SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-23588
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PAUL-SON GAMING CORPORATION
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(Exact name of registrant as specified in its charter)
NEVADA 88-0310433
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 South Industrial Road, Las Vegas, Nevada 89102
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(Address of principal executive offices) (Zip Code)
(702) 384-2425
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(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
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Not Applicable Not Applicable
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $ .01 PAR VALUE
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(Title of class)
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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 24, 1998, based on the
last reported bid price as reported on the Nasdaq National Market
of $7.75 per share, was approximately $12,997,447.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of August 24, 1998.
Common Stock, $.01 par value, 3,474,850 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.
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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.
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 its primary
manufacturing facilities located in San Luis, Mexico and sales
offices in Las Vegas; Reno, Nevada; Atlantic City, New Jersey;
Gulfport, Mississippi; Ft. Lauderdale, Florida; Portland, Oregon;
and Ontario, Canada. The Company sells its products in every
state in which casinos operate in the United States.
The Company also has retail sales outlets mostly within many
of its branch sales offices 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 opened a retail sales
outlet on the Las Vegas Strip during fiscal 1998 through which it
sells table game products, some of which are factory overruns,
returns or excess items, to the general public. In fiscal 1998,
the Company announced that it intends to offer many of its
products to the non-gaming and specialty markets, although this
has not yet become a significant business for the Company.
The Company was founded in 1963 by its current Chairman,
Paul S. Endy and initially manufactured and sold dice to casinos
in Las Vegas. In the more than 35 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.
BUSINESS STRATEGY
During its more than 35 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
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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, in Victoria, Australia and
Ontario, Quebec and British Columbia, Canada, and Mpumalanga and
Gauteng, South Africa. The Company's strategy for 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 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, and
(iv) 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,
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. 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. The Company's production capacity at its
Mexico facilities is approximately 65 million chips (based on a
single shift). Management believes that given its current
production level of approximately 8-10 million chips per year,
the Company will have sufficient manufacturing capacity to meet
potential increases in future demand.
Since 1994, Paul-Son has marketed commemorative chips.
Management of Paul-Son and its casino customers determined that
casino patrons often retained casino chips which
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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. The Company is also pursuing opportunities to
sell commemorative chips outside of the gaming industry.
TABLE LAYOUTS
Every gaming table is covered with a 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 a 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. The Company has introduced its own line of synthetic
layouts which management believes are more durable than felt
layouts.
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
approximately $65 to $325, depending on the type of table, the
complexity of the patterns and the variety and difficulty of
color combinations.
The Company manufactures its layouts in its Mexico
facilities. The Company's layout production capacity is
approximately 50,000 "steam" layouts and approximately 25,000
"hand-painted" layouts per year. In fiscal 1998, the Company
produced approximately 30,000 layouts. Management believes the
capacity of its layout production facilities in Mexico will allow
the Company to increase layout production as needed.
PLAYING CARDS
The Company manufactures and sells its own line of paper
casino playing cards. A deck of cards typically sells to casinos
for between approximately $.80 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. Given the Company's
relatively low market share, its established distribution system
for table game supplies and its low cost manufacturing
facilities, management believes that playing cards represent a
significant opportunity for the Company.
The Company produces all of its playing cards in its Mexico
facilities. The Company plans to purchase additional equipment
in the second quarter of fiscal 1999 to increase its production
capacity to approximately 30 million decks per year, up from the
Company's current annual production capacity of approximately 15
million decks. Expanded playing card production capacity will
permit management to aggressively seek new playing card business
from its existing
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casino customer base, from other casinos and from customers
outside of the casino industry. In fiscal 1998, the Company
produced approximately 5 million decks of playing cards.
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.
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 approximately $1,000 for a blackjack
table to approximately $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 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
typical sales price of casino dice currently ranges between
approximately $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). In fiscal 1998, the Company
produced approximately 500,000 pairs of dice.
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
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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 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, in limited
quantities, certain of its own plastic products, including
dealing shoes, in May 1997.
SALES, ADVERTISING AND PROMOTION
The Company generally distributes its products through its
approximate 15 person sales force, which operates out of regional
offices in Las Vegas and Reno, Nevada; Atlantic City, New Jersey;
Gulfport, Mississippi; Ft. Lauderdale, Florida; Ontario, Canada;
and Portland, Oregon. Additionally, the Company has a
distributor in Lima, Peru. 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 last fiscal year ended May 31, 1998,
approximately 50% 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." 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.
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 casino 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.
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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") and Nevada Dice Company,
d/b/a The Bud Jones Company ("Bud Jones"). The Company believes
key competitive factors for casino chip sales are durability,
graphics, ease of handling and security.
TABLE LAYOUTS. The Company's two primary competitors for
casino table layouts are Bud Jones and Midwest Game Supply Co.
("Midwest"). Management believes the key competitive factors for
felt table layout sales are cloth quality, enhanced graphics,
designs and clarity and range of colors.
PLAYING CARDS. The Company's major competitors in the
domestic playing card market are The U.S. Playing Card Co.,
Gemaco Playing Card Co. and Hoyle Products. Management believes
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 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, T.K. Specialty Company and Midwest.
Management believes 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 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 24, 1998, the Company employed approximately 500
persons. Approximately 400 of the employees are located at the
Company's Mexico facilities and the remainder are located in Las
Vegas and in other regional sales offices. None of the Company's
employees is covered by collective bargaining agreements.
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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, Inc. ("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.
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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
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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 of the Company 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 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 (the "Compliance Plan") prepared by the Company,
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,
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 time to require the Company's stock certificates to bear a
legend indicating that the securities are
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subject to the Nevada Act and the Nevada Gaming Regulations.
However, the Nevada Commission has not imposed such a requirement
to date.
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. Nevada's 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% 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.
12
<PAGE>
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, the state of Victoria,
Australia, and Mpumalanga and Gauteng, South Africa. 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 of
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
13
<PAGE>
its key personnel have obtained all licenses necessary for the
conduct of the Company's business in the jurisdictions in which
it manufactures and sells its casino table game products.
Suspension or revocation of such licenses could have a material
adverse effect upon 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 compact
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
14
<PAGE>
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 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 took the position
that any Native American tribe operating Class III gaming within
the state of California, absent a valid compact with 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.
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, approval or 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 is based and operates domestically from Company-
owned facilities in Las Vegas, Nevada and currently assembles and
manufactures its products at facilities in San Luis, Mexico.
15
<PAGE>
LAS VEGAS. The Company's Las Vegas headquarters (the "Las
Vegas Headquarters") are located in an approximately 62,000
square foot building. The Las Vegas Headquarters was purchased in
September 1995 for $2,000,000, and houses the casino sales
office, a centralized warehouse for certain of its finished goods
inventory, roulette and "Big Six" wheel manufacturing and a
graphics art department. In the Las Vegas Headquarters, the
Company also maintains certain inventory of templates, graphic
designs, logos, and tools and dies for casino customers' gaming
equipment. Maintaining such an inventory results in time and cost
savings for product manufacture and delivery to the Company's
customers. Additional limited warehousing space is located at
the Company's former headquarters (the "Original Facility").
