SHFL Entertainment 10Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2013
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number: 0-20820

SHFL entertainment, Inc.

(Exact name of registrant as specified in its charter)

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

6650 El Camino Road, Las Vegas	NV	89118
(Address of Principal	(State)	(Zip Code)
Executive Offices)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒No ☐

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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

(Do not check if a smaller reporting company)

Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒

As of September 4, 2013, there were 56,623,747 shares of our $.01 par value common stock outstanding.

SHFL ENTERTAINMENT, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JULY 31, 2013

TABLE OF CONTENTS

		Page
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Statements of Operations for the Three and Nine Months ended July 31, 2013 and 2012	3
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months ended July 31, 2013 and 2012	4
	Condensed Consolidated Balance Sheets as of July 31, 2013 and October 31, 2012	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months ended July 31, 2013 and 2012	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	50
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	52
Signatures		53

PART I

ITEM 1. FINANCIAL STATEMENTS

SHFL ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2013			2012			2013			2012
Revenue:
Product leases and royalties	$	29,349		$	27,830		$	87,941		$	80,730
Product sales and service		44,185			35,556			121,791			104,763
Total revenue		73,534			63,386			209,732			185,493
Costs and expenses:
Cost of leases and royalties		10,484			9,475			30,938			27,853
Cost of sales and service		17,272			13,889			45,050			39,308
Gross profit		45,778			40,022			133,744			118,332
Selling, general and administrative		27,257			19,007			71,169			55,991
Research and development		10,052			7,622			27,400			23,074
Total costs and expenses		65,065			49,993			174,557			146,226

Income from operations		8,469			13,393			35,175			39,267

Other income (expense):
Interest income		209			116			551			429
Interest expense		(266	)		(367	)		(789	)		(1,222	)
Other, net		228			180			498			209
Total other income (expense)		171			(71	)		260			(584	)
Income from operations before tax		8,640			13,322			35,435			38,683
Income tax provision		2,231			2,898			10,122			10,875
Net income	$	6,409		$	10,424		$	25,313		$	27,808

Basic earnings per share:	$	0.11		$	0.19		$	0.44		$	0.50
Diluted earnings per share:	$	0.11		$	0.18		$	0.44		$	0.49

Weighted average shares outstanding:
Basic		57,117			56,284			56,927			55,700
Diluted		57,789			57,029			57,623			56,445

See Notes to Unaudited Condensed Consolidated Financial Statements.

SHFL ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended July 31,						Nine Months Ended July 31,
	2013			2012			2013			2012

Net income	$	6,409		$	10,424		$	25,313		$	27,808
Currency translation adjustment		(10,559	)		(3,436	)		(10,666	)		(10,538	)
Total comprehensive income	$	(4,150	)	$	6,988		$	14,647		$	17,270

See Notes to Unaudited Condensed Consolidated Financial Statements.

SHFL ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	July 31, 2013		October 31, 2012

ASSETS
Current assets:
Cash and cash equivalents	$	41,819	$	24,160
Accounts receivable, net of allowance for bad debts of$391 and $491		39,332		45,708
Investment in sales-type leases and notes receivable, net of allowancefor bad debts of $42 and $8		9,366		9,287
Inventories		31,335		21,906
Prepaid income taxes		10,879		4,053
Deferred income taxes		3,782		4,622
Other current assets		7,467		6,901
Total current assets		143,980		116,637
Investment in sales-type leases and notes receivable, net of current portion		8,772		6,310
Products leased and held for lease, net		32,275		34,639
Property and equipment, net		30,217		17,417
Intangible assets, net		54,861		62,836
Goodwill		85,435		84,950
Deferred income taxes		3,173		5,183
Other assets		2,510		3,079
Total assets	$	361,223	$	331,051

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	13,386	$	6,702
Accrued liabilities and other current liabilities		21,337		22,402
Deferred income taxes		16		16
Customer deposits		3,714		3,383
Income tax payable		3,738		4,179
Deferred revenue		4,595		4,799
Current portion of long-term debt		530		-
Total current liabilities		47,316		41,481
Long-term debt		1,296		1,303
Other long-term liabilities		1,690		2,004
Deferred income taxes		2,528		1,493
Total liabilities		52,830		46,281
Commitments and contingencies (See Note 11)
Shareholders' equity:
Common stock, $0.01 par value;151,368 shares authorized;56,612 and 55,973 shares issued and outstanding		566		560
Additional paid-in capital		144,728		135,758
Retained earnings		144,757		119,444
Accumulated other comprehensive income		18,342		29,008
Total shareholders' equity		308,393		284,770
Total liabilities and shareholders' equity	$	361,223	$	331,051

See Notes to Unaudited Condensed Consolidated Financial Statements.

SHFL ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except per share amounts)

(Unaudited)

	Nine Months Ended, July 31,
	2013			2012
	(In thousands)
Cash flows from operating activities:
Net income	$	25,313		$	27,808
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		20,440			18,657
Amortization of debt issuance costs and debt discount		357			357
Share-based compensation		4,543			3,063
Provision for bad debts		364			113
Write-down for inventory obsolescence		434			533
Loss from disposal of assets		111			231
Profit on sale of leased assets		(4,153	)		(721	)
Excess tax benefit from stock option exercises		(907	)		(1,370	)
Changes in operating assets and liabilities:
Accounts receivable and investment in sales-type leases and notes receivable		(253	)		(5,191	)
Inventories		(11,006	)		(3,261	)
Accounts payable and accrued liabilities		3,780			(2,658	)
Customer deposits and deferred revenue		435			561
Income taxes payable		(290	)		3,300
Deferred income taxes		3,372			2,590
Prepaid income taxes		(6,847	)		(4,714	)
Other		(973	)		(3,430	)
Net cash provided by operating activities		34,720			35,868
Cash flows from investing activities:
Proceeds from sale of leased assets		6,285			1,640
Payments for products leased and held for lease		(10,785	)		(11,227	)
Purchases of property and equipment		(13,727	)		(5,852	)
Purchases of intangible assets		(1,807	)		(4,333	)
Acquisition of business		(1,590	)		(5,500	)
Other		(549	)		(690	)
Net cash used by investing activities		(22,173	)		(25,962	)

Cash flows from financing activities:
Proceeds from Revolver		8,000			11,000
Debt payments on Revolver		(8,000	)		(34,000	)
Proceeds from issuance of common stock, net		4,420			16,238
Excеss tax bеnеfit from stock option еxеrcisеs		907			1,370
Other		(42	)		(43	)
Net cash provided by (used in) financing activities		5,285			(5,435	)
Effect of exchange rate changes on cash		(173	)		1,370
Net increase in cash and cash equivalents		17,659			5,841
Cash and cash equivalents, beginning of year		24,160			22,189
Cash and cash equivalents, end of period	$	41,819		$	28,030

Non-cash investing activities
Noncash additions to property and equipment included in accounts payable	$	2,810		$	-

See Notes to Unaudited Condensed Consolidated Financial Statements.

SHFL ENTERTAINMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION

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

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

We lease, license and sell our products. When we lease or license our products, we generally negotiate a month-to-month fixed fee contract or to a lesser extent, we enter into participation arrangements whereby casinos pay a fee to us based on a percentage of net win. When we sell our products, we offer our customers a choice between a sale, a longer-term sales-type lease or other long-term financing. We offer our products worldwide in regulated markets.

Utility. Our Utility segment develops products for licensed casino operators that enhance table game speed, productivity, profitability and security. Utility products include various models of automatic card shufflers to suit specific games, as well as deck checkers and roulette chip sorters. This segment also includes ouri-Shoe Auto card reading shoe that gathers data and enables casinos to track table game play and ouri-Scorebaccarat viewer that displays current game results and trends. These products are intended to cost-effectively provide licensed casino operators and other users with data on table game play for security and marketing purposes, which in turn allows them to increase their profitability.

Proprietary Table Games. Our PTG segment consists of proprietary table games that enhance our casino customers' and other licensed operators' table game operations. Products in this segment include our internally developed and acquired proprietary table games, side bets, add-ons and progressives. Our proprietary content and features are also added to public domain games such as poker, baccarat, pai gow poker, craps and blackjack table games and to electronic platforms such asTable Master,SHFL FUSIONVirtual(formerlyVegas Star) andi-Table.

Electronic Table Systems. Our ETS segment consists of various products involving popular table game content using e-Table game platforms. Our primary ETS products arei-Table,Table Master,SHFL FUSIONVirtualandSHFL FUSIONHybrid Table Games (formerlyRapid Table Games). Ouri-Tableplatform combines an electronic betting interface with a live dealer and live cards or a live wheel that is designed to improve game speed and security while reducing many operating expenses associated with live tables. OurTable Master andSHFL FUSIONVirtualproducts feature a virtual dealer which enables us to offer table game content in both traditional gaming markets and in markets where live table games are not permitted, such as some racinos, video lottery and arcade markets. Like thei-Table, ourSHFL FUSIONHybrid 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. Unlike thei-Table,SHFL FUSIONHybrid Table Games is not confined to a fixed number of seats and can have hundreds of terminals tied to one game outcome.

Electronic Gaming Machines. Our EGM segment develops and delivers our video slot machines into markets including Australia, New Zealand, Asia, Mexico, parts of South America, and most recently, select markets in the United States. We offer a selection of video slot titles developed as stand-alone units or as linked progressive machines. In addition to selling the full EGM complement, we sell software conversion kits that allow existing EGM terminals to be converted to other games that operate on the current PC4 operating platform. Popular titles for our EGMs includeCats Hats & Bats,Eureka Gold Mine 2,88 Fortunes,Emerald FortunesandMahajanga. In addition, we continue to develop a popular range of games utilizing the Pink Panther™ brand, under license from Metro-Goldwyn-Mayer Studios, Inc. We also develop games incorporating features and bonus rounds based on the popular 1960’s animated television series, The Flintstones^TM& © Hanna-Barbera s13.

iGaming. Our iGaming segment delivers online versions of our specialty table games via our proprietary content delivery platform to online operators. Utilizing cloud-based technology, our platform is designed to deliver our games across multiple channels such as the web, social networks, tablets and smart phones both in free-to-play environments and for real money gambling in regulated online markets. We also license our content to online operators and protect the integrity of our valuable brands by pursuing online operators that infringe upon our intellectual property. Our iGaming segment primarily offers products to our customers through business-to-business (“B2B”) lease, license and participation arrangements. We are continuing to invest in this segment – namely, by expanding our team – to capitalize on the various existing and potential online markets.

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

In the opinion of our management, the accompanying Unaudited Condensed Consolidated Financial Statements include all adjustments necessary to fairly state, in all material respects, our results for the periods presented. These Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our 2012 Annual Report on Form 10-K filed with the SEC on December 21, 2012. The results of operations for the three and nine months ended July 31, 2013 are not necessarily indicative of results to be expected for the entire fiscal year.

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

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

●

persuasive evidence of an arrangement exists;

●

the price to the customer is fixed and determinable;

●

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

●

collection is reasonably assured.

Revenues are reported net of incentive rebates and discounts. Amounts billed prior to completing the earnings process are deferred until revenue recognition criteria are met. Our standard sales contracts do not contain right of return provisions and we have not experienced significant sales returns. Therefore we have not recorded an allowance for sales returns.

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

Product sales and service revenue— We generate sales revenue through the sale of equipment in each product segment, including sales revenue from sales-type leases and the sale of lifetime licenses for our proprietary table games. Our credit sales terms are primarily 30 to 90 days. Financing for intangible property and sales-type leases for tangible property have payment terms ranging generally from 24 to 36 months and are usually interest-bearing at market interest rates. Revenue from the sale of equipment is recorded in accordance with the contractual shipping terms. Products placed with customers on a trial basis are not recognized as revenue until the trial period ends, the customer accepts the product and all other relevant criteria have been met. If a customer purchases existing leased equipment, revenue is recorded on the effective date of the purchase agreement. Revenue on service and warranty contracts is recognized as the services are provided over the term of the contracts. Revenue from the sale of lifetime licenses or settlements with online operators, under which we have no continuing obligation, is recorded on the effective date of the license or settlement agreement.

Multiple element arrangements— Some of our revenue arrangements contain multiple deliverables, such as a product sale combined with a service element or the delivery of a future product. We allocate revenues among multiple deliverables in a multi-element arrangement, based on relative selling prices. In order of preference, relative selling prices will be estimated based on vendor specific objective evidence (“VSOE”), third-party evidence (“TPE”), or management’s best estimate of selling price (“BESP”).

When VSOE or TPE is not available, BESP is the amount we would sell the product or service for individually. The determination of BESP is made based on our normal pricing and discounting practices, which consider multiple factors, such as market conditions, competitive landscape, internal costs and profit objectives. Revenues allocated to future performance obligations elements are deferred and will be recognized upon delivery and customer acceptance.

Recently issued accounting standards or updates – adopted

In the current year, we adopted an Accounting Standards Update (“ASU”) which requires other comprehensive income to be presented with net income in one continuous statement or in a separate statement consecutively following net income. We adopted the ASU as of November 1, 2012 and chose to present comprehensive income in a separate Condensed Consolidated Statement of Comprehensive Income.

Recently issued accounting standards or updates – not adopted

In March 2013, the FASB issued an ASU requiring the release of cumulative translation adjustment into net income when an entity either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a foreign subsidiary. This ASU will be effective prospectively for our 2015 first quarter and is not expected to have a material impact on our financial statements.

Proposed Merger with Bally Technologies, Inc.

On July 15, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Bally Technologies, Inc., a Nevada corporation ("Bally"), and Manhattan Merger Corp., a Minnesota corporation and an indirect, wholly-owned subsidiary of Bally (“Merger Sub”). The Merger Agreement provides for the merger of Merger Sub with and intothe Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Bally. The Merger Agreement was unanimously approved by our board of directors and a committee of disinterested directors of our board of directors.

At the effective time of the proposed Merger, on the terms and subject to the conditions set forth in the Merger Agreement, each share of SHFL’s common stock, par value $0.01 (“SHFL Common Stock”) issued and outstanding immediately prior to such time, other than shares of SHFL Common Stock owned by SHFL, Bally or Merger Sub (each of which will be cancelled) and shares of SHFL Common Stock with respect to which appraisal rights are properly exercised and not withdrawn under Minnesota law, shall be automatically cancelled and converted into the right to receive $23.25 in cash, without interest. If the proposed Merger is consummated, shares of SHFL Common Stock will be delisted from the NASDAQ. No assurance can be given that the Merger will be completed.

Consummation of the proposed Merger is subject to customary conditions, including without limitation (i) the required approval of the Merger Agreement by SHFL’s shareholders, (ii) the expiration or early termination of the waiting period applicable to the consummation of the proposed Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1974, as amended (the “HSR Act”) (which waiting period, as previously announced, expired as of 11:59 p.m. EDT on August 26, 2013 with no action by the Federal Trade Commission or the Department of Justice), (iii) the receipt of specified licenses, permits, and other approvals relating to SHFL’s gaming operations issued by certain governmental authorities, (iv) the absence of any law or order that is in effect and restrains, enjoins or otherwise prohibits the proposed Merger, (v) the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the Merger Agreement (subject to customary materiality qualifiers) and (vi) the absence of any change, effect, development or circumstance that, individually or in the aggregate, constitutes or is reasonably likely to constitute a Company Material Adverse Effect (as defined in the Merger Agreement).

