<PAGE>
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: November 30, 1998
--------------------------
OR
( ) 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
- ------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 S. 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)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15
(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practicable date.
3,475,050 shares of Common Stock, $0.01 par value as of
January 13, 1999
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 and MAY 31, 1998 (unaudited)
ASSETS
NOVEMBER 30, MAY 31,
1998 1998
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $629,394 $347,876
Trade receivables, less allowance for doubtful accounts
of $417,000 and $292,340 2,424,956 5,147,819
Income taxes receivable 786,463 786,463
Inventories 4,818,850 5,171,402
Prepaid expenses 209,360 118,693
Other current assets 175,637 405,299
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Total current assets 9,044,660 11,977,552
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PROPERTY AND EQUIPMENT, NET 9,217,781 9,105,545
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DEFERRED TAX ASSET 647,832 263,000
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OTHER ASSETS
Note receivable 150,000 150,000
Goodwill and other assets 452,653 469,229
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602,653 619,229
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$19,512,926 $21,965,326
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings $300,000 $850,000
Current maturities of long-term debt 223,714 59,007
Bank overdraft - 431,380
Accounts payable 1,186,963 1,733,122
Accrued expenses 464,948 1,115,915
Customer deposits 476,237 681,825
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Total current liabilities 2,651,862 4,871,249
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LONG-TERM DEBT, NET OF CURRENT MATURITIES 2,059,734 1,769,722
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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: 3,476,050 and 3,465,050
shares as of November 30, 1998 and May 31, 1998 34,761 34,658
Additional paid-in capital 13,643,947 13,566,800
Retained earnings 1,132,137 1,722,897
Less: Treasury stock, at cost, 2,000 and 0 shares (9,515) -
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14,801,330 15,324,355
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$19,512,926 $21,965,326
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See notes to condensed consolidated financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------------ ----------------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenues $5,466,639 $6,093,221 $11,165,048 $11,639,804
Cost of revenues 4,203,890 4,784,912 8,597,249 9,526,491
------------- ------------ ------------ ------------
Gross profit 1,262,749 1,308,309 2,567,799 2,113,313
Selling, general and
administrative 1,660,478 1,720,166 3,383,271 3,287,706
expenses ------------- ------------ ------------ ------------
Operating loss (397,729) (411,857) (815,472) (1,174,393)
Other income 6,635 28,940 16,228 90,441
Interest expense (57,917) (2,793) (108,516) (7,647)
------------- ------------ ------------ ------------
Loss before income (449,011) (385,710) (907,760) (1,091,599)
taxes
Income tax benefit 156,438 138,092 317,000 395,741
------------- ------------ ------------ ------------
Net loss ($292,573) ($247,618) ($590,760) ($695,858)
============= ============ ============ ============
Loss per share:
Basic ($0.08) ($0.07) ($0.17) ($0.20)
============= ============ ============ ============
Diluted ($0.08) ($0.07) ($0.17) ($0.20)
============= ============ ============ ============
See notes to condensed consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS ENDED
NOVEMBER 30,
-------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $13,578,551 $11,258,448
Cash paid to suppliers and employees (12,373,217) (13,168,004)
Interest received 8,186 61,305
Interest paid (108,516) (7,647)
Income taxes paid, net (145,568) (260,479)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 959,436 (2,116,377)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on sale of equipment 3,000 7,350
Purchase of property and equipment, net (653,372) (1,811,028)
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NET CASH USED IN INVESTING ACTIVITIES (650,372) (1,803,678)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 500,000 1,800,000
Proceeds from exercise of options 77,250 135,160
Purchases of treasury stock (9,515) -
Principal payments on short-term borrowings (550,000) -
Principal payments on long-term borrowings (45,281) (23,986)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (27,546) 1,911,174
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 281,518 (2,008,881)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 347,876 2,753,152
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CASH AND CASH EQUIVALENTS, END OF PERIOD $629,394 $744,271
============== =============
RECONCILIATION OF NET LOSS TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss ($590,760) ($695,858)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 533,338 483,152
Provision for bad debts 120,000 45,434
Loss on sale of assets 4,798 3,663
Change in assets and liabilities:
(Increase) decrease in accounts receivable 2,602,863 (591,466)
Increase in income tax benefit receivable - (337,290)
(Increase) decrease in inventories 352,552 (612,245)
Increase in prepaid expenses (90,667) (121,041)
Increase in deferred tax asset (384,832) -
(Increase) decrease in other current assets 229,662 (260,822)
(Increase) decrease in other assets 16,576 (150,247)
Decrease in accounts payable and accrued expenses (1,197,126) (276,562)
Decrease in bank overdraft (431,380) -
Increase (decrease) in customer deposits (205,588) 715,835
Decrease in income taxes payable - (318,930)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $959,436 ($2,116,377)
============== =============
See notes to condensed consolidated financial statements.
</TABLE>
4
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PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 a 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 condensed 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. The condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and do not include all of the information and
notes required by generally accepted accounting principles for
complete financial statements. These statements should be
read in conjunction with the Company's annual audited
consolidated financial statements and related notes included
in the Company's Form 10-K for the year ended May 31, 1998.
The condensed consolidated balance sheet as of November
30, 1998 and statements of operations and cash flows for the
three and six month periods ended November 30, 1998 and 1997
are unaudited, but in the opinion of management, reflect all
adjustments, which consist of only normal recurring
adjustments, necessary for a fair presentation of results for
such periods. The results of operations for an interim period
are not necessarily indicative of the results for the full
year.
A summary of the Company's significant accounting
policies follows:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments and
repurchase agreements with maturities of three months or less
to be cash and cash equivalents.
5
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PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
INVENTORIES
Inventories are stated at the lower of cost or market,
net of reserves for slow-moving, excess and obsolete items.
Cost is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of
depreciation. Depreciation is computed primarily on the
straight-line method for financial reporting purposes over the
following estimated useful lives:
YEARS
-----
Buildings and improvements 18-27
Furniture and equipment 5-10
Vehicles 5-7
GOODWILL
Goodwill is amortized on a straight-line basis over 20
years.
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.
6
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PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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 life of assets and
the allowance for doubtful accounts and slow-moving, excess
and obsolete inventories. Actual results could differ from
those estimates.
RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (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. The
adoption of SFAS No. 130 did not affect the Company's
condensed consolidated financial statements for the three and
six-month periods ended November 30, 1998 and 1997.
The FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" in June 1997. This
statement, which is effective for fiscal years beginning after
December 15, 1997, establishes standards for segment reporting
in the financial statements. This is a disclosure item only
and will have no impact on reported earnings per share.
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 has not yet adopted
7
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PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
this standard but does not believe the adoption thereof will
have a significant impact on its consolidated financial
statements.
The FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits -- an
amendment of FASB Statements No. 87, 88, and 106" in February
1998. This statement, which is effective for fiscal years
beginning after December 15, 1997, revises employers'
disclosures about pensions and other postretirement benefit
plans. The Company believes the adoption of this standard
will not have a significant impact on its consolidated
financial statements.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
November 30, May 31,
1998 1998
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<S> <C> <C>
Raw materials $1,812,362 $1,734,738
Work in process 358,745 333,182
Finished goods 2,920,743 3,303,482
---------------- -------------
5,091,850 5,371,402
Less inventory reserves 273,000 200,000
---------------- -------------
$4,818,850 $5,171,402
================ =============
</TABLE>
NOTE 3 - 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 (8.0% at November 30, 1998)
plus one per cent. This facility, which is cross collateralized
with a $1.8 million and a $500,000 note (collectively "the
Facilities"), 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 (see Note 4). The Company is also the
guarantor of these facilities. Borrowings under the line of
credit at November 30, 1998 and May 31, 1998 were $300,000 and
$850,000, respectively. The line of credit agreement contains
restrictive covenants, generally requiring the Company to
maintain certain quarterly and annual financial ratios, as
defined in the agreement. As of November 30, 1998, the Company
was in compliance with the quarterly ratios.
8
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NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt consists of the following:
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
<TABLE>
<CAPTION>
November 30, May 31,
1998 1998
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<S> <C> <C>
Note payable to a 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 $1,741,926 $1,771,076
Note payable to a bank in monthly principal
installments of $13,889 plus interest at 9.75% due
August 2001, 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 $486,111 -
assets
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 55,411 57,653
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2,283,448 1,828,729
Less current portion 223,714 59,007
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$2,059,734 $1,769,722
============== ============
</TABLE>
NOTE 5 - EARNINGS PER SHARE
The following table provides a reconciliation of basic and
diluted loss per share as required by SFAS No. 128, "Earnings per
Share":
<TABLE>
<CAPTION>
Dilutive
Stock
Basic Options Diluted
------------ ----------- -------------
For the 6 month period ending November 30, 1998
- -----------------------------------------------
<S> <C> <C> <C>
Net loss ($590,760) ($590,760)
Weighted Average Shares 3,473,732 - 3,473,732
Per Share Amount ($0.17) ($0.17)
For the 6 month period ending November 30, 1997
- -----------------------------------------------
Net loss ($695,858) ($695,858)
Weighted Average Shares 3,422,102 - 3,422,102
Per Share Amount ($0.20) ($0.20)
</TABLE>
9
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PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Dilutive stock options for the six months ended November 30,
1998 (111,000) and November 30, 1997 (918,250) have not been
included in the computation of diluted net 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 antidilutive options have been excluded from
the computation of diluted net loss per share for the respective
six-month periods. These outstanding antidilutive options for
the six months ended November 30, 1998 and 1997 were 623,250 and
0, respectively.
NOTE 6 - RELATED PARTIES
Included in selling, general and administrative expenses for
the six month periods ended November 30, 1998 and 1997 are
approximately $0 and $54,000, respectively, for legal services
of the Company's Board of Directors.
On November 22, 1996 the Company advanced to a director a
$150,000 line of credit. The line of credit was due in full on
December 1, 1998. As a result of nonpayment of the loan, the
Company is proceeding to enforce its rights under certain
agreements, including foreclosure on shares of the Company's
common stock pledged on behalf of the director by the Company's
principal stockholder and cancellation of certain stock options
granted by the Company to the director.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Paul-Son is a 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, 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 and
Reno, Nevada; Atlantic City, New Jersey; Fort Lauderdale,
Florida; Gulfport, Mississippi; Portland, Oregon; and Ontario,
Canada. The Company sells its products in every state in which
casinos operate in the United States.
COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30,
1998 AND NOVEMBER 30, 1997
REVENUES. For the three months ended November 30, 1998,
revenues were approximately $5.5 million, a decrease of
approximately $627,000, or 10%, versus revenues of approximately
$6.1 million for the three months ended November 30, 1997. The
decrease in revenues for the 1998 period was caused principally
by a decrease in sales of distributed products not manufactured
by the Company, such as furniture and seating accessories, of
approximately $1.3 million offset, in part, by an increase in
sales of Company manufactured products of approximately $700,000.
The decline in sales of products not manufactured by the Company
sold was attributable to fewer new openings and expansions of
casinos in the 1998 period versus the prior year period. The
increase in the sale of manufactured products was caused
principally by increases in playing card sales versus the prior
period. Sales of products manufactured by the Company totaled
approximately $4.0 million in the 1998 period versus approximately
$3.3 million in the same period of the prior year.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, decreased to 76.9% for the three months ended November 30,
1998, as compared to 78.5% for the three months ended November
30, 1997. This improvement in the gross margin occurred as sales
of the Company's manufactured, higher-margin products
(principally playing cards, casino chips, dice and table layouts)
increased by approximately $600,000 over the prior year three-
month period. Increases in playing card sales accounted for the
majority of the increase. Additionally, improvements in the
Company's gross margin in the 1998 quarter were attributable to
the elimination of dual playing card production facilities. The
Company previously manufactured playing cards in San Luis, Mexico
and, to a limited extent, in Las Vegas, Nevada. Certain
inefficiencies, which resulted in higher manufacturing costs in
the prior year quarter, were eliminated with the transition of
the Las Vegas playing card production to San Luis in May 1998.
GROSS PROFIT. Gross profit for the three months ended
November 30, 1998 decreased in absolute dollars by approximately
$45,000 from the comparable period in the prior year as a result
of the aforementioned lower revenues offset, in part, by the
aforementioned lower cost of revenues as a percentage of sales
from 78.5% to 76.9%.
11
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three
months ended November 30, 1998, selling, general and
administrative ("SG&A") expenses decreased approximately $59,000
or 3.4%, compared to the comparable period of the prior year.
This decrease was primarily attributable to a decrease in certain
personnel related costs offset, in part, by increases in
depreciation expense related to property and equipment purchases
during the fiscal year ended May 31, 1998 and an increased
standard monthly provision for doubtful accounts.
INTEREST EXPENSE. For the three months ended November 30,
1998, interest expense increased to approximately $58,000 from
approximately $3,000 in the 1997 period. This increase was due
principally to the acquisition of debt (approximately $1.8
million) associated with the purchase of a new manufacturing
facility in San Luis and certain manufacturing equipment acquired
in November 1997, the acquisition of an additional $500,000 of
debt in October 1998 and average outstanding borrowings of
approximately $500,000 under the Company's existing line of
credit facility.
OTHER INCOME. For the three months ended November 30, 1998,
other income decreased to approximately $7,000 from approximately
$29,000 in the 1997 period. This decrease was caused principally
by a reduction in the amount of interest income received during
the three months ended November 30, 1998 as compared to the
comparable 1997 quarterly period (based on average outstanding
cash balances during the quarters).
NET LOSS. For the three months ended November 30, 1998 the
Company's net loss was approximately $293,000, a decline in net
operating results of approximately $45,000 from the net loss of
approximately $248,000 for the quarter ended November 30, 1997.