During fiscal 1998, the Company continued to transition its
primary manufacturing processes to San Luis, Mexico. Due to the
relocation of virtually all of the Company's manufacturing
facilities to San Luis, Mexico, the Company has listed for sale
both the Las Vegas Headquarters and the Original Facility and
intends to reevaluate its space needs depending, in part, on real
estate market conditions and the Company's business objectives.
The Las Vegas Headquarters secures a deed of trust issued under
the Company's bank line of credit. 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, playing
cards, dice and layouts at three facilities in San Luis, Mexico,
a 34,000 square foot leased facility in which casino chips and
dice are manufactured, an adjacent 45,000 square foot facility
purchased by the Company in December 1994, in which the layout
and the machine shop departments are currently located, and an
approximately 66,000 square foot facility purchased in November
1997 located approximately 400 yards from the Company's other San
Luis facilities used for playing card and chip production, and to
manufacture the Company's own line of plastic table games
products. 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.
FACILITY CAPACITY. With its current approximate 145,000
square feet of manufacturing facilities, management believes that
the Company has sufficient production capacity to meet
anticipated future demand for all of its products.
RETAIL FACILITY. The Company is leasing an approximately
2,000 square foot retail store in a retail shopping center on the
Las Vegas Strip. The lease term expires in December 1999, and
the Company believes that the retail facility is adequate for its
current retail needs.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
<PAGE>
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.
Fiscal
Year High Low
- -------- ------ ------
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............................... 14 3/4 12 1/8
1998 Second Quarter.............................. 22 1/4 13 1/2
1998 Third Quarter............................... 16 1/4 10 3/8
1998 Fourth Quarter.............................. 11 1/2 7 5/16
1999 First Quarter (through August 24, 1998)..... 9 7/8 6 1/2
The last reported bid price of the Common Stock on the
Nasdaq National Market on August 24, 1998 was $7.75 per share.
There were approximately 140 holders of record of the Common
Stock as of August 24, 1998.
(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,
17
<PAGE>
1998, 1997 and 1996 and as of May 31, 1998 and 1997 have been
derived from the audited Consolidated Financial Statements of the
Company included elsewhere herein. The selected consolidated
financial data as of May 31, 1996, 1995 and 1994 and for the
years ended May 31, 1995 and 1994 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 pro forma data gives effect to the Acquisition as if
it had occurred on June 1, 1994.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31, PRO FORMA
--------------------------------------------------------------- MAY 31,
1998 1997 1996 1995 1994 1994
---------- ---------- ---------- ---------- ---------- ------------
OPERATIONS STATEMENT DATA: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues............................ $25,886 $24,914 $23,379 $24,595 $21,088 $22,839
Cost of revenues.................... 21,944 17,224 16,323 17,137 14,601 15,698
---------- ---------- ---------- ---------- ---------- ------------
Gross profit........................ 3,942 7,690 7,056 7,458 6,487 7,141
Selling, general and adminis-
trative expenses.................... 7,146 5,968 6,577 7,739 4,771 4,993
---------- ---------- ---------- ---------- ---------- ------------
Operating income (loss)............. (3,204) 1,722 479 (281) 1,716 2,148
Other income (expense).............. 19 412 52 140 (46) (42)
---------- ---------- ---------- ---------- ---------- ------------
Income (loss) before income tax
(expense) benefit and minority
interests innet income of
consolidated companies........ (3,185) 2,134 531 (141) 1,670 2,106
Income tax (expense) benefit........ 966 (762) (194) - (523) (682)
Minority interest in net income of
consolidated companies........ - - - - (90) -
---------- ---------- ---------- ---------- ---------- ------------
Net income (loss)<F1>......... $(2,219) $1,372 $337 $(141) $1,057 $1,424
========== ========== ========== ========== ========== ============
Earnings (loss) per share:
Basic......................... $(0.65) $0.41 $0.10 $(.04) $0.61
Average shares outstanding.... 3,437,894 3,330,764 3,324,000 3,324,000 2,332,657
Diluted....................... $(.65) $0.40 $0.10 $(.04) $0.59
Diluted shares................ 3,437,894 3,443,376 3,325,125 3,324,000 2,397,183
<FN>
<F1> 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, had been subject to corporate income taxes at
the applicable federal and state rates for the year ended
May 31, 1994.
</FN
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
MAY 31,
-------------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- -------
BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents......... $348 $2,753 $998 $1,254 $3,296
Working capital................... 7,106 9,308 7,601 9,832 12,288
Property and equipment, net....... 9,106 7,250 7,259 4,990 2,705
Total assets...................... 21,965 20,397 17,401 19,040 20,244
Current liabilities............... 4,871 3,234 2,071 3,729 4,512
Long-term debt, less current
maturities...................... 1,770 67 471 788 1,069
Stockholders' equity.............. 15,324 17,085 14,859 14,522 14,663
</TABLE>
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 the 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 follows this trend after a period of
operation.
19
<PAGE>
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:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues.............................................. 100.0% 100.0% 100.0%
Cost of revenues...................................... 84.8% 69.1% 69.8%
Gross profit.......................................... 15.2% 30.9% 30.2%
Selling, general and administrative expenses.......... 27.6% 24.0% 28.1%
Operating income (loss)............................... (12.4)% 6.9% 2.1%
Interest expense...................................... 0.5% 0.2% 0.3%
Net income (loss)..................................... (8.6)% 5.5% 1.4%
</TABLE>
The following table details the Company's historical
revenues by product line:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------
1998 1997 1996
-------- -------- --------
REVENUES: (IN THOUSANDS)
<S> <C> <C> <C>
Casino chips.......................................... $ 5,174 $ 9,516 $ 7,362
Table layouts......................................... 3,202 3,205 2,678
Playing cards......................................... 4,714 3,265 4,198
Gaming furniture...................................... 9,085 4,970 5,249
Dice.................................................. 1,395 1,576 1,257
Table accessories and other products.................. 2,316 2,382 2,635
-------- -------- --------
Total............................................... $ 25,886 $ 24,914 $ 23,379
======== ======== ========
</TABLE>
COMPARISON OF OPERATIONS FOR THE YEARS ENDED MAY 31, 1998 AND
MAY 31, 1997
REVENUES. For the fiscal year ended May 31, 1998,
Paul-Son's revenues reached a record total of approximately $25.9
million. The fiscal 1998 revenue figure represents a $1.0
million, or 4%, increase from the $24.9 million in revenues which
the Company generated the previous fiscal year. The increase in
revenues for the 1998 period resulted principally from an
increase in gaming furniture and accessory sales (products not
manufactured by the Company) of approximately $4.0 million and an
increase in playing card sales of approximately $1.4 million
offset, in part, by a decrease in casino chip sales of
approximately $4.3 million. Gaming furniture and accessory sales,
which are products purchased from third party suppliers and then
sold to the customer, increased principally due to significant
orders from certain customers associated with new openings and
expansions and increased demand for these products. Playing card
sales in fiscal 1998 increased nearly 45% from fiscal 1997.
