Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1997
------------------------------------
[ ] 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 0-23588
---------------------------------------
PAUL-SON GAMING CORPORATION
- ------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 88-0310433
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 South Industrial Road, Las Vegas, Nevada 89102
- ------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(702) 384-2425
- ------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Not Applicable Not Applicable
- ------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $ .01 PAR VALUE
- ------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-
affiliates of the registrant as of August 22, 1996, based on the
last reported bid price as reported on the Nasdaq National Market
of $13 5/8 per share, was approximately $20,719,538.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of August 22, 1997.
Common Stock, $.01 par value, 3,421,500 shares
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report is
incorporated by reference from the Paul-Son Gaming Corporation
Proxy Statement to be filed with the Commission not later than
120 days after the end of the fiscal year covered by this Report.
2
PART I
ITEM 1. BUSINESS
Paul-Son Gaming Corporation, a Nevada corporation (the
"Company" or "Paul-Son"), is the leading manufacturer and
supplier of casino table game equipment in the United States.
Currently the Company's products include casino chips, table game
layouts, playing cards, dice, gaming furniture and miscellaneous
table accessories such as chip trays, drop boxes and dealing
shoes, which are used in conjunction with casino table games such
as blackjack, poker, baccarat, craps and roulette. The Company
is headquartered in Las Vegas, Nevada, with manufacturing
facilities located in Las Vegas and San Luis, Mexico and sales
offices in Las Vegas; Reno, Nevada; Atlantic City, New Jersey;
Gulfport, Mississippi; New Orleans, Louisiana; Ft. Lauderdale,
Florida; Portland, Oregon; and Ontario, Canada. The Company
sells its products in every state in which casinos operate in the
United States, and management believes that it has the leading
market share for most of its principal product lines.
The Company also has retail sales outlets which provide
casino-quality products for personal use, including poker chips,
"Fantasy Casino" chips, dice, playing cards and gift items made
with Paul-Son components. Further, scaled-down gaming furniture
and accessories are also offered for personal use. The Company's
retail outlets are an adjunct to its branch sales offices in all
but the New Orleans, Portland and Ontario locations.
The Company was founded in 1963 by its current Chairman,
Paul S. Endy, Jr. and initially manufactured and sold dice to
casinos in Las Vegas. In the more than 30 years since its
founding, the Company has expanded its product offerings and, as
the industry has expanded and gaming has been legalized in other
jurisdictions, its customer and geographic base. As a result of
this growth, the Company now offers a full line of table game
products.
As a full-service supplier, Paul-Son manufactures products
to meet particular customer and industry specifications, which
may include a range of shapes and sizes, varied color schemes and
other graphics, and security and anti-counterfeit features. The
useful lives of the Company's products typically range from
several hours in the case of playing cards and dice, to several
months in the case of layouts, and several years in the case of
casino chips and gaming furniture. As such, the Company's core
business is the ongoing replacement sale of these products. When
a new casino opens, the Company strives to supply most of the
products required to operate the casino's table games, frequently
on a sole-supplier basis. When successful, revenues are
generated both from the initial sale to the new casino and on a
continuing basis, as the new casino becomes part of the Company's
core customer base.
RECENT DEVELOPMENTS
PAUL-SON'S DRAW POKER
In July 1997, the Company entered into an agreement with Pit
Six Gaming, LLC ("Pit Six Gaming") to be the exclusive
manufacturer and distributor of a new table game developed by Pit
Six Gaming to be marketed under the name "Paul-Son's Draw Poker".
The agreement is for a period of six months, during which time
the Company will have the opportunity to evaluate the
3
marketability and demand for the new game. Under the agreement,
the parties will split equally any revenues from the game during
the evaluation period. At the Company's option, after the six
month period, the parties may enter into a long-term agreement
wherein the Company will continue to be the exclusive
manufacturer and distributor of the game, with the parties
dividing the revenues derived from the game on a 50%-50% basis.
NON-GAMING PRODUCTS
In August 1997, the Company announced the formation of a
50%-50% joint venture with DeBartolo Entertainment, LLC
("Debartolo Entertainment") in a newly formed limited liability
company, Brand One Marketing, LLC ("Brand One"). Brand One was
organized for the purpose of marketing non-gaming commemorative
chips or "trading discs" and commemorative playing cards to the
sports, travel, and entertainment memorabilia markets. Because
management of the Company believes DeBartolo Entertainment to be
one of the leading sports and entertainment promoters in the
United States, management believes that this joint venture will
allow the Company to enter the non-gaming promotional products
and collectibles market on a national basis. The Company will be
the exclusive manufacturer and supplier of all products marketed
by Brand One.
BUSINESS STRATEGY
During its more than 30 years of operations, management
believes the Company has established an excellent reputation for
product quality, reliability, customer service and value. In
addition, the Company has developed an extensive distribution
network and is licensed or authorized to supply gaming equipment
in every state in the United States in which such licenses are
required. The Company is also licensed or authorized to supply
gaming equipment on a number of Native American lands and in
Victoria, Australia, and Ontario, Quebec and Saskatchewan,
Canada. The Company has applications pending for licensing in
British Columbia, Canada, and Mpumalanga and Gauteng, South
Africa. The Company's strategy for continued growth is to:
(i) capitalize upon its competitive advantages to maintain its
market position for those products in which it has a dominant
share and thereby benefit from the expected continued growth in
the United States casino market; (ii) upgrade its manufacturing
facilities and aggressively pursue market share for products,
such as playing cards, in which the Company does not currently
have a leading share; (iii) expand internationally into growing
casino markets, including those in Canada, Australia, Europe,
South America, Central America, Asia, Africa and the Caribbean;
(iv) enhance management's ability to respond quickly to changes
in market conditions by upgrading the Company's financial
reporting and management information systems; and (v) develop or
acquire new products which the Company can sell through its
existing distribution network.
PRODUCTS
CASINO CHIPS
Paul-Son designs and manufactures casino chips to meet a
variety of customer preferences and specifications, including
size, weight, ability to stack, ease of handling, texture, color,
4
graphics, durability, and security and anti-counterfeit
features. Casino chips are manufactured from a proprietary
formulation of approximately ten raw materials using a
compression molding system that management believes is unique to
the industry. The Company has developed the ability to mold
detailed graphics bearing casino logos or other designs onto both
sides of a chip. In addition, customized security and
identifying features are incorporated into a chip.
A casino will generally order all of its chips, including
replacement chips after wear and usage, from a single supplier.
Accordingly, Paul-Son strives to become the original chip
supplier to a casino upon its opening. A new casino order will
typically include approximately five distinct chip colors and
styles, ranging in denominations from $1 to $1,000. The
Company's selling price is generally between $.60 and $.80 per
chip, depending upon the specification, design and security
features. Given this relatively low cost and a chip's expected
lifespan of five or more years, management believes that
competition is generally based upon factors other than price.
To protect its market position and satisfy the demands of
its customers, the Company continuously seeks to improve the
quality and features of its chips. For example, in 1993, the
Company introduced a new line of full-color chips with detailed
customized graphics which cover virtually the entire face of a
chip. Also, in 1993, the Company developed a chip featuring a
wide selection of popular pictures to be sold to individuals
through retail outlets and by mail-order. Every year since 1994
the Company has introduced improved formulations and additional
security features which are incorporated in the manufacture of
its casino chips.
The Company manufactures all of its chips at its facilities
in San Luis, Mexico. To meet the increasing demand for its
chips, in 1993 and again in 1997, the Company expanded production
capacity at the facility to its current annual capacity of
approximately 65 million chips. Management believes that given
its current production level of approximately 18 million chips
per year, the Company will have sufficient manufacturing capacity
to meet anticipated future demand.
In January 1994, Paul-Son began to market commemorative
chips. Management of Paul-Son and its casino customers
determined that casino patrons often retained casino chips which
commemorated certain types of events such as title boxing
matches, significant anniversaries, and premier entertainment
events. Casinos benefit to the extent that casino chips
purchased are not redeemed, thereby resulting in added cash flow
to the casino. Paul-Son believes that promoting such additional
benefits to casinos has assisted the Company in sales of new
racks of primary casino chips. The Company is also pursuing
opportunities to sell commemorative chips outside of the gaming
industry.
TABLE LAYOUTS
Every gaming table is covered with a felt layout containing
silk-screened patterns particular to each specific game, as well
as multi-colored logos and other markings according to individual
casino preferences. Paul-Son is the leading manufacturer of felt
layouts in the United States, utilizing high quality cloth,
enhanced graphics, and proprietary dye formulations which
management believes result in the widest variety of customized
colors.
5
Layouts are typically installed by Paul-Son on new gaming
tables prior to delivery to a casino. The layouts are then
regularly replaced by the casinos to maintain their appearance,
generally within 60 days. Layouts typically sell in a range of
$65 to $325, depending on the type of table, the complexity of
the patterns and the variety and difficulty of color
combinations.
Since December 1994, the Company has manufactured its
layouts in its San Luis, Mexico facilities. The Company's layout
production capacity is approximately 50,000 "steam" layouts and
24,000 "hand-painted" layouts per year. Management believes that
the capacity of its layout production facilities in Mexico will
allow the Company to increase layout production and continue to
meet anticipated future demand.
During the last two years, certain competitors of the
Company in the gaming supply industry have introduced synthetic
nylon layouts to the casino industry. Demand for these synthetic
layouts, because of their durability and longer wear, has been
increasing over the last year. To date, the principal
disadvantage of synthetic layouts has been the limited selection
of colors and graphics. Due to the increasing demand, the
Company has sought to introduce its own line of technologically
advanced synthetic layouts which will be available in a wider
variety of colors and graphics. In August 1997, the Company
entered into an agreement to procure the equipment necessary to
manufacture its own synthetic layouts. Management believes the
synthetic layouts which will be manufactured by the Company will
be superior to synthetic layouts currently available, in terms of
colors and graphics.
PLAYING CARDS
In 1988, the Company began manufacturing and selling its own
line of paper casino playing cards. A deck of cards sells to
casinos for between $.85 and $2.00 and, based on casino industry
practices, is generally replaced every eight hours or less. A
casino typically enters into a one year purchase commitment with
a supplier to supply its cards at regular intervals, generally
monthly. Casinos often purchase cards from more than one
supplier, as casino floor managers often have preferences for a
particular type of card.
The Company believes that it is the fourth largest casino
card manufacturer in the United States, currently providing cards
to approximately 6% of casinos operating in the United States.
Given the Company's relatively low market share and its
established distribution system for table game supplies,
management believes that playing cards represent a significant
opportunity for the Company.
The Company produces its playing cards in its Las Vegas and
San Luis, Mexico facilities. The Company is currently completing
the purchase of additional manufacturing space in San Luis and is
in the process of purchasing the equipment necessary to expand
its playing card production capacity to 25 million decks per
year; up from the Company's current annual production capacity of
15 million decks. Expanded playing card production capacity will
permit management to aggressively seek new playing card business
from its existing casino customer base, from other casinos and
from customers outside of the casino industry.
6
The Company also distributes plastic playing cards which are
used predominately in California card clubs. Traditionally, the
plastic playing cards are preferred by the California card room
market while the paper cards are generally preferred by the
traditional hotel-casino markets. The Company is currently
exploring the feasibility of manufacturing its own line of
plastic playing cards.
GAMING FURNITURE
The Company sells a variety of casino gaming furniture,
including tables, seating and roulette and Big Six wheels.
Tables range in price from $1,000 for a blackjack table to
$15,000 for a double roulette table and wheel. The Company offers
a "Premier" line of gaming furniture which has been the staple of
the Company, and a "Select" line which was developed in 1995 in
response to the industry's demand for a lower priced, quality
line of blackjack tables. Management believes that the "Select"
line enables the Company to compete with the price structure of
its competitors while maintaining Company quality standards.
Paul-Son vigorously pursues gaming table sales because the sale
of a gaming table will generally bolster its ability to sell
consumable products such as layouts, dice, chips, cards, and
other accessories to the table purchasers. The Company buys its
tables in unassembled form from quality wood shops. Tables are
then assembled by the Company and completed by adding the felt
layout, drop boxes, trays and other accessories. Table game
seating is produced by nonaffiliated manufacturers and
distributed by the Company. In January 1996, the Company
commenced manufacturing its own roulette and Big Six wheels. By
manufacturing the wheels, management believes the Company has
better control over the quality of the wheels it offers to its
customers.
DICE
Paul-Son manufactures dice at its San Luis, Mexico
facilities from cellulose acetate specifically formulated to
provide the required clarity, hardness and dimensional stability.
The Company offers a variety of spot designs, which are inserted
in the body of the dice and machined flat to the surface. A
casino may request the imprinting of its name and logo (in a
variety and combination of colors), the insertion of a security
"key" onto the reverse side of a particular spot, the addition of
a security "glow" spot, the serialization of the dice, or all or
a combination of the above.
Paul-Son dice are manufactured in conformity with the
strictest standards of gaming regulators, which require that each
die be within 3/10,000th of an inch of a perfect cube. The sales
price of casino dice currently ranges between $2.35 and $3.05 per
pair. Generally, a set of dice (two and one-half pair) does not
remain in play for more than eight hours in a busy casino. The
Company currently has the capacity to produce approximately
600,000 pairs of dice per year (based upon one production shift).