This decline in net operating results was primarily due to the
aforementioned decrease in revenues offset, in part, by the
aforementioned improvement in gross profit margin percentages and
decrease in SG&A expenses. Net loss per diluted share was $.08
for the three months ended November 30, 1998 as compared to a net
loss per diluted share of $.07 per share for the three months
ended November 30, 1997.
During several of the Company's prior reporting quarters,
the Company has experienced a positive impact from the decrease
in the value of the Mexican peso. Over the last year, the value
of the Mexican peso has remained relatively stable. The Company
cannot predict what impact fluctuations in the valuation of the
Mexican peso will have on the cost of the Company's products
manufactured in Mexico.
COMPARISON OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30,
1998 AND NOVEMBER 30, 1997
REVENUES. For the six months ended November 30, 1998,
revenues totaled approximately $11.2 million, an approximately 4%
decrease from the approximately $11.6 million of revenues in the
comparable period of the prior year. The decrease in revenues
for the 1998 period was due principally to a decrease in sales of
non-manufactured, distributed products, such as furniture and
seating accessories, of approximately $2.3 million offset, in
part, by an increase in sales of manufactured products of
approximately $1.9 million. The decline in non-manufactured
products sold was attributable to fewer new openings or
expansions of casinos in the 1998 period versus
12
<PAGE>
the prior year period. The significant increase in manufactured
products sold occurred principally from an increase in playing
card sales of approximately $1.6 million (or approximately 102%).
Sales of products manufactured by the Company totaled
approximately $8.2 million in the 1998 period vs. approximately
$6.4 million in the same period of the prior year.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, decreased to 77.0% for the current period as compared to
81.8% for the six months ended November 30, 1997. This
improvement in the gross margin occurred as sales of the
Company's manufactured, higher-margin products (principally
playing cards, casino chips, dice and table layouts) increased by
approximately $1.8 million over the prior year six-month period.
Additionally, improvements in the Company's gross margin were
attributable to the elimination of dual playing card production
facilities. During the six-month period ended November 30, 1997,
the Company manufactured playing cards in San Luis, Mexico and,
to a limited extent, in Las Vegas, Nevada. Certain
inefficiencies, which resulted in higher manufacturing costs in
the prior year six-month period, were eliminated with the
transition of the Las Vegas playing card production to San Luis
in May 1998.
GROSS PROFIT. Gross profit for the six months ended
November 30, 1998, increased in absolute dollars by approximately
$450,000 over the comparable period in the prior year. This
improvement was primarily a result of the aforementioned
improvement in the cost of revenues as a percentage of sales in
the 1998 period versus the 1997 period offset, in part, by the
aforementioned lower revenue levels for the six months ended
November 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the six
months ended November 30, 1998, SG&A expenses increased
approximately $95,000, or 2.9%, to approximately $3.4 million as
compared to approximately $3.3 million in the comparable period
of the prior year. This increase was primarily attributable to
increased depreciation expenses related to property and equipment
purchases during the fiscal year ended May 31, 1998 and increased
standard monthly provisions for doubtful accounts offset, in
part, by a decrease in certain personnel costs.
INTEREST EXPENSE. For the six months ended November 30,
1998, interest expense increased to approximately $109,000, from
approximately $8,000 in the 1997 period. This increase was due
principally to the acquisition of debt (approximately $1.8
million) associated with the purchase of a new manufacturing
facility in San Luis and certain manufacturing equipment acquired
in November 1997, the acquisition of an additional $500,000 of
debt in October 1998, and average outstanding borrowings of
approximately $600,000 under the Company's existing line of
credit facility.
OTHER INCOME. For the six months ended November 30, 1998,
other income decreased to approximately $16,000 from
approximately $90,000 in the 1997 period. This decrease was
caused principally by a reduction in the amount of interest
income received during the six months ended November 30, 1998, as
compared to the comparable 1997 period (based on average
outstanding cash balances during the periods).
NET LOSS. For the six months ended November 30, 1998 the
Company sustained a net loss of approximately $591,000, versus a
net loss of approximately $696,000 in the comparable prior
13
<PAGE>
year period. This improvement in net operating results was
primarily due to the aforementioned increase in gross profit
margins offset, in part, by the aforementioned decrease in
revenues and increase in SG&A expenses. The net loss per diluted
share was $.17 for the six months ended November 30, 1998, as
compared to a net loss per diluted share of $.20 per share for
the six months ended November 30, 1997.
During certain previous reporting periods, the Company has
generally had a positive impact from the decrease in the value of
the Mexican peso. Over the last year, the value of the Mexican
peso has remained relatively stable. The Company cannot predict
what impact fluctuations between the Mexican peso and the U.S.
dollar will have on the cost of the Company's products
manufactured in Mexico.
MATERIAL CHANGES IN FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. Management believes that the combination of cash
flow from operations, cash on hand and bank financing
alternatives will provide sufficient liquidity both on a short
term and long term basis.
WORKING CAPITAL. Working capital totaled approximately $6.4
million at November 30, 1998, a decrease of approximately
$714,000 in working capital from approximately $7.1 million in
working capital at May 31, 1998.
CASH FLOW. Operating activities provided approximately $1.1
million in cash during the six months ended November 30, 1998, as
compared to cash used of approximately $2.1 million during the
same period in the prior year. The primary operational sources
of cash during the period were related to collections on accounts
receivable balances of approximately $2.6 million and reductions
of inventories of approximately $353,000. These sources of cash
were offset, in part, by cash used to reduce balances in accounts
payable, accrued expenses and a bank overdraft of approximately
$1.6 million and to finance the Company's net loss before
depreciation and income taxes of approximately $300,000. Overall
the Company experienced an increase in cash of approximately
$282,000.
LINE OF CREDIT. In October 1998, the Company renewed its
existing line of credit with Norwest Bank of Nevada ("Norwest"),
which allows the Company to borrow up to $1.0 million. The
renewed line of credit (the "Line of Credit") matures on October
31, 1999. As of November 30, 1998, advances of $300,000 were
outstanding under the Line of Credit. The Line of Credit is
collateralized by a first priority security interest in
substantially all of the Company's depository accounts at
Norwest, accounts receivable, inventory, furniture, fixtures and
equipment, and bears interest at a variable rate equal to
Norwest's prime lending rate (8% at November 30, 1998) plus 1%.
Under the Line of Credit and other Norwest credit
facilities, the Company has agreed to comply with certain
financial covenants and ratios which are primarily calculated on
an annual basis. Specifically, the Company has agreed to
have annual profitability of at least $250,000, have
14
<PAGE>
an annual tangible net worth (stockholders' equity less
intangible assets and amounts due from, and investments in,
related parties) of at least $14 million and maintain a quarterly
debt to tangible worth ratio (total liabilities divided by
tangible net worth) of less than 0.5 to 1. As of November 30,
1998, the Company was in compliance with the quarterly ratios.
NORWEST BANK NOTE. In October 1998, the Company borrowed
$500,000 (the "1998 Norwest Note") from Norwest. The proceeds
from the 1998 Norwest Note were used to purchase certain
additional playing card equipment. The 1998 Norwest Note bears
interest at 9.75%, payable in monthly principal installments of
$13,889 through August 2001. The 1998 Norwest Bank Note 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 1998 Norwest Note contains
similar financial covenants to the Line of Credit.