The Merger Agreement contains certain termination rights for Bally and the Company. In connection with the termination of the Merger Agreement under specific circumstances, the Company may be required to pay to Bally a termination fee of $43.3 million.

The Merger Agreement contains certain limitations on the operations of the Company during the period prior to the effective time of the proposed Merger, including a prohibition on share repurchases by the Company.

For terms of the Merger Agreement, including circumstances under which the Merger Agreement can be terminated and the ramifications of such termination, as well as other terms and conditions, please refer to the Merger Agreement filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the SEC on July 18, 2013. Additional information regarding the proposed Merger transaction will be contained in a definitive proxy statement to be filed by the Company with the SEC.

During the nine months ended July 31, 2013, we incurred approximately $4.0 million of expenses related to the Merger Agreement. These expenses consisted primarily of payments to financial advisors and consultation with legal counsel.

2. SELECTED BALANCE SHEET DATA

The following provides additional disclosures for selected balance sheet accounts:

	July 31, 2013		October 31, 2012
	(In thousands)
Inventories:
Raw materials and component parts	$	16,073	$	11,309
Work-in-process		4,916		3,478
Finished goods		10,346		7,119
Total	$	31,335	$	21,906

	July 31, 2013		October 31, 2012
	(In thousands)
Other current assets:
Prepaid expenses		4,383		3,772
Other receivables		2,081		1,707
Other		1,003		1,422
Total	$	7,467	$	6,901

	July 31, 2013			October 31, 2012
	(In thousands)
Products leased and held for lease:
Utility	$	53,816		$	51,269
Less: accumulated depreciation		(37,674	)		(35,371	)
Utility, net		16,142			15,898

Proprietary Table Games		9,726			9,004
Less: accumulated depreciation		(5,233	)		(4,429	)
Proprietary Table Games, net		4,493			4,575

Electronic Table Systems		25,941			28,122
Less: accumulated depreciation		(17,466	)		(15,988	)
Electronic Table Systems, net		8,475			12,134

Electronic Gaming Machines		4,896			2,876
Less: accumulated depreciation		(1,731	)		(844	)
Electronic Gaming Machines, net		3,165			2,032

Total, net	$	32,275		$	34,639

In the first quarter of the current year, we made a change in our accounting estimates relating to the depreciable lives of theTable Master leased and available for lease machines in the ETS segment. In anticipation of the launch ofTable MasterFusion we shortened the estimated economic life of the leased and available for lease machines to be fully depreciated by April 2014.

The net effect of the change on book income from operations and net income for the three and nine months ended July 31, 2013 was $0.3 million and $0.8 million, respectively. There was no net effect on EPS for the three months ended July 31, 2013 and there was a $0.01 effect for the nine months ended July 31, 2013.

	July 31, 2013		October 31, 2012
	(In thousands)
Accrued liabilities and other current liabilities:
Accrued compensation	$	15,191	$	15,158
Accrued taxes		1,102		2,743
Other accrued liabilities		5,044		4,501
Total	$	21,337	$	22,402

3. INTANGIBLE ASSETS AND GOODWILL

Amortizable intangible assets. All of our recorded intangible assets, excluding goodwill and theStargames andCARD tradenames, are subject to amortization. We amortize our intangible assets as the economic benefits of the intangible asset are consumed or otherwise used up. Amortization expense was $2.0 million and $2.2 million for the three months ended July 31, 2013 and 2012, respectively and $6.2 million and $6.8 million for the nine months ended July 31, 2013 and 2012, respectively. Amortization expenses are included in cost of leases and royalties and cost of sales and service, except for customer relationships which are included in selling, general and administrative expenses.

Amortizable intangible assets are comprised of the following:

	Weighted Average Useful Life (in years)		July 31, 2013			October 31, 2012
			(In thousands)
Amortizable intangible assets:

Patents, games and products		10	$	67,925		$	67,174
Less: accumulated amortization				(55,951	)		(53,182	)
				11,974			13,992
Customer relationships		10		24,967			26,623
Less: accumulated amortization				(16,017	)		(15,197	)
				8,950			11,426
Licenses and other		6		23,665			22,935
Less: accumulated amortization				(11,665	)		(10,024	)
				12,000			12,911
Total			$	32,924		$	38,329

Tradenames.Intangibles with an indefinite life, consisting of theStargames andCARD tradenames, are not amortized, and were $21.9 million and $24.5 million as of July 31, 2013 and October 31, 2012, respectively.

Goodwill. Changes in the carrying amount of goodwill as of July 31, 2013, are as follows:

Activity by Segment	Utility			Proprietary Table Games		Electronic Table Systems			Electronic Gaming Machines			Total
	(In thousands)

Goodwill	$	48,818		$	10,253	$	35,328		$	13,130		$	107,529
Accumulated impairments		-			-		(22,137	)		-		$	(22,137	)
Balance as of October 31, 2011	$	48,818		$	10,253	$	13,191		$	13,130		$	85,392

Foreign currency translation adjustment		(3,468	)		-		(466	)		(463	)	$	(4,397	)
Acquisition		-			3,000		-			-			3,000
Other		-			955		-			-			955
Balance as of October 31, 2012	$	45,350		$	14,208	$	12,725		$	12,667		$	84,950

Foreign currency translation adjustment		85			-		(1,402	)		(1,397	)	$	(2,714	)
Acquisition		-			-		-			2,650			2,650
Other		-			549		-			-			549
Balance as of July 31, 2013	$	45,435		$	14,757	$	11,323		$	13,920		$	85,435

The $2.7 million of additional goodwill in our EGM segment relates to the acquisition of ProTec Games, Inc. ("ProTec"), a computer-based content provider for casino slot games, table games and online video games to develop graphical assets and perform software development and testing primarily for our EGM machines. Approximately $2.1 million of the acquisition price was paid to date and the remaining consideration was recorded as a liability due in the current fiscal fourth quarter.

The $0.5 million of additional goodwill in our PTG segment relates to our acquisition of certain assets from Bet Technology, Inc. (“BTI”) in 2004. In 2004, we recorded an initial estimated liability of $7.6 million for contingent installment payments computed as the excess fair value of the acquired assets over the fixed installments and other direct costs. In November 2004, we began paying monthly note installments based on a percentage of certain revenue from BTI games for a period of up to ten years, not to exceed $12.0 million. The final principal and interest payment related to our initial estimated liability of $7.6 million was paid in February 2009 and all payments made subsequently have been recorded as additional goodwill. As of July 31, 2013, we have paid the $12.0 million maximum amount.

4. DEBT

Debt consisted of the following:

	July 31, 2013			October 31, 2012
	(In thousands)
Revolver	$	-		$	-
Other long-term debt		1,826			1,303
Total Debt		1,826			1,303
Less current portion		(530	)		-
Total long-term debt	$	1,296		$	1,303

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

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

●

the Federal Funds Rate plus .50%;

●

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

●

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

Swing Line Loans bear interest at the Base Rate plus the applicable margin. Borrowings under the Revolver may be used for working capital, capital expenditures and general corporate purposes (including share repurchases).

As of July 31, 2013, there was no amount drawn under the Revolver and after considering restrictive financial covenants under the Senior Secured Revolving Credit Facility, we had approximately $200 million of available remaining credit under the Revolver. The Revolver matures on, and no further borrowings may be made after, October 29, 2015.

On May 31, 2012, the Senior Secured Revolving Credit Facility was amended to clarify and define certain restrictive covenants.

Covenants.Our Senior Secured Revolving Credit Facility contains three financial maintenance covenants requiring us to maintain a Total Leverage Ratio, as defined therein, of not more than 3.75 to 1.0, a Senior Leverage Ratio, as defined therein, of not more than 3.0 to 1.0 until October 31, 2013 and not more than 2.75 to 1.00 after October 31, 2013 and Interest Expense Coverage Ratio, as defined therein, in excess of 3.0 to 1.0 at the end of any fiscal quarter. As of July 31, 2013, our Total Leverage Ratio, Senior Leverage Ratio and Interest Expense Coverage Ratio were 0.02 to 1.0, 0.0 to 1.0 and 141.11 to 1.0, respectively.

Guarantors and collateral. The Revolver obligations under our Senior Secured Revolving Credit Facility are guaranteed by each existing and future wholly-owned domestic subsidiary of ours that is not an immaterial subsidiary and are secured by a first priority lien on substantially all of our and our guarantors’ assets. If loans are ever made pursuant to our Incremental Facility, such loans would share such collateral equally and ratably with our Revolver.

5. SHAREHOLDERS’ EQUITY

Common stock repurchases.Our board of directors periodically authorizes us to repurchase shares of our common stock. As of July 31, 2013, $21.1 million remained outstanding under our board authorization; however, pursuant to the Merger Agreement with Bally, stock repurchases are prohibited until the proposed Merger is effective or terminated. We cancel shares that are repurchased and record the repurchase as a reduction to common stock and additional paid-in capital. No shares were repurchased during the nine months ended July 31, 2013. Although we generally prioritize bank debt reduction and direct investment in our business over share repurchases we may consider share repurchases when there are anomalies in the value created by, but not limited to, market conditions.

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

6. SHARE-BASED COMPENSATION

Share-based award plans. In December 2012, our board of directors adopted and, in March 2013, our shareholders approved the 2012 Stock Incentive Plan (the “2012 Plan”). The approved plan replaced all previous plans. The 2012 Plan included 6.7 million new awards available for grant as well as the shares available for grant or subject to outstanding awards under the prior plans.

The 2012 Plan includes a variety of forms of awards, including stock options, stock appreciation rights, restricted stock, restricted stock units and dividend equivalents. Stock options may not be granted at an exercise price less than the market value of our common stock on the date of grant. Each share issued in connection with an award granted, other than stock options and stock appreciation rights, will be counted against the 2012 Plan's share reserve as 1.67 shares for every one share issued in connection with such award (and shall be counted as 1.67 shares for each one share that is returned or deemed not to have been issued from the 2012 Plan). Any shares covered by an award which is forfeited, canceled or expired shall be deemed not to have been issued for purposes of determining the maximum number of shares which may be issued under the 2012 Plan. As of July 31, 2013, under the 2012 Plan, there were 7.4 million shares available for grant.

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

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands, except per share amount)
Outstanding at November 1, 2012		3,010		$	14.68
Granted		532			13.18
Exercised		(482	)		9.18
Forfeited		(24	)		12.25
Expired		(405	)		25.92

Outstanding at July 31, 2013		2,631		$	13.68		6.2	$	26,781

Fully vested and expected to vest at July 31, 2013		2,594		$	13.69		6.2	$	26,414

Exercisable at July 31, 2013		1,504		$	15.00		4.5	$	14,567

The weighted average grant date fair value of stock options granted during the nine months ended July 31, 2013 and 2012 was $6.56 and $6.26, respectively. The total intrinsic value of the stock options exercised for the nine months ended July 31, 2013 and 2012, was $3.8 million and $6.2 million, respectively.

During the nine months ended July 31, 2013 and 2012, 0.5 million and 1.5 million options were exercised, respectively. For the nine months ended July 31, 2013 and 2012, the tax effect/benefit from stock option exercises affected our deferred tax asset or income tax payable as well as our additional paid-in capital by an equal amount and had no effect on our income tax provision. As of July 31, 2013, there was a total of $5.4 million of unamortized compensation related to stock options, which expense is expected to be recognized over a weighted-average period of 1.8 years or immediately upon a change in control as defined in the 2012 Plan.

During the nine months ended July 31, 2013 and 2012, we granted 0.5 million and 0.4 million stock options, respectively, with a grant date fair value of $3.5 million and $2.8 million, respectively.

Option valuation models require the input of certain assumptions and changes in assumptions used can materially affect the fair value estimate. Expected volatility is based on the historical volatility of our common stock. Expected term represents the estimated weighted-average time between grant date and its exercise date and is based on historical factors. Expected dividend yield is based on our expectation that dividends will not be paid within the average expected life of existing options. Risk-free interest rate is based on U.S. Treasury rates appropriate for the expected term. There were no stock awards during the three months ended July 31, 2013. We estimate the fair value of each stock option award on the grant date using the Black-Scholes valuation model incorporating the weighted-average assumptions noted in the following table:

	Three Months Ended July 31, 2013	Nine Months Ended July 31, 2013
Option valuation assumptions:
Expected dividend yield	N/A	None
Expected volatility	N/A		63.1	%
Risk-free interest rate	N/A		0.6	%
Expected term (in years)	N/A		4.4

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

	Shares			Weighted Average Grant-Date Fair Value		Remaining Vesting Period		Aggregate Intrinsic Value
	(In thousands, except per share amount)
Non-vested at November 1, 2012		652		$	11.79
Granted		415			14.88
Vested		(226	)		12.06
Forfeited		(18	)		12.82

Non-vested at July 31, 2013		823		$	13.25		1.5	$	18,727

Expected to vest		794		$	13.21		1.5	$	18,066

During the nine months ended July 31, 2013 and 2012, we issued 0.4 million and 0.5 million shares of restricted stock, respectively, with an aggregate fair value of $6.2 million and $5.6 million, respectively. The weighted average grant date fair value of non-vested shares granted during the nine months ended July 31, 2013 and 2012 was $14.88 and $12.35, respectively. The total value of each restricted stock grant, based on the fair market value of the stock on the date of grant, is amortized to compensation expense over the related vesting period.

In the current year certain restricted stock awards containing market-based conditions were issued. The market-based conditions affect the number of shares to vest, which varies based on the Company’s stock price compared to several peers and competitors. For restricted stock subject to market-based conditions, the Company uses a Monte-Carlo simulation pricing model to determine the grant date fair value. The Monte-Carlo simulation pricing model takes into account the same input assumptions as the Black-Scholes model; however, it also further incorporates into the fair value determination the possibility that the market condition may not be satisfied and impact of the possible differing stock price paths. There were no restricted stock awards with market conditions granted during the three months ended July 31, 2013. The following assumptions were used in the Monte-Carlo pricing model:

	Three Months Ended July 31, 2013	Nine Months Ended July 31, 2013
Monte-Carlo valuation assumptions:
Expected dividend yield	N/A	None
Expected volatility	N/A		43.5	%
Risk-free interest rate	N/A		0.4	%
Expected term (in years)	N/A		2.8

As of July 31, 2013, there was $8.8 million of unamortized compensation expense related to restricted stock, which is expected to be recognized over a weighted-average period of 1.8 years or immediately upon a change in control as defined in the 2012 Plan.