Casinos typically purchase dice from two or more suppliers.
TABLE ACCESSORIES AND OTHER PRODUCTS
In order to offer its customers a full product
line, the Company sells a number of ancillary casino
table game products which it typically does not
manufacture. These include plastic money paddles, discard
holders, drop boxes, dealing shoes, trays and covers, dice
sticks and on/off pucks. These products are generally sold
in conjunction with the sale of gaming tables and tend
7
to have long useful lives. The Company generally maintains two
suppliers for each of these products.
In order to compete with the increasing competition from
manufacturers of these products who sell direct to the Company's
casino customers, the Company began manufacturing its own dealing
shoes in May 1997, and may expand to manufacture other plastic
table game accessories.
SALES, ADVERTISING AND PROMOTION
The Company generally distributes its products through its
17 person sales force, which operates out of regional offices in
Las Vegas, Reno, Atlantic City, Gulfport, Mississippi, New
Orleans, Louisiana, Ft. Lauderdale, Florida, Ontario, Canada and
Portland, Oregon. Additionally, the Company has distributors in
New Orleans, Louisiana and Lima, Peru to sell its products to
licensed casino operations, either land-based, riverboats or
cruise ships. Management believes that the long-standing
customer relationships which its individual sales representatives
have developed over the years and the Company's reputation for
quality and reliability are key factors upon which the Company
successfully competes in the market place. From time to time the
Company enters into agreements for the distribution of its
products on an exclusive and non-exclusive basis.
During the fiscal year ended May 31, 1997, approximately 62%
of the Company's revenue was generated by core sales to its
existing customers. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-
Overview." The Company's experience has been that once a casino
buys from a table game supplier, it tends to purchase replacement
products from the same supplier, provided quality, service and
competitive pricing are maintained. As a result, the Company's
sales efforts are primarily focused on selling a full range of
table gaming products to casinos while they are in the
development and licensing stage. By thereafter maintaining a
frequent contact program, the Company seeks to realize a steadily
increasing base of core sales, while capturing incremental sales
to new casinos. Management anticipates that as the industry
continues to expand, it may be necessary to open additional sales
offices in strategic locations in order to establish and maintain
these important relationships.
The Company places advertising in trade publications,
produces a complete sales catalogue for the retail market, and
participates in major casino industry trade shows. The Company
keeps abreast of new casino openings through personal contact
with customer casino's management, legislative and trade
publications and wire service press releases. When new casinos
are identified, Company representatives make personal contact
with appropriate officers and/or purchasing agents in order to
solicit the sale of the Company's products to such potential new
customers.
MATERIALS AND SUPPLIES
For certain of its products, the Company is dependent upon a
limited number of suppliers to provide the Company with raw
materials for manufacturing and finished goods for distribution.
The Company's policy is to maintain two or more suppliers of such
raw materials and finished goods whenever possible.
8
COMPETITION
There are a number of companies that compete with the
Company in the sale of each of its product lines:
CASINO CHIPS. The casino chip product line has in recent
years become an increasingly competitive area of the gaming
supply business. Currently, the Company's major competitors are
Chipco International Ltd. ("Chipco"), Nevada Dice Company, d/b/a
The Bud Jones Company ("Bud Jones"), and VSR Gaming Supplies
("VSR"). The Company believes that key competitive factors for
casino chip sales are durability, graphics, ease of handling and
security.
TABLE LAYOUTS. The Company's three primary competitors for
casino table layouts are Bud Jones, VSR and Midwest Game Supply
Co. ("Midwest"). Management believes that the key competitive
factors for table layout sales are cloth quality, enhanced
graphics, designs and clarity and range of colors. In addition,
certain synthetic layouts are now being marketed in competition
with the traditional cloth layouts manufactured and sold by the
Company.
PLAYING CARDS. The major competitors in the domestic
playing card market are The U.S. Playing Card Co., Gemaco Playing
Card Co. and Hoyle Products. Management believes that the
primary competitive factors for playing cards are price, ease of
handling, durability, brand name identification and reputation.
GAMING FURNITURE. The Company's principal competitors for
casino gaming furniture are Bud Jones, VSR and smaller regional
wood shops in certain geographic areas. Competition is based on
quality, price and durability.
DICE. The Company's principal competitors for casino dice
sales are Bud Jones, VSR, T.K. Specialty Company and Midwest.
Management believes that the primary competitive factors for dice
sales are quality and pricing. In addition, casino shift
managers typically prefer that casinos purchase dice from more
than one supplier due to industry superstition that dice from one
of its suppliers may run "cold" for the house from time to time.
TABLE ACCESSORIES AND OTHER PRODUCTS. The Company's
principal competitors for distributing table accessories and
other products, which include plastic money paddles, discard
holders, drop boxes, dealing shoes, trays and covers, dice sticks
and on/off pucks, are Bud Jones, VSR and Midwest. The Company
believes that key competitive factors for these products are the
ability to be a single source supplier, price and product
quality.
EMPLOYEES
At August 22, 1997, the Company employed 491 persons, with
93 in Las Vegas, Nevada, 380 in San Luis, Mexico, and the
remainder in regional sales offices. None of the Company's
employees is covered by collective bargaining agreements.
9
REGULATION AND LICENSING
NEVADA. The manufacture and distribution of gaming
equipment in Nevada are subject to extensive state and local
regulation. The Company's operations are subject to the
licensing and regulatory control of the Nevada Gaming Commission
(the "Nevada Commission"), the Nevada State Gaming Control Board
(the "Nevada Board") and various local regulatory agencies
(collectively with the Nevada Commission and the Nevada Board,
the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the
Nevada Gaming Authorities seek to (i) prevent unsavory or
unsuitable persons from having a direct or indirect involvement
with gaming at any time or in any capacity, (ii) establish and
maintain responsible accounting practices and procedures,
(iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal
fiscal affairs and the safeguarding of assets and revenues,
providing reliable record keeping and requiring the filing of
periodic reports with the Nevada Gaming Authorities, (iv) prevent
cheating and fraudulent practices, and (v) provide sources of
state and local revenues through taxation and licensing fees.
Changes in such laws, regulations and procedures could have an
adverse effect on the Company's operations.
Paul-Son Gaming Supplies ("Paul-Son Supplies"), the
Company's wholly owned subsidiary which manufactures and
distributes casino table game equipment used in Nevada, is
required to be licensed by the Nevada Gaming Authorities. The
gaming license is not transferable and must be renewed
periodically. The Company is registered as a publicly traded
corporation by the Nevada Commission, and is required
periodically to submit detailed financial and operating reports
to the Nevada Commission and furnish any other information which
the Nevada Commission may require. No person may become a
stockholder of, or receive any percentage of profits from Paul-
Son Supplies without first obtaining licenses and approvals from
the Nevada Gaming Authorities. The Company and Paul-Son Supplies
have obtained from the Nevada Gaming Authorities the various
approvals, permits and licenses required in order to engage in
its manufacturing, distribution and sales activities in Nevada.
The Nevada Gaming Authorities may investigate any individual
who has a material relationship to, or material involvement with,
the Company or Paul-Son Supplies, in order to determine whether
such individual is suitable or should be licensed as a business
associate of a gaming licensee. Officers, directors and certain
key employees of Paul-Son Supplies must file applications with
the Nevada Gaming Authorities and may be required to be licensed
or found suitable by the Nevada Gaming Authorities. Officers,
directors and key employees of the Company who are actively and
directly involved in manufacturing, distribution and sales
activities of Paul-Son Supplies may be required to be licensed or
found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any
cause which they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed
personal and financial information followed by a thorough
investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes
in licensed positions must be reported to the Nevada Gaming
Authorities and in addition to their authority to deny an
application for a finding of suitability or licensure, the Nevada
Gaming Authorities have jurisdiction to disapprove a change in a
corporate position.
10
If the Nevada Gaming Authorities were to find an officer,
director or key employee unsuitable for licensing or unsuitable
to continue having a relationship with the Company or Paul-Son
Supplies the companies involved would have to sever all
relationships with such person. In addition, the Nevada
Commission may require the Company or Paul-Son Supplies to
terminate the employment of any person who refuses to file
appropriate applications. Determinations of suitability or of
questions pertaining to licensing are not subject to judicial
review in Nevada.
The Nevada Commission may also require the holder of any
equity of a corporation registered under the Nevada Gaming
Control Act (the "Nevada Act"), regardless of the amount held, to
file applications, be investigated and be found suitable to own
the equity security of a registered corporation. If the Nevada
Commission determines that a person is unsuitable to own such
equity security, then pursuant to the regulations of the Nevada
Commission, the registered corporation can be sanctioned,
including the loss of its approvals, if without the prior
approval of the Nevada Commission and following a determination
of unsuitability, it (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever,
(ii) recognizes any voting right by such unsuitable person in
connection with such securities, (iii) pays the unsuitable person
remuneration in any form, or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion,
exchange, liquidation, or similar transaction. The applicant
must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation. If a security
holder is found unsuitable, the Company may itself be found
unsuitable if it fails to pursue all lawful efforts to require
such unsuitable person to relinquish such holder's voting
securities for cash at fair market value. The Company's Articles
of Incorporation require a person found unsuitable to relinquish
such person's voting securities upon demand of the Company.
The Nevada Gaming Authorities have the power to investigate
at any time any record or beneficial stockholder of a publicly
traded corporation registered under the Nevada Act. Nevada law
requires any person who acquires more than 5% of the Company's
voting securities to report the acquisition to the Nevada
Commission and such person may be required to be found suitable.
Also, any person who becomes a beneficial owner of more than 10%
of the voting securities of a publicly traded corporation
registered under the Nevada Act must apply for a finding of
suitability by the Nevada Commission upon notice to do so and
must pay the costs and fees incurred by the Nevada Board in
connection with the investigation. Under certain circumstances
an institutional investor, as such term is defined in the
regulations of the Nevada Commission and the Nevada Board
("Nevada Gaming Regulations"), which acquires more than 10%, but
not more than 15%, of the Company's voting securities, may apply
to the Nevada Commission for a waiver of such finding of
suitability requirement if such institutional investor holds the
voting securities for investment purposes only. An institutional
investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired
and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing,
directly or indirectly, the election of a majority of the members
of the board of directors of the Company, any change in the
Company's corporate charter, bylaws, management, policies or
operations of the Company, or any of its gaming affiliates, or
any other action which the Nevada Commission finds to be
inconsistent with holding the Company's voting securities for
investment purposes only. Activities which are not deemed
to be inconsistent with holding voting securities for
investment purposes only include: (i) voting on all
matters voted on by stockholders; (ii) making financial
11
and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a
change in its management, policies or operations; and (iii) such
other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial
stockholder who must be found suitable is a corporation,
partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The
applicant is required to pay all costs of investigation incurred
by the Nevada Authorities in conducting any such investigation.
Any person who fails or refuses to apply for a finding of
suitability or a license within 30 days after being ordered to do
so by the Nevada Commission or the Chairman of the Nevada Board
may be found unsuitable. The same restrictions apply to a record
owner if the record owner, after request, fails to identify the
beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the
Common Stock beyond such period of time as may be prescribed by
the Nevada Commission may be guilty of a gross misdemeanor.
The Company and Paul-Son Supplies are required to submit
detailed financial and operating reports to the Nevada
Commission. Substantially all material loans, leases, sales of
securities and similar financing transactions by Paul-Son
Supplies must be reported to or be approved by the Nevada
Commission.
If it were determined that gaming laws were violated by
Paul-Son Supplies, the gaming licenses it holds could be limited,
conditioned, suspended or revoked. In addition, Paul-Son
Supplies, the Company and the persons involved, could be subject
to substantial fines for each separate violation of the gaming
laws. A supervisor could be appointed by the Nevada Commission
to oversee the Company's operations and, under certain
circumstances, earnings generated during the supervisor's
appointment could be forfeited to the State of Nevada.
Limitation, conditioning or suspension of any gaming license or
the appointment of a supervisor could, and revocation of any
gaming license would, materially and adversely affect the
Company's operations.
In July 1996, the Nevada Board approved a detailed gaming
compliance plan prepared by the Company (the "Compliance Plan"),
the objective of which was to formulate a comprehensive set of
internal review and control policies and procedures to monitor
and strengthen the Company's commitment to compliance with all
gaming laws and regulations in all gaming jurisdictions including
Nevada. Major provisions of the Compliance Plan include the
formation by the Board of Directors of a Compliance Committee,
the creation of a position in the Company of Compliance Officer
(the "Compliance Officer"), and the review of sales transactions
by the Compliance Officer.
The Company is required to maintain a current stock ledger
in Nevada which may be examined by the Nevada Gaming Authorities
at any time. If any securities are held in trust by an agent or
by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to
the Nevada Gaming Authorities. A failure to make
such disclosure may be grounds for finding the record
holder unsuitable. The Company is also required to render
maximum assistance in determining the identity of the
beneficial owner. The Nevada Commission has the power at any
12
time to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada
Act and the Nevada Gaming Regulations. However, to date the
Nevada Commission has not imposed such a requirement.