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 a
calendar year; however, there does not appear to be any
seasonality associated with the Company's core sales to existing
customers.
SALE OF REAL ESTATE. On January 5, 1999 the Company
completed the sale to Gary Fox, an individual, of certain real
estate previously utilized as the Company's business headquarters
in Las Vegas, Nevada. The real estate, which carried a book
value of approximately $351,000, was sold for approximately
$685,000 and, after the payment of certain closing costs and
improvements, generated approximately $610,000 in net cash
proceeds.
STOCK REPURCHASE PROGRAM. The Company announced that its
Board of Directors authorized the open market repurchase of up to
approximately 170,000 shares of the Company's common stock. As
of January 12, 1998, the Company had repurchased 2,000 shares on
the open market at a total cost of approximately $9,515 under
this authorization. The Company has funded the purchases made to
date and intends to fund any future repurchases from cash on
hand.
RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS. See Note
1 to the Condensed Consolidated Financial Statements for a
discussion of recently issued or adopted accounting standards and
their expected impact on the Company's condensed consolidated
financial statements.
YEAR 2000 PROJECT. The Company has conducted a review of
its computer systems to identify those areas that could be
affected by year 2000 issues and is in the process of updating
its existing critical systems to improve overall business
performance and to accommodate business for the year 2000.
However, given the inherent risks for this project and the
resources required, the timing and costs involved could differ
materially from that anticipated by the Company. The Company is
confident that its critical systems will be remediated by year-
end 1999. The Company plans to test problems related to year
2000 issues and also plans to solicit and evaluate responses from
its primary suppliers and business partners. The
Company plans to test year 2000 corrections in
sufficient time to allow for an alternative contingency
plan if the planned corrections are not completely successful.
The Company's contingency plan is expected to be
15
<PAGE>
developed by the end of its fiscal quarter ending August 31,
1999. Due to the speculative nature of contingency planning, it
is uncertain whether future contingency plans will be sufficient
to reduce the risk of material impacts on our operations for year
2000 issues. Although no material difficulties are anticipated
at this time, there can be no assurance that the conversion
project will be completed on schedule, 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.
Overall estimated status for the Company as of November 30,
1998 shows identification of potential problems at 80% complete,
assessment at 50% complete and testing at 10% complete.
The estimated cumulative 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 November 30, 1998, the
Company has incurred approximately $10,000 of 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 and financing sources. 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, those relating
to dependence on existing management, gaming regulation
(including action affecting licensing), leverage and debt service
(including sensitivity to fluctuations in interest rates),
domestic or global economic conditions and changes in federal or
state tax laws or the administration of such laws.
For a summary of additional factors affecting forward-
looking information, see the Company's annual report on Form 10-K
for the year ended May 31, 1998, Part II, Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Statement on Forward-Looking Information."
Note: Dollar amounts have been rounded for narrative
purposes while the percentages were calculated using actual
amounts.
16
<PAGE>
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on
October 13, 1998, to elect the following directors:
<TABLE>
<CAPTION>
Name of Director For Against Abstain
------------------ ----------- --------- ----------
<S> <C> <C> <C>
Jerry G. West 3,288,613 90,157 0
Martin S. Winick 3,288,613 90,157 0
</TABLE>
ITEM 5 OTHER EVENTS
On November 25, 1998, the Board of Directors appointed Eric
Endy Chairman of the Board, President and Chief Executive Officer,
a position Eric Endy had held in an interim capacity since October
30, 1998. See "Item 6 Exhibit and Reports on Form 8-K, (b)
Reports on Form 8-K."
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.01 Modification/Change in Terms Agreement
dated October 23, 1998 between Paul-Son
Gaming Supplies, Inc. and Norwest Bank
Nevada, N.A.; Promissory Note made by
Paul-Son Gaming Supplies, Inc., in favor
of Norwest Bank Nevada, N.A., dated
October 23, 1998; Change in Terms
Agreement dated October 23, 1998, between
Paul-Son Gaming Supplies, Inc. and Norwest
Bank Nevada, N.A.
27.01 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed a Form 8-K dated October 30, 1998,
under Item 5, "Other Events," reporting that Paul S. Endy,
Jr. had suffered a stroke and that Eric P. Endy had been
appointed interim chief executive officer of the Company.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned thereunto duly
authorized.
PAUL-SON GAMING CORPORATION
Date: January 12, 1999 By: /s/ Eric P. Endy
------------------------------
Eric P. Endy, Chief Executive
Officer (Duly Authorized
Officer)
Date: January 12, 1999 By: /s/ John M. Garner
------------------------------
John M. Garner, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
10.01 Modification/Change in Terms Agreement dated 20
October 23, 1998 between Paul-Son Gaming Supplies,
Inc. and Norwest Bank Nevada, N.A.; Promissory Note
made by Paul-Son Gaming Supplies, Inc., in favor of
Norwest Bank Nevada, N.A., dated October 23, 1998;
Change in Terms Agreement dated October 23, 1998,
between Paul-Son Gaming Supplies, Inc. and Norwest
Bank Nevada, N.A.
27.01 Financial Data Schedule 34
</TABLE>
19
<PAGE>
MODIFICATION/CHANGE IN TERMS AGREEMENT
This Modification/Change in Terms Agreement ("MODIFICATION
AGREEMENT") is entered into the 23 day of October, 1998, by and
between Paul-Son Gaming Supplies, a Nevada corporation
("BORROWER") and Norwest Bank Nevada, N.A. ("BANK").
RECITALS
On or about November 14, 1997, Bank extended to
Borrower two loans. One loan was in the original principal amount
of One Million Eight Hundred Thousand And No/100 Dollars
($1,800,000.00) ("Credit Facility 1"), and a second loan was in
the original principal amount of One Million And No/100 Dollars
($1,000,000.00) ("Credit Facility 2").
Credit Facility 1 was evidenced by a Promissory Note
dated November 14, 1997 in the original principal amount of One
Million Eight Hundred Thousand And No/100 Dollars ($1,800,000.00)
("Note 1"). Credit Facility 2 was evidenced by a Promissory Note
dated November 14, 1997 in the original principal amount of One
Million And No/100 Dollars ($1,000,000.00) ("Note 2").
Notes 1 and 2 are secured, in part, by a Deed of Trust
dated November 14, 1997, and recorded on November 20, 1997 as
Instrument No. 00156 in Book 971120 of the official records of
the County Recorder of Clark County, Nevada (the "Deed of
Trust"). Notes 1 and 2 are also secured, in part, by that certain
Continuing Security Agreement dated November 14, 1997, executed
by Borrower in favor of Bank ("Security Agreement").
The terms of the loans evidenced by Notes 1 and 2 are
further governed by various documents, including, but not limited
to, that certain Letter Loan Agreement dated November 14, 1997
(the "Loan Agreement"). The Notes, the Deed of Trust, the Loan
Agreement, and the Continuing Security Agreement, and the other
documents executed in connection therewith are collectively
referred to hereinafter as the "Loan Documents."