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

	Three Months Ended July 31,						Nine Months Ended July 31,
	2013			2012			2013			2012
	(In thousands)
Compensation costs:
Stock options	$	602		$	363		$	1,737		$	1,366
Restricted stock		1,054			651			2,806			1,697
Total compensation cost	$	1,656		$	1,014		$	4,543		$	3,063
Related tax benefit	$	(584	)	$	(375	)	$	(1,596	)	$	(1,088	)

7. INCOME TAXES

Our effective income tax rate from continuing operations for the three and nine months ended July 31, 2013 was 25.8% and 28.6%, respectively. Our effective income tax rate from continuing operations for the three and nine months ended July 31, 2012 was 21.8% and 28.1%, respectively. The higher effective income tax rate is primarily attributable to non-deductible expenses recorded in the current period for transaction costs related to the proposed Merger as well as the mix of forecasted domestic and foreign income for the year. The prior year included a benefit in the quarter ended July 31, 2012 for transaction costs related to the terminated acquisition of Ongame Network Ltd, which became deductible in the quarter. Our effective income tax rate may fluctuate due to changes in the amount and mix of domestic and foreign income, changes in tax legislation, changes in valuation allowances and changes in assessments of uncertain tax positions and related accumulated interest and penalties.

8. EARNINGS PER SHARE

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

	Three Months Ended July 31,				Nine Months Ended July 31,
	2013		2012		2013		2012

Net income available to common shares	$	6,409	$	10,424	$	25,313	$	27,808

Basic
Weighted average shares		57,117		56,284		56,927		55,700

Diluted
Weighted average shares, basic		57,117		56,284		56,927		55,700
Dilutive effect of options and non-participating securities		672		745		696		745
Weighted average shares, diluted		57,789		57,029		57,623		56,445

Basic earnings per share	$	0.11	$	0.19	$	0.44	$	0.50
Diluted earnings per share	$	0.11	$	0.18	$	0.44	$	0.49

Weighted average anti-dilutive shares excludedfrom diluted EPS		1,103		1,593		1,424		1,981

9. FAIR VALUE MEASUREMENT

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

Cash and cash equivalents, accounts receivable, the current portion of our investment in sales-type leases and notes receivable are not presented as their carrying value approximates fair value due to their short term nature. It is impracticable to estimate the fair value of the long-term portion of our investment in sales-type leases and notes receivable as it is comprised of many insignificant balances, customers with different credit profiles and various interest rates. As of July 31, 2013 our investment in sales-type leases and notes receivable had an approximate 5.5% effective interest rate and an approximate 2 year average maturity.

As of July 31, 2013 and October 31, 2012, there were no amounts drawn under our Revolver.

10. OPERATING SEGMENTS

The iGaming segment results have historically not met the quantitative thresholds that require separate segment reporting and therefore that segment was aggregated with the PTG and Unallocated Corporate segment results in the prior year. In the current year iGaming has been separately reported and the prior period segment data has been restated to conform to the current period presentation. Also in the current period the Unallocated Corporate capital expenditures consist primarily of amounts paid for the construction of our new consolidated facility in Las Vegas. The following provides financial information concerning our reportable segments of our operations:

	Three Months Ended July 31,						Nine Months Ended July 31,
	2013			2012			2013			2012

Revenue:
Utility	$	25,644		$	24,382		$	81,445		$	68,988
Proprietary Table Games		13,839			12,989			40,670			36,300
Electronic Table Systems		10,822			6,053			25,040			21,183
Electronic Gaming Machines		23,167			19,957			62,229			56,699
iGaming		62			5			348			2,323
	$	73,534		$	63,386		$	209,732		$	185,493
Gross profit:
Utility	$	15,529		$	15,285		$	51,663		$	42,622
Proprietary Table Games		11,338			10,629			33,352			29,671
Electronic Table Systems		4,943			2,055			10,396			8,868
Electronic Gaming Machines		13,956			12,048			38,043			34,848
iGaming		12			5			290			2,323
	$	45,778		$	40,022		$	133,744		$	118,332
Operating income (loss):
Utility	$	12,775		$	13,334		$	43,974		$	36,986
Proprietary Table Games		9,772			9,555			28,216			26,770
Electronic Table Systems		1,702			(846	)		999			(967	)
Electronic Gaming Machines		8,555			8,701			23,776			24,948
iGaming		(2,362	)		(1,074	)		(5,288	)		(1,648	)
Unallocated Corporate		(21,973	)		(16,277	)		(56,502	)		(46,822	)
	$	8,469		$	13,393		$	35,175		$	39,267
Depreciation and amortization:
Utility	$	1,805		$	1,874		$	5,429		$	5,549
Proprietary Table Games		1,599			1,359			4,744			3,962
Electronic Table Systems		1,947			1,630			6,171			4,940
Electronic Gaming Machines		430			336			1,178			879
iGaming		112			-			180			-
Unallocated Corporate		891			1,061			2,738			3,327
	$	6,784		$	6,260		$	20,440		$	18,657
Capital expenditures:
Utility	$	1,899		$	1,557		$	5,766		$	3,767
Proprietary Table Games		1,878			405			2,973			2,154
Electronic Table Systems		815			2,634			2,213			4,860
Electronic Gaming Machines		1,305			211			1,874			5,341
iGaming		234			704			1,314			1,393
Unallocated Corporate		7,055			852			12,179			3,897
	$	13,186		$	6,363			26,319			21,412

REVENUE BY GEOGRAPHIC AREA

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

	Three Months Ended July 31,								Nine Months Ended July 31,
	2013				2012				2013				2012
	(Dollars in thousands)
Revenue:
United States	$	27,459	37.3	%	$	28,372	44.8	%	$	88,592	42.2	%	$	83,327	44.9	%
Canada		1,773	2.4	%		2,422	3.8	%		5,352	2.6	%		6,166	3.3	%
Other Americas		1,453	2.0	%		1,046	1.6	%		4,286	2.0	%		3,224	1.8	%
Europe		3,300	4.5	%		2,085	3.3	%		9,598	4.6	%		6,112	3.3	%
Australia		23,419	31.8	%		20,785	32.8	%		65,581	31.3	%		64,772	34.9	%
Asia		15,635	21.3	%		8,240	13.0	%		35,197	16.8	%		20,905	11.3	%
Other		495	0.7	%		436	0.7	%		1,126	0.5	%		987	0.5	%
	$	73,534	100.0	%	$	63,386	100.0	%	$	209,732	100.0	%	$	185,493	100.0	%

11. COMMITMENTS AND CONTINGENCIES

Employment agreements. We have entered into employment agreements with our corporate officers and certain other key employees with durations ranging from one to three years. Significant contract provisions include minimum annual base salaries, healthcare benefits, bonus compensation if performance measures are achieved and non-compete provisions. These contracts are primarily “at will” employment agreements, under which the employee or we may terminate employment. If we terminate any of these employees without cause, we are obligated to pay the employee payments as specified in their individual employment agreement. As of July 31, 2013 and October 31, 2012, minimum aggregate severance benefits totaled $6.7 million and $6.5 million, respectively.

Contingencies relating to the Proposed Merger– The Company retained Macquarie Capital (USA) Inc. to act as its financial advisor in connection with the proposed Merger. The financial advisor will receive a transaction fee currently expected to be $13.6 million for its services, $2.0 million of which became payable upon the rendering of the financial advisor’s opinion and the principal portion of which is contingent upon completion of the proposed Merger. In addition, the Company has agreed to reimburse the financial advisor for expenses incurred in connection with its engagement.

Legal proceedings. In the ordinary course of business, we are involved in various legal proceedings and other matters that are complex in nature and have outcomes that are difficult to predict. We record accruals for such contingencies to the extent that we conclude that it is probable that a loss will be incurred and the amount of loss can be reasonably estimated. No estimate of the reasonably possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below because the inherently unpredictable nature of legal proceedings may be affected by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery or other material legal proceedings are incomplete; (iii) the proceeding is in its early stages and there is insufficient information available to assess the viability of the stated grounds; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; or (vi) the trier of fact is granted latitude by applicable law to apply judgment. Our assessment of each matter may change based on future unexpected events. An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, gaming licenses, intellectual property, results of operations or financial position. Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity, but may be material to the results of operations in any given period. We assume no obligation to update the status of pending litigation after the date of this Quarterly Report on Form 10-Q, except as may be required by applicable law, statute or regulation.

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

The Court set the Markman hearing for December 2010. In November 2010, the Court granted our Motion to Stay because of pending reexamination proceedings that were initiated at our request before the United States Patent and Trademark Office (“USPTO”) as to all of the patents in suit. In June 2012, the USPTO granted our petitions to reexamine two of the patents in suit, which patents were previously granted a Reexamination Certificate. At present, the case remains stayed. The Company believes that it has meritorious defenses and intends to continue to vigorously defend this matter.

Macau SHFL FUSION Hybrid Table Games Patent Issue – In June 2009, customs officials from Macau SAR seized a baccaratSHFL FUSION Hybrid Table Games (formerly Rapid Table Games) unit displayed by SHFL entertainment (Asia) Limited (“SHFL Asia”) at the G2E Asia Gaming Show. This seizure related to a claim by Jay Chun (“Chun”) of alleged patent infringement. In October 2009, the Office of the Public Prosecutor dismissed the investigation after a series of appeals and procedural developments. Chun appealed to the Investigation Judge, which proceedings were dismissed. From this decision, Chun appealed to the Macau Second Instance Court, which remanded the matter to the Investigation Court “Tribunal de Instrução Criminal” for further proceedings. In January 2013, the Investigation Court formally served an accusation on SHFL Asia. A Trial Hearing of this matter began on April 18, 2013 and was concluded on July 19, 2013 with the acquittal of SHFL Asia. The Court’s acquittal found no patent infringement by SHFL Asia. On July 29, 2013, Chun appealed the acquittal to the Macau Second Instance Court. We believe that we have meritorious defenses and will continue to vigorously defend this matter.

In May 2012, Chun along with Natural Noble Limited (“Natural Noble”), which is a company that we believe is controlled by Chun (collectively, the "Natural Noble Plaintiffs"), obtained an ex parte decision from a Macau court allegedly enjoining one of our subsidiaries. The injunction was requested and ordered against an alleged Australian entity named Shuffle Master Asia Limited, which entity does not exist, rather than our subsidiary SHFL Asia. The injunction sought to prevent us from displaying any products that infringe the Natural Noble Plaintiffs’ patents during the 2012 G2E Asia Gaming Show, even though the decision did not specify which of our products displayed at the G2E Asia Gaming Show would allegedly infringe such patents. After initially agreeing with Macau customs officials’ request to cover our SHFL FUSION Hybrid Table Games unit, we received court approval to post a bond of approximately $0.1 million to enable our subsidiary SHFL Asia to display the SHFL FUSION Hybrid Table Game unit at the G2E Asia Gaming Show. In February 2013, SHFL Asia submitted arguments of appeal contesting the decision to grant the injunction to the Macau Second Instance Court. The Court dismissed the appeal on July 18, 2013 based on the fact that SHFL Asia is not the entity against which the injunction was granted, but rather the injunction was granted against the non-existent Australian entity named Shuffle Master Asia Limited. Therefore, the Court found that SHFL Asia did not have procedural standing to appeal the decision. Despite not being the party against which the injunction was granted, SHFL Asia believes it has the right to appeal the decision. SHFL Asia submitted an application for Appeal to the Macau Court of Final Appeal on August 2, 2013. We believe that we have meritorious claims and are vigorously pursuing the matter.

In June 2012, the Natural Noble Plaintiffs and LT Game Limited, a company that we believe is controlled by Chun (collectively, the “LT Game Plaintiffs”), filed a writ of summons with a Macau court seeking monetary damages and other civil relief as a result of the alleged infringement of the Natural Noble Plaintiffs’ patents by SHFL Asia and SHFL entertainment, Inc. at the 2012 G2E Asia Gaming Show. A trial date has not yet been set for this matter. We believe that we have meritorious defenses, have submitted our defenses and counterclaims in this matter and are vigorously defending this matter.

In July 2012, LT Game International Ltd., a company that we believe may be controlled by Chun, filed a complaint against SHFL in the United States District Court for the District of Nevada alleging unfair competition and tortious interference with current and prospective business and contractual relations as a result of our alleged disparagement and misrepresentations regarding LT Game International Ltd.’s business, products and services. The complaint seeks injunctive relief and an unspecified amount of damages, including claims for reasonable attorneys’ fees and disbursements, costs, statutory damages under the Lanham Act, treble damages and profits. The parties are conducting discovery and a trial date has not yet been set for this matter. We believe that this complaint is without merit and we are vigorously defending this matter.

In October 2012, SHFL Asia filed a lawsuit with a Macau court against the LT Game Plaintiffs and Paradise Entertainment, Inc. (collectively “Paradise Defendants”), a company that we believe is the ultimate parent company of LT Game Limited and Natural Noble. This lawsuit seeks an injunction against the Paradise Defendants’ assertions of monopolistic rights, whereby the Paradise Defendants claim that their respective patents cover multi-game terminal betting as a concept or generic invention. The lawsuit alleges that the Paradise Defendants have made statements of such monopolistic rights, publicly and to SHFL Asia’s customers, to the detriment of SHFL Asia’s business and such statements claim patent protection beyond the legal scope of patent protection in Macau. The lawsuit further alleges that the Paradise Defendants’ patents are not novel, and thus the Paradise Defendants cannot restrict SHFL Asia and others from selling or using multi-game terminal betting products in Macau. A Trial Hearing began in June, 2013 and is scheduled to continue on September 9, 2013. We believe that we have a meritorious case and are vigorously pursuing this claim.

Litigation relating to the Proposed Merger– Shortly after the announcement of the proposed Merger, three complaints challenging the proposed Merger between the Company and Bally were filed in the Minnesota District Court, Fourth Judicial District, County of Hennepin:

	(i)	Brandt v. SHFL entertainment, Inc., et al. (Case No. 27-cv-13-13529) (“Brandt”);

	(ii)	Katzman Trust v. SHFL entertainment, Inc.,et al. (Case No. 27-cv-13816) (“Katzman”); and

	(iii)	Rosenfeld v. SHFL entertainment, Inc., et al. (Case No. 27-cv-13-13933) (“Rosenfeld”).

Four similar cases also were filed in the Eighth Judicial District Court, County of Clark, Nevada:

	(i)	Morris v. Bally Technologies, Inc., et al. (Case No. A-13-685682-B) (“Morris”);

	(ii)	Suchla v. Bally Technologies, Inc., et al. (Case No. A-13-685725-C) (“Suchla”);

	(iii)	Fix v. SHFL entertainment, Inc., et al. (Case No. A-13-685793-C) (“Phelps”); and

	(iv)	Fix v. SHFL entertainment, Inc., et al. (Case No. A-13-686190-B) (“Fix”).