The Company may not make a public offering of its securities
without the approval of the Nevada Commission. Such approval, if
given, does not constitute a recommendation or approval of the
investment merits of the securities.
Changes in control of the Company through merger,
consolidation, acquisition of assets, management or consulting
agreements or any form of takeover cannot occur without the prior
investigation of the Nevada Board and approval of the Nevada
Commission. The Nevada Commission may require controlling
stockholders, officers, directors and other persons having a
material relationship or involvement to be licensed.
The Nevada legislature has declared that some corporate
acquisitions opposed by management, repurchases of voting
securities and other corporate defense tactics that affect
corporate gaming licensees in Nevada, and corporations whose
stock is publicly-traded that are affiliated with those
operations, may be injurious to stable and productive corporate
gaming. The Nevada Commission has established a regulatory
scheme to ameliorate the potentially adverse effects of these
business practices upon Nevada's gaming industry and to further
Nevada's policy to (i) assure the financial stability of
corporate gaming operators and their affiliates, (ii) preserve
the beneficial aspects of conducting business in the corporate
form, and (iii) promote a neutral environmental for the orderly
governance of corporate affairs. Approvals are, in certain
circumstances, required from the Nevada Commission before the
Company can make exceptional repurchases of voting securities
above the current market price thereof (commonly referred to as
"greenmail") and before a corporate acquisition opposed by
management can be consummated. The Nevada Gaming Regulations
also require prior approval by the Nevada Commission if the
Company were to adopt a plan of recapitalization proposed by the
Company's Board of Directors in opposition to a tender offer made
directly to its stockholders for the purpose of acquiring control
of the Company.
NEW JERSEY. The Company, its officers and directors,
certain of its employees and stockholders, Paul-Son Supplies, and
Mexicana, S.A. de C.V. (99% owned by Paul-Son Supplies and 1%
owned by the Company) ("Paul-Son Mexicana") are currently
required to be licensed under the New Jersey Casino Control Act
(the "New Jersey Act") as a casino service industry qualified to
sell it products to casinos in New Jersey. The terms of
agreements which the Company enters into with Atlantic City
casinos may require the prior approval of the New Jersey Casino
Control Commission (the "New Jersey Commission").
The sale of gaming-related devices and systems to casinos in
New Jersey is also subject to the New Jersey Act and the
regulations promulgated thereunder by the New Jersey Commission.
The New Jersey Commission has broad discretion in promulgating
and interpreting regulations under the New Jersey Act.
Amendments and supplements to the New Jersey Act, if any, may be
of a material nature, and accordingly may adversely affect the
ability of the Company or its employees to obtain any required
licenses, permits and approvals from the New Jersey Commission,
or any renewals thereof.
13
The current regulations govern licensing requirements,
standards for qualification, persons required to be qualified,
disqualification criteria, competition, investigation of
supplementary information, duration of licenses, record keeping,
causes for suspension, standards for renewals or revocation of
licenses, equal employment opportunity requirements, fees and
exemptions. In deciding to grant a license, the New Jersey
Commission may consider, among other things, the financial
stability, integrity, responsibility, good character, reputation
for honesty, business ability and experience of the Company and
its directors, officers, management and supervisory personnel,
principal employees and stockholders as well as the adequacy of
the financial resources of the Company.
New Jersey licenses are granted for a period of one or two
years, depending on the length of time a company has been
licensed, and are renewable. The New Jersey Commission may
impose such conditions upon licensing as it deems appropriate.
These include the ability of the New Jersey Commission to require
the Company to report the names of all of its stockholders as
well as the ability to require any stockholders whom the New
Jersey Commission finds not qualified to dispose of the stock,
not receive dividends, not exercise any rights conferred by the
shares, nor receive any remuneration from the Company for
services rendered or otherwise. Failure of such stockholder to
dispose of such stockholder's stock could result in the loss of
the Company's license. Licenses are also subject to suspension,
revocation or refusal for sufficient cause, including the
violation of any law. In addition, licensees are also subject to
monetary penalties for violations of the New Jersey Act or the
regulations of the New Jersey Commission.
OTHER JURISDICTIONS. The Company currently operates at
various levels in Arizona, California, Colorado, Connecticut,
Florida, Illinois, Indiana, Iowa, Louisiana, Michigan, Minnesota,
Mississippi, Missouri, New York, Oregon, South Dakota,
Washington, Wisconsin, the provinces of Ontario, Quebec, British
Columbia and Saskatchewan, Canada and the state of Victoria,
Australia. Although the regulatory schemes in these
jurisdictions are not identical, their material attributes are
substantially similar, as described below.
The manufacture, sale and distribution of gaming devices and
the ownership and operation of gaming facilities in each
jurisdiction are subject to various provincial, state, county
and/or municipal laws, regulations and ordinances, which are
administered by the relevant regulatory agency or agencies in
that jurisdiction (the "Gaming Regulators"). These laws,
regulations and ordinances primarily concern the responsibility,
financial stability and character of gaming equipment
manufacturers, distributors and operators, as well as persons
financially interested or involved in gaming or liquor
operations.
In many jurisdictions, manufacturing or distributing gaming
supplies may not be conducted unless proper licenses are
obtained. An application for a license may be denied for any
cause which the Gaming Regulators deem reasonable. In order to
ensure the integrity of manufacturers and suppliers of gaming
supplies, most jurisdictions have the authority to conduct
background investigations of the Company, its key personnel and
significant stockholders. The Gaming Regulators may at any time
revoke, suspend, condition, limit or restrict a license for any
cause deemed reasonable by the Gaming Regulators. Fines for
violation of gaming laws or regulations may be levied against the
holder of a license and persons involved. The Company
and its key personnel have obtained all licenses necessary
for the conduct of the Company's business in the
14
jurisdictions in which it manufactures and sells its casino table
game products. Suspension or revocation of such licenses could
have a material adverse effect on the Company's operations.
NATIVE AMERICAN GAMING REGULATION. Gaming on Native
American lands is extensively regulated under federal law, tribal-
state compacts and tribal law. The Indian Gaming Regulatory Act
of 1988 ("IGRA") provides the framework for federal and state
control over all gaming on Native American land. IGRA regulates
the conduct of gaming on Native American lands and the terms and
conditions of contracts with third parties for management of
gaming operations. IGRA is administered by the Bureau of Indian
Affairs and the National Indian Gaming Commission ("NIGC").
IGRA classifies games that may be conducted on Native
American lands into three categories. "Class I Gaming" includes
social games solely for prizes of minimal value, or traditional
forms of Native American gaming engaged in by individuals as part
of, or in connection with, tribal ceremonies or celebrations.
"Class II Gaming" includes bingo, pulltabs, lotto, punch boards,
tip jars, instant bingo, and other games similar to bingo, if
those games are played at the same location as bingo is played.
"Class III Gaming" includes all other commercial forms of gaming,
such as table games, slots, video casino games, and other
commercial gaming (e.g. sports betting and pari-mutuel wagering).
Class I Gaming on Native American lands is within the
exclusive jurisdiction of the Native American tribes and is not
subject to the provisions of IGRA.
Class II Gaming is permitted on Native American lands if
(i) the state in which the Native American lands are located
permits such gaming for any purpose by any person, organization
or entity, (ii) the gaming is not otherwise specifically
prohibited on Native American lands by federal law, (iii) the
gaming is conducted in accordance with a tribal ordinance or
resolution which has been approved by the NIGC, (iv) a Native
American tribe has sole proprietary interest and responsibility
for the conduct of gaming, (v) the primary management officials
and key employees are tribally licensed, and (vi) miscellaneous
other requirements are met.
Class III Gaming is permitted on Native American lands if
the conditions applicable to Class II Gaming are met and, in
addition, the gaming is conducted in conformance with the terms
of a written agreement between a tribal government and the
government of the state within whose boundaries the tribe's lands
are located (a "tribal-state compact").
IGRA requires states to negotiate in good faith with Native
American tribes that seek to enter into a tribal-state compact
for the conduct of Class III gaming. Such tribal-state compacts
may include provisions for the allocation of criminal and civil
jurisdiction between the state and the Native American tribe
necessary for the enforcement of such laws and regulations,
taxation by the Native American tribe of such activity in amounts
comparable to those amounts assessed by the state for comparable
activities, remedies for breach, standards for the operation of
such activity and maintenance of the gaming facility, including
licensing, and any other subjects that are directly related to
the operation of gaming activities. The terms of tribal-state
compacts vary from state to state. Tribal- state compacts
within one state tend to be substantially similar to
each other. Tribal-state compacts usually specify
the types of permitted games, entitle the state to
15
inspect casinos, require background investigations and licensing
of casino employees, and may require the tribe to pay a portion
of the state's expenses for establishing and maintaining
regulatory agencies.
Pursuant to tribal-state compacts, agreements with tribes or
as otherwise allowed by state law, the Company is currently
qualified to distribute its gaming supplies to certain tribes in
the states of Arizona, Florida, Louisiana, Minnesota,
Mississippi, New York, North Dakota, Oregon, Iowa, Connecticut,
Michigan, South Dakota, Washington, Wisconsin and the provinces
of Ontario and Saskatchewan, Canada.
In 1996, the Nevada Gaming Authorities informed the Company
that it intended to take the position that any Native American
tribe operating Class III gaming within the state of California
was doing so illegally, causing the Company to cease all sales of
products to Native American tribes conducting any form of Class
III gaming in the state of California. A similar situation exists
with Native American tribes operating in the state of New Mexico
and the Company also ceased sales of its products to those
tribes.
UNITED STATES ? FEDERAL. The Federal Gambling Devices Act
of 1962 makes it unlawful for a person to manufacture, deliver
or receive gaming machines, gaming machine type devices and
components thereof across interstate lines unless that person has
first registered with the Department of Justice of the United
States.
LICENSING OF OFFICERS AND DIRECTORS. In each jurisdiction
where the Company is presently licensed, the officers and
directors who are required to be licensed have either been
approved or licensed or have applications for such licenses or
approvals pending. As regulatory authorities require additional
persons to be licensed or approved or when the Company seeks to
enter into new jurisdictions, the Company promptly causes
necessary applications to be filed.
APPLICATION OF FUTURE OR ADDITIONAL REGULATORY REQUIREMENTS.
In the future, the Company intends to seek the necessary
licenses, approvals and findings of suitability for the Company,
its products and its personnel in other jurisdictions throughout
the world where significant sales are anticipated to be made.
However, there can be no assurance that such licenses, approvals
or findings of suitability will be obtained and if obtained will
not be revoked, suspended or conditioned or that the Company will
be able to obtain the necessary approvals for its future products
as they are developed in a timely manner, or at all. If a
license, approval or finding of suitability is required by a
regulatory authority and the Company fails to seek or does not
receive the necessary license of finding of suitability, the
Company may be prohibited from selling it products for use in the
respective jurisdiction or may be required to sell its products
through other licensed entities at a reduced profit to the
Company.
ITEM 2. PROPERTIES
The Company currently assembles and manufactures its
products at facilities in Las Vegas, Nevada and San Luis, Mexico.
16
LAS VEGAS. In May 1997, the Company relocated its corporate
headquarters to an approximately 62,000 square foot building (the
"New Las Vegas Facility"), located approximately one-half mile
from the Company's approximately 26,000 square foot facility (the
"Old Las Vegas Facility") where its headquarters had been located
since 1966. The New Las Vegas Facility was purchased in September
1995, and also houses the casino sales office, a centralized
warehouse of finished goods inventory, the Las Vegas playing card
production line, roulette and Big Six wheel manufacturing and the
table layout art and chip art departments. At the New Las Vegas
Facility, the Company also maintains an inventory of templates,
graphic designs, logos, and tools and dies for each individual
casino customer's gaming equipment. Maintaining such an
inventory results in time and cost savings for product
manufacture and delivery. The Company's retail sales showroom,
plastic dealing shoes manufacturing and limited storage are
located at the Old Las Vegas Facility. In February 1997, the
Company sold one of the buildings (approximately 9,000 square
feet) which was a component of the Old Las Vegas Facility,
resulting in the reduction in the square footage at the Old Las
Vegas Facility from 35,000 to 26,000, and the repayment of the
Company's debt which was secured by a deed of trust on the Old
Las Vegas Facility. The remaining components of the Old Las Vegas
Facility are listed for sale. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
SAN LUIS. The Company manufactures casino chips, dice and
layouts at two adjacent facilities in San Luis, Mexico; a 34,000
square foot facility ("Main Facility") in which the casino chips
and dice are manufactured, and a new 45,000 square foot facility
(together with the Main Facility, the "San Luis Facilities")
purchased by the Company in December 1994, in which the layout
and the machine shop departments are currently located and the
new playing card production line is located. The Company leases
the Main Facility pursuant to an eight year lease which expires
in April 2001, with an option to extend the term an additional 12
years.
In July 1997, the Company's Board of Directors approved the
purchase of an existing approximately 66,000 square foot facility
(the "New San Luis Building") in San Luis, Mexico, located
approximately 400 yards from the Main Facility for $1,100,000.