Credit Facility 2 matures on October 31, 1998 ("Maturity
Date 2"), and the Borrower has asked that the Bank extend
Maturity Date 2, and to extend additional credit in the nature of
a third credit facility in favor of Borrower. The Bank is willing
to extend Maturity Date 2, and to provide additional financing in
the nature of a third credit facility for Borrower's use, subject
to the terms of this Modification Agreement.
NOW, THEREFORE, in consideration of the foregoing, and for
other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as
follows:
<PAGE>
1. Note 2 is amended to reflect the Maturity Date of Note
2 is extended to November 1, 1999.
2. The Loan Agreement is amended to reflect the following:
(a) A new section is inserted on page one which shall
read as follows:
CREDIT FACILITY 3: Borrower agrees to borrow from
Bank, and subject to the terms and conditions of
this Agreement and the other Loan Documents, Bank
agrees to loan, to or for the benefit of Borrower,
a sum not to exceed Five Hundred Thousand and
No/100 Dollars ($500,000.00) in the form of a
non-revolving term loan. Indebtedness arising
under Credit Facility 3 shall be evidenced by and
bear interest as provided in Bank's form of
promissory note, date October 23, 1998 ("Note 3"),
which shall be duly signed and delivered to Bank
by Borrower, and all notes taken in renewal or
modification of, additional to or in substitution
for it.
(b) A sentence is added to the "LOAN PURPOSES" section
on page one as follows:
The purpose of Credit Facility 3 is to provide
funds to purchase capital assets to be used in the
Borrower's manufacturing facility located in
Mexico.
(c) The "MATURITY DATES" section on page one is
amended to reflect that Maturity Date 2 is extended to
November 1, 1999. Further, a new sentence is added as
follows:
The Maturity Date of Credit Facility 3 is August
23, 2001 ("Maturity Date 3").
(d) The "INTEREST RATES" section on page one is
amended to reflect that the interest on Credit Facility
2 is now the Base Rate PLUS one-percent (1.00 %).
Further, a new sentence is added as follows:
Interest on Credit Facility 3 shall be calculated
at an annual rate equal to the Base Rate PLUS one
and three-quarters percent (1.75%), which rate is
variable and may change as often as daily.
(e) The "REPAYMENT" section on page two is amended to
add the following:
Credit Facility 3 shall be repaid in monthly
installments of $13,888.89 PLUS all interest
accrued and unpaid at the time of each monthly
installment, beginning on November 23, 1998, and
continuing on the twenty-third (23rd) day of each
month until Maturity Date 3. On Maturity Date 3,
all unpaid
2
<PAGE>
principal, all accrued interest and all other fees
and charges shall be fully due and payable.
(f) The "COLLATERAL" section on page two is amended to
reflect that Credit Facility 3 shall be secured by the personal
property described in the Loan Agreement and the Continuing
Security Agreement, and by a second deed of trust on the real
property described in the Loan Agreement and the Deed of Trust.
(g) The "SIGNIFICANT COVENANTS" section is amended/
modified as follows:
- SUBSECTION (V) is amended and fully restated as
follows:
" within thirty (30) days of the end of each
month, provide an accounts receivables and
payables aging report (in a form acceptable
to Bank), and a schedule of contracts in
progress (containing such information
required by Bank), and a borrowing base
certificate (containing such information
requited by Bank and in a form acceptable to
Bank), all signed by an authorized financial
officer of Borrower."
- SUBSECTION (VIII) is deleted in its entirety.
- A NEW SUBSECTION "(xviii)" is added which shall
read as follows:
"during any calendar year in which this
Agreement is in effect (beginning on the date
of this Modification Agreement and continuing
through Maturity Date 2), Borrower shall pay
in full all outstanding principal and accrued
interest on Credit Facility 2 and shall
maintain a zero ($0.00) balance with respect
to Credit Facility 2 for a period of thirty
(30) consecutive days."
- A NEW SUBSECTION (ixx) is added which shall
read as follows:
"maintain at all times during the term of
this Agreement, a Minimum Cash Flow of 1.25x,
measured on a quarterly basis. Minimum Cash
Flow shall be calculated by determining the
following: (Net Profit plus depreciation)
divided by (prior period CPLTD, unfinanced
CAPEX plus dividends).
3
<PAGE>
- A NEW SUBSECTION (xx) is added which shall read
as follows:
on an annual basis, on or before June 30 of
each year, provide information and access to
Bank to allow Bank to conduct an audit
regarding the value and sufficiency of the
collateral for the Credit Facilities, which
audit shall be at the expense of Borrower.
(h) A NEW SECTION is added to the Loan Agreement which
shall read as follows:
CROSS-DEFAULT/CROSS-COLLATERALIZATION: The Bank
and Borrower agree that a default in the
performance relating to any Credit Facility shall
be deemed a default of all Credit Facilities.
Additionally, Bank and Borrower agree that all the
collateral securing the obligations of one Credit
Facility shall secure the obligations of all
Credit Facilities, and Borrower grants to Bank a
security interest in all such collateral for such
purposes.
3. At the time of the execution of this Modification
Agreement by Borrower (except otherwise provided below), and as a
condition of extending the term of the Note 2 and the granting of
Credit Facility 3, Borrower shall pay to Bank a fee of $5000.00,
plus all fees and costs incurred by Bank in relation to this
Modification Agreement, including, without limitation, all legal
fees, recording fees, and title fees (including, without
limitation, the costs of any endorsements to any policies of
title insurance required by Bank, in its discretion), and all
other fees required under the Loan Documents.
4. Nothing contained in this Agreement shall be construed
to allow any third party to assume the rights or duties of
Borrower under the terms of the Loan Documents, as modified and
amended.
5. All terms not defined herein (or redefined herein)
shall have the meanings ascribed to those terms in the original
Loan Documents (as they may have previously been modified and
amended).
6. In the event that there is any conflict between the
terms of this Agreement and the terms of the Loan Documents (as
may have previously been modified or amended), the terms of this
Agreement shall prevail and be controlling. Except as
specifically provided herein, the terms of the Loan Documents
remain in full force and effect.
7. Borrower and Bank hereby confirm and agree that the
Deed of Trust shall continue to secure all obligations and
indebtedness of the Borrower created in relation to Credit
Facilities 1 and 2. No present or future rights, remedies,
benefits or powers belonging to the Bank, as beneficiary under
the Deed of Trust, or the trustee thereunder, whether arising
from Notes 1 and 2,
4
<PAGE>
Deed of Trust or any other Loan Document, shall be affected,
prejudiced or restricted by this Agreement.
8. The Borrower and Bank both agree that all disputes,
claims and controversies between them, whether individual, joint,
or class in nature, arising from this Agreement, the Loan, the
Note or otherwise, including without limitation contract and tort
disputes, shall be arbitrated pursuant to the Rules of the
American Arbitration Association, upon request of either party.