Each of the foregoing actions is a putative class action or shareholder derivative action filed on behalf of the public shareholders of the Company and names as defendants the Company, its directors, Bally and Merger Sub except for the Rosenfeld action, which does not name Bally and Merger Sub as defendants. The complaints generally allege that the individual defendants breached their fiduciary duties in connection with their consideration and approval of the proposed Merger and the entity defendants aided and abetted those alleged breaches. The complaints seek, among other relief, declaratory judgment, damages and an injunction against the proposed Merger.

On August 9, 2013, the Minnesota actions were consolidated before Judge Mel Dickstein under the caption In re SHFL entertainment, Inc., No. 27-CV-13-13529. On August 16, 2013, all defendants moved to dismiss the Minnesota complaints on several grounds, including failure to state a claim on which relief may be granted and lack of standing. A hearing on the defendants’ motions is currently scheduled for October 23, 2013. The Minnesota court has directed the Company to produce certain limited discovery before that date and plaintiffs to file any motion for injunctive relief by October 11, 2013 (which would then be heard at the same time as defendants' motions to dismiss).

The outcome of these lawsuits cannot be predicted with any certainty. An adverse judgment for monetary damages could have a material adverse effect on the operations and liquidity of the Company. A preliminary injunction could delay or jeopardize the completion of the proposed Merger, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the proposed Merger. All of the defendants believe that the claims asserted against them in the lawsuits are without merit and are defending against them vigorously. Additional lawsuits arising out of or relating to the Merger Agreement or the proposed Merger may be filed in the future.

We are also subject to a variety of other claims and suits that arise from time to time in the ordinary course of business. We do not believe the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, will have a material adverse impact on our financial position, liquidity or results of operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q contains forward-looking statements. We consider such statements to be made under the safe harbor created by the federal securities laws to which we are subject. In some cases, you can identify forward-looking statements by the following words: “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology intended to identify performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Examples of such forward-looking statements include, without limitation, statements about or relating to the following:

	●	The pending, proposed acquisition of the Company, including the potential timing consummation of such transaction, pursuant to the terms of the Merger Agreement by and among the Company, Bally and Merger Sub;

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

●

Increasing our Proprietary Table Games (“PTG”) content through development or acquisitions of new proprietary titles;

●

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

●

The growth opportunities and revenue potential from ouri-Table,i-Table RouletteandMD3shuffler products;

●

The benefits of our products;

●

Continued volatility in sales revenue from our Utility segment;

●

Expected sources of revenue in the Utility segment;

●

Expectations of revenue in the current year from online products;

●

Expectations that Electronic Gaming Machine (“EGM”) revenues will continue to come from sales of EGMs in Australia, Asia and other markets;

●

Expectations regarding revenue and placement increases in our EGM segment through the use of long-term financing arrangements;

●

Expected growth of certain markets or our business in certain markets, including Asia, United States, Canada and Latin America;

●

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

●

Expectations for online gaming to represent an opportunity for continued growth;

●

Expectations with respect to outstanding litigation; and

●

Expectations with respect to foreign currency exchange rate fluctuation risk.

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

	●	Difficulties or delays in the consummation of the acquisition of the Company under the Merger Agreement, including as a result of an inability to meet closing conditions, obtain necessary regulatory approvals, the failure to obtain the necessary debt financing arrangements set forth in the debt commitment letter received in connection with the proposed Merger, inability to obtain shareholder approval of such transaction, the possibility that costs related to the proposed Merger will be greater than expected, an inability to maintain compliance with the covenants set forth in the Merger Agreement and other risks and uncertainties that could delay or prevent the closing of such transaction;

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

●

Legislative and regulatory changes that impact us or our customers;

●

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

●

High volatility or extreme changes in foreign currency exchange rates;

●

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

●

Difficulties in maintaining and protecting our intellectual property rights;

●

Potential infringement of the intellectual property rights of third parties;

●

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

●

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

●

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

●

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

●

Inability to obtain market acceptance of products currently in development;

●

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

●

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

●

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

●

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

●

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

In addition, refer to the “Risk Factors” section in Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended October 31, 2012, as filed with the Securities and Exchange Commission on December 21, 2012, and as incorporated by reference in Part II, Item 1A of this Quarterly Report on Form 10-Q, for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. There can be no assurance that the proposed Merger will in fact be consummated. As a result of these factors, we cannot assure that the forward-looking statements will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, these statements should not be regarded as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by each of these cautionary statements above.

The following discussion should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” in the Annual Report on Form 10-K and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in October and the associated quarters of those fiscal years.

Overview

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

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

On July 15, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Bally and Merger Sub. The Merger Agreement provides for the merger of Merger Sub with and intothe Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Bally. At the effective time of the proposed Merger, on the terms and subject to the conditions set forth in the Merger Agreement, each share of SHFL Common Stock issued and outstanding immediately prior to such time, other than shares of SHFL Common Stock owned by SHFL, Bally or Merger Sub (each of which will be cancelled) and shares of SHFL Common Stock with respect to which appraisal rights are properly exercised and not withdrawn under Minnesota law, shall be automatically cancelled and converted into the right to receive $23.25 in cash, without interest. If the proposed Merger is consummated, shares of SHFL Common Stock will be delisted from the NASDAQ. No assurance can be given that the proposed Merger will be completed.

Consummation of the proposed Merger is subject to customary conditions, including without limitation (i) the required approval of the Merger Agreement by SHFL’s shareholders, (ii) the expiration or early termination of the waiting period applicable to the consummation of the proposed Merger under the HSR Act (which waiting period, as previously announced, expired as of 11:59 p.m. EDT on August 26, 2013 with no action by the Federal Trade Commission or the Department of Justice), (iii) the receipt of specified licenses, permits, and other approvals relating to SHFL’s gaming operations issued by certain governmental authorities, (iv) the absence of any law or order that is in effect and restrains, enjoins or otherwise prohibits the proposed Merger, (v) the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the Merger Agreement (subject to customary materiality qualifiers) and (vi) the absence of any change, effect, development or circumstance that, individually or in the aggregate, constitutes or is reasonably likely to constitute a Company Material Adverse Effect (as defined in the Merger Agreement).

Strategy

We believe we enhance our customer and shareholder value through our execution of the following strategic priorities:

	●	An unwavering commitmentto create innovative solutions and services for casino operators and compelling gaming experiences for playersthrough enhanced customer centricity.
	●	Reinforce our relationships with our customersby providing enhanced efficiencies, security and profitability on the casino floor. We continue to work toward developing innovative products that anticipate and respond to their needs.

	●	Maintain a cost-conscious mindset, promote a lean culture, and serve as prudent stewards of shareholder capital.
	●	Seek long-term profitability and sustainability through our recurring revenue model.We plan to continue to invest capital in our lease business to maximize our return and build on our economic engine.

	●	Foster the spirit of invention and the commitment to innovation that is at the heart of our success. With nearly 2,500 worldwide patents, trademarks and copyrights granted and pending, our pipeline for new intellectual property is robust. We believe our intellectual property collectively represents one of the strongest portfolios in the industry and our success depends upon our ability to preserve, leverage and protect these core assets.
	●	Capitalize on existing and emerging markets, and the worldwide proliferation of gaming. A large part of our success in fiscal 2012 was turning opportunities into achievements. As new markets continue to emerge across the globe and as existing gaming markets continue to evolve, we strive to make the most of every opportunity that arises. We also believe that we have room to grow our footprint in existing markets – like Latin America, United States, Canada and Asia – in all or some of our product categories.

	●	Sound balance sheet management to fuel growth through:
		o	continued investmentin our recurring revenue model, global intellectual property and research and development (“R&D”).We believe this will promote growth on our top and bottom line without relying on the introduction of significant new markets;

		o	continuedexamination of strategic acquisitions. We are seeking opportunities that are accretive to earnings, have strong existing recurring revenues and merit our efforts of integration; and
		o	use ofour financial resources to improve our return to shareholders through continued deleveraging and evaluation of stock repurchases and/or dividends.

	●	Promote and foster internal staff development and deepen our bench strength. We know our success is directly attributable to the caliber of our workforce and we remain committed to each and every employee’s development. We will continue to set the talent bar high.
	●	Drive margin improvement across all product categories. Our overall gross margin and operating margin have shown continuous improvement over the past four fiscal years. We plan to continue our process improvement initiatives and uncover additional operational efficiencies.

●

Capitalize on opportunities created from existing online gaming markets and prepare ourselves for the potential legalization of Internet gambling in the United States. The gaming landscape is quickly evolving and we will strive to be a leading content-provider in this arena.

We are focused on our customers and on value-creation for our shareholders. We seek to maintain continuous improvementwhile keeping innovation at the core of our success. We believe that continued execution of our strategic plan is the best method to foster the growth of our business in fiscal 2013.

Sources of Revenue

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

Currently, the majority of Utility segment revenue is derived from our automatic card shufflers. In addition to leasing shufflers, we also sell and service them. In the PTG segment, the majority of games placed are licensed to our customers on month-to-month license arrangements, which provides us with monthly royalty revenue. In the ETS segment, we derive revenue from fixed fee leases, participation arrangements, sales and service contracts. In the EGM segment, we derive revenue from selling the full EGM complement, as well as sales of game conversion kits, and to a lesser extent, participation and lease arrangements. The majority of our iGaming revenue has historically been related to licensing and settlement agreements with online operators. We plan to generate revenue in the current year from our suite of online products, which feature online versions of our specialty table games delivered via our proprietary content delivery platform to online operators. We anticipate revenue from real money gambling in regulated online markets, as well as free-to-play environments. We will continue to protect our intellectual property and pursue settlements where applicable.

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

Utility

●

We expect to continue to emphasize lease revenues in our Utility segment within the United States. One of the current growth drivers for this segment has been theMD3shuffler upgrade initiative. The MD3shuffler is our next generation upgrade for the legacyMD series shufflers. As theMD1 shuffler reaches its end of life where replacement parts will no longer be available, our strategy is to encourage our customers to upgrade theMD1 andMD2shufflers, both leased and previously sold, with theMD3shuffler. Our objective is that, over time, the majority of these placements will be leases. We expect revenue growth drivers to be our next generation shuffler models like the Deck Mate 2. We expect to upgrade previous models through both outright sales and leases of next generation shufflers.

●

We expect to continue seeing volatility in sales revenue in our Utility segment. Factors that can impact sales include new openings, whereby certain operators may opt to allocate equipment expenses into initial capital budgets and thus purchase products outright. Additionally, sales may be positively impacted as the overall health of our customers improve and capital becomes more readily available. While we encourage leasing outside the United States, a large majority of our international Utility product placements historically have been sales. We are starting to see increased lease activity in international markets such as Asia and Latin America. Growth drivers for the Utility segment outside the United States are new jurisdictional openings, the expansion of existing markets, and growing demand for greater security and sophistication in existing casinos.

Proprietary Table Games

●

The majority of our PTG segment revenue is derived from royalties and leases. While we have a strong leasing presence in the United States, we are constantly looking to expand our proprietary table games in other parts of the world where the current penetration of proprietary table games is lower. With global gaming expansion and the growing acceptance of specialty table games, we have recently seen some successes with new lease placements of our premium table games as well as progressives and side bets.

●

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

●

We also pursue opportunities to place PTG products in new properties and jurisdictions in the United States. Several states have either opened new casino properties or approved live table games over the past year, and we have seen significant placements of our table game products in those new jurisdictions.

●

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

Electronic Table Systems

●

Although we continually pursue opportunities to increase lease revenues in our ETS segment, the nature of the gaming landscape in the United States has gradually evolved whereby there are fewer racinos and electronic-only markets and more live gaming markets. As a result, we have seen some of our leased ETS products removed from those electronic-only markets as some states have approved live table games. While this has caused some setbacks in the growth of our domestic ETS business, we have been able to return some of these products to service in other markets such as Latin America and even position these products as low-denomination, labor-free alternatives to live tables in live markets. However, the live market placements typically do not perform to the same revenue and profitability levels as units in electronic-only markets. There are opportunities for our ETS suite of products in markets with strong player acceptance, such as Australia and Asia. Given our large install base of legacy e-tables in Australia, we believe there are upgrade opportunities with our refreshedFUSION line.

	●	Through development of new products and enhancements of our existing products we expect to generate revenue and growth for the ETS segment. New products include the following:
		o	In Australia and Asia, we have begun generating revenue from placements of our new multi-game feature onSHFL FUSION Hybrid, which offers enhanced live statistics at the touch of a button and allows the player to choose between multiple games. Similarly, we recently debuted additional features of SHFL FUSION Hybrid, which take the multi-game concept one step further by enabling concurrent wagering.

		o	We recently upgraded theSHFL FUSIONVirtual platform to offer modular 22-inch widescreen terminals, new graphic displays, and a variety of configurable options such asSHFL FUSIONVirtual Live Roulette, which incorporates a live wheel.
		o	We recently debuted our next generationTable Master Fusion product that shares a common modular terminal withSHFL FUSIONVirtual andSHFL FUSION Hybrid. We expect this product to drive growth in domestic as well as international markets.

The i-Table andi-Table Roulettecombine an electronic betting interface with a live table game and graphically-enhanced central display touchscreens. We expect these products to provide us with growth opportunities in domestic and international markets if they achieve customer and player acceptance.

Electronic Gaming Machines

●

Our EGM segment is primarily a sales model and we expect to continue to realize the majority of our EGM revenues from sales of EGMs in the global marketplace, such as Australia, Asia, the United States and other markets that make strategic sense.

●

We expect that EGM revenue and placements in fiscal 2013 will continue above fiscal 2012 levels primarily driven by new game content and enhancements, continued momentum in emerging markets, and global market expansion. We also expect revenue and placements to increase through the continued use of long-term financing arrangements.

●

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

●

We also expect global growth in markets such as Asia, Latin America and the United States. In the prior fiscal year, we grew our footprint in Mexico, Latin America, the Philippines and Macau.

iGaming

●

Because of the strength of our brand portfolio and our technological expertise, we believe that online gaming has significant growth potential for our business, particularly in current regulated online markets, like Europe, and potential new ones, such as the United States. As the regulatory environment of the U.S. market potentially evolves, either on a federal or state-by-state level, we are positioning ourselves to capitalize on opportunities to supply online operators with a variety of content, similar to our land-based strategy.

●

We continue to invest in our iGaming infrastructure and will continue to expand our team in order to best capitalize on the various existing and potential online opportunities.

●

We plan to generate revenue in the current year from our suite of online products, which feature online versions of our specialty table games delivered via our proprietary content delivery platform to online operators. We anticipate revenue from real money gambling in regulated online markets, as well as free-to-play environments.

●

We have successfully sought enforcement and remedies against parties that infringed our intellectual property and will continue to protect and pursue settlements where applicable.

Expenses

Cost of sales and service and cost of leases and royalties primarily include the cost of products sold, depreciation of leased assets, amortization of product-related intangible assets, service, manufacturing overhead, shipping and installation. Operating expenses allocated to segments include other costs directly identified with each segment, such as product specific R&D, product approval costs, product-related litigation expenses, product management, sales commissions and other directly-allocable sales expenses. We continue to expend significant efforts on the development of our next generation products and product enhancements in each segment, which includes development of our online content delivery platform, online versions of our table games, social gaming and mobile applications. Efforts related to product licensing, product specific litigation and enforcement as well as entity infrastructure and licensing are also included in operating expenses allocated to segments.