The purchase of the New San Luis Building is expected to be
completed no later than October 31, 1997. The Company plans to
use the New San Luis Building to augment its playing card and
chip production capabilities to accommodate the anticipated
increase in demand for the Company's playing cards.
FACILITY CAPACITY. With the purchase of the New San Luis
Building, management believes that the Company has sufficient
production capacity to meet anticipated future demand for all of
its products.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal
proceeding, nor, to the Company's knowledge, is any material
legal proceeding threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Price Range of Common Stock
The Company's common stock ("Common Stock") is traded on the
Nasdaq National Market under the symbol "PSON." The following
table sets forth the high and low bid prices of the Common Stock,
as reported by the Nasdaq National Market, during the periods
indicated.
[CAPTION]
Fiscal
Year High Low
- ------- ------- -------
1996 First Quarter.............................. 7 3/4 5
1996 Second Quarter............................. 10 1/4 5 3/4
1996 Third Quarter.............................. 9 1/2 7 1/2
1996 Fourth Quarter............................. 9 1/2 7 1/4
1997 First Quarter.............................. 9 1/2 7
1997 Second Quarter............................. 8 1/4 7 1/4
1997 Third Quarter.............................. 12 1/4 7 3/4
1997 Fourth Quarter............................. 14 1/2 11 1/2
1998 First Quarter (through August 22, 1997).... 14 7/8 12 1/8
The last reported bid price of the Common Stock on the
Nasdaq National Market on August 22, 1997 was $13 5/8 per share.
There were approximately 140 holders of record of the Company's
Common Stock as of August 22, 1997.
(b) Dividend Policy
The Company has never paid cash dividends. Payments of
dividends are within the discretion of the Company's Board of
Directors and depend upon the earnings, capital requirements, and
operating and financial condition of the Company, among other
factors. The Company currently expects to retain its earnings to
finance the growth and development of its business and does not
expect to pay cash dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data included in the
following tables should be read in conjunction with the Company's
Consolidated Financial Statements and related notes, and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere herein. The selected
consolidated financial data for the years ended May 31,
18
1997, 1996 and 1995 and as of May 31, 1997 and 1996 have been
derived from the audited Consolidated Financial Statements of the
Company included elsewhere herein. The selected consolidated
financial data as of May 31, 1995, 1994 and 1993 and for the years
ended May 31, 1994 and 1993 have been derived from the Company's
audited financial statements not included herein. The selected
consolidated financial data gives effect to the reorganization of
the Company and certain affiliated entities, but not the
acquisition ("Acquisition") of C.J. Sisk ("Sisk"), another
affiliated entity, which occurred in connection with the
Company's initial public offering of its common stock in March
1994 (the "1994 Offering"). The pro forma data gives effect to
the Acquisition as if it had occurred on June 1, 1993.
19
YEARS ENDED MAY 31, PRO FORMA
----------------------------------------------------------------------- MAY 31,
1997 1996 1995 1994 1993 1994
----------- ----------- ----------- ----------- ----------- -----------
Revenues $ 24,914 $ 23,379 $ 24,595 $ 21,088 $ 13,492 $ 22,839
Cost of revenues 17,224 16,323 17,137 14,601 9,281 15,698
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 7,690 7,056 7,458 6,487 4,211 7,141
Selling general and
administrative expenses 5,968 6,577 7,739 4,771 3,232 4,993
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) 1,722 479 (281) 1,716 979 2,148
Other income (expense) 412 52 140 (46) (78) (42)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and minority interests
in net income of consolidated
companies 2,134 531 (141) 1,670 901 2,106
Income tax (expense) benefit (762) (194) - (523) (297) (682)
Minority interest in net
income of consolidated
companies - - - (90) (96) -
----------- ----------- ----------- ----------- ------------ -----------
Net income (loss) $ 1,372 $ 337 $ (141) $ 1,057 $ 508 $ 1,424
=========== =========== =========== =========== ============ ===========
Earnings per share:
Primary $ 0.41 $ 0.10 $(0.04) $ 0.61
Shares used in calculation 3,330,764 3,324,000 3,324,000 2,332,657
Fully diluted $ 0.38 $ 0.10 - $ 0.59
Shares used in calculation 3,647,810 3,326,647 3,324,000 2,397,183
Sisk was a sole proprietorship and, accordingly, was not
subject to corporate income taxes. The pro forma
information has been computed as if the Company, adjusted
for the acquisition of Sisk, had been subject to corporate
income taxes at the applicable federal and state rates for
the year ended May 31, 1994.
MAY 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- ----------- ---------- ----------
BALANCE SHEET DATA: (in thousands, except per share data)
Cash and cash equivalents $ 2,753 $ 998 $ 1,254 $ 3,296 $ 826
Working capital 9,308 7,601 9,832 12,288 1,181
Property and equipment, net 7,250 7,259 4,990 2,705 1,301
Total assets 20,397 17,401 19,040 20,244 5,635
Current liabilities 3,234 2,071 3,729 4,512 2,991
Long-term debt, less current
maturities 67 471 788 1,069 725
Stockholders' equity 17,085 14,859 14,522 14,663 1,766
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Paul-Son provides gaming equipment and supplies to new
casinos and consumable products to its existing customer base.
The principal consumable products have limited useful lives,
ranging from several hours in the case of playing cards and dice
to several months in the case of table game layouts and several
years in the case of casino chips and gaming furniture. "Core"
business revenues are generated by sales of these products to the
over 75% of the casinos in the United States with which the
Company has an established relationship and comprise the majority
of the Company's total revenues. Complementing this core
business is the significant additional revenue the Company
realizes when providing a full range of products to new casinos.
The Company strives to become a casino's sole supplier of table
game equipment and supplies.
During the past decade, casino entities have expanded from
land-based resort properties to riverboats, both cruising and
dockside, and to Native American lands. As a licensed supplier,
the Company has vigorously pursued table gaming opportunities in
emerging gaming jurisdictions. Because of the Company's
production capacity and its experience in the gaming supply
industry, management believes the Company is well positioned to
capitalize on the combined growth of the gaming industry both
domestically and internationally.
While the gaming industry has grown in recent years, the
growth rate of table games has not matched that of the gaming
industry as a whole. This trend is attributed to an increasing
allocation of total casino gaming space to slot machines which,
in certain cases, may reduce the allocation of total casino
gaming space to table games. The number of new table games in
new jurisdictions typically follow this trend after a period of
operation. However, new table games continue to be introduced in
an effort to offset this trend and create exciting and
progressive games in the table game segment.
RESULTS OF OPERATIONS
The following table summarizes selected items from the
Company's Consolidated Statements of Operations as a percentage
of revenues for the periods indicated:
YEARS ENDED MAY 31,
------------------------------
1997 1996 1995
------- ------- -------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 69.1% 69.8% 69.7%
Gross profit 30.9% 30.2% 30.3%
Selling, general and administrative 24.0% 28.1% 31.5%
expenses(1)
Operating income (loss) 6.9% 2.1% (1.2%)
Interest expense 0.2% 0.3% 0.4%
Net income (loss) 5.5% 1.4% (0.6%)
Bad debt expense accounted for 0.2%, 1.5% and 11.8% of
selling, general and administrative expenses for the years ended
May 31, 1997, 1996 and 1995, respectively.
21
The following table details the Company's historical
revenues by product line:
YEARS ENDED MAY 31,
----------------------------------
1997 1996 1995
-------- -------- --------
REVENUES: (IN THOUSANDS)
Casino chips $ 9,516 $ 7,362 $ 7,347
Table layouts 3,205 2,678 3,184
Playing cards 3,265 4,198 3,752
Gaming furniture 4,970 5,249 5,674
Dice 1,576 1,257 1,221
Table accessories and other products 2,382 2,635 3,417
-------- -------- --------
Total $24,914 $23,379 $24,595
======== ======== ========
COMPARISON OF OPERATIONS FOR THE YEARS ENDED MAY 31, 1997 AND
MAY 31, 1996
REVENUES. For the fiscal year ended May 31, 1997,
Paul-Son's revenues reached a record total of $24.9 million.
This revenue figure represented a $1.5 million, or 6.6%, increase
from the $23.4 million in revenues which the Company generated
the previous year. The increase in revenues resulted principally
from an increase in new casino openings during the year. In
fiscal year 1997, the Company sold products totaling $9.4 million
to 36 new casinos (including riverboats, land based properties
and Native American casinos) versus $4.7 million to 25 new
casinos in the previous fiscal year. The increase in new casino
revenues was offset by a decrease in core sales. Core sales in
fiscal 1997 were $15.5 million, a decrease of $3.1 million or
16.6% from core sales of $18.7 million in fiscal 1996. Core
sales, which are sales of consumable gaming supplies and
equipment to the Company's existing customer base, decreased
during the year primarily due to a decrease in playing card
sales, both paper and plastic. Playing card sales were down due
to a number of factors including a change in the Company's
supplier of plastic playing cards during the second quarter of
the fiscal year and the slowdown in shipments to many of the
Company's contract playing card customers who had a temporary
over supply of playing cards during the first quarter of the 1997
fiscal year. In addition, during fiscal 1997, the Company
restructured its playing card sales force, developed an improved
playing card product and relocated a portion of its playing card
production to San Luis, Mexico, resulting in a temporary slowdown
in playing card sales efforts. Management believes the changes
implemented will result in greater sales coverage in all
geographic areas, an improved product and more competitive
pricing. As a result of these changes, the Company experienced
an increase of 37.7% in paper playing card sales in the fourth
quarter of fiscal 1997 over the average of the sales generated in
each of the first three quarters of the 1997 fiscal year.
To a lesser extent, the Company's core sales were affected
by a decline in the sales of table accessories, which are
generally acquired from third party manufacturers, who have been
selling directly to casino customers in competition with the
Company. As a result the Company began manufacturing its own line
of plastic dealing shoes in May 1997.
22
In connection with the increase in new casino openings,
sales of casino chips, table layouts, and dice increased 29.3%,
19.6%, and 25.3%, respectively, while, as a result of the
decrease in core sales, playing cards, gaming furniture, and
table accessories and other products decreased 22.2%, 5.3% and
9.6%, respectively, as compared to the prior fiscal year.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, decreased to 69.1% for the fiscal year ended May, 31 1997,
as compared to 69.8% in the prior fiscal year. This percentage
decrease was due to a number of factors including higher sales
volume and corresponding higher operating efficiencies (i.e.
increased sales resulting in a higher number of units produced
over the same fixed production costs), although the corresponding
higher efficiencies achieved were partially offset by a temporary
increase in fixed production costs resulting from the relocation
of a portion of the Company's playing card production to San
Luis, Mexico. Also contributing to the decrease in the Company's
cost of revenues percentage was a change in product mix sold
during the year. Chip sales, for which the Company generates the
highest gross margin, were $9.5 million, versus $7.4 million in
the prior fiscal year.
During several of its most recent reporting periods, the
Company has generally had a positive impact from the decrease in
the value of the Mexican peso. During the fiscal year ended May
31, 1997 the value of the Mexican peso remained relatively
stable. The Company cannot predict what impact fluctuations will
have on future costs of the Company's products manufactured in
Mexico.
GROSS PROFIT. Gross profit increased in absolute dollars by
$634,000 to $7.7 million as compared to $7.1 million in the prior
fiscal year as a result of the higher revenues and a decrease in
cost of revenue as a percentage of sales from 69.8% to 69.1% due
to the factors discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative ("SG&A") expenses for the fiscal year
ended May 31, 1997 decreased $610,000 or 9.3%, to $6.0 million or
24.0% of revenues compared to $6.6 million or 28.1% of revenues
in the previous fiscal year. SG&A reductions were achieved in
almost all categories across the board with few exceptions. Major
reductions in SG&A expenses included reductions in salaries and
wages ($50,000), outside commissions ($126,000), advertising and
promotion costs ($98,000), legal and accounting ($66,000), and
travel and entertainment costs ($63,000). Most reductions were
due to the cost cutting and restructuring program initiated by
the Company during the second quarter of fiscal 1995. The most
significant increase in SG&A expenses was in depreciation and
amortization ($43,000) due to the addition of property and
equipment purchased during the previous three fiscal years.
INTEREST EXPENSE. For the year ended May 31, 1997, interest
expense decreased approximately 33% to $43,000 as compared to
$64,000 in the prior fiscal year, as a result of the Company's
efforts to pay down long-term debt and fund operations and
capital expenditures out of cash generated from operations.
OTHER INCOME. In fiscal 1997, other income increased
$397,000 or 687% over the previous fiscal year. In February
1997, the Company sold an approximately 9,000 square foot
23
building which was part of the Old Las Vegas Facility for
$450,000. The Company's depreciated cost basis of the building
was $129,000, resulting in a capital gain of $326,000 before
income taxes ($205,000 net of income taxes).
NET INCOME. For the year ended May 31, 1997, the Company
had record net income of $1.4 million, an increase of $1.1
million over the net income of $300,000 in the prior fiscal year.