No act to take or dispose of any collateral securing the Note (as
amended) shall constitute a waiver of this arbitration agreement,
or shall be prohibited by this arbitration agreement. This
includes, without limitation: obtaining injunctive relieve or a
temporary restraining order; invoking a power of sale under any
mortgage or deed of trust; obtaining a writ of attachment or
imposition of a receiver; or exercising any rights relating to
personal property, including taking or disposing of such
property, with or without judicial process, pursuant to Article 9
of the Nevada Uniform Commercial Code. Any disputes, claims or
controversies concerning the lawfulness or reasonableness of any
act, or exercise of any right, concerning any collateral securing
the Note, shall also be arbitrated; provided, however, that no
arbitrator shall have the right or the power to enjoin or
restrain any act of any party from seeking equitable relief from
a court of competent jurisdiction. The statute of limitation,
estoppel, waiver, laches and other similar doctrines, which would
otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of
an arbitration proceeding shall be deemed the commencement of an
action for these purposes. The Federal Arbitration Act shall
apply to the construction, interpretation, and enforcement of
this arbitration provision.
9. The provisions hereof shall be binding upon and inure
to the benefit of the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
IN WITNESS WBEREOF, the parties have signed this Agreement
as of the date first above written.
BORROWER: BANK:
Paul-Son Gaming Supplies, Norwest Bank Nevada, N.A.
a Nevada corporation
By: /s/ Eric P. Endy By: /s/ Andrew B. George
--------------------------- ----------------------------
Eric P. Endy, C.O.O. Andrew B. George
Its: President Its: Managing Officer
5
<PAGE>
ACKNOWLEDGMENT, CONSENT AND RATIFICATION OF GUARANTORS
The undersigned Guarantor hereby consent to the terms of
this Modification Agreement and acknowledge that its obligations
arising under the Guarantee dated November 14, 1997, remain
unaffected by the terms hereof. The undersigned Guarantor hereby
ratifies and reaffirms all of the terms of the Guarantee dated
November 14, 1997 and the Continuing Security Agreement signed by
Guarantor in connection therewith on November 14, 1997.
Paul-Son Gaming Corporation,
a Nevada corporation
By: /s/ Eric P. Endy
--------------------------
Eric P. Endy, C.O.O.
Its: President
Dated and effective as of the date first above written.
6
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
=============================================================================
Borrower: Paul-Son Gaming Supplies, Inc. Lender: Norwest Bank Nevada,
(TIN: 88-0126025) National Association
1700 Industrial Road Las Vegas Business
Las Vegas, NV 89102-2620 Banking, Market 1
3300 West Sahara Avenue
Div. 100
Las Vegas, NV 89102
=============================================================================
LOAN TYPE. This is a Variable Rate (1.750% over NORWEST BANK
MINNESOTA BASE, making an initial rate of 9.750%), Principal Plus
Interest Loan to a Corporation for $500,000.00 due on August 23,
2001.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
[ ] PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL
INVESTMENT.
[X] BUSINESS (INCLUDING REAL ESTATE INVESTMENT).
SPECIFIC PURPOSE. The specific purpose of this loan is: To
finance equipment to be used in Mexico.
FLOOD INSURANCE. As reflected on Flood Map No. 32003C 2170 D
dated 08-16-1995, for the community of Las Vegas, City Of, the
property that will secure the loan is not located in an area that
has been identified by the Director of the Federal Emergency
Management Agency as an area having special flood hazards.
Therefore, although flood insurance may be available for the
property, no special flood hazard insurance is required by law
for this loan.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan
proceeds will be disbursed until all of Lender's conditions for
making the loan have been satisfied. Please disburse the loan
proceeds of $500,000.00 as follows:
AMOUNT PAID TO BORROWER DIRECTLY: $500,000.00
$500,000.00 Deposited to Account # .
--------------
NOTE PRINCIPAL: $500,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as
agreed the following charges:
PREPAID FINANCE CHARGES PAID IN CASH: $0.00
OTHER CHARGES PAID IN CASH: $5,794.50
$5,000.00 Application Fee
$32.00 Flood Certification Fee
$150.00 UCC Search Fee (est.)
$70.00 Tax Services Contract
$542.50 Attorney Fee
--------------
TOTAL CHARGES PAID IN CASH: $5,794.50
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER
REPRESENTS AND WARRANTS TO LENDER THAT THE INFORMATION PROVIDED
ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO MATERIAL
ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN
BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS
AUTHORIZATION IS DATED OCTOBER 23, 1998.
BORROWER:
PAUL-SON GAMING SUPPLIES, INC.
BY: /s/ Eric P. Endy
-----------------------------
ERIC P. ENDY, EXECUTIVE VICE
PRESIDENT/COO/SECRETARY/DIRECTOR
=============================================================================
<PAGE>
[NEVADA TITLE COMPANY LETTERHEAD]
ESCROW DISCLAIMER
=================
TO: NEVADA TITLE COMPANY
RE: 98-10-1654 SBD
DATE: NOVEMBER 2, 1998
The undersigned parties acknowledge that the Escrow Agent's
function is to be a disinterested third party, taking mutual
instructions from the parties to a transaction for preparation of
documentation to complete the principals' prior agreements.
The Escrow Agent is NOT AN ATTORNEY and CANNOT ADVISE the parties
as to any legal business, regulations, disclosure requirements,
or tax consequences of any provisions or instrument set forth or
prepared in connection with this transaction. The undersigned
have read and understand each document to which we have affixed
our signature and have authorized and instructed Escrow Agent in
the manner in which any blanks remaining in said forms are to be
completed.
With regard to any questions we may have had pertaining to the
Escrow Instructions, the Escrow Agent's role or participation in
this escrow, or to the role of the Real Estate Broker, if any, we
have received sufficient explanation. We understand that the
subject escrow shall close in accordance with the matters set
forth on the documents we have executed.
With regard to any questions we may have had pertaining to the
new loan being obtained, if any, we have been made aware that the
loan documents were not generated by Nevada Title Company, and
that we have received sufficient explanation from the lender
providing said loan.
DO NOT AFFIX YOUR SIGNATURES BELOW UNTIL YOU HAVE READ AND AGREED
WITH THE MATTERS SET FORTH ABOVE. SHOULD YOU STILL HAVE QUESTIONS
WITH REGARD TO THE ABOVE, YOU ARE ADVISED TO SEEK THE ADVICE OF
AN INDEPENDENT LEGAL COUNSEL.
SELLERS BUYERS
PAUL-SON GAMING SUPPLIES, INC.
/s/ Eric P. Endy, C.O.O.
------------------------------
/s/ John M. Garner, C.F.O.
------------------------------
<PAGE>
[NEVADA TITLE COMPANY LETTERHEAD]
TO: NEVADA TITLE COMPANY
RE: 98-10-1654 SBD
DATE: NOVEMBER 2, 1998
COMPLIANCE AGREEMENT
In the event a post-closing or post-disbursement adjustment is
necessary by an entity involved with this escrow transaction, the
undersigned authorizes Nevada Title Company to, if immediate
action be necessary, advance funds on their behalf to effect an
accurate closing settlement. The undersigned, upon notification,
and the opportunity to investigate such advances, agrees to fully
cooperate and pay to Nevada Title Company any and all funds so
advanced on their behalf.