Management believes its ability to meet customers' quality
expectations, competitive pricing, and its aggressive pursuit of
this business segment have contributed to this growth.
Offsetting the increase in gaming furniture and playing card
sales was
20
<PAGE>
a decrease in casino chip sales of approximately 45%, or
approximately $4.3 million. Management believes this decrease
was caused by a decline in new casino openings and expansions in
fiscal 1998 as compared to fiscal 1997 and a low demand for
casino chips during fiscal 1998. Since casino chips may be used
by casinos for several years, related sales are subject to
varying replacement cycles. Sales of other Company manufactured
products (dice and table layouts) did not fluctuate significantly
between the two fiscal periods. Sales of Company manufactured
products were 53.2% of total revenues in fiscal 1998 compared to
68.1% in fiscal 1997.
Core sales in fiscal 1998 were approximately $12.7 million
compared to approximately $15.5 million in fiscal 1997, a
decrease of approximately $2.8 million or 18.1%. 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 the aforementioned decline in casino chip sales,
offset, in part, by the increase in playing card sales.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, increased to 84.8% for the fiscal year ended May, 31 1998,
as compared to 69.1% in the prior fiscal year. This percentage
increase was principally caused by three significant factors: (i)
the aforementioned change in the mix of products sold from
higher-margin manufactured products (casino chips, cards, dice
and layouts) to marginally profitable distributed items, such
as gaming tables and seating furniture, which caused an
approximate $1.7 million deterioration in gross margins, (ii)
the underabsorption of fixed manufacturing costs due to the
low production volume of Company manufactured products during
1998, and (iii) certain cost inefficiencies resulting from the
final transition of certain manufacturing processes (i.e.
playing cards, layouts, and certain plastic goods) from the
Company's Las Vegas facility to its Mexico facilities.
During certain previous reporting periods, the Company has
experienced a positive impact from the decrease in the value of
the Mexican peso. During the fiscal year ended May 31, 1998, the
value of the Mexican peso remained relatively stable. The Company
cannot predict what impact fluctuations between the Mexican peso
and the U.S. dollar will have on the future operating results of
the Company.
GROSS PROFIT. Gross profit decreased in absolute dollars by
approximately $3.8 million to approximately $3.9 million as
compared to approximately $7.7 million in the prior fiscal year.
This decline in gross profit was a result of the increase in cost
of revenues as a percentage of sales from 69.1% to 84.8% due to
the cost of revenue factors discussed above offset, in part, by
slightly higher revenues in the fiscal 1998 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative ("SG&A") expenses for the fiscal year
ended May 31, 1998 increased approximately $1.2 million, or
19.7%, to $7.1 million or 27.6% of revenues compared to $6.0
million, or 24.0% of revenues, in the previous fiscal year. This
increase was primarily attributable to sales office and
administrative payroll related expenses (an approximate $600,000
increase over fiscal 1997) from the expansion into new and
existing gaming markets, start-up costs involved in marketing the
Company's non-gaming products with various customers, increased
depreciation and other occupancy costs arising from property and
equipment purchases and the opening of retail outlets
21
<PAGE>
and newly opened sales offices. Additionally, bad debt expense
increased due to an increase in accounts receivable amounts
outstanding as compared to the prior year, the separation from a
certain Company distributor and a reevaluation of the financial
condition of certain of the Company's significant debtors during
fiscal 1998.
INTEREST EXPENSE. For the year ended May 31, 1998, interest
expense increased approximately 200% to $128,000 as compared to
$43,000 in the prior fiscal year, as a result of increased
average outstanding borrowings under the Company's line of credit
during fiscal 1998 and the acquisition of $1.8 million of new
debt to finance a new building in San Luis, Mexico and certain
equipment acquired in November 1997.
OTHER INCOME. In fiscal 1998, other income decreased
$308,000, or 67.8%, over the previous fiscal year. This decrease
was attributable principally to a gain before income taxes of
approximately $326,000 which resulted from the sale of certain
real estate in fiscal 1997.
NET INCOME (LOSS). For the year ended May 31, 1998, the
Company incurred a net loss of approximately $2.2 million, a
decrease of $3.6 million from the net income of $1.4 million in
the prior fiscal year. This decrease was primarily due to the
aforementioned decreases in gross profit, other income, and
increases to SG&A expenses from the 1997 period, offset, in part,
by a slight increase in revenues over the prior fiscal year.
Basic net loss per share was $.65 for the year ended May 31, 1998
as compared with basic net income of $.41 for the year ended May
31, 1997.
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 total of approximately $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% over core sales of $18.7 million in
fiscal 1996. The decrease was 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 a 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 underwent the transition of 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.
22
<PAGE>
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.
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 certain previous reporting periods, the Company has
experienced 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
approximately $634,000 to approximately $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. SG&A expenses
for the fiscal year ended May 31, 1997 decreased approximately
$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 expense 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
23
<PAGE>
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
$339,000, or 293%, over the previous fiscal year. In February
1997, the Company sold an approximately 9,000 square foot
building which was part of the Original 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 (LOSS). For the year ended May 31, 1997, the
Company had record net income of approximately $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 year. Basic net
income per share was $.41 for the year ended May 31, 1997 as
compared with $.10 for the year ended May 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. Management believes that the combination of cash
flows from operations, the Company's existing line of credit and
additional bank financing will provide sufficient liquidity, both
on a short-term and long-term basis.
WORKING CAPITAL. Working capital totaled approximately $7.1
million at May 31, 1998, versus approximately $9.3 million at
May 31, 1997. Working capital decreased during the year
primarily due to the Company's net loss before depreciation of
approximately $1.2 million and by the Company's cash investment
in certain property, plant and equipment during the year.
CASH FLOW. Operating activities used approximately $2.6
million in cash during the fiscal year ended May 31, 1998
compared to cash provided of approximately $2.1 million during
the prior year. Net loss before depreciation and income taxes of
approximately $2.2 million was the major factor contributing to
the cash used in operations. Other significant cash activities
during fiscal 1998 included sources of cash from the issuance of
common stock of $403,000 attributable to the exercise of
approximately 49,000 stock options during the fiscal year and
cash used to purchase property, plant and equipment, net of $1.8
million of long-term borrowings, of approximately $1.0 million.
Total cash and cash equivalents decreased by approximately $2.4
million during the year as compared to an increase in cash and
cash equivalents of approximately $1.8 million in the prior
fiscal year.