This increase in net income was primarily due to increases in
revenues, gross profit and other income and decreases in SG&A
expenses over the prior fiscal. Net income per share was $.41
for the year ended May 31, 1997, as compared to $.10 for the year
ended May 31, 1996.
COMPARISON OF OPERATIONS FOR THE YEARS ENDED MAY 31, 1996 AND
MAY 31, 1995
REVENUES. For the fiscal year ended May 31, 1996,
Paul-Son's revenues totaled $23.4 million. This revenue figure
represented a $1.2 million, or 4.9%, decrease from the $24.6
million in revenues which the Company generated the previous
year. The decrease in revenues resulted principally from a
decrease in new casino openings during the year. In fiscal year
1996, the Company sold products totaling $4.7 million to 25 new
casinos (including riverboats, land based properties and Native
American casinos), versus $6.0 million to 40 new casinos in the
previous fiscal year. However, while new casino revenues
decreased in fiscal 1996, core sales increased. Core sales in
fiscal 1996 were a record $18.7 million, a slight increase of
$0.1 million or 0.5% over core sales of $18.6 million in fiscal
1995. In connection with the decrease in new casino openings,
sales of table layouts, gaming furniture, and table accessories
and other products decreased 15.9%, 7.5%, and 22.9%,
respectively, while, as a result of the increase in core sales,
casino chips, playing cards and dice increased 0.2%, 11.9% and
2.9%, respectively, as compared to the prior fiscal year.
COST OF REVENUES. In relationship to the lower sales volume
generated during the fiscal year ended May 31, 1996, cost of
revenues decreased by $0.8 million from $17.1 million to $16.3
million when compared to the prior fiscal year. Cost of revenues
as a percentage of sales remained almost constant at 69.8% as
compared to 69.7% in fiscal 1995. Although the cost of revenues
percentage remained almost constant in fiscal 1996, there were
several factors which impacted cost of revenues both positively
and negatively during the year. Negative factors included lower
sales volume and the corresponding lower number of units
produced, resulting in lower operating efficiencies and higher
per unit fixed production costs, and increases in raw material
costs and purchase prices paid for distributed items. Positive
factors included a devaluation of the Mexican peso by
approximately 20% during the year and a decrease in Las Vegas
production support staff following the relocation of the
remainder of the layout production operations to Mexico during
the year.
GROSS PROFIT. As a result of the lower revenue, Paul-Son's
gross profit decreased by $400,000, from $7.5 million to $7.1
million. As discussed above, gross profit as a percentage of
sales remained relatively constant at 30.2% versus 30.3% in the
prior fiscal year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses
for the fiscal year ended May 31, 1996 decreased $1.1 million to
$6.6 million or 28.1% of revenues compared to $7.7 million or
31.5% of revenues in the previous fiscal year. Following the
higher than anticipated bad
24
debt losses of almost $913,000, due to certain casino closures in
the fiscal year ended May 31, 1995, management adopted much more
stringent credit and collection policies for all casino sales,
which resulted in a reduction of bad debt losses by almost
$813,000 to $96,000 in fiscal 1996. Other principal changes in
SG&A expenses included increases of $315,000 in salaries to
corporate officers, sales and administrative personnel and
increased depreciation of $147,000 due to the acquisition of
additional production facilities and equipment in fiscal 1995 and
1996. Decreases in SG&A expenses resulting from the Company's
cost cutting and restructuring program initiated during the
second quarter of fiscal 1996 included reductions in advertising
and promotion costs ($176,000), fees paid to outside consultants
($204,000), freight and postage costs ($164,000) and travel and
entertainment costs ($109,000).
INTEREST EXPENSE. For the year ended May 31, 1996, interest
expense decreased approximately 42% to $63,906 as compared to
$109,593 in the prior year as a result of the Company's efforts
to pay down long-term debt and fund operations and capital
expenditures out of cash generated from operations and the
remaining undisbursed proceeds from the 1994 Offering.
NET INCOME (LOSS). Net income improved from a net loss of
$140,000 ($(.04) per share) in 1995 to net income of $337,000
($.10 per share) in fiscal 1996 primarily as a result of the
lower SG&A expenses discussed above.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. Management believes that the combination of cash
on hand, cash flows from operations and the Company's existing
line of credit will provide sufficient liquidity, both on a short-
term and long-term basis.
WORKING CAPITAL. Working capital totaled $9.2 million at
May 31, 1997, versus $7.6 million at May 31, 1996. Working
capital increased during the year primarily due to the Company's
net income before depreciation of $2.2 million, which was
partially offset by the Company's investment of $900,000 in
property, plant and equipment during the year.
CASH FLOW. Operating activities provided $2.1 million in
cash during the fiscal year ended May 31, 1997 compared to cash
provided of $1.6 million during the prior year. Net income before
depreciation and income taxes of $2.6 million was the major
factor contributing to the cash provided by operations. Other
significant sources of cash during the year included the proceeds
generated from the sale of a building ($450,000), and proceeds
from the issuance of common stock ($772,000) attributable to the
exercise of 93,000 stock options during the fiscal year.
Significant uses of cash included the purchase of property, plant
and equipment ($920,000) and reduction in long-term debt
($451,000). Total cash and cash equivalents increased by $1.8
million during the year as compared to a total reduction in cash
of $260,000 in the prior fiscal year.
LINE OF CREDIT. The Company maintains a line of credit (the
"Line of Credit"), with Wells Fargo Bank of Nevada ("Wells
Fargo") which presently allows the Company to borrow up to
$750,000. The Line of Credit matures on January 2, 1998. As of
May 31, 1997, no advances were outstanding and the total amount
of the Line of Credit was available. The Line of Credit is
25
collateralized by a first priority security interest in
substantially all of the Company's depository accounts at Wells
Fargo, accounts receivable, inventory, furniture, fixtures and
equipment, and bears interest at a variable rate of 2.0% over
Wells Fargo's prime lending rate.
Under the Line of Credit, the Company has agreed to comply
with certain financial covenants and ratios. Specifically, the
Company has agreed to maintain a current ratio (current assets to
current liabilities) of not less than 1.5 to 1, a debt to worth
ratio (total liabilities divided by stockholders' equity) of less
than 1 to 1 and a fixed charge coverage ratio ((earnings before
interest, taxes, depreciation and amortization) divided by (prior
period current maturities of long term debt plus interest plus
rent)) of at least 2.0 to 1.
PAY OFF OF SECURED DEBT. In December 1993, the Company
obtained a $500,000 loan for capital expenditures and working
capital purposes (the "Note") from a financial institution. The
Note which bore interest at 8% per annum, with monthly payments
of principal and interest totaling $6,067, was paid off in
February 1997. The Note was secured by a deed of trust on the Old
Las Vegas Facility.
SEASONALITY. The Company has traditionally experienced some
seasonality, as new casino openings, particularly in Las Vegas,
have tended to occur near the end of a calendar year (typically
during the Company's second fiscal quarter). There does not
appear to be any seasonality associated with the Company's "core
sales" to existing customers.
BACKLOG. Open orders as of May 31, 1997 totaled $2.5
million, compared to $3.6 million as of May 31, 1996. Management
believes that substantially all of these orders will be filled
within the next six months, with the majority filled within the
first fiscal quarter.
LAS VEGAS FACILITIES. In May of 1997, the Company relocated
its corporate headquarters to the "New Las Vegas Facility." The
New Las Vegas Facility was purchased in September 1995 for
$2,000,000, and since September 1995, the Company has made
improvements totaling approximately $352,000. In February 1997,
the Company sold one of the buildings (approximately 9,000 square
feet) which was a component of the Old Las Vegas Facility for
$450,000, resulting in the reduction in the square footage at the
Old Las Vegas Facility from 35,000 to 26,000, and repayment of
the Company's debt in the original principal amount of $500,000
which was secured by a deed of trust on the Old Las Vegas
Facility. The remaining components of the Old Las Vegas Facility
are listed for sale.
SAN LUIS FACILITIES. In January 1997, the Company installed
a second playing card production line in the San Luis Facilities.
The use of existing space at the San Luis Facilities provides
additional playing card production capacity while the Company
evaluates production costs and efficiencies achieved in the San
Luis Facilities. The additional production line will also
augment the Company's ability to solicit orders from larger and
multi-site casinos both in the United States and from the
international market. The Company's ability to compete for
additional market share in playing card sales should be enhanced
by the Company's anticipated decrease in per unit production
costs. Management is analyzing whether the anticipated lower
playing card production costs will justify the relocation of
other portions of its manufacturing operations to Mexico.
26
NEW SAN LUIS BUILDING. In July 1997, the Company's Board of
Directors approved the purchase of an existing approximately
66,000 square foot New San Luis Building located approximately
400 yards from the Main Facility for $1,100,000. The purchase of
the New San Luis Building is expected to be completed no later
than October 31, 1997. The funds for the purchase of the New San
Luis Building will come from cash on hand or a combination of
cash on hand and new financing. The Company plans to use the New
San Luis Building to augment its playing card and chip production
capabilities to accommodate the anticipated increase in demand
for the Company's playing cards.
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included herein contains statements that
may be considered forward-looking, such as statements relating to
anticipated performance, financing sources and the relocation of
certain operations. Any forward-looking statement made by the
Company necessarily is based upon a number of estimates and
assumptions that, while considered reasonable by the Company, is
inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are
beyond the control of the Company, and are subject to change.
Actual results of the Company's operations may vary materially
from any forward-looking statement made by or on behalf of the
Company. Forward-looking statements should not be regarded as a
representation by the Company or any other person that the
forward-looking statements will be achieved. Undue reliance
should not be placed on any forward-looking statements. Some of
the contingencies and uncertainties to which any forward-looking
statement contained herein is subject include, but are not
limited to, the following:
RELIANCE ON EXPANSION OF CASINO INDUSTRY. A significant
percentage of the Company's revenue is generated by sales
relating to casino openings and expansions. As such, the
Company's future growth will be dependent to a material degree on
the continued emergence and growth of new markets for the
Company's products, including new casino openings or expansions
throughout the United States and other areas of the world. A
reduction in the pace of new casino openings and casino
expansions in existing and emerging legalized gaming
jurisdictions would have a negative effect on the Company's
business. Similarly, the restriction or abolishment of legalized
casino gaming in jurisdictions in which the Company currently
does business would have a negative impact on the Company.
GAMING REGULATIONS. The manufacture and distribution of
gaming equipment and supplies are subject to extensive federal,
state and local regulation. Although these regulations vary
among jurisdictions, virtually all jurisdictions require
licenses, permits and approvals to be held by the Company and its
key personnel in connection with the manufacture and distribution
of some or all of the Company's products. The failure of the
Company or its key personnel to obtain or retain required
licenses, permits or approvals in one or more jurisdictions could
have an adverse effect on the Company and could adversely affect
the ability of the Company and its key personnel to obtain or
retain licenses in other jurisdictions. No assurance can be
given that such licenses, permits or approvals will be obtained,
retained or renewed in the future in existing or emerging
jurisdictions.
27
Any beneficial holder of the Company's common stock may be
subject to investigation by the gaming authorities in any or all
of the jurisdictions in which the Company operates if such
authorities have reason to believe that such ownership may be
inconsistent with such state's gaming policies. Persons who
acquire beneficial ownership of more than certain designated
percentages of the Company's common stock will be subject to
certain reporting and qualification procedures established by the
Nevada and other gaming authorities, as well as certain local
licensing authorities.
NEED FOR TRIBAL-STATE COMPACTS. The Company's ability to
generate greater revenues and earnings is dependent in part on
the growth of Native American tribal casinos. Under IGRA, the
operation of a casino on Native American tribal land is not
permitted until the Native American tribe and the state in which
it is located have entered into a tribal-state compact
authorizing gaming on the tribe's land and such tribal-state
compact is approved by the Secretary of the Department of
Interior. Many states have resisted entering into tribal-state
compacts, which has resulted in litigation challenging the
constitutionality of IGRA. If IGRA were found to be
unconstitutional, the procedures that would apply to the
initiation and operation of Native American tribal casinos would
be uncertain. Such a finding could severely limit or delay the
expansion of gaming in additional jurisdictions. In addition, a
recent court ruling has placed limits on the ability of Native
American tribes to force states to enter into tribal-state
compacts and several states, through legislation or
constitutional amendment, have sought to limit the scope of
Native American gaming under IGRA.
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company's
financial results are dependent in part upon sales to new or
expanding casinos, which may, in turn, be dependent upon the
authorization of gaming in additional jurisdictions. The timing
of these events does not follow consistent patterns throughout
any given year. Given this uncertain timing and the large dollar
value of sales to new casinos, the Company's future operating
results may be subject to significant quarterly fluctuations.
