:
Dated ___________________________________, 2000
----------------------------------------------------
----------------------------------------------------
Signature(s) in Box
PLEASE DATE AND SIGN ABOVE exactly as your name
appears at left, indicating where appropriate,
official position or representative capacity.
- ------- -------
</TABLE>