LINE OF CREDIT. The Company maintains a line of credit (the
"Line of Credit") with Norwest Bank of Nevada ("Norwest") which
presently allows the Company to borrow up to $1.0 million. The
Line of Credit matures on October 31, 1998. As of May 31, 1998,
$850,000 was outstanding under the Line of Credit. The Line of
Credit is collateralized by a first priority security interest on
the Las Vegas Headquarters and in substantially all of Paul-Son
Supplies' assets including accounts receivable, inventory,
furniture, fixtures and equipment. The Line of Credit bears
interest at Norwest's prime rate (8.5% at May 31, 1998).
24
<PAGE>
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 net tangible net worth of not
less than $14.0 million, a total liabilities to tangible net
worth ratio of no greater than 0.5 to 1.0, and an annualized
profitability of not less than $250,000 in net income, all as
defined in the agreement. As of May 31, 1998, the Company was in
violation of the requirement to maintain the $250,000 annual net
income; however, the violation has been formally waived by
Norwest through the maturity date of the Line of Credit
(October 31, 1998).
SECURED DEBT. In November 1997, the Company obtained a $1.8
million loan (the "Note") from Norwest. The proceeds were used
in acquiring the New San Luis Facility and certain equipment to
be used principally in the Company's manufacturing processes.
The Note bears interest at 8.87% per annum, with monthly payments
of principal and interest totaling $18,118. The Note calls for
monthly payments through November 2002, at which time the
remaining principal balance of approximately $1.5 million is due.
The Note is secured by a first deed of trust on the Las Vegas
Headquarters and by a first security interest in all accounts,
inventory, and general intangibles of Paul-Son Supplies. The
Note contains the same financial covenant and ratio requirements
as under the Line of Credit. As of May 31, 1998, the Company was
in violation of the covenant to maintain annual net income of
$250,000; however, the Company has obtained a formal waiver from
Norwest through June 1, 1999.
SEASONALITY. The Company has occasionally experienced some
seasonality relative to new casino openings, particularly in Las
Vegas, as new openings have tended to occur near the end of the
calendar year; however, 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, 1998 totaled
approximately $2.0 million, compared to approximately $2.5
million as of May 31, 1997. 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 1997, the Company relocated its
corporate headquarters from the Original Facility to the Las
Vegas Headquarters, an approximately 62,000 square foot building
purchased in September of 1995 for approximately $2,000,000. Due
to the relocation of virtually all of the Company's manufacturing
facilities to San Luis, Mexico, the Company has listed for sale
both the Las Vegas Headquarters and the Original Facility and
intends to reevaluate its space needs depending, in part, on real
estate market conditions and the Company's business objectives.
The Las Vegas Headquarters secures a deed of trust issued under
the Line of Credit and the Note.
SAN LUIS FACILITIES. The Company leases the 34,000 square
foot 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 December 1994, the Company purchased the adjacent
45,000 square foot facility for approximately $1.5 million. In
November 1997, the Company completed the purchase of the 66,000
square foot New San Luis Facility for approximately $1.1 million.
25
<PAGE>
CAPITAL EXPENDITURES. The Company plans to purchase
equipment necessary to increase its playing card manufacturing
efficiency and capacity in the second quarter of fiscal 1999.
The cost of the equipment, which the Company plans to finance
through additional bank financing, is approximately $600,000.
STOCK REPURCHASE PROGRAM. In July 1998, the Company
announced that its Board of Directors authorized the open market
repurchase of up to 5% of the outstanding Common Stock. As of
August 24, 1998, no repurchases had been made. The Company
intends to fund any repurchases from cash on hand.
RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of
Position 98-5 "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). This standard provides guidance on the financial
reporting for start-up costs and organization costs and requires
costs of start-up activities and organization costs to be
expensed as incurred. This standard is effective for fiscal
years beginning after December 15, 1998, though earlier adoption
is encouraged. Management believes that SOP 98-5 will not have a
material impact on the Company's consolidated financial
statements.
The FASB issued SFAS No. 130, "Reporting Comprehensive
Income" in June 1997. This statement, which is effective for
fiscal years beginning after December 31, 1997, 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 stockholders'
equity section of the consolidated balance sheet. This is a
disclosure item only and will have no impact on reported earnings
per share.
The FASB recently issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information", which is
effective for financial statements for fiscal years beginning
after December 31, 1997. The Company is required to adopt SFAS
No. 131 during the fiscal year ending May 31, 1999. This
statement establishes additional standards for segment reporting
in the financial statements. This is a disclosure item only and
will have no impact on earnings per share.
During fiscal 1998, the Company adopted SFAS No. 128,
"Earnings Per Share". SFAS No. 128 requires the presentation of
basic net earnings (loss) per share and diluted net earnings
(loss) per share for all periods in which a statement of
operations is presented. Basic net earnings (loss) per share is
computed by dividing net earnings (loss) by the average shares
outstanding during the respective period. Diluted net earnings
(loss) per share is computed by dividing net earnings by the
average shares outstanding and the dilutive effect of common
share equivalents for the respective period. These common share
equivalents are options to purchase common stock whose exercise
price is less than the average market price.
26
<PAGE>
YEAR 2000 PROJECT
The Company is conducting a review of its computer systems
to identify those areas that could be affected by the "Year 2000"
issue and is in the process of updating many of its existing
systems to improve overall business performance and to
accommodate business for the "Year 2000". However, given the
inherent risks for a project of this magnitude and the resources
required, the timing and costs involved could differ materially
from that anticipated by the Company. The Company expects its
"Year 2000" date conversion project to be completed on a timely
basis. However, there can be no assurance that the conversion
project will be completed on schedule, and that the systems of
other companies on which the Company may rely also will be timely
converted or that such failure to convert by another company
would not have an adverse impact on the Company's systems. The
estimated costs directly or indirectly associated with the
conversion project is currently expected to be less than $50,000,
a significant portion of which will be in the form of capital
expenditures. As of May 31, 1998, the Company has incurred no
significant costs which are directly or indirectly related to the
"Year 2000" project.
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
27
<PAGE>
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.
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 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
have grown marginally over the past several years, the Company
believes that the Company's rate of growth would have been
greater if not for this trend. An acceleration of the
aforementioned trend of allocating more gaming space to slot
machines rather than table games could have a negative impact on
the Company's rate of growth.
28
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The Company's success depends
to a significant degree on the performance of Paul S. Endy,
Chairman of the Board and Chief Executive Officer, and Eric P.
Endy, President and Director. The Company does not carry key man
life insurance for either of these executive officers, and the
loss of the services of either of them could have a material
adverse effect on the Company.
The Company is also dependent upon the abilities and efforts
of certain other management personnel, particularly in the sales
department. The Company's sales department has recently had two
successive senior management persons depart, while at the same
time experiencing relatively flat sales and larger than
historical proportions of sales of lower gross margin products.
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, competitive issues relative to
established businesses with significant current market share and
business/customer relationships, 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 48% 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.