TABLE GAMES GROWTH RATE. The Company's primary products are
sold to casinos with table games. In recent years, there has
been an increasing allocation of total casino gaming space to
slot machines, and in certain cases, a resulting reduction in the
allocation of total casino gaming space to table games. As a
result, the growth rate of table games has not matched that of
the casino industry as a whole. Although the Company's sales and
income have continued to increase due to the growth and expansion
of the gaming industry, particularly in the newly emerging gaming
jurisdictions, the Company believes that the Company's rate of
growth would have been greater if not for this trend. An
acceleration of this trend would have a further negative impact
on the Company's rate of growth.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends
to a significant degree on the performance of Paul S. Endy, Jr.,
Chairman of the Board and Chief Executive Officer, Eric P. Endy,
President and Director, and Louis W. DeGregorio, Senior Vice
President of Sales. The Company does not carry key man life
insurance for any of these executive officers, and the loss of
the services of one or more of them could have a material adverse
effect on the Company.
28
Management anticipates that as the Company continues to
expand into new gaming jurisdictions throughout the United States
and internationally, its future success will depend in part upon
its ability to attract and retain qualified personnel to fill key
sales, administrative and management positions. There can be no
assurance that the Company will be able to locate and retain such
individuals.
EXPANSION OF INTERNATIONAL SALES. Although currently only a
small percentage of the Company's sales are to casinos located in
foreign countries, a component of the Company's business strategy
is the expansion of its international sales. To the extent the
Company is successful in this endeavor, it will be increasingly
subject to the customary risks of doing business in foreign
countries. These risks include fluctuations in foreign currency
exchange rates and controls, nationalization and other economic,
tax and regulatory policies of local governments and the
possibility of trade embargoes, political instability or war or
other hostility, as well as the laws and policies of the United
States affecting foreign trade and investment.
COMPETITION. There are significant competitors in each of
the Company's major product lines. With the continuing expansion
of gaming, it is possible that new competitors may be attracted
to the table game supply business, some of which may be in the
business of selling gaming products, have licenses to sell gaming
supplies and have greater financial resources than the Company.
The entry by such companies into the Company's markets could
adversely impact the Company's business.
CONTROL BY EXISTING STOCKHOLDER; ANTITAKEOVER EFFECTS.
Paul S. Endy is the beneficial owner of approximately 50% of the
outstanding Common Stock of the Company. As a result, Mr. Endy
effectively controls the election of all of the members of the
Board of Directors of the Company and effectively controls
virtually all matters requiring approval by the stockholders of
the Company. Such ownership may discourage acquisition of large
blocks of the Company's securities and could have an anti-
takeover effect, possibly depressing the price of the Common
Stock. In addition, Nevada corporation law and the Company's
Articles of Incorporation and Bylaws contain provisions that may
have the effect of delaying, deferring or preventing a change in
control of the Company.
RELIANCE ON SUPPLIERS. For certain of its products, the
Company is dependent upon a limited number of suppliers to
provide the Company with raw materials for manufacturing and
finished goods for distribution. The failure of one or more of
these suppliers to meet the Company's performance specifications,
quality standards or delivery schedules could have a material
adverse effect on the Company.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report (Deloitte & Touche LLP)
Independent Auditors' Report (McGladrey & Pullen, LLP)
Consolidated Balance Sheets at May 31, 1997 and May 31, 1996
Consolidated Statements of Operations for the Years Ended
May 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the
Years Ended May 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
May 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Financial Statement Schedule included in Part IV of this
report
30
PAUL-SON GAMING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
MAY 31, 1997
31
INDEPENDENT AUDITORS' REPORT
Board of Directors
PAUL-SON GAMING CORPORATION:
We have audited the accompanying consolidated balance sheets of
Paul-Son Gaming Corporation and subsidiaries as of May 31, 1997,
and 1996 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the two years in
the period ended May 31, 1997. Our audits also included the
financial statement schedule for the years ended May 31, 1997 and
1996 listed in the Index at Item 14(a)2. These financial
statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and
financial statement schedule based on our audits. The financial
statements and financial statement schedule of the Company for
the period ended May 31, 1995 were audited by other auditors
whose report, dated August 25, 1995, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Paul-
Son Gaming Corporation and subsidiaries as of May 31, 1997 and
1996, and the results of their operations and their cash flows
for each of the two years in the period ended May 31, 1997 in
conformity with generally accepted accounting principles. Also,
in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
August 8, 1997
32
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PAUL-SON GAMING CORPORATION
Las Vegas, Nevada
We have audited the accompanying consolidated statements of
operations, stockholders' equity, and cash flows of Paul-Son
Gaming Corporation and subsidiaries for the year ended May 31,
1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of
operations and cash flows of Paul-Son Gaming Corporation for the
year ended May 31, 1995, in conformity with generally accepted
accounting principles.
/s/ McGladrey & Pullen, LLP
McGLADREY & PULLEN, LLP
Las Vegas, Nevada
August 25, 1995
33
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1997 AND 1996
ASSETS 1997 1996
- ------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 2,753,152 $ 997,509
Trade receivables, less allowance for doubtful
accounts 1997 $269,140; 1996 $281,712 3,669,139 2,601,910
Inventories (Note 2) 5,350,446 5,604,630
Prepaid expenses 140,962 170,903
Other current assets 627,808 296,660
------------- ------------
TOTAL CURRENT ASSETS 12,541,507 9,671,612
------------- ------------
Property and Equipment, net (Notes 3 and 5) 7,250,030 7,259,423
------------- ------------
Other Assets
Note receivable (Note 6) 150,000 -
Goodwill and other assets 455,205 470,090
------------- ------------
605,205 470,090
------------- ------------
$ 20,396,742 $ 17,401,125
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt (Note 5) $ 24,052 $ 85,914
Accounts payable (Note 6) 727,196 661,521
Accrued expenses 584,212 403,627
Customer deposits 1,579,161 865,438
Income tax payable (Note 8) 318,930 54,170
------------- ------------
TOTAL CURRENT LIABILITIES 3,233,551 2,070,670
------------- ------------
Long-Term Debt, less current maturities
Due to related parties (Note 6) - 15,000
Other (Note 5) 67,424 456,161
------------- ------------
67,424 471,161
------------- ------------
Deferred Tax Liability (Note 8) 11,060 -
------------- ------------
Commitments and Contingencies (Note 7)
Stockholders' Equity (Note 9)
Preferred stock, authorized 10,000,000 shares,
$.01 par value, none issued and outstanding - -
Common stock, authorized 30,000,000 shares,
$.01 par value, issued and outstanding
3,417,000 and 3,324,000 shares in 1997
and 1996 34,170 33,240
Additional paid-in capital 13,108,998 12,256,698
Retained earnings 3,941,539 2,569,356
------------- ------------
17,084,707 14,859,294
------------- ------------
$ 20,396,742 $ 17,401,125
============= ============
See Notes to Consolidated Financial Statements.
34
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1997, 1996 AND 1995
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
Revenues $ 24,913,706 $ 23,379,252 $ 24,595,192
Cost of revenues, including related party cost of
revenues of 1997-$ 0; 1996-$331,355;
1995-$493,799 (Note 6) 17,223,759 16,323,043 17,137,403
-------------- -------------- --------------
GROSS PROFIT 7,689,947 7,056,209 7,457,789
Selling, general and administrative expenses (Note 6) 5,967,735 6,577,397 7,738,507
-------------- -------------- --------------
OPERATING INCOME (LOSS) 1,722,212 478,812 (280,718)
Other income (expense)
Interest income 82,066 57,694 295,249
Interest expense (Note 6) (42,700) (63,906) (109,593)
Other 372,436 57,856 (45,744)
-------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES 2,134,014 530,456 (140,806)
Income tax expense (Note 8) (761,831) (193,616) -
-------------- -------------- --------------
NET INCOME (LOSS) $ 1,372,183 $ 336,840 $ (140,806)
============== ============== ==============
Earnings (loss) per share:
Primary $ 0.41 $ 0.10 $ (0.04)
============== ============== ==============
Fully Diluted $ 0.38 $ 0.10 $ -
============== ============== ==============
See Notes to Consolidated Financial Statements.
35
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1997, 1996 AND 1995
Common Stock Additional
---------------------- Paid-in Retained
Shares Dollars Capital Earnings Total
- ----------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1994 3,324,000 $ 33,240 $ 12,256,698 $ 2,373,322 $ 14,663,260
Net loss - - - (140,806) (140,806)
--------------------------------------------------------------------
Balance, May 31, 1995 3,324,000 33,240 12,256,698 2,232,516 14,522,454
Net income - - - 336,840 336,840
--------------------------------------------------------------------
Balance, May 31, 1996 3,324,000 $ 33,240 $ 12,256,698 $ 2,569,356 $ 14,859,294
Shares issued from the exercise of options 93,000 930 771,300 - 772,230
Income tax benefit from exercise of options - 81,000 - 81,000
-
Net income - - - 1,372,183 1,372,183
--------------------------------------------------------------------
Balance, May 31, 1997 3,417,000 $ 34,170 $ 13,108,998 $ 3,941,539 $ 17,084,707
====================================================================
See Notes to Consolidated Financial Statements.
36
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1997, 1996 AND 1995
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Cash received from customers $ 24,554,494 $ 24,513,389 $ 22,756,375
Cash paid to suppliers and employees (22,153,199) (23,357,951) (25,198,210)
Interest paid (42,700) (69,060) (109,593)
Interest received 82,066 57,694 162,796
Income tax refunds 18,940 494,019 -
Income taxes paid (404,778) (6,750) (850,271)
-------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,054,823 1,631,341 (3,238,903)
-------------------------------------------------
Cash Flows from Investing Activities
Deposits on real property - - (200,000)
Proceeds received on sale of property and equipment 464,161 15,400 47,686
Purchase of property and equipment (919,972) (3,059,544) (2,824,588)
Proceeds from short-term investments - 1,493,536 -
Investment in note receivable (Note 7) (150,000) - -
Purchase of securities held to maturity - - (1,427,124)
Proceeds from securities held to maturity - - 6,000,000
-------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (605,811) (1,550,608) 1,595,974
-------------------------------------------------
Cash Flows from Financing Activities
Payments on due to related party (15,000) (235,000) (250,000)
Proceeds from short-term borrowings 150,000 - -
Principal payments on short term-term borrowings (150,000) - -
Principal payments on long-term borrowings (450,599) (102,211) (149,216)
Proceeds from the issuance of common stock 772,230 - -
-------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 306,631 (337,211) (399,216)
-------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,755,643 (256,478) (2,042,145)
Cash and cash equivalents, beginning 997,509 1,253,987 3,296,132
-------------------------------------------------
Cash and cash equivalents, ending $ 2,753,152 $ 997,509 $ 1,253,987
=================================================
Reconciliation of Net Income (Loss) to Net Cash Provided By
(Used in) Operating Activities
Net income (loss) $ 1,372,183 $ 336,840 $ (140,806)
Depreciation and amortization 791,643 768,787 585,924
Accretion of discounts - - (132,453)
Provision for bad debts 96,000 96,000 912,697
Gain on sale of property and equipment (326,439) 5,698 (11,608)
Change in assets and liabilities:
(Increase) decrease in accounts receivable (1,163,229) 878,491 (308,791)
(Increase) decrease in inventories 254,184 61,251 (2,517,960)
(Increase) decrease in other assets (316,263) 449,867 (231,773)
(Increase) decrease in prepaid expenses 29,941 11,449 (130,633)
(Increase) decrease in income tax refund receivable - 661,499 (661,499)
Increase (decrease) in accounts payable and accrued expenses 246,260 (1,884,803) 1,116,797
Increase (decrease) in customer deposits 713,723 192,092 (1,530,026)
Increase (decrease) in income taxes payable 345,760 54,170 (188,772)
Increase in deferred tax liability 11,060 - -
------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 2,054,823 $ 1,631,341 $ (3,238,903)
================================================
37
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Paul-Son Gaming Corporation, including its subsidiaries
(collectively, "Paul-Son" or the "Company"), is the leading
manufacturer and supplier of casino table game equipment in the
United States. The Company's products include casino chips,
table layouts, playing cards, dice, furniture, table accessories
and other products, which are used with casino table games such
as blackjack, poker, baccarat, craps and roulette. The Company
sells its products in every state in which casinos operate in the
United States and in various countries throughout the world.
BASIS OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of
Paul-Son and its wholly owned subsidiaries, Paul-Son Gaming
Supplies, Inc. ("Paul-Son Supplies"), Paul-Son Mexicana, S.A. de
C.V. ("Mexicana") and Commercial Paul-Son, S.A. de C.V. All
material intercompany balances and transactions have been
eliminated in consolidation.
A summary of the Company's significant accounting policies
follows:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments and
repurchase agreements with original maturities of three months or
less to be cash and cash equivalents.
At various times throughout the year, the Company maintained cash
balances at financial institutions in excess of federally insured
amounts.
INVENTORY
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of depreciation.
Depreciation is computed primarily on the straight-line method
for financial reporting purposes over the following estimated
useful lives:
YEARS
-----
Buildings and improvements 18-27
Furniture and equipment 5-10
Vehicles 5-7
GOODWILL
Goodwill is amortized on a straight-line basis over 20 years.
38
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
ADVERTISING COSTS
Advertising costs, consisting primarily of costs of attending
industry trade shows, are expensed as incurred.