The amounts reported 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. In the current period the costs related to the proposed Merger have been included in Unallocated Corporate expenses.

Gross Margin

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

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

We occasionally record inventory adjustments related to obsolescence or declines in the net realizable value of some products. While those adjustments occur in the normal course of business, it can cause negative pressure on our margins. We also occasionally dispose of leased assets that are no longer in service and are no longer usable. As products approach the end of their anticipated life-cycle we assess the remaining useful life of the leased asset base and adjust the remaining depreciation period accordingly.

In addition to the lease versus sale strategy, we expect to see continual improvement in our gross margins through value engineering to reduce manufacturing costs. Our focus is currently on savings attributable to component parts, product redesign and lower cost manufacturing opportunities within each of our segments.

The following table presents our various revenues and expenses as a percentage of revenue:

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended July 31,										Nine Months Ended July 31,
	2013					2012					2013					2012
	(Dollars in thousands)
Revenue:
Utility	$	25,644		34.9	%	$	24,382		38.5	%	$	81,445		38.8	%	$	68,988		37.2	%
Proprietary Table Games		13,839		18.8	%		12,989		20.5	%		40,670		19.4	%		36,300		19.6	%
Electronic Table Systems		10,822		14.7	%		6,053		9.5	%		25,040		11.9	%		21,183		11.4	%
Electronic Gaming Machines		23,167		31.5	%		19,957		31.5	%		62,229		29.7	%		56,699		30.6	%
iGaming		62		0.1	%		5		0.0	%		348		0.2	%		2,323		1.2	%

Total revenue		73,534		100.0	%		63,386		100.0	%		209,732		100.0	%		185,493		100.0	%
Cost of revenue		27,756		37.7	%		23,364		36.9	%		75,988		36.2	%		67,161		36.2	%

Gross profit		45,778		62.3	%		40,022		63.1	%		133,744		63.8	%		118,332		63.8	%
Selling, general and administrative		27,257		37.1	%		19,007		30.0	%		71,169		33.9	%		55,991		30.2	%
Research and development		10,052		13.7	%		7,622		12.0	%		27,400		13.1	%		23,074		12.4	%

Income from operations		8,469		11.5	%		13,393		21.1	%		35,175		16.8	%		39,267		21.2	%
Other income (expense):
Interest income		209		0.3	%		116		0.2	%		551		0.3	%		429		0.2	%
Interest expense		(266	)	(0.4	%)		(367	)	(0.6	%)		(789	)	(0.4	%)		(1,222	)	(0.6	%)
Other, net		228		0.3	%		180		0.3	%		498		0.2	%		209		0.1	%
Total other income (expense)		171		0.2	%		(71	)	(0.1	%)		260		0.1	%		(584	)	(0.3	%)

Income from operations before tax		8,640		11.7	%		13,322		21.0	%		35,435		16.9	%		38,683		20.9	%
Income tax provision		2,231		3.0	%		2,898		4.6	%		10,122		4.8	%		10,875		5.9	%
Net income	$	6,409		8.7	%	$	10,424		16.4	%	$	25,313		12.1	%	$	27,808		15.0	%

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

REVENUE AND GROSS MARGIN

	Three Months Ended July 31,						Percentage			Nine Months Ended July 31,						Percentage
	2013			2012			Change			2013			2012			Change
	(Dollars in thousands)
Revenue:
Leases and royalties	$	29,349		$	27,830			5.5	%	$	87,941		$	80,730			8.9	%
Sales and service		44,185			35,556			24.3	%		121,791			104,763			16.3	%
Total	$	73,534		$	63,386			16.0	%	$	209,732		$	185,493			13.1	%

Cost of revenue:
Leases and royalties	$	10,484		$	9,475			10.6	%	$	30,938		$	27,853			11.1	%
Sales and service		17,272			13,889			24.4	%		45,050			39,308			14.6	%
Total	$	27,756		$	23,364			18.8	%	$	75,988		$	67,161			13.1	%

Gross profit:
Leases and royalties	$	18,865		$	18,355			2.8	%	$	57,003		$	52,877			7.8	%
Sales and service		26,913			21,667			24.2	%		76,741			65,455			17.2	%
Total	$	45,778		$	40,022			14.4	%	$	133,744		$	118,332			13.0	%

Gross margin:
Leases and royalties		64.3	%		66.0	%					64.8	%		65.5	%
Sales and service		60.9	%		60.9	%					63.0	%		62.5	%
Total		62.3	%		63.1	%					63.8	%		63.8	%

Three months ended July 31, 2013 compared to three months ended July 31, 2012

Revenue

Our revenue for the three months ended July 31, 2013 increased $10.1 million over the same prior year period, primarily due to the following:

●

Increase of $8.6 million sales and service revenue:

Increase in ETS primarily driven by sales ofSHFL FUSIONVirtual seats in Australia andSHFL FUSION Hybrid sales in Asia and New Zealand;

Increase in EGM primarily driven by an increase in the number of units sold as well as an increase in average sales price; and

Increase in Utility primarily driven by an increase in the number of shufflers sold primarily in Asia.

●

Increase of $1.5 million in our leases and royalties revenue:

Increase most notably in our PTG segment driven by a 13.5% increase in units on lease; and

Increase in Utility primarily related to an increase in shuffler average lease price.

Gross margin

Our gross margin for the three months ended July 31, 2013 decreased 80 basis points (“bps”) to 62.3% as compared to the same prior year period, reflecting the following:

	●	The mix of segment performance, primarily driven by increased revenue in the ETS segment as a percent of total revenue;

	●	Increase in headcount of the Company’s service team that has expanded to service thegrowing product footprint globally; and

	●	Increased depreciation on theTable Master seats on lease and available for lease. In anticipation of the launch ofTable MasterFusion we shortened the estimated economic life of the leased and available for lease.

Nine months ended July 31, 2013 compared to nine months ended July 31, 2012

Revenue

Our revenue for the nine months ended July 31, 2013 increased $24.2 million over the same prior year period, primarily due to the following:

●

Increase of $17.0 million sales and service revenue:

An increase in Utility primarily driven by an increase in the number of shufflers sold;

Increase in EGM primarily driven by an increase in the number of units sold;

An increase in ETS driven primarily by an increase in the number of seats sold;

Increase in PTG driven by sales of table game lifetime licenses in the current period; and

Partially offset by decreased iGaming revenues from less settlement and licensing fees in the current period.

●

Increase of $7.2 million in our leases and royalties revenue:

Increase most notably in our PTG segment driven by a 13.5% increase in units on lease;

Increase in ETS lease revenue primarily driven by higher average lease prices driven primarily by a change in the mix of products on lease; and

Increase in Utility primarily related to an increase in shuffler average lease price.

Gross margin

Our gross margin for the nine months ended July 31, 2013 remained consistent at 63.8%. Consolidated margin included the net effect of the following:

●

Increased segment margin performance in the Utility segment primarily driven by an increase in the number of shufflers sold in the current year;

●

Partially offset by decreased margins in ETS which were unfavorably impacted by decreased sales revenue and increased depreciation on theTable Master seats on lease and available for lease. In anticipation of the launch ofTable MasterFusion we shortened the estimated economic life of the leased and available for lease; and

●

Further offset by changes in product mix most notably from a $2.0 million decrease in settlement fees from online operators with little associated direct costs.

The following table provides additional information regarding our operating expenses:

OPERATING EXPENSES

	Three Months Ended July 31,						Percentage			Nine Months Ended July 31,						Percentage
	2013			2012			Change			2013			2012			Change
	(Dollars in thousands)

Selling, general and administrative	$	27,257		$	19,007			43.4	%	$	71,169		$	55,991			27.1	%
Percentage of revenue		37.1	%		30.0	%					33.9	%		30.2	%

Research and development	$	10,052		$	7,622			31.9	%	$	27,400		$	23,074			18.7	%
Percentage of revenue		13.7	%		12.0	%					13.1	%		12.4	%

Total operating expenses	$	37,309		$	26,629			40.1	%	$	98,569		$	79,065			24.7	%
Percentage of revenue		50.7	%		42.0	%					47.0	%		42.6	%

Three months ended July 31, 2013 compared to three months ended July 31, 2012

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

SG&A expenses increased $8.3 million for the three months ended July 31, 2013, as compared to the same prior year period. This increase primarily reflects the following:

●

Merger related costs:

We incurred approximately $3.6 million of expenses related to the proposed Merger transaction. These expenses consisted primarily of payments to financial advisors and consultation with legal counsel.

●

Compensation and related expenses:

Increase of approximately $1.6 million in payroll and related expenses driven primarily by increased headcount across various support departments as well as increases in stock based compensation and medical costs.

●

iGaming:

Increase of approximately $1.1 million in costs incurred to establish our product management and sales teams as well as costs incurred to pursue online operators that infringe upon our intellectual property.

●

Consulting and professional fees:

Increase of approximately $0.8 million in consulting expenses, professional accounting fees, and legal expenses primarily related to consultation and representation with external professionals.

●

Promotion, advertising and tradeshow expense:

Increase of approximately $0.6 million primarily related to expanded participation in tradeshows to market our new products and to enter new jurisdictions.

●

Corporate development related costs:

Partially offset by a reduction of $0.5 million in prior year expenses related to the terminated Ongame Network Ltd. acquisition.

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

R&D expenses increased $2.4 million for the three months ended July 31, 2013 as compared to the same prior year period primarily related to increased headcount and increased product approval expenses. The following projects have been the focus of our R&D efforts during the three months ended July 31, 2013:

●

EGM:

R&D efforts were spent on developing additional new EGM titles for theEquinox cabinet and to support ongoing business growth in Australia and geographic expansion into Asia, Latin America and the United States.

●

iGaming:

Development of online content delivery platforms and versions of our table games for online social gaming and mobile applications.

●

Utility:

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

●

PTG:

Ongoing enhancements to the successful progressive offerings on our table game titles including the development of our Nexus Command software and OWAP products.

●

ETS:

Expenses primarily related to the development of updated ETS products including theTable Master Fusion, and the multigame and concurrent gaming enhancements to theSHFL FUSIONHybrid andSHFL FUSIONVirtualproducts as well as ongoing development ofi-Table andi-Table Roulette.

Nine months ended July 31, 2013 compared to nine months ended July 31, 2012

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

SG&A expenses increased $15.2 million for the nine months ended July 31, 2013, as compared to the same prior year period. This increase primarily reflects the following:

●

Compensation and related expenses:

Increase of approximately $4.1 million in payroll and related expenses driven primarily by increased headcount across various support departments as well as increases in stock based compensation and medical costs; and

Increase of approximately $1.3 million in sales and profit driven compensation driven by increased revenue in the current year.

●

Merger related costs:

We incurred approximately $4.0 million of expenses related to the proposed Merger transaction. These expenses consisted primarily of payments to financial advisors and consultation with legal counsel.

●

iGaming:

Increase of approximately $1.9 million in costs incurred to establish our product management and sales teams as well as costs incurred to pursue online operators that infringe upon our intellectual property.

●

Consulting and professional fees:

Increase of approximately $1.5 million in consulting expenses and professional accounting fees primarily related to consultation with external professionals.

●

Litigation expenses:

Increase of approximately $1.3 million in legal and consulting expenses primarily related to the LT Games litigation described in Note 11 of the Condensed Consolidated Financial Statements.

●

Promotion, advertising and tradeshow expense:

Increase of approximately $1.1 million primarily related to expanded participation in tradeshows to market our new products and to enter new jurisdictions.

●

Facilities expenses:

Increase of approximately $0.8 million primarily related to leased facilities in new jurisdictions.

●

Corporate development related costs:

Partially offset by a net decrease of approximately $1.2 million in corporate development related expenses. In the prior year period we incurred $2.2 million in expenses related to the terminated Ongame Network Ltd. acquisition.

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

R&D expenses increased $4.3 million for the nine months ended July 31, 2013 as compared to the same prior year period primarily related to increased headcount and increased product approval expenses. The following projects have been the focus of our R&D efforts during the nine months ended July 31, 2013:

●

EGM:

●

iGaming:

Development of online content delivery platforms and versions of our table games for online social gaming and mobile applications.

●

Utility:

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

●

PTG:

Ongoing enhancements to the successful progressive offerings on our table game titles including the development of our Nexus Command software and OWAP products.

●

ETS:

Expenses primarily related to the development of updated ETS products including the next generation of theTable Master Fusion, and the multigame and concurrent gaming enhancements to theSHFL FUSIONHybrid andSHFL FUSION Virtualproducts as well as ongoing development ofi-Table andi-Table Roulette.

The following table provides additional information regarding our depreciation and amortization expenses:

DEPRECIATION AND AMORTIZATION EXPENSES

	Three Months Ended July 31,				Percentage			Nine Months Ended July 31,				Percentage
	2013		2012		Change			2013		2012		Change
	(Dollars in thousands)
Gross margin:
Depreciation	$	3,730	$	3,164		17.9	%	$	11,172	$	9,126		22.4	%
Amortization		1,205		1,400		(13.9%	)		3,702		4,271		(13.3%	)
Total		4,935		4,564		8.1	%		14,874		13,397		11.0	%

Operating expenses:
Depreciation		1,035		862		20.1	%		3,075		2,745		12.0	%
Amortization		814		834		(2.4%	)		2,491		2,515		(1.0%	)
Total		1,849		1,696		9.0	%		5,566		5,260		5.8	%

Total:
Depreciation		4,765		4,026		18.4	%		14,247		11,871		20.0	%
Amortization		2,019		2,234		(9.6%	)		6,193		6,786		(8.7%	)
Total	$	6,784	$	6,260		8.4	%	$	20,440	$	18,657		9.6	%

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.

Three months ended July 31, 2013 compared to three months ended July 31, 2012

Total depreciation and amortization included in gross margin increased 8.1% in the three months ended July 31, 2013 as compared to the same prior year period. Increased depreciation in gross margin is attributable to increases in leased assets as well as increased depreciation on theTable Master seats on lease and available for lease. In anticipation of the launch ofTable MasterFusion we shortened the estimated economic life of the leased and available for lease. Decreased amortization in gross margin is due to reduced amortization of intangible assets in our Utility segment as the underlying intangible assets are approaching the end of their estimated useful lives.

Total depreciation and amortization included in operating expenses increased 9.0% in the three months ended July 31, 2013 as compared to the same prior year period. The increase in depreciation expenses relates primarily to depreciation of infrastructure and equipment purchased in the prior year.