DEMAND STATEMENTS, FEES, RECONVEYANCE FEES
Escrow Agent is directed to file the necessary Trust Deeds and
other instruments and pay any encumbrance which a title search
reveals against the subject property, except as set forth herein.
Nevada Title Company is authorized and directed to pay said
encumbrances as directed by the lienholder thereof, acting solely
upon the written direction of such lienholder, and it is
expressly understood and agreed that Nevada Title Company assumes
no liability for the accuracy of any such statement or direction.
NOTWITHSTANDING ANY PROVISION IN THE TRUST DEEDS BEING PAID OFF
THROUGH THIS TRANSACTION, NEVADA TITLE COMPANY SHALL CHARGE A
TRUSTEE FEE AS MAY BE REQUIRED TO RECONVEY THE TRUST DEED OF
RECORD. Escrow Agent is expressly authorized to charge to the
account of the party obligated to pay same, any charge or expense
incurred in connection with this transaction or the terms
thereof. Escrow Agent is further directed and authorized to
reimburse itself for any charges which it may incur during this
escrow by charging such amount to the party obligated to pay
same.
BORROWERS
PAUL-SON GAMING SUPPLIES, INC.
/s/ Eric P. Endy, C.O.O.
------------------------------
/s/ John M. Garner, C.F.O.
------------------------------
<PAGE>
PROMISSORY NOTE
==================================================================
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Borrower: Paul-Son Gaming Supplies, Inc. Lender: Norwest Bank of Nevada, National Association
(TIN: 88-0126025) Las Vegas Business Banking, Market 1
1700 Industrial Road 3300 West Sahara Avenue
Las Vegas, NV 89102-2620 Div. 100
Las Vegas, NV 89102
</TABLE>
==================================================================
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Principal Amount: $1,000,000.00 Initial Rate: 9.750% Date of Agreement: October 23, 1998
</TABLE>
PROMISE TO PAY. Paul-Son Gaming Supplies, Inc. ("Borrower")
promises to pay to Norwest Bank Nevada, National Association
("Lender"), or order, in lawful money of the United States of
America, the principal amount of Five Hundred Thousand & 00/100
Dollars ($500,000.00), together with interest on the unpaid
principal balance from October 23, 1998, until paid in full.
PAYMENT. Subject to any payment changes resulting from changes
in the Index, Borrower will pay this loan in 33 principal
payments of $13,888.89 each and one final principal and interest
payment of $42,016.46. Borrower's first principal payment is due
November 23, 1998, and all subsequent principal payments are due
on the same day of each month after that. In addition, Borrower
will pay regular monthly payments of all accrued unpaid interest
due as of each payment date. Borrower's first interest payment
is due November 23, 1998, and all subsequent interest payments
are due on the same day of each month after that period.
Borrower's final payment due August 23, 2001, will be for all
principal and accrued interest not yet paid. The annual interest
rate for this Note is computed on a 365/360 basis; that is, by
applying the ratio of the annual interest rate over a year of 360
days, multiplied by the outstanding principal balance, multiplied
by the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lender's address shown
above or at such other place as Lender may designate in writing.
Unless otherwise agreed or required by applicable law, payments
will be applied first to any unpaid collection costs and any late
charges, then to any unpaid interest, and any remaining amount to
principal.
VARIABLE INTEREST RATE. The interest rate on this Note is
subject to change from time to time based on changes in an index
which is the NORWEST BANK MINNESOTA BASE (the "Index"). The
Index is not necessarily the lowest rate charged by Lender on its
loans and is set by Lender in its sole discretion. If the Index
becomes unavailable during the term of this loan, Lender may
designate a substitute index after notifying Borrower. Lender
will tell Borrower the current Index rate upon Borrower's
request. Borrower understands that Lender may make loans based
on other rates as well. The interest rate change will not occur
more often than each DAY. The Index currently is 8.000% per
annum. The interest rate to be applied to the unpaid principal
balance of this Note will be at a rate of 1.75 percentage points
over the Index, resulting in an initial rate of 9.750% per annum.
NOTICE: Under no circumstances will the interest rate on this
Note be more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower or
Borrower's obligation to continue to make payments under the
payment schedule. Rather, they will reduce the principal balance
due and may result in Borrower making fewer payments.
LATE CHARGE. If a payment is 15 days or more late, Borrower will
be charged 5.000% of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following
happens: (a) Borrower fails to make any payment when due. (b)
Borrower breaks any promise Borrower has made to Lender, or
Borrower fails to comply with or to perform when due any other
term, obligation, covenant, or condition contained in this Note
or any agreement related to this Note, or in any other agreement
or loan Borrower has with Lender. (c) Any representation or
statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect
either now or at the time made or furnished. (d) Borrower become
insolvent, a receiver is appointed for any part of Borrower's
property, Borrower makes an assignment for the benefit of
creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (e)
Any creditors tries to take any of Borrower's property on or in
which Lender has a lien or security interest. This includes a
garnishment of any of Borrower's accounts with Lender. (f) Any
guarantor dies or any of the other events described in this
default section occurs with respect to any guarantor of this
Note. (g) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment
or performance of the Indebtedness is impaired.
LENDER'S RIGHTS. Upon default, Lender may declare the entire
unpaid principal balance on this Note and all accrued unpaid
interest immediately due, without notice, and then Borrower will
pay that amount. Upon default, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted
under applicable law, do one or both of the following: (a)
Increase the variable interest rate on this Note to 18.000% per
annum, and (b) add any unpaid accrued interest to principal and
such sum will bear interest therefrom until paid at the rate
provided in this Note (including any increased rate). The
interest rate will not exceed the maximum rate permitted by
applicable law. This Note has been delivered to Lender and
accepted by Lender in the State of Nevada. If there is a lawsuit
Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of Clark County, the State of Nevada
(Initial Here EPE). Lender and Borrower hereby waive the
right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Borrower against the
other. This Note shall be governed by and construed in
accordance with the laws of the State of Nevada.
RIGHT OF SETOFF. Borrower grants to Lender a contractual
possessory security interest in, and hereby assigns, conveys,
delivers, pledges, and transfers to Lender all Borrower's right,
title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else
and all accounts Borrower may open in the future, excluding
however all IRA and Keogh accounts, and all trust accounts for
which a grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable
law, to charge or setoff all sums owing on this Note against any
and all such accounts.
ARBITRATION. Except for "Core Proceedings" under the United
States Bankruptcy Code, the Bank and the Borrower agree to submit
to binding arbitration all claims, disputes and controversies
between or among them, whether in tort, contract or otherwise
(and their respective employees, officers, directors, attorneys,
and other agents) arising out of or relating to in any way (i)
the loan and related loan and security documents which are the
subject of this Agreement and its negotiation, execution,
collateralization, administration, repayment, modification,
extension, substitution, formation, inducement, enforcement,
default or termination; or (ii) be governed by the Federal
Arbitration Act (Title 9 of the United States Code); and (iii) be
conducted in accordance with the Commercial Arbitration rules of
the American Arbitration Association ("AAA").