29
<PAGE>
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.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
Consolidated Balance Sheets at May 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended
May 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the
Years Ended May 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
May 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Financial Statement Schedule included in Part IV of this
report
31
<PAGE>
PAUL-SON GAMING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
MAY 31, 1998
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Paul-Son Gaming Corporation
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of
Paul-Son Gaming Corporation and subsidiaries (the "Company") as
of May 31, 1998 and 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of
the three years in the period ended May 31, 1998. 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 audits.
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, 1998 and
1997, and the results of their operations and their cash flows
for each of the three years in the period ended May 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
August 24, 1998
33
<PAGE>
<TABLE>
<CAPTION>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1998 AND 1997
<S> <C> <C>
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 347,876 $ 2,753,152
Trade receivables, net 5,147,819 3,669,139
Income taxes receivable 786,463 -
Inventories, net 5,171,402 5,350,446
Prepaid expenses 118,693 140,962
Other current assets 405,299 627,808
------------------------------
TOTAL CURRENT ASSETS 11,977,552 12,541,507
------------------------------
Property and Equipment, net 9,105,545 7,250,030
Deferred Tax Asset 263,000 -
Other Assets:
Note receivable 150,000 150,000
Other assets 469,229 455,205
------------------------------
TOTAL OTHER ASSETS 619,229 605,205
------------------------------
TOTAL ASSETS $ 21,965,326 $ 20,396,742
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 850,000 $ -
Current maturities of long-term debt 59,007 24,052
Bank overdraft 431,380 -
Accounts payable 1,733,122 727,196
Accrued expenses 1,115,915 584,212
Customer deposits 681,825 1,579,161
Income tax payable - 318,930
------------------------------
TOTAL CURRENT LIABILITIES 4,871,249 3,233,551
------------------------------
Long-Term Debt, less current maturities 1,769,722 67,424
Deferred Tax Liability - 11,060
Commitments and Contingencies
Stockholders' Equity:
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 3,465,750 and 3,417,000 shares in 1998 and
1997 34,658 34,170
Additional paid-in capital 13,566,800 13,108,998
Retained earnings 1,722,897 3,941,539
------------------------------
TOTAL STOCKHOLDERS' EQUITY 15,324,355 17,084,707
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,965,326 $ 20,396,742
==============================
</TABLE>
See Notes to Consolidated Financial Statements
34
<PAGE>
<TABLE>
<CAPTION>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1998, 1997 AND 1996
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 25,885,627 $ 24,913,706 $ 23,379,252
Cost of revenues 21,943,781 17,223,759 16,323,043
-------------------------------------------
GROSS PROFIT 3,941,846 7,689,947 7,056,209
Selling, general and administrative expenses 7,145,552 5,967,735 6,577,397
-------------------------------------------
OPERATING INCOME (LOSS) (3,203,706) 1,722,212 478,812
Other income (expense)
Interest income 92,096 82,066 57,694
Interest expense (127,597) (42,700) (63,906)
Other 54,299 372,436 57,856
-------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (3,184,908) 2,134,014 530,456
Income tax (expense) benefit 966,266 (761,831) (193,616)
-------------------------------------------
NET INCOME (LOSS) $ (2,218,642) $ 1,372,183 $ 336,840
===========================================
Earnings (loss) per share:
Basic $ (0.65) $ 0.41 $ 0.10
===========================================
Diluted $ (0.65) $ 0.40 $ 0.10
===========================================
</TABLE>
See Notes to Consolidated Financial Statements
35
<PAGE>
<TABLE>
<CAPTION>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1998, 1997 AND 1996
Common Stock Additional
--------------------------- Paid-in Retained
Shares Dollars Capital Earnings Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 1, 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
Shares issued from the exercise of options 48,750 488 402,802 - 403,290
Income tax benefit from exercise of options - - 55,000 - 55,000
Net loss - - - (2,218,642) (2,218,642)
----------------------------------------------------------------------
Balance, May 31, 1998 3,465,750 $ 34,658 $ 13,566,800 $ 1,722,897 $ 15,324,355
======================================================================
</TABLE>
See Notes to Consolidated Financial Statements
36
<PAGE>
<TABLE>
<CAPTION>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1998, 1997 AND 1996
1998 1997 1996
<S> <C> <C> <C>
Cash Flows from Operating Activities
Cash received from customers $ 23,458,056 $ 24,554,494 $ 24,513,389
Cash paid to suppliers and employees (25,692,604) (22,153,199) (23,357,951)
Interest paid (127,597) (42,700) (69,060)
Interest received 92,096 82,066 57,694
Income tax refunds - 18,940 494,019
Income taxes paid (299,117) (404,778) (6,750)
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,569,166) 2,054,823 1,631,341
--------------- --------------- ---------------
Cash Flows from Investing Activities
Proceeds received on sale of property and equipment 7,350 464,161 15,400
Purchase of property and equipment (2,834,003) (919,972) (3,059,544)
Proceeds from short-term investments - - 1,493,536
Investment in note receivable - (150,000) -
--------------- --------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (2,826,653) (605,811) (1,550,608)
--------------- --------------- ---------------
Cash Flows from Financing Activities
Payments on due to related party - (15,000) (235,000)
Proceeds from short-term borrowings 850,000 150,000 -
Proceeds from long-term borrowings 1,800,000 - -
Principal payments on short-term borrowings - (150,000) -
Principal payments on long-term borrowings (62,747) (450,599) (102,211)
Proceeds from the issuance of common stock 403,290 772,230 -
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,990,543 306,631 (337,211)
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,405,276) 1,755,643 (256,478)
Cash and cash equivalents, beginning 2,753,152 997,509 1,253,987
--------------- --------------- ---------------
Cash and cash equivalents, ending $ 347,876 $ 2,753,152 $ 997,509
=============== =============== ===============
Reconciliation of Net Income (Loss) to Net Cash Provided By
(Used in) Operating Activities
Net income (loss) $ (2,218,642) $ 1,372,183 $ 336,840
Depreciation and amortization 967,475 791,643 768,787
Provision for bad debts 213,938 96,000 96,000
Loss (gain) on sale of property and equipment 3,663 (326,439) 5,698
Change in assets and liabilities:
(Increase) decrease in accounts receivable (1,692,618) (1,163,229) 878,491
(Increase) decrease in income taxes receivable (731,463) - 661,499
Decrease in inventories 179,044 254,184 61,251
(Increase) decrease in other assets 208,485 (316,263) 449,867
Decrease in prepaid expenses 22,269 29,941 11,449
Increase in deferred tax asset (263,000) - -
Increase (decrease) in accounts payable and accrued expenses 1,537,629 246,260 (1,884,803)
Increase in bank overdraft 431,380 - -
Increase (decrease) in deferred tax liability (11,060) 11,060 -
Increase (decrease) in customer deposits (897,336) 713,723 192,092
Increase (decrease) in income taxes payable (318,930) 345,760 54,170
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (2,569,166) $ 2,054,823 $ 1,631,341
=============== =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE>
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 Authentic Products, Inc. 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 AND BANK OVERDRAFT
The Company considers all highly liquid investments and
repurchase agreements with original maturities of three months or
less to be cash and cash equivalents.