Nine months ended July 31, 2013 compared to nine months ended July 31, 2012

Total depreciation and amortization included in gross margin increased 11.0% in the nine months ended July 31, 2013 as compared to the same prior year period. Increased depreciation in gross margin is attributable to increases in leased assets as well as increased depreciation on theTable Master seats on lease and available for lease. In anticipation of the launch ofTable MasterFusion we shortened the estimated economic life of the leased and available for lease. Decreased amortization in gross margin is due to reduced amortization of intangible assets in our Utility segment as the underlying intangible assets are approaching the end of their estimated useful lives.

Total depreciation and amortization included in operating expenses increased 5.8% in the nine months ended July 31, 2013 as compared to the same prior year period. The increase in depreciation expenses relates primarily to depreciation of infrastructure and equipment purchased in the prior year.

INCOME TAXES

Three months ended July 31, 2013 compared to three months ended July 31, 2012

The effective income tax rate for the three months ended July 31, 2013 increased to 25.8% as compared to 21.8% in the prior year period. This increase primarily reflects the following:

●

Non-deductible expenses recorded in the current period for transaction costs related to the proposed Merger;

●

Expenses recorded in the prior year for transaction costs related to the terminated Ongame Network Ltd. acquisition, became deductible in the quarter ended July 31, 2012 due to our decision not to proceed with the acquisition, which benefited the prior year quarterly tax rate; and

●

Changes in the mix of forecasted domestic and foreign income from operations before tax for the year.

Nine months ended July 31, 2013 compared to nine months ended July 31, 2012

The effective income tax rate for the nine months ended July 31, 2013 increased to 28.6% as compared to 28.1% in the prior year period. This increase primarily reflects the following:

●

Non-deductible expenses recorded in the current period for transaction costs related to the proposed Merger; and

●

Partially offset by changes in geographic income before taxes, which benefitted the rate year over year.

SEGMENT OPERATING RESULTS

Utility Segment Operating Results

Three months ended July 31, 2013 compared to three months ended July 31, 2012

	Three Months Ended July 31,						Increase			Percentage
	2013			2012			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
Utility Segment Revenue:
Lease	$	12,261		$	11,915		$	346			2.9	%
Sales - Shuffler		10,027			9,027			1,000			11.1
Sales - Chipper		261			608			(347	)		(57.1	)
Service		1,856			1,814			42			2.3
Other		1,239			1,018			221			21.7
Total sales and service		13,383			12,467			916			7.3
Total Utility segment revenue	$	25,644		$	24,382		$	1,262			5.2	%

Utility segment gross profit	$	15,529		$	15,285		$	244			1.6	%
Utility segment gross margin		60.6	%		62.7	%

Utility segment operating income	$	12,775		$	13,334		$	(559	)		(4.2%	)
Utility segment operating margin		49.8	%		54.7	%


Shuffler unit information:
Lease units, end of period(1)		8,287			8,245			42			0.5	%
Average monthly lease price	$	470		$	461		$	9			2.0	%

Sold units during the period		642			563			79			14.0	%
Average sales price	$	15,618		$	16,034		$	(416	)		(2.6%	)

Chipper unit information:
Lease units, end of period		289			228			61			26.8	%

Sold during period		20			35			(15	)		(42.9%	)
Average sales price	$	13,050		$	17,371		$	(4,321	)		(24.9%	)

Our Utility segment revenue for the three months ended July 31, 2013 increased $1.3 million as compared to the same prior year period, primarily due to the following:

●

A 11.1% increase in shuffler sales revenue:

An increase of 14.0% in the number of units sold, driven primarily by increased sales of approximately 180MD3shufflers in Asia and to a lesser extent sales ofMD3 in Australia and Europe. Over half of the sales in Asia were with one customer; and

Partially offset by a 2.6% decrease in average sales price, driven in part by volume discounts given to large customer orders.

●

A 2.9% increase in lease revenue:

A 2.0% increase in the shuffler average lease price primarily driven by customers upgrading to new shuffler models at higher average lease price; and

An increase in the number of placements of the newly introducedMD3 shuffler, which accounted for the majority of our new lease placements during the quarter. TheMD3 lease base has grown by approximately 750 units over the prior year.

●

Partially offset by a 57.1% decrease in chipper sales revenue:

The prior year included several sales ofEasy Chipper D in the United States and Canada.

Utility gross profit increased 1.6% year over year and Utility gross margin decreased 210 bps to 60.6% as compared to the same prior year period. The increase in gross profit primarily related to the following:

●

The overall increase in total revenues as noted above; and

●

Decreased amortization of intangible assets associated withEasy Chipper andone2six as the related intangible assets are approaching the end of their estimated useful lives.

The decrease in gross margin primarily related to the following:

●

An increase in the headcount of our service team that has expanded to service our growing lease base.

Utility operating income decreased 4.2% for the three months ended July 31, 2013 as compared to the same prior year period and operating margin decreased 490 bps to 49.8%. These changes primarily related to an increase in R&D expense related to new shuffler models and utility products.

Nine months ended July 31, 2013 compared to nine months ended July 31, 2012

	Nine Months Ended July 31,						Increase			Percentage
	2013			2012			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
Utility Segment Revenue:
Lease	$	36,224		$	34,787		$	1,437			4.1	%
Sales - Shuffler		34,979			24,477			10,502			42.9
Sales - Chipper		1,319			1,068			251			23.5
Service		5,411			5,280			131			2.5
Other		3,512			3,376			136			4.0
Total sales and service		45,221			34,201			11,020			32.2
Total Utility segment revenue	$	81,445		$	68,988		$	12,457			18.1	%

Utility segment gross profit	$	51,663		$	42,622		$	9,041			21.2	%
Utility segment gross margin		63.4	%		61.8	%

Utility segment operating income	$	43,974		$	36,986		$	6,988			18.9	%
Utility segment operating margin		54.0	%		53.6	%


Shuffler unit information:
Lease units, end of period(1)		8,287			8,245			42			0.5	%
Average monthly lease price	$	464		$	450		$	14			3.1	%

Sold units during the period		2,413			1,565			848			54.2	%
Average sales price	$	14,496		$	15,640		$	(1,144	)		(7.3%	)

Chipper unit information:
Lease units, end of period		289			228			61			26.8	%

Sold during period		88			59			29			49.2	%
Average sales price	$	14,989		$	18,102		$	(3,113	)		(17.2%	)

Our Utility segment revenue for the nine months ended July 31, 2013 increased $12.5 million as compared to the same prior year period, primarily due to the following:

●

A 42.9% increase in shuffler sales revenue:

An increase of 54.2% in the number of units sold, driven primarily by increased sales of approximately 460iDeal shufflers as well as 460MD3shufflers in the United States and Asia. TheiDeal shuffler sales in the current period were primarily driven by a significant sale of previously leased shufflers to a large casino customer in the United States; and

Partially offset by a 7.3% decrease in average sales price, driven primarily by the significant sale of previously leased shufflers described above and volume discounts given to large customer orders. Sales of previously leased shufflers generally have a lower sales price than new models.

●

A 4.1% increase in lease revenue:

A 3.1% increase in the shuffler average lease price primarily driven by customers upgrading to new shuffler models at higher average lease price; and

An increase in the number of placements of the newly introduced MD3 shuffler, which accounted for the majority of our new lease placements during the period. The MD3 lease base has grown by approximately 750 units over the prior year.

●

A 23.5% increase in chipper sales revenue:

An increase of 49.2% in the number of units sold, driven primarily by increased sales ofEasy Chipper D and our newly introducedChipStar chipper; and

Partially offset by a 17.2% decrease in chipper average sales price. The newChipStar chipper is offered at a lower selling price than our other chipper models.

Utility gross profit increased 21.2% year over year and Utility gross margin increased 160 bps to 63.4% as compared to the same prior year period. The increase in gross profit and gross margin primarily related to the following:

●

The overall increase in total revenues as noted above, primarily driven by increases in the number of shufflers sold and the significant sale of previously leased shufflers to a large casino customer in the United States;

●

Decreased amortization of intangible assets associated withEasy Chipper andone2six as the related intangible assets are approaching the end of their estimated useful lives; and

●

Partially offset by an increase in the headcount of our service team that has expanded to service our growing lease base.

Utility operating income increased 18.9% for the nine months ended July 31, 2013 as compared to the same prior year period and operating margin increased 40 bps to 54.0%. These changes primarily related to the changes described in gross profit and gross margin above.

Proprietary Table Games Segment Operating Results

Three months ended July 31, 2013 compared to three months ended July 31, 2012

	Three Months Ended July 31,						Increase			Percentage
	2013				2012 *		(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

PTG segment revenue:
Royalties and leases	$	13,384		$	12,324		$	1,060			8.6	%
Sales		362			547			(185	)		(33.8%	)
Service		22			27			(5	)		(18.5%	)
Other		71			91			(20	)		(22.0%	)
Total sales and service revenue		455			665			(210	)		(31.6	)
Total PTG segment revenue	$	13,839		$	12,989		$	850			6.5	%

PTG segment gross profit	$	11,338		$	10,629		$	709			6.7	%
PTG segment gross margin		81.9	%		81.8	%

PTG segment operating income	$	9,772		$	9,555		$	217			2.3	%
PTG segment operating margin		70.6	%		73.6	%


PTG unit information:
Premium units, end of period		2,905			2,699			206			7.6	%
Side bet units, end of period		2,899			2,542			357			14.0	%
Progressive units, end of period		1,258			1,139			119			10.4	%
Add-on units, end of period		569			341			228			66.9	%
Total revenue generating lease base		7,631			6,721			910			13.5	%

Average monthly lease/license price	$	585		$	611		$	(26	)		(4.3%	)

Sold during period		4			10			(6	)		(60.0%	)
Average sales price	$	90,500		$	54,750		$	35,750			65.3	%

*The results of our iGaming segment for the prior year have been reported separately in the current year. Therefore, we have removed iGaming revenues and expenses that were previously reported in PTG to conform to the current year presentation.

Total PTG segment revenue for the three months ended July 31, 2013 increased $0.9 million as compared to the same prior year period, primarily due to the following:

●

A 8.6% increase in royalties and leases revenue:

Increased placements of premium table games in the United States, primarilyUltimate Texas Hold “Em andMississippi Stud;

Increased placements of progressive units in the United States, primarilyUltimate Texas Hold “Em Progressiveand Three Card Poker Progressive; and

Increased revenue from placements of6 Card Bonus add-on forThree Card Poker as well asHouse Money andKings Bounty side bets.

●

Partially offset by a decrease in sales of table game licenses:

Decrease in the number of licenses sold to 4 compared to 10 in the prior year period; and

A 65.3% increase in average sales price, driven by a change in the mix of table game licenses sold.

PTG gross profit increased 6.7% year over year primarily due to the overall increase in total revenue described above. PTG gross margin did not change significantly year over year and was 81.9% for the quarter ended July 31, 2013.

PTG operating income increased 2.3% year over year, and operating margin decreased 300 bps to 70.6% as compared to the same prior year period. The increase in operating income is primarily related to the increase in gross profit described above and the decrease in operating margin is primarily related to the following:

●

An increase in operating expenses driven in part by increased amortization as well as R&D expenses related to enhancements to the successful progressive offerings on our table game titles including the development of our Nexus Command software and OWAP products; and

●

Partially offset by the increase in gross profit referred to above.

Nine months ended July 31, 2013 compared to nine months ended July 31, 2012

	Nine Months Ended July 31,						Increase			Percentage
	2013			2012 *			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

PTG segment revenue:
Royalties and leases	$	39,098		$	35,379		$	3,719			10.5	%
Sales		1,330			618			712			115.2	%
Service		69			92			(23	)		(25.0	%)
Other		173			211			(38	)		(18.0	%)
Total sales and service revenue		1,572			921			651			70.7
Total PTG segment revenue	$	40,670		$	36,300		$	4,370			12.0	%

PTG segment gross profit	$	33,352		$	29,671		$	3,681			12.4	%
PTG segment gross margin		82.0	%		81.7	%

PTG segment operating income	$	28,216		$	26,770		$	1,446			5.4	%
PTG segment operating margin		69.4	%		73.7	%


PTG unit information:
Premium units, end of period		2,905			2,699			206			7.6	%
Side bet units, end of period		2,899			2,542			357			14.0	%
Progressive units, end of period		1,258			1,139			119			10.4	%
Add-on units, end of period		569			341			228			66.9	%
Total revenue generating lease base		7,631			6,721			910			13.5	%

Average monthly lease/license price	$	569		$	585		$	(16	)		(2.7	%)

Sold during period		17			12			5			41.7	%
Average sales price	$	78,235		$	51,598		$	26,637			51.6	%

Total PTG segment revenue for the nine months ended July 31, 2013 increased $4.4 million as compared to the same prior year period, primarily due to the following:

●

An 10.5% increase in royalties and leases revenue:

Increased placements of premium table games in the United States, primarilyUltimate Texas Hold “Em andMississippi Stud;

Increased placements of progressive units in the United States, primarilyUltimate Texas Hold “Em Progressiveand Three Card Poker Progressive; and

Increased revenue from placements of6 Card Bonus add-on forThree Card Poker as well as the purchased install base and placements of theFire Bet side bet, and placements ofHouse Money andKings Bounty.

●

An increase of 115% in sales of table game licenses:

Increase of 41.7% in the number of licenses sold over the prior year period; and

A 51.6% increase in average sales price, driven by a change in the mix of table game licenses sold.

PTG gross profit increased 12.4% year over year primarily due to the overall increase in total revenue described above. PTG gross margin did not change significantly year over year and was 82.0% for the nine month period ended July 31, 2013.

PTG operating income increased 5.4% year over year, and operating margin decreased 430 bps to 69.4% as compared to the same prior year period. The increase in operating income is primarily related to the increase in gross profit described above and the decrease in operating margin is primarily related to the following:

●

An increase in operating expenses driven in part by increased amortization from intangible assets acquired in the prior year in connection with the purchase ofFire Bet, as well as R&D expenses related to enhancements to the successful progressive offerings on our table game titles including the development of our Nexus Command software and OWAP products; and

●

Corporate development expenses of approximately $0.5 million incurred in the first quarter of 2013 primarily related to expenses incurred related to a potential acquisition that we explored and determined not to pursue.

Electronic Table Systems Segment Operating Results

Three months ended July 31, 2013 compared to three months ended July 31, 2012

	July 31,						Increase			Percentage
	2013			2012			(Decrease)			Change
	(In thousands, except for units and per unit/seat amounts)
ETS segment revenue:
Royalties and leases	$	3,415		$	3,437		$	(22	)		(0.6%	)
Sales		6,305			1,828			4,477			244.9	%
Service		142			149			(7	)		(4.7%	)
Other		960			639			321			50.2	%
Total sales and service revenue		7,407			2,616			4,791			183.1	%
Total ETS segment revenue	$	10,822		$	6,053		$	4,769			78.8	%

ETS segment gross profit	$	4,943		$	2,055		$	2,888			140.5	%
ETS segment gross margin		45.7	%		34.0	%

ETS segment operating income (loss)	$	1,702		$	(846	)	$	2,548			(301.2%	)
ETS segment operating margin		15.7	%		(14.0%	)

ETS unit information:

**SHFL FUSIONHybrid,Table Master and SHFL FUSIONVirtual:**
Lease seats, end of period		2,254			2,421			(167	)		(6.9%	)
Average monthly lease price	$	464		$	459		$	5			1.1	%

Sold during the period		391			115			276			240.0	%
Average sales price	$	16,129		$	15,896		$	233			1.5	%

i-Table:
Installed base, end of period		102			63			39			61.9	%

Total ETS segment revenue for the three months ended July 31, 2013 increased $4.8 million as compared to the same prior year period, primarily due to the following:

●

A 244.9% increase in sales revenue:

Increase of 240.0% in seats sold driven primarily bySHFL FUSIONVirtual seats in Australia andSHFL FUSION Hybrid sales in Asia and New Zealand; and

An increase of 1.5% in average sales price. In the prior year, average sales price was lower primarily due to discounts on refurbished units sold in Australia and Latin America.