INCOME TAX
The Company uses Statement of Financial Accounting Standards
("SFAS") No. 109 issued by the Financial Accounting Standards
Board ("FASB") for financial accounting and reporting for income
taxes. A current tax liability or asset is recognized for the
estimated taxes payable or refundable on tax returns for the
current year. A deferred tax liability or asset is recognized
for the estimated future tax effects, based on provisions of the
enacted law, attributable to temporary differences and
carryforwards.
FOREIGN TRANSACTIONS
Sales outside of the United States are not significant and
substantially all transactions occur in United States dollars.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding during the period. The weighted average number of
common shares used in computing primary earnings per share was
3,330,764, 3,324,000 and 3,324,000 for fiscal 1997, 1996, and
1995, respectively. The weighted average number of common and
common equivalent shares used in computing fully diluted earnings
per share was 3,647,810, 3,326,647 and 3,324,000 for fiscal 1997,
1996, and 1995, respectively. Common equivalent shares include
the impact of outstanding dilutive stock options.
ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RELIANCE ON SUPPLIERS
For certain of its products, the Company is dependent upon a
limited number of suppliers to provide the Company with raw
materials for manufacturing and finished goods for distribution.
The failure of one or more of these suppliers to meet the
Company's performance specifications, quality standards or
delivery schedules could have a material adverse effect on the
Company.
39
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
STOCK OPTIONS
The Company has adopted the disclosure requirement under SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123
establishes accounting and disclosure requirements using a fair
value based method of accounting for stock based employee
compensation plans. Under SFAS No. 123 the Company may either
adopt the new fair value based accounting method or continue the
intrinsic value based method under Accounting Principles Board
("APB") Opinion No. 25 and provide pro forma disclosures of net
income and earnings per share as if the accounting provisions of
SFAS No. 123 had been adopted. The Company has elected to
account for its plans under APB Opinion No. 25 and calculate the
pro forma disclosures of net income and earnings per share
required under SFAS No. 123.
LONG LIVED ASSETS
In May 1995, SFAS No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" was
issued. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. During 1997, the Company adopted SFAS No.
121, the effect of which was not material.
RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB issued SFAS No. 128, "Earnings Per Share" in February
1997. This statement establishes standards for computing and
presenting earnings per share and is effective for the Company's
fiscal year ending May 31, 1998. Earlier application of this
statement is not permitted. The Company believes that the
implementation of this statement will not have a significant
effect on earnings per share.
The FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure" in February 1997. This statement establishes
standards for disclosing information about an entity's capital
structure and is effective for the Company's fiscal year ending
May 31, 1998. The Company plans to adopt the disclosure
requirements of SFAS No. 129.
The FASB issued SFAS No. 130, "Reporting Comprehensive Income" in
June 1997. This statement requires a company to classify items of
other comprehensive income by their nature in a financial
statement and display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the stockholder's equity section
of the consolidated balance sheet. This statement will be
effective for the Company's fiscal year ending May 31, 1999. The
Company has not determined the effect of this statement on its
financial statement disclosure.
The Company is required to adopt SFAS No.131, "Disclosure About
Segments of an Enterprise and related Information" in the fiscal
year ending May 31, 1999. This statement establishes additional
standards for segment reporting in the financial statements. The
Company has not determined the effect of this statement on its
financial statement disclosure.
40
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 2. INVENTORIES
Inventories consist of the following at May 31:
1997 1996
----------------------------
Raw materials $ 1,977,089 $ 2,778,329
Work in process 465,514 436,726
Finished goods 2,907,843 2,389,575
----------------------------
$ 5,350,446 $ 5,604,630
============================
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at May 31:
1997 1996
Land $ 728,412 $ 805,052
Buildings and improvements 5,913,362 6,126,608
Furniture and equipment 3,475,883 2,774,628
Vehicles 876,892 819,153
-------------------------------
10,994,549 10,525,441
Less accumulated depreciation 3,744,519 3,266,018
-------------------------------
$ 7,250,030 $ 7,259,423
===============================
NOTE 4. SHORT-TERM BORROWINGS
The Company finances some of its activities through a revolving
line of credit with a financial institution which allows maximum
borrowings of the lesser of $750,000 or 75% of eligible accounts
receivable. Borrowings are collateralized by a general pledge
agreement covering the Company's accounts receivable, inventory,
certain fixed assets and depository accounts. There was no
balance outstanding under the line of credit at May 31, 1997 and
at May 31, 1996. There was no activity on the line for the years
ending May 31, 1997 and 1996. Interest on the line is based on
the institution's prime rate plus 2%, payable monthly. The
credit agreements contain restrictive covenants, generally
requiring the Company to maintain certain financial ratios as
defined in the agreement. As of May 31, 1997 the Company was in
compliance with all financial ratios and covenants required as
defined in the agreement.
41
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 5. LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt, excluding amounts due to related parties,
consists of the following at May 31:
1997 1996
-----------------------------
Notes payable to bank, collateralized by
a deed of trust, interest at 8%,
principal and interest payments of
$6,077 are due monthly through 1998 $ 0 $ 406,376
Various notes payable for equipment,
interest at 14.5% to 25.5%, payable in
monthly payments of $6,300 through 1998 27,472 67,643
Notes payable to mortgage companies,
collateralized by real estate,
interest at 7.5% to 9.5%, principal
and interest payments of $898 are due
monthly through 2016 64,004 68,056
----------------------------
91,476 542,075
Less current portion 24,052 85,914
----------------------------
$ 67,424 $ 456,161
============================
Estimated annual principal maturities of long-term debt at May
31, 1997 are as follows:
1998 $ 24,052
1999 14,499
2000 6,220
2001 6,723
2002 2,642
Thereafter 37,340
------------
$ 91,476
============
The majority stockholder has personally guaranteed approximately
$27,472 of the above debt.
42
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 6. RELATED PARTIES
The Company purchased plastic coated playing cards from an entity
related through common ownership. Included in accounts payable
at May 31, 1997 and 1996, are payables to the related entity for
these purchases in the amounts of $21,343 and $33,859,
respectively. Included in interest expense is approximately $0,
$7,000 and $23,000 to related parties in 1997, 1996 and 1995,
respectively.
The following amounts were paid for legal, accounting, and
consulting services to individuals who are currently, or have
been, members of the Company's Board of Directors:
1997 1996 1995
--------------------------------------
Laurence A. Speiser $ 134,317 $ 128,591 $ 152,033
Wayne H. White 0 23,819 56,575
Michael E. Cox 18,377 36,691 79,493
Due to related parties consists of the following at May 31:
1997 1996
Unsecured note payable to majority
stockholder, annual payments of $125,000 $ 0 $ 15,000
plus interest at 6%
Less current portion -
-----------------------
$ 0 $ 15,000
=======================
On November 22, 1996, the Company advanced to a director a
$150,000 line of credit. The line of credit is to be repaid in
full on or before December 31, 1998, with interest only payable
to the Company at an interest rate equal to prime plus 2%. The
loan is secured by a general pledge agreement covering all the
director's assets, rights to purchase certain shares of the
Company's stock, and a pledge of certain shares of the Company's
common stock by the Company's principal stockholder.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company leases land, manufacturing and office space under
operating leases with terms of between 3 to 8 years. Approximate
minimum annual rental commitments at May 31, 1997 are as follows:
1998 $ 213,107
1999 191,217
2000 152,683
2001 130,515
2002 0
Thereafter 0
-------------
$ 687,522
=============
43
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
The Company has a twelve year option to extend the lease at one
facility. The annual rent during the first 8 year term is
$142,380. The rent payments during the option period will
increase 5% annually.
Rent expense totaled $233,633, $228,222 and $231,186 in 1997,
1996 and 1995, respectively.
The Company is party to various claims arising in the normal
course of business. Management believes that these matters are
expected to be resolved with no material impact on the Company's
financial position, liquidity, or results of operations.
NOTE 8. INCOME TAX MATTERS
The provision (benefit) for income taxes reflected in the
Statements of Income for the years ended May 31, 1997 and 1996
consisted of:
1997 1996
Current $ 799,238 $ 193,616
Deferred (37,407) 0
------------------------------
Total provision (benefit) $ 761,831 $ 193,616
==============================
The provision (benefit) for income taxes differs from amounts
computed by applying the federal income tax rate of 34% for the
year ended May 31, 1997 and 1996, to income before provision for
federal income taxes for the following reasons:
1997 % 1996 %
-------------------------------------------
Federal and state income tax at statutory rate $ 725,565 34.00 $ 180,000 34.00
Adjustments:
Meals and entertainment 21,697 1.02 23,000 4.34
State taxes 35,348 1.66 10,600 2.00
Other (20,779) (0.98) (19,984) -3.76
-------------------------------------------
Total provision for income taxes $ 761,831 35.70 $ 193,616 36.58
============ ===========
As of May 31, 1997 and 1996, there were no material temporary
differences or carryforwards.
NOTE 9. STOCK OPTION PROGRAMS
The Company has stock option programs which consist of the 1994
Long-Term Incentive Plan (the "Incentive Plan") and the 1994
Directors' Stock Option Plan (the "Directors' Plan"). The
Incentive Plan provides for the grant of stock options to
executive officers, key employees,
44
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
outside consultants and employee-directors. On July 29, 1996,
the Board of Directors amended and stockholders subsequently
approved to increase the aggregate shares issuable under the
Incentive Plan to 1,000,000 from 500,000 shares. The options
granted under the Incentive Plan expire 10 years after the date
of grant. The Directors' Plan provides that each non-employee
director, upon joining the Board of Directors, will receive an
option to purchase 3,000 shares of common stock. The initial
option grant vests over a 3 year period, with one-third of the
option grant vesting at the end of each year. At the beginning
of the fourth year of service on the Board of Directors, and each
year thereafter, each nonemployee director receives an annual
grant to purchase 1,000 shares of common stock. In addition,
each year each non-employee director receives options to purchase
1,000 shares of common stock for serving on the following
committees of the Board of Directors for at least six months
prior to the date of grant: the Audit Committee; the
Compensation Committee; and the Compliance Committee. No option
is exercisable sooner than 6 months and one day after the date of
grant. The options expire on the tenth anniversary of the date
of grant or 9 months after retirement or 2 years after death.
Options covering 3,000 and 6,000 shares were granted during the
year ended May 31, 1997 and 1996, at $8.06 and $6.50 per share,
respectively.
The following is a summary of option activity for the 3 years
ended May 31, 1997:
Weighted
Options Shares Average
Available Under Exercise
for Grant Plan Price
------------------------------------
Outstanding at May 31, 1994 265,500 309,500 $ 11.27
Granted (36,500) 36,500 13.41
Canceled 42,250 (42,250) 11.25
Exercised - - -
------------------------------------
Outstanding at May 31, 1995 271,250 303,750 11.53
Granted (326,000) 326,000 8.66
Canceled 306,750 (306,750) 11.49
Exercised - - -
------------------------------------
Outstanding at May 31, 1996 252,000 323,000 $ 8.71
Additional shares reserved 500,000 - -
Granted (715,000) 715,000 8.95
Canceled 35,000 (35,000) 8.15
Exercised 93,000 (93,000) 8.30
------------------------------------
Outstanding at May 31, 1997 165,000 910,000 $ 8.96
====================================
45
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
1997 1996
------ ------
The weighted average fair value of options granted $4.27 $4.21
The following table summarizes information concerning currently
outstanding and exercisable options:
---------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------------------------------------------------------------------------------
$ 6.5 to 9.0 680,000 9.41 $ 8.21 162,500 $ 8.21
$ 9.0 to 13.0 230,000 9.68 $ 11.17 3,000 $ 13.00
------------------------------------------------------------------------------------
910,000 165,500
------------------------------------------------------------------------------------
The Company accounts for these plans under APB Opinion No. 25,
under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with
SFAS No. 123, "Accounting for Stock Based Compensation", the
Company's net income and earning per share would have been
reduced to the following pro forma amounts:
1997 1996
Net income: As reported: $ 1,372,183 $ 336,840
Pro forma: 11,115 177,812
Earnings per share: As reported:
Primary $ 0.41 $ 0.10
Fully diluted $ 0.38 $ 0.10
Pro forma:
Primary $ 0 $ 0.05
Fully diluted $ 0 $ 0.05
Pro forma earnings reflect only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in pro forma
net income because compensation costs are reflected over the
option-vesting period and compensation costs for options granted
prior to fiscal 1996 is not considered.
The fair value of each option is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions used for 1997 and 1996 grants; risk-free interest
rate at the date of grant which ranged from 5.6% to 6.7%;
expected dividend yield of 0.0%; expected life of 5 years; and
expected violatility of 43.79%.
As of May 31, 1997, a maximum of 1,075,000 shares of common stock
have been reserved for issuance under these plans. None of the
options can be granted at less than the fair market value of the
Company's common stock on the date of grant.
46
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------
NOTE 10. CASH FLOW INFORMATION
There were no significant noncash investing or financing
activities during the years ended May 31, 1997, 1996, and 1995.