Bank overdrafts represent outstanding checks drawn against the
Company's bank account which had not been presented to the bank
as of the balance sheet date.
ACCOUNTS RECEIVABLE AND CUSTOMER DEPOSITS
The Company performs ongoing credit evaluations of its customers
and generally requires a fifty percent deposit for manufactured
or purchased products at the discretion of management. These
customer deposits are classified as a current liability on the
balance sheet. The Company maintains an allowance for doubtful
accounts, and charges against the allowance have been within
management's expectations (see Note 10).
INVENTORY
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
38
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
_________________________________________________________________
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:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements 18-27
Furniture and equipment 5-10
Vehicles 5-7
</TABLE>
GOODWILL
Goodwill is amortized on a straight-line basis over 20 years.
REVENUE RECOGNITION
Substantially all revenue is recognized when products are shipped
to customers. The Company typically sells its products with
payment terms of net 30 days or less.
INCOME TAXES
The Company uses Statement of Financial Accounting Standards
("SFAS") No. 109 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
During fiscal 1998, the Company adopted SFAS No. 128, "Earnings
Per Share". SFAS No. 128 requires the presentation of basic net
earnings (loss) per share and diluted net earnings (loss) per
share for all periods in which a statement of operations is
presented. Basic net earnings (loss) per share is computed by
dividing net earnings (loss) by the average shares outstanding
during the respective period. Diluted net earnings (loss) per
share is computed by dividing net earnings (loss) by the average
shares outstanding and the dilutive effect of common share
equivalents for the respective period. These common share
equivalents are options to purchase common stock whose exercise
price is less than the average market price (see Note 9). During
the fiscal years ending May 31, 1998, 1997 and 1996, the average
number of common shares outstanding used in
39
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
_________________________________________________________________
computing basic net earnings (loss) per share was 3,437,894,
3,330,764 and 3,324,000, respectively, and the weighted average
number of common and common equivalent shares used in computing
diluted net earnings (loss) per share was 3,437,897, 3,443,376
and 3,325,125 for fiscal 1998, 1997, and 1996, respectively (see
Note 9).
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. Estimates and assumptions have been made in determining
the depreciable lives of assets, the allowance for doubtful
accounts receivable, and the provision for obsolete or slow
moving inventories. 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.
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 APB Opinion No. 25 and provide
pro forma disclosures of net income (loss) and earnings (loss)
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 (loss) and earnings (loss) per share required under
SFAS No. 123 (see Note 9).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or
liquidation. The carrying amounts at May 31, 1998 for the
Company's financial instruments approximate fair value.
40
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
_________________________________________________________________
RECOVERABILITY OF LONG-LIVED ASSETS
Management evaluates the carrying value of all long-lived assets
to determine recoverability based on an analysis of non-
discounted future cash flows. Based on its most recent analysis,
management believes that no material impairment in the value of
long-lived assets exists at May 31, 1998.
RECENTLY ISSUED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of
Position 98-5 "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). This standard provides guidance on the financial
reporting for start-up costs and organization costs and requires
costs of start-up activities and organization costs to be
expensed as incurred. This standard is effective for fiscal
years beginning after December 15, 1998, though earlier adoption
is encouraged. Management believes that SOP 98-5 will not have a
material impact on the consolidated financial statements.
The FASB issued SFAS No. 130, "Reporting Comprehensive Income" in
June 1997. This statement, which is effective for fiscal years
beginning after December 31, 1997, 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 stockholders' equity section of
the consolidated balance sheet. This is a disclosure item only
and will have no impact on reported earnings per share.
The FASB recently issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information", which is effective for
financial statements for fiscal years beginning after December
31, 1997. The Company is required to adopt SFAS No. 131 during
the fiscal year ending May 31, 1999. This statement establishes
additional standards for segment reporting in the financial
statements. This is a disclosure item only and will have no
impact on earnings per share.
NOTE 2. INVENTORIES
Inventories consist of the following at May 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Raw materials $ 1,734,738 $ 1,977,089
Work in process 333,182 465,514
Finished goods 3,303,482 2,907,843
------------- -------------
5,371,402 5,350,446
Less inventory reserves 200,000 -
------------- -------------
$ 5,171,402 $ 5,350,446
============= =============
</TABLE>
41
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
_________________________________________________________________
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at May 31:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Land $ 804,370 $ 728,412
Buildings and improvements 7,354,821 5,913,362
Furniture and equipment 4,682,806 3,475,883
Vehicles 925,856 876,892
-------------- --------------
13,767,853 10,994,549
Less accumulated depreciation 4,662,308 3,744,519
-------------- --------------
$ 9,105,545 $ 7,250,030
============== ==============
</TABLE>
NOTE 4. SHORT-TERM BORROWINGS
The Company has a $1.0 million line of credit agreement with a
bank. Interest on outstanding borrowings currently accrues at
the bank's prime rate of interest (8.5% at May 31, 1998). This
facility, which is cross collateralized with a $1.8 million note
(see Note 5), is secured by a first deed of trust on certain real
estate owned by Paul-Son Supplies and by a secured interest in
all accounts, equipment, inventory and general intangibles of
Paul-Son Supplies. The Company is also the guarantor of this
facility and the $1.8 million note. Borrowings under the line of
credit at May 31, 1998 and 1997 were $850,000 and $0,
respectively. The line of credit agreement and the $1.8 million
note contain restrictive covenants, generally requiring the
Company to maintain certain financial ratios, as defined in the
agreement, and to maintain net income annually of at least
$250,000. As of May 31, 1998 the Company was in violation of
this covenant; however, this violation has been formally waived
by the bank through the maturity date of the line of credit of
October 31, 1998 and through June 1, 1999 for the $1.8 million
note.
NOTE 5. LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt consists of the following at May 31:
<TABLE>
<CAPTION>
1998 1997
------------------------------
<S> <C> <C>
Note payable to bank in monthly installments of
$18,118 including interest of 8.87% through
October 2003 with a balloon payment of
approximately $1,450,000 due November 2003,
secured by a first deed of trust on the Company's
main facility in Las Vegas, Nevada and a first
security interest on all Company assets (see Note
4 for discussion of covenants) $ 1,771,076 $ -
Notes payable to mortgage companies, collateralized
by real estate, interest at 7.5% to 9.5%, with
principal and interest payments of $898 due monthly
through 2016 57,653 64,004
</TABLE>
42
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
_________________________________________________________________
<TABLE>
<CAPTION>
<S> <C> <C>
Various notes payable for equipment, interest at
14.5% to 25.5%, payable in monthly installments of
$6,300 through 1998 - 27,472
-------------- --------------
1,828,729 91,476
Less current portion 59,007 24,052
-------------- --------------
$ 1,769,722 $ 67,424
============== ==============
</TABLE>
Estimated annual principal maturities of long-term debt at May
31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 59,007
2000 63,743
2001 69,955
2002 71,080
2003 77,591
Thereafter 1,487,353
-------------
$ 1,828,729
=============
</TABLE>
NOTE 6. RELATED PARTIES
Included in cost of revenues were amounts paid to a related party
from the purchase of plastic coated playing cards in the amount
of $0, $0, and approximately $331,000 for the years ended May 31,
1998, 1997 and 1996, respectively.