●

An increase of 50.2% in revenue from the sale of conversions, parts and peripherals.

ETS gross profit increased 140.5% and gross margin increased 1,170 bps to 45.7% as compared to the same prior year period. The increase in gross profit and gross margin are primarily due to the following:

●

The increase in revenue described above partially driven by higher average sales price on seats sold; and

●

Partially offset by increased depreciation on theTable Master leased and available for lease machines. In anticipation of the launch ofTable MasterFusion we shortened the estimated economic life of the leased and available for lease machines.

ETS operating income increased to $1.7 million for the three months ended July 31, 2013 as compared to a loss of $0.8 million in the same prior year period and operating margin increased to 15.7%. The increase in operating income and operating margin is primarily related to the following:

●

The increase in gross profit and gross margin described above;

●

A decrease in R&D related expenses from the prior year. In the prior year we incurred expenses related to development of our new ETS products; and

●

Partially offset by an increase in legal and consulting expenses related to the LT Games litigation described in Note 11 of the Condensed Consolidated Financial Statements.

Nine months ended July 31, 2013 compared to nine months ended July 31, 2012

	Nine Months Ended July 31,						Increase			Percentage
	2013			2012			(Decrease)			Change
	(In thousands, except for units and per unit/seat amounts)
ETS segment revenue:
Royalties and leases	$	11,773		$	10,205		$	1,568			15.4	%
Sales		10,689			7,579			3,110			41.0	%
Service		425			450			(25	)		(5.6%	)
Other		2,153			2,949			(796	)		(27.0%	)
Total sales and service revenue		13,267			10,978			2,289			20.9	%
Total ETS segment revenue	$	25,040		$	21,183		$	3,857			18.2	%

ETS segment gross profit	$	10,396		$	8,868		$	1,528			17.2	%
ETS segment gross margin		41.5	%		41.9	%

ETS segment operating income (loss)	$	999		$	(967	)	$	1,966			(203.3%	)
ETS segment operating margin		4.0	%		(4.6%	)

ETS unit information:

**SHFL FUSIONHybrid, Table Master and SHFL FUSIONVirtual**:
Lease seats, end of period		2,254			2,421			(167	)		(6.9%	)
Average monthly lease price	$	545		$	454		$	91			20.0	%

Sold during the period		579			409			170			41.6	%
Average sales price	$	17,929		$	18,531		$	(602	)		(3.2%	)

i-Table:
Installed base, end of period		102			63			39			61.9	%

Total ETS segment revenue for the nine months ended July 31, 2013 increased $3.9 million as compared to the same prior year period, primarily due to the following:

●

A 41.0% increase in sales revenue:

Increase of 41.6% in seats sold driven primarily bySHFL FUSION Virtual seats in Australia.

●

An increase of 15.4% in royalties and leases revenue:

A 20.0% increase in the average lease price, driven primarily by the mix of products on lease and an increase in revenue from seats in electronic-only markets such as Maryland in the beginning part of the year. As Maryland has approved live gaming we have experienced a decline in ETS revenues from that market; and

Partially offset by a 6.9% decrease in the number of seats on lease, primarily driven byTable Master seats in the United States.

These increases were offset by a 27.0% decrease in revenue from the sale of conversions, parts and peripherals.

ETS gross profit increased 17.2% year over year and gross margin remained relatively consistent at 41.5%. The increase in gross profit is due to the following:

●

The increase in revenue described above primarily related to the increase in seats sold and the higher average lease price for units on lease; and

●

ETS operating income increased to $1.0 million as compared to a loss of $1.0 million in the same prior year period and operating margin increased to 4.0%. The increase in operating income and operating margin is primarily related to the following:

●

The increase in gross profit described above;

●

A decrease in the amount of R&D. In the prior year we incurred expenses related to development of our new ETS products; and

●

Partially offset by an increase in legal and consulting expenses related to the LT Games litigation described in Note 11 of the Condensed Consolidated Financial Statements.

Electronic Gaming Machines Segment Operating Results

Three months ended July 31, 2013 compared to three months ended July 31, 2012

	Three Months Ended July 31,						Increase			Percentage
	2013			2012			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

EGM segment revenue:
Lease revenue	$	287		$	154		$	133			86.4	%
Sales		21,145			18,153			2,992			16.5	%
Service		42			35			7			20.0	%
Other		1,693			1,615			78			4.8	%
Total sales and service revenue		22,880			19,803			3,077			15.5	%
Total EGM segment revenue	$	23,167		$	19,957		$	3,210			16.1	%

EGM segment gross profit	$	13,956		$	12,048		$	1,908			15.8	%
EGM segment gross margin		60.2	%		60.4	%

EGM segment operating income	$	8,555		$	8,701		$	(146	)		(1.7	%)
EGM segment operating margin		36.9	%		43.6	%

EGM unit information:
Lease seats, end of period		503			380			123			32.4	%

Sold during period		1,116			1,021			95			9.3	%
Average sales price	$	18,947		$	17,780		$	1,167			6.6	%

Total EGM segment revenue for the three months ended July 31, 2013 increased $3.2 million as compared to the same prior year period, primarily due to the following:

●

A 16.5% increase in sales revenue:

Driven by the 9.3% increase in units sold primarily in Australia and Asia; and

An increase of 6.6% in average sales price as the prior year included a significant sale to a customer in the Philippines at a lower sales price. The average sales price was also negatively impacted by foreign currency exchange rate changes and in Australian dollars the average sales price increased by 8.4%.

●

Lease revenue also increased primarily due to an increase of machines on participation arrangements and the performance of our machines in Mexico.

●

Partially offset by the impact of foreign exchange fluctuations:

Total revenue was negatively impacted by approximately $0.6 million due to the exchange effect of a weakening Australian dollar.

EGM gross profit increased 15.8% year over year, and EGM gross margin remained relatively flat at 60.2%. The increase in gross profit primarily related to the following:

●

The increase in EGM sales revenues as noted above.

EGM operating income decreased 1.7% for the three months ended July 31, 2013 and operating margin decreased 670 bps to 36.9% as compared to the same prior year period. The decrease in operating income and operating margin primarily related to the following:

●

An increase in EGM R&D expenses in the current quarter as compared to the prior year.

Nine months ended July 31, 2013 compared to nine months ended July 31, 2012

	Nine Months Ended July 31,						Increase			Percentage
	2013			2012			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

EGM segment revenue:
Lease revenue	$	845		$	359		$	486			135.4	%
Sales		56,345			52,063			4,282			8.2	%
Service		99			67			32			47.8	%
Other		4,940			4,210			730			17.3	%
Total sales and service revenue		61,384			56,340			5,044			9.0	%
Total EGM segment revenue	$	62,229		$	56,699		$	5,530			9.8	%

EGM segment gross profit	$	38,043		$	34,848		$	3,195			9.2	%
EGM segment gross margin		61.1	%		61.5	%

EGM segment operating income	$	23,776		$	24,948		$	(1,172	)		(4.7%	)
EGM segment operating margin		38.2	%		44.0	%

EGM unit information:
Lease seats, end of period		503			380			123			32.4	%

Sold during period		2,891			2,726			165			6.1	%
Average sales price	$	19,490		$	19,099		$	391			2.0	%

Total EGM segment revenue for the nine months ended July 31, 2013 increased $5.5 million as compared to the same prior year period, primarily due to the following:

●

A 8.2% increase in sales revenue:

Driven by a 6.1% increase in units sold;

We recognized our first sales of EGMs in the United States in the current period; and

An increase of 2.0% in average sales price as the prior year included a significant sale to a customer in the Philippines at a lower sales price.

●

A 17.3% increase in revenue from conversions, parts and peripherals.

●

Lease revenue also increased primarily due to an increase of machines on participation arrangements and the performance of our machines in Mexico.

●

Partially offset by the impact of foreign exchange fluctuations:

Total revenue was negatively impacted by approximately $1.0 million due to the exchange effect of a weakening Australian dollar.

EGM gross profit increased 9.2% year over year, and EGM gross margin remained relatively flat at 61.1%. The increase in gross profit primarily related to the following:

●

The increase in EGM sales revenues as noted above, driven primarily by the increase in units sold.

EGM operating income decreased 4.7% and operating margin decreased 580 bps to 38.2% for the nine months ended July 31, 2013 as compared to the same prior year period. The decreases in operating income and operating margin primarily related to the following:

●

An increase in EGM R&D expenses in the current period as compared to the prior year; and

●

Partially offset by the increase in total EGM gross profit as noted above.

iGaming Operating Results

Three months ended July 31, 2013 compared to three months ended July 31, 2012

	Three Months Ended July 31,						Increase			Percentage
	2013			2012			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

iGaming segment revenue:
Revenue	$	62		$	5		$	57			1,140.0	%
Total iGaming segment revenue	$	62		$	5		$	57			1,140.0	%

iGaming segment gross profit	$	12		$	5		$	7			140.0	%
iGaming segment gross margin		19.4	%		100.0	%

iGaming segment operating income (loss)	$	(2,362	)	$	(1,074	)	$	(1,288	)		119.9	%
iGaming segment operating margin		(3,809.7%	)		(21,480.0%	)

In the current year we have separately reported the results of our iGaming segment, which were previously combined with the PTG segment. The prior year results that were previously reported in the PTG segment were reclassified for current reporting and comparison purposes. In the current year, we expect to generate revenue from providing online versions of our games in real money gambling regulated markets, licensing our content to additional online operators, and launching free-to-play online versions of our games. In order to achieve these milestones we have incurred costs related to establishing a sales office and sales team, obtaining regulatory approvals and integrating our platform with site operators. Additionally, we are developing online versions of our games for distribution on our content delivery platform. We will also continue to protect the integrity of our valuable brands by pursuing online operators that infringe upon our intellectual property, which has provided the majority of our historical revenues in this segment.

Total iGaming segment revenue for the three months ended July 31, 2013 and 2012 related primarily to settlement and license fees from online operators for prior use of our intellectual property.

Gross profit increased year over year primarily related to the increase in revenues. In the prior year there were little direct costs and therefore segment margin was not significantly affected by direct costs. In the current quarter direct costs consisted primarily of depreciation of our online content delivery platform that was placed into service in the current quarter.

iGaming operating loss increased to $2.4 million for the three months ended July 31, 2013 as compared $1.1 million in the same prior year period. The increase in operating loss primarily related to the following:

●

An increase in SG&A costs related to expenditures to assemble our sales team, operate our iGaming sales office in Gibraltar and obtain the regulatory approvals for the content delivery platform and related game content;

●

A $0.7 million increase in R&D expenses related primarily to increased headcount of personnel for the development of games and to oversee the integration of our online content delivery platform with site operators; and

●

Partially offset by a reduction in expense related to due diligence and professional fees for the terminated Ongame Network Ltd. acquisition. We incurred $0.5 million related to the terminated acquisition in the prior year period.

Nine months ended July 31, 2013 compared to nine months ended July 31, 2012

	Nine Months Ended July 31,						Increase			Percentage
	2013			2012			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

iGaming segment revenue:
Revenue	$	348		$	2,323		$	(1,975	)		(85.0%	)
Total iGaming segment revenue	$	348		$	2,323		$	(1,975	)		(85.0%	)

iGaming segment gross profit	$	290		$	2,323		$	(2,033	)		(87.5%	)
iGaming segment gross margin		83.3	%		100.0	%

iGaming segment operating income (loss)	$	(5,288	)	$	(1,648	)	$	(3,640	)		220.9	%
iGaming segment operating margin		(1,519.5%	)		(70.9%	)

Total iGaming segment revenue for the nine months ended July 31, 2013 decreased $2.0 million as compared to the same prior year period due to less settlement and license fees from online operators for prior use of our intellectual property. The prior year period included significant revenues from settlement and license fees.

Gross profit decreased year over year primarily related to the decrease in revenues described above. In the prior year there were little direct costs and therefore segment margin was not significantly affected by direct costs. In the current year direct costs consisted primarily of depreciation of our online content delivery platform that was placed into service in the current year.

iGaming operating loss increased to $5.3 million for the nine months ended July 31, 2013 as compared to $1.6 million in the same prior year period. The increase in operating loss primarily related to the following:

●

The decrease in gross profit described above;

●

A $1.0 million increase in R&D expenses related primarily to increased headcount of personnel for the development of games and to oversee the integration of our online content delivery platform with site operators; and

●

Partially offset by a reduction in expense related to due diligence and professional fees for the terminated Ongame Network Ltd. acquisition. We incurred $2.2 million related to the terminated acquisition in the prior year period.

Unallocated Corporate Operating Results

Three months ended July 31, 2013 compared to three months ended July 31, 2012

	Three Months Ended July 31,						Increase			Percentage
	2013			2012			(Decrease)			Change
	(In thousands)

Unallocated Corporate operating loss	$	(21,973	)	$	(16,277	)	$	(5,696	)		(35.0%	)

Unallocated corporate operating loss increased $5.7 million to $22.0 million for the quarter ended July 31, 2013 as compared to the prior year period, primarily due to the following:

●

Merger related costs:

●

Compensation and related expenses:

Increase of approximately $0.9 million in payroll and related expenses driven primarily by increased headcount across various support departments as well as increases in stock based compensation and medical costs.

●

Promotion, advertising and tradeshow expense:

Increase of approximately $0.5 million primarily related to expanded participation in tradeshows to market our new products and to enter new jurisdictions.

Nine months ended July 31, 2013 compared to nine months ended July 31, 2012

	Nine Months Ended July 31,						Increase			Percentage
	2013			2012			(Decrease)			Change
	(In thousands)

Unallocated Corporate operating loss	$	(56,502	)	$	(46,822	)	$	(9,680	)		(20.7%	)

Unallocated corporate operating loss increased $9.7 million to $56.5 million for the nine months ended July 31, 2013 as compared to the prior year period, primarily due to the following:

●

Merger related costs:

●

Compensation and related expenses:

Increase of approximately $3.1 million in payroll and related expenses driven primarily by increased headcount across various support departments as well as increases in stock based compensation and medical costs.