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is incorporated by reference from the
Company's Proxy Statement to be filed with the Securities and
Exchange Commission (the "Commission") in connection with the
Annual Meeting of Stockholders on October 13, 1997.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the
Company's Proxy Statement to be filed with the Commission in
connection with the Annual Meeting of Stockholders on October 13,
1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
This information is incorporated by reference from the
Company's Proxy Statement to be filed with the Commission in
connection with the Annual Meeting of Stockholders on October 13,
1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference the Company's
Proxy Statement to be filed with the Commission in connection
with the Annual Meeting of Stockholders on October 13, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Included in Part II of this report:
Consolidated Balance Sheets at May 31, 1997 and
1996.
Consolidated Statements of Operations for the
Years Ended May 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity
for the Years Ended May 31, 1997, 1996 and 1995.
48
Consolidated Statements of Cash Flows for the
Years Ended May 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Account
Other schedules are omitted because of the absence
of conditions under which they are required or
because the required information is given in the
financial statements or notes thereto.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
3.01 Articles of Incorporation of Paul-Son Gaming
Corporation and Certificate of Amendment of
Articles of Incorporation of Paul-Son Gaming
Corporation incorporated herein by reference
from the Company's registration statement on
Form S-1 (SEC No. 33-74758), Part II, Item 16,
Exhibit 3.01.
3.02 Bylaws of Paul-Son Gaming Corporation
incorporated herein by reference from the
Company's registration statement on Form S-1
(SEC No. 33-74758), Part II, Item 16, Exhibit
3.02.
4.01 Plan and Agreement of Merger and Exchange dated
March 25, 1994 between Paul-Son Playing Cards,
Inc., Paul-Son Casino Supplies of New Jersey,
Inc., Paul-Son Dice and Card, Inc., Paul-Son
Gaming Corporation, Paul S. Endy, and Eric P.
Endy, incorporated herein by reference from the
Company's annual report on Form 10-K for the
year ended May 31, 1994, Part IV, Item 14(c),
Exhibit 4.01.
4.02 Specimen Common Stock Certificate for the
Common Stock of Paul-Son Gaming Corporation
incorporated herein by reference from the
Company's registration statement on Form S-1
(SEC No. 33-74758), Part II, Item 16, Exhibit
4.01.
49
10.01 Loan Agreement dated January 9, 1996 by and
between Paul-Son Gaming Supplies, Inc., as
borrower, and First Interstate Bank of Nevada,
N.A., as lender; Promissory Note dated January
9, 1996, executed by Paul-Son Gaming Supplies,
Inc., payable to the order of First Interstate
Bank of Nevada, N.A.; Commercial Security
Agreement dated January 9, 1996, executed by
Paul-Son Gaming Supplies, Inc., as debtor, in
favor of First Interstate Bank of Nevada, N.A.,
as secured party; Commercial Guaranty dated
January 9, 1996, by and between Paul-Son Gaming
Supplies, Inc. As borrower and Paul-Son Gaming
Corporation as guarantor and First Interstate
Bank of Nevada, N.A., as lender, incorporated
herein by reference from the Company's annual
report on Form 10-K for the year ended May 31,
1996, Part IV, Item 14(c), Exhibit 10.02.
10.02 Paul-Son Gaming Corporation 1994 Directors'
Stock Option Plan (as amended July 29, 1996),
incorporated herein by reference from the
Company's annual report on Form 10-K for the
year ended May 31, 1996, Part IV, Item 14(c),
Exhibit 10.03.
10.03 Paul-Son Gaming Corporation 1994 Long-Term
Incentive Plan (as amended July 29, 1996),
incorporated herein by reference from the
Company's annual report on Form 10-K for the
year ended May 31, 1996, Part IV, Item 14(c),
Exhibit 10.04.
10.04 Lease dated May 17, 1993, by and between
Paul-Son Mexicana S.A. de C.V., as lessee, and
Coprodiedad Arte Y Diseno, as lessor
incorporated herein by reference from the
Company's registration statement on Form S-1
(SEC No. 33-74758), Part II, Item 16, Exhibit
10.05.
10.05 Exclusive Distributor Agreement dated
November 1, 1993, by and between Jones Casino
Supplies, Inc. and Paul-Son Supplies and Card,
Inc. incorporated herein by reference from the
Company's registration statement on Form S-1
(SEC No. 33-74758), Part II, Item 16, Exhibit
10.13.
10.06 Consulting Agreement dated July 29, 1996, by
and between Paul-Son Gaming Corporation and
Martin S. Winick; Addendum to Consulting
Agreement by and between Martin S. Winick and
Paul-Son Gaming Corporation dated November 19,
1996, by and between Paul-Son Gaming
Corporation and Martin S. Winick, incorporated
herein by reference from the company's report
on Form 10-Q for the quarter ended November 30,
1996, Part II, Item 6(a), Exhibit 10.01.
50
10.07 Line of Credit Agreement dated November 19,
1996, by and between Paul-Son Gaming
Corporation and Martin S. Winick, Line of
Credit Promissory Note, dated November 1996, by
Martin S. Winick, in favor of Paul-Son Gaming
Corporation; Security Agreement dated November
19, 1996, by Martin S. Winick, in favor of Paul-
Son Gaming Corporation; Assignment Agreement
dated November 19, 1996, by Martin S. Winick to
Paul-Son Gaming Corporation; and Collateral
Undertaking Agreement dated November 19, 1996,
by and between Paul S. Endy, Jr., individually
and as trustee of the Paul S. Endy, Jr. Living
Trust, and Paul-Son Gaming Corporation,
incorporated herein by reference from the
Company's report on Form 10-Q for the quarter
ended November 30, 1996, Part II, Item 6(a),
Exhibit 10.02.
10.08 Master Agreement dated July 30, 1997, by and
between Authentic Products, Inc. and Gridiron
Marketing, LLC, which includes as Exhibit C the
form of Operating Agreement of Brand One
Marketing, LLC dated August 4, 1997, by and
between Gridiron Marketing, LLC, and Authentic
Products, Inc.
21.01 List of subsidiaries of Paul-Son Gaming
Corporation.
23.01 Consent of Deloitte & Touche LLP.
23.02 Consent of McGladrey & Pullen, LLP.
27.01 Financial Data Schedule
51
[Letterhead of McGladrey & Pullen, LLP]
INDEPENDENT AUDITOR'S REPORT
ON THE SCHEDULE
To the Board of Directors
PAUL-SON GAMING CORPORATION
Las Vegas, Nevada
Our audit of the consolidated financial statements of Paul-Son
Gaming Corporation and Subsidiaries included Schedule II
contained herein, for the year ended May 31, 1995.
In our opinion, the schedule presents fairly the information
required to be set forth therein in conformity with generally
accepted accounting principles,
/s/ McGladrey & Pullen, LLP
Las Vegas, Nevada
August 25, 1995
52
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1997, 1996 AND 1995
BALANCE AT PROVISIONS BALANCE AT
BEGINNING CHARGED TO END OF
YEARS ENDED MAY 31, OF YEAR EXPENSES CHARGE-OFFS YEAR
- -----------------------------------------------------------------------------------------------
Allowance for doubtful accounts
1997 $ 281,712 $ 96,000 $ 108,572 $ 269,140
=============================================================
1996 $ 214,000 $ 96,000 $ 28,288 $ 281,712
=============================================================
1995 $ 20,000 $ 912,697 $ 718,697 $ 214,000
=============================================================
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PAUL-SON GAMING CORPORATION
August 28, 1997 By: /s/ Paul S. Endy, Jr.
Paul S. Endy, Jr.
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
August 28, 1997 /s/ Paul S. Endy, Jr.
Paul S. Endy, Jr.
Chairman of the Board and
Chief Executive Officer
/s/ Eric P. Endy
Eric P. Endy
President and Director
/s/ Kirk Scherer
Kirk Scherer, Treasurer and Chief
Financial Officer
(Principal Financial and Accounting Officer)
54
/s/ Laurence A. Speiser
Laurence A. Speiser, Secretary and
Director
/s/ Jerry G. West
Jerry G. West, Director
/s/ Richard W. Scott
Richard W. Scott, Director
/s/ Martin S. Winick
Martin S. Winick, Director
55
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
3.01 Articles of Incorporation of Paul-Son Gaming
Corporation and Certificate of Amendment of
Articles of Incorporation of Paul-Son Gaming
Corporation incorporated herein by reference
from the Company's registration statement on
Form S-1 (SEC No. 33-74758), Part II,
Item 16, Exhibit 3.01.
3.02 Bylaws of Paul-Son Gaming Corporation
incorporated herein by reference from the
Company's registration statement on Form S-1
(SEC No. 33-74758), Part II, Item 16,
Exhibit 3.02.
4.01 Plan and Agreement of Merger and Exchange
dated March 25, 1994 between Paul-Son
Playing Cards, Inc., Paul-Son Casino
Supplies of New Jersey, Inc., Paul-Son Dice
and Card, Inc., Paul-Son Gaming Corporation,
Paul S. Endy, and Eric P. Endy, incorporated
herein by reference from the Company's
annual report on Form 10-K for the year
ended May 31, 1994, Part IV, Item 14(c),
Exhibit 4.01.
4.02 Specimen Common Stock Certificate for the
Common Stock of Paul-Son Gaming Corporation
incorporated herein by reference from the
Company's registration statement on Form S-1
(SEC No. 33-74758), Part II, Item 16,
Exhibit 4.01.
10.01 Loan Agreement dated January 9, 1996 by and
between Paul-Son Gaming Supplies, Inc., as
borrower, and First Interstate Bank of
Nevada, N.A., as lender; Promissory Note
dated January 9, 1996, executed by Paul-Son
Gaming Supplies, Inc., payable to the order
of First Interstate Bank of Nevada, N.A.;
Commercial Security Agreement dated January
9, 1996, executed by Paul-Son Gaming
Supplies, Inc., as debtor, in favor of First
Interstate Bank of Nevada, N.A., as secured
party; Commercial Guaranty dated January 9,
1996, by and between Paul-Son Gaming
Supplies, Inc. As borrower and Paul-Son
Gaming Corporation as guarantor and First
Interstate Bank of Nevada, N.A., as lender,
incorporated herein by reference from the
Company's annual report on Form 10-K for the
year ended May 31, 1996, Part IV, Item
14(c), Exhibit 10.02.
10.02 Paul-Son Gaming Corporation 1994 Directors'
Stock Option Plan (as amended July 29,
1996), incorporated herein by reference from
the Company's annual report on Form 10-K for
the year ended May 31, 1996, Part IV, Item
14(c), Exhibit 10.03.
10.03 Paul-Son Gaming Corporation 1994 Long-Term
Incentive Plan (as amended July 29, 1996),
incorporated herein by reference from the
Company's annual report on Form 10-K for the
year ended May 31, 1996, Part IV, Item
14(c), Exhibit 10.04.
56
10.04 Lease dated May 17, 1993, by and between
Paul-Son Mexicana S.A. de C.V., as lessee,
and Coprodiedad Arte Y Diseno, as lessor
incorporated herein by reference from the
Company's registration statement on Form S-1
(SEC No. 33-74758), Part II, Item 16,
Exhibit 10.05.
10.05 Exclusive Distributor Agreement dated
November 1, 1993, by and between Jones
Casino Supplies, Inc. and Paul-Son Supplies
and Card, Inc. incorporated herein by
reference from the Company's registration
statement on Form S-1 (SEC No. 33-74758),
Part II, Item 16, Exhibit 10.13.
10.06 Consulting Agreement dated July 29, 1996, by
and between Paul-Son Gaming Corporation and
Martin S. Winick; Addendum to Consulting
Agreement by and between Martin S. Winick
and Paul-Son Gaming Corporation dated
November 19, 1996, by and between Paul-Son
Gaming Corporation and Martin S. Winick,
incorporated herein by reference from the
company's report on Form 10-Q for the
quarter ended November 30, 1996, Part II,
Item 6(a), Exhibit 10.01.
10.07 Line of Credit Agreement dated November 19,
1996, by and between Paul-Son Gaming
Corporation and Martin S. Winick, Line of
Credit Promissory Note, dated November 1996,
by Martin S. Winick, in favor of Paul-Son
Gaming Corporation; Security Agreement dated
November 19, 1996, by Martin S. Winick, in
favor of Paul-Son Gaming Corporation;
Assignment Agreement dated November 19,
1996, by Martin S. Winick to Paul-Son Gaming
Corporation; and Collateral Undertaking
Agreement dated November 19, 1996, by and
between Paul S. Endy, Jr., individually and
as trustee of the Paul S. Endy, Jr. Living
Trust, and Paul-Son Gaming Corporation,
incorporated herein by reference from the
Company's report on Form 10-Q for the
quarter ended November 30, 1996, Part II,
Item 6(a), Exhibit 10.02.
10.08 Master Agreement dated July 30, 1997, by and 58
between Authentic Products, Inc. and
Gridiron Marketing, LLC, which includes as
Exhibit C the form of Operating Agreement of
Brand One Marketing, LLC dated August 4,
1997, by and between Gridiron Marketing,
LLC, and Authentic Products, Inc.
21.01 List of subsidiaries of Paul-Son Gaming 120
Corporation.
23.01 Consent of Deloitte & Touche LLP. 122
23.02 Consent of McGladrey & Pullen, LLP. 124
27.01 Financial Data Schedule 126
57