Included in interest expense is approximately $0, $0 and $7,000
to related parties for the years ended May 31, 1998, 1997 and
1996, respectively.
The following amounts were paid for legal, accounting, and
consulting services to individuals who were members of the
Company's Board of Directors during the periods reported:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Laurence A. Speiser $ 108,000 $ 134,317 $ 128,591
Wayne H. White - - 23,819
Michael E. Cox - - 36,691
</TABLE>
Included in accounts receivable are amounts owed from an officer
of the Company of approximately $30,000 and $25,000 at May 31,
1998 and 1997, respectively.
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 (8.5% at May
31, 1998) 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 guarantee by the
Company's majority stockholder.
43
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
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, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 281,581
2000 201,527
2001 130,515
--------------
$ 613,623
==============
</TABLE>
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 $264,154, $233,633 and $228,222 for the
years ended May 31, 1998, 1997 and 1996, 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 (expense) benefit for income taxes reflected in the
Consolidated Statements of Operations for the years ended May 31,
1998, 1997 and 1996 consisted of:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Current $ 678,805 $ (799,238) $ (193,616)
Deferred 287,461 37,407 -
-----------------------------------------
$ 966,266 $ (761,831) $ (193,616)
=========================================
</TABLE>
A reconciliation of the Company's income tax (expense) benefit as
compared to the tax (expense) benefit calculated by applying the
statutory federal tax rate (34%) to the income (loss) before
income taxes for the years ended May 31, 1998, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Computed expected income tax
(expense) benefit at 34% $1,082,869 $(725,565) $(180,000)
ADJUSTMENTS:
State taxes 32,503 (35,348) (10,600)
Meals and entertainment (22,987) (21,697) (23,000)
Prior year items and other (126,119) 20,779 19,984
-----------------------------------
Income tax (expense) benefit $ 966,266 $(761,831) $(193,616)
===================================
</TABLE>
44
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
_________________________________________________________________
The primary components of the deferred tax asset ($263,000) for
the year ended May 31, 1998 were operating loss carryforwards
(approximately $70,000), inventory and bad debt reserves
(approximately $130,000) and intangible assets (approximately
$40,000). There were no other significant temporary differences
or carryforwards for the year ended May 31, 1998. For the year
ended May 31, 1997, there were no significant temporary
differences or carryforwards.
NOTE 9. EARNINGS PER SHARE AND STOCK OPTION PROGRAMS
The following table provides a reconciliation of basic and
diluted earnings (loss) per share as required by SFAS No. 128,
"Earnings Per Share":
<TABLE>
<CAPTION>
Dilutive
Stock
Basic Options Diluted
------------- ----------- -------------
<S> <C> <C> <C>
For the year ended May 31, 1998
- -------------------------------
Net loss $ (2,218,642) - $ (2,218,642)
Shares 3,437,894 - 3,437,894
Per Share Amount $ (.65) $ (.65)
For the year ended May 31, 1997
- -------------------------------
Net income $ 1,372,183 - $ 1,372,183
Shares 3,330,764 112,612 3,443,376
Per Share Amount $ 0.41 $ 0.40
For the year ended May 31, 1996
- -------------------------------
Net income $ 336,840 - $ 336,840
Shares 3,324,000 1,125 3,325,125
Per Share Amount $ 0.10 $ 0.10
</TABLE>
Dilutive stock options for the year ended May 31, 1998 (861,250)
have not been included in the computation of the diluted net
earnings (loss) per share as their effect would be antidilutive.
The Company has granted certain stock options to purchase common
stock which had an exercise price greater than the average market
price. These options have been excluded from the computation of
diluted earnings (loss) per share for the respective fiscal
years. These outstanding antidilutive options for the years
ended May 31, 1998, 1997 and 1996, were 4,000, 197,500, and
317,000, respectively.
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 "DirectorsR Plan"). The
45
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
_________________________________________________________________
Incentive Plan provides for the grant of stock options to
executive officers, key employees, 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 DirectorsR 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 the 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 4,000, 3,000 and 6,000
shares were granted during the years ended May 31, 1998, 1997 and
1996 at $10.56, $8.06 and $6.50, respectively.
The following is a summary of option activity for the 3 years
ended May 31, 1998:
<TABLE>
<CAPTION>
Weighted
Options Shares Average
Available Under Exercise
for Grant Plan Price
---------------------------------------
<S> <C> <C> <C>
Outstanding at June 1, 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
Granted (14,000) 14,000 10.00
Canceled 10,000 (10,000) 8.75
Exercised 48,750 (48,750) 8.27
---------------------------------------
Outstanding at May 31, 1998 209,750 865,250 $9.02
=======================================
1998 1997 1996
---- ---- ----
The weighted average fair value of options granted $4.78 $4.27 $4.21
</TABLE>
46
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
_________________________________________________________________
The following table summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
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
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.50 to 9.00 619,500 8.03 8.20 452,000 8.20
$ 9.01 to 13.00 245,750 8.74 11.12 62,750 11.34
- -------------------------------------------------------------------------------
865,250 514,750
- -------------------------------------------------------------------------------
</TABLE>
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 (loss) and earnings (loss) per share would
have been reduced to the following pro forma amounts.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ---------
<S> <C> <C> <C> <C>
Net income (loss): As reported: $(2,218,642) $1,372,183 $336,840
Pro forma: $(2,820,169) 11,115 177,812
Earnings (loss) per share: As reported:
Basic $(.65) $0.41 $0.10
Diluted $(.65) $0.40 $0.10
Pro forma:
Basic $(.82) $0 $0.05
Diluted $(.82) $0 $0.05
</TABLE>
Pro forma earnings (loss) reflect only options granted from
fiscal 1996 to fiscal 1998. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No.
123 is not reflected in pro forma net income (loss) because
compensation costs are reflected over the option-vesting period
and compensation costs for options granted prior to fiscal 1996
are 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 1998, 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 volatility of 43.79%.
47
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
_________________________________________________________________
As of May 31, 1998 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 stock on the date of grant.