●

Consulting and professional fees:

Increase of approximately $1.1 million in consulting expenses, professional accounting fees, and legal expenses primarily related to consultation and representation with external professionals.

●

Promotion, advertising and tradeshow expense:

Increase of approximately $1.0 million primarily related to expanded participation in tradeshows to market our new products and to enter new jurisdictions.

●

Facilities expenses:

Increase of approximately $0.6 million primarily related to leased facilities in new jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

Our primary historical source of liquidity and capital resources has been cash on hand, cash from operations and various forms of debt. We use cash to fund growth in our operating assets, including inventory and products leased and held for lease, to fund new products through both research and development and strategic acquisitions of businesses and intellectual property. We expect capital expenditures for property and equipment to increase in the remainder of fiscal 2013 related to the construction of our new consolidated facility in Las Vegas. Based on past performance and current expectations, we believe these resources will satisfy our needs for working capital, capital expenditures, debt service and other liquidity requirements associated with our existing operations for the next 12 months.

Our Senior Secured Revolving Credit Facility contains three financial maintenance covenants: a Total Leverage Ratio, Senior Leverage Ratio and an Interest Expense Coverage Ratio. Under the facility, we are required to maintain a Total Leverage Ratio, as defined therein, of not more than 3.75 to 1.0. Our Total Leverage Ratio as of July 31, 2013 was 0.02 to 1.0. Furthermore, we are required to maintain a Senior Leverage Ratio, as defined therein, of not more than 3.0 to 1.0 until October 31, 2013 and not more than 2.75 to 1.00 after October 31, 2013. Our Senior Leverage Ratio as of July 31, 2013 was 0.0 to 1.0. We are also required to maintain an Interest Coverage Ratio, as defined therein, in excess of 3.0 to 1.0 at the end of any fiscal quarter. Our Interest Coverage Ratio as of July 31, 2013 was 141.11 to 1.0.

Cash and cash equivalents at our foreign subsidiaries were $35.2 million as of July 31, 2013 and $22.5 million as of October 31, 2012. Amounts held by foreign subsidiaries could be subject to U.S. income taxation upon repatriation to the United States. We constantly evaluate our cash position in each territory and look for ways to efficiently deploy capital to markets where it is most needed.

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

	July 31, 2013		October 31, 2012		Increase (Decrease)		Percentage Change
	(In thousands, except ratios)

Cash and cash equivalents	$	41,819	$	24,160	$	17,659		73.1	%
Working capital	$	96,664	$	75,156	$	21,508		28.6	%
Current ratio	3.0 : 1		2.8 : 1

CASH FLOWS SUMMARY

	Nine Months Ended July 31,						Increase			Percentage
	2013			2012			(Decrease)			Change
	(In thousands)

Net cash provided by operating activities	$	34,720		$	35,868		$	(1,148	)		(3.2%	)
Net cash used in investing activities		(22,173	)		(25,962	)		(3,789	)		(14.6%	)
Net cash provided (used in) by financing activities		5,285			(5,435	)		10,720			(197.2%	)
Effects of exchange rates		(173	)		1,370			(1,543	)		(112.6%	)
Net change in cash and cash equivalents	$	17,659		$	5,841

Operating

Cash flows provided by operating activities decreased $1.1 million for the nine months ended July 31, 2013 compared to the same prior year period, primarily due to following:

●

An increase in cash used for inventory of approximately $7.7 million. We have increased our inventory levels in the current period primarily related to our plans to place EGMs in the United States as well as increased shuffler inventory for demand in future periods.

●

An increase in cash paid for income tax liabilities of $3.9 million compared to the same prior year period; and

●

A decrease in net income of $2.5 million.

Partially offset by the following:

●

A decrease in cash used for accounts payable and accrued liabilities of $6.4 million; and

●

A decrease in cash used for investment in sales-type leases and notes receivable of $4.9 million; and

●

A decrease of $2.5 million in cash expended for prepaid and other current assets.

Investing

Cash used in investing activities decreased $3.8 million for the nine months ended July 31, 2013 compared to the same prior year period, primarily due to the following:

●

Proceeds received from the sale of lease assets increased $4.6 million due to an increase in the number of leased assets sold compared to the prior year;

●

Decrease of $3.9 million in acquired intellectual property and games which were recorded as a business acquisition for accounting purposes compared to the prior year;

●

Purchases of intangible assets decreased approximately $2.5 million due to less activity in the current year. In the prior year we purchased intangible assets related primarily to the licenses to be used in our EGM segment; and

●

Partially offset by an increase of $7.9 million in purchases of property and equipment primarily related to our new consolidated facility in Las Vegas.

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

	Nine Months Ended July 31,						Increase			Percentage
	2013			2012			(Decrease)			Change
	(In thousands)

Payments for products leased and held for lease	$	(10,785	)	$	(11,227	)	$	(442	)		(3.9%	)
Purchases of property and equipment		(13,727	)		(5,852	)		7,875			134.6	%
Purchases of intangible assets		(1,807	)		(4,333	)		(2,526	)		(58.3%	)
Total capital expenditures	$	(26,319	)	$	(21,412	)

Financing

Cash flows provided by financing activities increased $10.7 million for the nine months ended July 31, 2013 compared to the same prior year period, primarily due to following:

●

There were zero net draws on our Revolver as compared to net payments of $23.0 million during the nine months ended July 31, 2012; and

●

Partially offset by decreased proceeds from issuances of common stock of $11.8 million, due to a decrease in the number of option exercised in the current period compared to the prior year period.

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

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

●

the Federal Funds Rate plus .50%;

●

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

●

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

On May 31, 2012, the Senior Secured Revolving Credit Facility was amended to clarify and define certain restrictive covenants.

CAPITAL RESOURCES

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

DEBT, OTHER LONG-TERM LIABILITIES AND CONTRACTUAL OBLIGATIONS

Our contractual obligations have not changed materially from the amounts disclosed in our Annual Report on Form 10-K as of October 31, 2012.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have material off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States. Our critical accounting policies are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended October 31, 2012.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, which arise during the normal course of business from changes in interest rates and foreign exchange rates. A discussion of our primary market risks is presented below.

Foreign currency risk. We are exposed to foreign currency exchange rate risk inherent in our leases and sales commitments, anticipated leases and sales, anticipated purchases and assets, liabilities and debt denominated in currencies other than the U.S. dollar. We transact business in numerous countries around the world using numerous currencies, of which the most significant to our operations for the three and nine months ended July 31, 2013 and 2012, were the Australian dollar and the Euro. Our settlement of inter-company trade balances requires the exchange of currencies, which results in the recognition of foreign currency fluctuations. We expect that a significant portion of the volume of our business will continue to be denominated in foreign currencies. As such, we expect our cash flows and earnings to continue to be exposed to the risks that may arise from fluctuations in foreign currency exchange rates.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

As required by Rule 13a-15(b) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the design and operating effectiveness as of July 31, 2013, of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of July 31, 2013.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the three and nine months ended July 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

For information on Legal Proceedings and significant developments in any of the cases disclosed in our Annual Report on Form 10-K for the year ended October 31, 2012, see Note 11 to our Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

For a complete description of the facts and circumstances surrounding material litigation to which we are a party, see our Annual Report on Form 10-K for the year ended October 31, 2012.

ITEM 1A. RISK FACTORS

SHFL entertainment, Inc. is subject to risks and uncertainties that could cause our actual results to differ materially from the expectations expressed in the forward-looking statements. Factors that could cause our actual results to differ from expectations are described under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012, and our more recent reports filed with the U.S. Securities and Exchange Commission.

Our recently announced acquisition of the Company by Bally may not be consummated.

It is not certain that we will be acquired by Bally: (1) there is risk that the conditions to the closing of the proposed Merger will not be satisfied (including a failure of the Company’s shareholders to approve, on a timely basis or otherwise, the proposed Merger or that the regulatory approvals required for the proposed Merger will not be obtained, on a timely basis or otherwise, or are obtained subject to conditions that are not anticipated); (2) uncertainties exist as to the timing of the consummation of the proposed Merger and the ability of each of the Company and Bally to consummate the proposed Merger; (3) other potential bidders may make competitive responses to the proposed Merger; (4) Bally may be unable to obtain, on a timely basis or otherwise, the necessary debt financing for the proposed Merger and (5) legislative, regulatory and economic developments may impact the ability of the Company and Bally to consummate the proposed Merger. In addition, if the acquisition is not completed, the Company may be required, in certain circumstances, to pay a termination fee equal to approximately $43.3 million and the Company would not realize any of the anticipated benefits of having completed the acquisition.

We can give no assurance that the conditions to the proposed Merger will be satisfied.

The Company is subject to litigation initiated in connection with the proposed Merger, which could be time consuming and divert the resources and the attention of management.

The Company and the individual members of our Board have been named as defendants in certain lawsuits relating to the Merger Agreement and the proposed Merger, and may be named in additional lawsuits relating to the Merger Agreement and the proposed Merger. The lawsuits filed to date generally allege that the individual defendants breached their fiduciary duties in connection with their consideration and approval of the proposed Merger and the entity defendants aided and abetted those alleged breaches. The complaints seek, among other relief, declaratory judgment, damages and an injunction against the proposed Merger. The defense of any such lawsuits, and any additional lawsuits relating to the Merger Agreement and the proposed Merger, may be expensive and may divert management’s attention and resources, which could adversely affect the Company’s business results of operations and financial condition.

Our business may be disrupted while the acquisition by Bally is pending or if the acquisition is not consummated.

The proposed transaction may disrupt the current plans and operations of the Company. To date, the Company has incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, and these fees and costs are payable by the Company whether or not the proposed Merger is consummated. Furthermore, we cannot predict how our suppliers, customers and other business partners will view or react to the proposed Merger and some may be hesitant to do business with us in light of uncertainties about our ability to perform due to our recently announced pending acquisition by Bally. If we are unable to reassure our customers, suppliers and other business partners to continue transacting business with us, our financial results may be adversely affected. Whether or not the proposed Merger is completed, prior to its completion, it may be difficult for us to retain and recruit employees in vital areas.

We are also subject to restrictions, without the consent of Bally, on the conduct of our business prior to the consummation of the proposed Merger as provided in the Merger Agreement, including, among other things, certain restrictions on our ability to make certain capital expenditures, investments and acquisitions; sell, transfer or dispose of our assets; enter into certain contracts with customers; amend our organizational documents and incur indebtedness. These restrictions could prevent us from pursuing otherwise attractive business opportunities, result in our inability to respond effectively to competitive pressures, industry developments and future opportunities and may otherwise harm our business, financial results and operations.

In the event our recently announced acquisition by Bally is not consummated, the price of SHFL Common Stock may be affected.

Our closing stock price was $18.70 on July 15, 2013, and closed at $22.81 on July 16, 2013, after the announcement of the acquisition. The increase in the stock price is primarily due to the premium to be paid related to the acquisition. In the event our recently announced acquisition by Bally is not consummated, the price of our common shares may be adversely affected.

If theproposed Merger is not completed or we are not otherwise acquired, we may consider other strategic alternatives which are subject to risks and uncertainties.

If the proposed Merger is not completed, our board of directors will review and consider various alternatives available to us, including, among others, continuing as a public company with no material changes to our business or capital structure, returning capital to shareholders, seeking a minority investment from a strategic or financial partner or attempting to implement a sale to either a financial or strategic buyer. These alternative transactions may involve various additional risks to our business, including, among others, distraction of our management team and associated expenses as described above in connection with the proposed Merger, our ability to consummate any such alternative transaction, the valuation assigned to our business in any such alternative transaction, our ability or a potential buyer’s ability to access capital on acceptable terms or at all and other variables which may adversely affect our operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Value of Shares That May Yet Be Purchased Under the Stock Buyback Program⁽¹⁾
February 1 through February 28, 2013		-	$	-		-	$	21,077
March 1 through March 31, 2013		-		-		-		21,077
April 1 through April 30, 2013		-		-		-		21,077
Total		-	$	-		-

(1) In September 2006, our board of directors authorized a stock buyback program for up to $30.0 million of the Company’s shares; as of July 31, 2013, $21.1 million remained outstanding under our board authorization; however, pursuant to the Merger Agreement with Bally, stock repurchases are prohibited until the proposed Merger is effective or terminated. We cancel shares that we repurchase. Although we generally prioritize bank debt reduction over share repurchases we may consider share repurchases when there are anomalies in the share value created by, but not limited to, market conditions.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

2.1	Agreement and Plan of Merger, dated as of July 15, 2015, by and among Bally Technologies, Inc., Manhattan Merger Corp. and the Registrant (Incorporated by reference to exhibit 2.1 to our Current Report on Form 8-K, filed July 18, 2013).

3.1	Articles of Incorporation of the Registrant as amended July 15, 1992 (Incorporated by reference to exhibit 3.2 in our Annual Report on Form 10-K for the year ended October 31, 1995).
3.2	Articles of Amendment to Articles of Incorporation of the Registrant, effective January 14, 2005 (Incorporated by reference to exhibit 3.2 to our Annual Report on Form 10-K, filed January 13, 2005).
3.3	Articles of Correction of Articles of Amendment of Articles of Incorporation of the Registrant, effective March 15, 2005 (Incorporated by reference to exhibit 3.1 to our Current Report on Form 8-K, filed March 18, 2005).
3.4	Amended and Restated Bylaws of the Registrant, effective December 13, 2012 (Incorporated by reference to exhibit 3.1 to our Current Report on Form 8-K, filed December 17, 2012).
3.5	Articles of Amendment of Articles of Incorporation (Changing Name) of the Registrant, as amended September 28, 2012 (Incorporated by reference to exhibit 3.1 in our Current Report on Form 8-K, filed October 2, 2012).
3.6	Articles of Amendment of Articles of Incorporation (Restating Articles of Incorporation) of the Registrant as amended September 28, 2012 (Incorporated by reference to exhibit 3.2 in our Current Report on Form 8-K, filed October 2, 2012).

4.1	Registration Rights Agreement dated May 13, 2004, by and between Casinos Austria AG on the one hand and the Registrant on the other hand (Incorporated by reference to exhibit 10.2 in our Quarterly Report on Form 10-Q for the quarter ended April 30, 2004).

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 32.1	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

101.INS	XBRL Instance**
101.SCH	XBRL Taxonomy Extension Schema**
101.CAL	XBRL Taxonomy Extension Calculation**
101.DEF	XBRL Taxonomy Extension Definition**
101.LAB	XBRL Taxonomy Extension Labels**
101.PRE	XBRL Taxonomy Extension Presentation**

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

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

SIGNATURES

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SHFL ENTERTAINMENT, INC. (Registrant)
Date: September 6, 2013
/s/ MICHAEL GAVIN ISAACS
Michael Gavin Isaacs Chief Executive Officer (Principal Executive Officer)
/s/ LINSTER W. FOX
Linster W. Fox Chief Financial Officer (Principal Financial Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Good

SHFL Entertainment (SHFL) Inactive 10-Q2013 Q3 Quarterly report

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