NOTE 10. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides, based on periodic reviews of its trade
receivables, for estimated uncollectible accounts. A summary of
amounts provided for bad debt provisions and charges to its
allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
BALANCE AT PROVISIONS/ BALANCE
BEGINNING CHARGED TO AT END OF
Years Ended May 31, OF YEAR EXPENSES CHARGE-OFFS YEAR
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $ 269,140 $ 213,938 $ 108,084 $ 374,994
=====================================================
1997 $ 281,712 $ 96,000 $ 108,572 $ 269,140
=====================================================
1996 $ 214,000 $ 96,000 $ 28,288 $ 281,712
=====================================================
</TABLE>
NOTE 11. CASH FLOW INFORMATION
There were no significant noncash investing or financing
activities during the years ended May 31, 1998, 1997, and
1996.
48
<PAGE>
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, 1998.
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,
1998.
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,
1998.
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, 1998.
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, 1998 and
1997.
Consolidated Statements of Operations for the
Years Ended May 31, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity
for the Years Ended May 31, 1998, 1997 and 1996.
49
<PAGE>
Consolidated Statements of Cash Flows for the
Years Ended May 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
All required 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 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 Paul-Son Gaming Corporation 1994 Directors'
Stock Option Plan (as amended July 29, 1996)
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.
10.02 Paul-Son Gaming Corporation 1994 Long-Term
Incentive Plan (as amended July 29, 1996) 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
10.03 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.
50
<PAGE>
10.04 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.
10.05 Letter Loan Agreement dated November 14, 1997,
among Norwest Bank Nevada, National
Association, Paul-Son Gaming Supplies, Inc.,
as borrower, and Paul-Son Gaming Corporation,
as guarantor; Guaranty dated November 14,
1997, by Paul-Son Gaming Corporation in favor
of Norwest Bank Nevada, National Association;
Term Note dated November 14, 1997, by Paul-Son
Gaming Supplies, Inc., payable to Norwest Bank
Nevada, National Association; Promissory Note
dated November 14, 1997 by Paul-Son Gaming
Supplies, Inc., payable to Norwest Bank
Nevada, National Association; Continuing
Credit Agreement dated November 14, 1997, by
Paul-Son Gaming Supplies, Inc. in favor of
Norwest Bank Nevada, National Association;
Continuing Security Agreement dated November
14, 1997, by Paul-Son Gaming Corporation in
favor of Norwest Bank Nevada, National
Association; and Deed of Trust dated November
14, 1997, among Paul-Son Gaming Supplies,
Inc., as grantor, Norwest Bank Nevada,
National Association, as beneficiary, and
Americorp Financial, Inc., as trustee,
incorporated by reference from the Company's
quarterly report on Form 10-Q for the quarter
ended November 30, 1997, Item 6, Exhibit
10.01.
21.01 List of subsidiaries of Paul-Son Gaming
Corporation.
23.01 Consent of Deloitte & Touche LLP.
51
<PAGE>
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 27, 1998 By /s/ Paul S. Endy
Paul S. Endy
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 27, 1998 By /s/ Paul S. Endy
Paul S. Endy
Chairman of the Board and
Chief Executive Officer
By /s/ Eric P. Endy
Eric P. Endy
President and Director
By /s/ John M. Garner
John M. Garner, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
By /s/ Jerry G. West
Jerry G. West, Director
52
<PAGE>
By /s/ Richard W. Scott
Richard W. Scott, Director
By /s/ Martin S. Winick
Martin S. Winick, Director
53
<PAGE>
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 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 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.
10.02 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
10.03 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.
10.04 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.
10.05 Letter Loan Agreement dated November 14,
1997, among Norwest Bank Nevada, National
Association, Paul-Son Gaming Supplies, Inc.,
as borrower, and Paul-Son Gaming
Corporation, as guarantor; Guaranty dated
November 14, 1997, by Paul-Son Gaming
Corporation in favor of Norwest Bank Nevada,
National Association; Term Note dated
November 14, 1997, by Paul-Son Gaming
Supplies, Inc., payable to Norwest Bank
Nevada, National Association; Promissory
Note dated November 14, 1997 by Paul-Son
Gaming Supplies, Inc., payable to Norwest
Bank Nevada, National
54
<PAGE>
Association; Continuing Credit Agreement
dated November 14, 1997, by Paul-Son Gaming
Supplies, Inc. in favor of Norwest Bank
Nevada, National Association; Continuing
Security Agreement dated November 14, 1997,
by Paul-Son Gaming Corporation in favor of
Norwest Bank Nevada, National Association;
and Deed of Trust dated November 14, 1997,
among Paul-Son Gaming Supplies, Inc., as
grantor, Norwest Bank Nevada, National
Association, as beneficiary, and Americorp
Financial, Inc., as trustee, incorporated by
reference from the Company's quarterly
report on Form 10-Q for the quarter ended
November 30, 1997, Item 6, Exhibit 10.01.
21.01 List of subsidiaries of Paul-Son Gaming 56
Corporation.
23.01 Consent of Deloitte & Touche LLP. 58
27.01 Financial Data Schedule 60
55
<PAGE>
EXHIBIT 21.01
56
<PAGE>
<TABLE>
<CAPTION>
PAUL-SON GAMING CORPORATION
LIST OF SUBSIDIARIES
STATE/COUNTRY OF
NAME INCORPORATION PARENT
<S> <C> <C>
Paul-Son Gaming Supplies, Inc. Nevada Paul-Son Gaming Corporation
Paul-Son Mexicana, S.A. de C.V. Mexico Paul-Son Gaming Supplies, Inc.
(99%)
Paul-Son Gaming Corporation
(1%)
Authentic Products, Inc. Nevada Paul-Son Gaming Corporation
</TABLE>
EXHIBIT 23.01
58
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement Nos. 33-84726, 33-84728, and 333-25981 of Paul-Son
Gaming Corporation on Form S-8 of our report dated August 24,
1998, appearing in the Annual Report on Form 10-K of Paul-Son
Gaming Corporation for the year ended May 31, 1998.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
August 24, 1998
59
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and statements of operations income of
Paul-Son Gaming Corporation, as of and for the year ended May 31, 1998,
and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 348
<SECURITIES> 0
<RECEIVABLES> 5,523
<ALLOWANCES> 375
<INVENTORY> 5,171
<CURRENT-ASSETS> 11,978
<PP&E> 13,768
<DEPRECIATION> 4,662
<TOTAL-ASSETS> 21,965
<CURRENT-LIABILITIES> 4,871
<BONDS> 0
0
0
<COMMON> 35
<OTHER-SE> 15,289
<TOTAL-LIABILITY-AND-EQUITY> 21,965
<SALES> 25,886
<TOTAL-REVENUES> 26,032
<CGS> 21,944
<TOTAL-COSTS> 21,944
<OTHER-EXPENSES> 7,146
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128
<INCOME-PRETAX> (3,185)
<INCOME-TAX> (966)
<INCOME-CONTINUING> (2,219)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,219)
<EPS-PRIMARY> (.65)
<EPS-DILUTED> (.65)
</TABLE>