The arbitration requirement does not limit the right of either
party to (i) foreclosure against real or personal property
collateral; (ii) exercise self-help remedies relating to
collateral or proceeds of collateral such as setoff or
repossession; or (iii) obtain provision ancillary remedies such
as replevin, injunctive relief, attachment or the appointment of
a receiver, before during or after the pendency or any
arbitration proceeding. This exclusion does not constitute a
waiver of the right or obligation of either party to submit any
dispute to arbitration, including those arising from the exercise
of the actions detailed in sections (i), (ii) and (iii) of this
paragraph.
Any arbitration proceeding will be before a single arbitrator
selected according to the Commercial Arbitration Rules of the
AAA. The arbitrator will be a neutral attorney who has practiced
in the area of commercial law for a minimum of ten years. The
arbitrator will determine whether or not an issue is arbitratable
and will give effect to the statutes of limitations in
determining any claim. Judgment upon the award rendered by the
arbitrator may be
<PAGE>
10-23-1998 PROMISSORY NOTE Page 2
Loan No. 227529-9002 (Continued)
=================================================================
entered in any court having jurisdiction.
MOTION PRACTICE. In any arbitration proceeding the arbitrator
will decide (by documents only or with a hearing at the
arbitrator's discretion) any pre-hearing motions which are
similar to motions to dismiss for failure to state a claim or
motions for summary adjudication.
DISCOVERY. In any arbitration proceeding discovery will be
permitted and will be governed by the Nevada Rules of Civil
Procedure. All discovery must be completed no later than 20 days
before the hearing date and within 180 days of the commencement
of arbitration proceedings. Any requests for any extension of
the discovery periods, or any discovery disputes, will be subject
to final determination by the arbitrator upon a showing that the
request for discovery is essential for the party's presentation
and that no alternative means for obtaining information is
available.
PAYMENT OF ARBITRATION COSTS AND FEES. The arbitrator shall
award costs and expenses of the arbitration proceeding in
accordance with provisions of the loan agreement, promissory note
and/or other loan documents.
GENERAL PROVISIONS. Lender may delay or forego enforcing any of
its rights or remedies under this Note without losing them.
Borrower and any other person who signs, guarantees or endorses
this Note, to the extent allowed by law, waive presentment,
demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly
stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser shall be
released from liability. All such parties agree that Lender may
renew or extend (repeatedly and for any length of time) this
loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties
also agree that Lender may modify this loan without the consent
of or notice to any other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE
PROVISION. BORROWER AGREES TO THE TERMS OF THE NOTE AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
Paul-Son Gaming Supplies, Inc.
By: /s/ Eric P. Endy
Eric P. Endy, Executive Vice President
/COO/Secretary & Director
=================================================================
<PAGE>
CHANGE IN TERMS AGREEMENT
=================================================================
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Borrower: Paul-Son Gaming Supplies, Inc. Lender: Norwest Bank of Nevada, National Association
(TIN: 88-0126025) Las Vegas Business Banking, Market 1
1700 Industrial Road 3300 West Sahara Avenue
Las Vegas, NV 89102-2620 Div. 100
Las Vegas, NV 89102
</TABLE>
==================================================================
Principal Amount: $1,000,000.00 Date of Agreement: October 23, 1998
DESCRIPTION OF EXISTING INDEBTEDNESS. THE UNDERSIGNED IS
INDEBTED TO NORWEST BANK NEVADA, NATIONAL ASSOCIATION,
("LENDER"), AS EVIDENCED BY A PROMISSORY NOTE DATED NOVEMBER 14,
1997, IN THE FACE AMOUNT OF $1,000,000.00, HAVING AN UNPAID
PRINCIPAL BALANCE OF $850,000.00, WITH INTEREST ACCRUED TO
OCTOBER 22, 1998, IN THE AMOUNT OF $6,876.72.
DESCRIPTION OF CHANGE IN TERMS. LENDER HEREBY EXTENDS THE
MATURITY DATE TO NOVEMBER 1, 1999.
ALL TERMS AND CONDITIONS OF THE LETTER/LOAN AGREEMENT DATED
NOVEMBER 14, 1997 SHALL REMAIN IN FULL FORCE AND EFFECT EXXCEPT
AS MODIFIED WITHIN THIS PARAGRAPH OF THIS CHANGE IN TERMS
AGREEMENT.
EFFECTIVE THIS DATE, LENDER AMENDS THE INTEREST RATE TO BASE RATE
+ 1% PER ANNUM AS FURTHER DESCRIBED BELOW.
PROMISE TO PAY. Paul-Son Gaming Supplies, Inc. ("Borrower")
promises to pay to Norwest Bank Nevada, National Association
("Lender"), or order, in lawful money of the United States of
America, the principal amount of One Million and 00/100 Dollars
($1,000,000.00) or so much as may be outstanding, together with
interest on the unpaid outstanding principal balance of each
advance. Interest shall be calculated from the date of each
advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all
outstanding principal plus all accrued unpaid interest on
November 1, 1999. In addition, Borrower will pay regular monthly
payments of accrued unpaid interest beginning November 23, 1998,
and all subsequent interest payments are due on the same day of
each month after that. The annual interest rate for this
Agreement is computed on a 365/360 basis; that is, by applying
the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by
the actual number of days the principal balance is outstanding.
Borrower will pay Lender at Lender's address shown above or at
such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be
applied first to any unpaid collection costs and any late
charges, then to any unpaid interest, and any remaining amount to
principal.
VARIABLE INTEREST RATE. The interest rate on this Agreement is
subject to change from time to time based on changes in an index
which is the NORWEST BANK MINNESOTA BASE (the "Index"). The
Index is not necessarily the lowest rate charged by Lender on its
loans and is set by Lender in its sole discretion. If the Index
becomes unavailable during the term of this loan, Lender may
designate a substitute index after notifying Borrower. Lender
will tell Borrower the current Index rate upon Borrower's
request. Borrower understands that Lender may make loans based
on other rates as well. The interest rate change will not occur
more often than each DAY. The index currently is 8.000% per
annum. The interest rate to be applied to the unpaid principal
balance of this Agreement will be at a rate of 1.000 percentage
point over the Index, resulting in an initial rate of 9.000% per
annum. NOTICE: Under no circumstances will the interest rate on
this Agreement be more than the maximum rate allowed by
applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued
unpaid interest. Rather, they will reduce the principal balance
due.
LATE CHARGE. If a payment is 15 days or more late, Borrower will
be charged 5.000% of the regularly schedule payment.
DEFAULT. Borrower will be in default if any of the following
happens: (a) Borrower fails to make any payment when due. (b)
Borrower breaks any promise Borrower has made to Lender, or
Borrower fails to comply with or to perform when due any other
term, obligation, covenant, or condition contained in this
Agreement or any agreement related to this Agreement, or in any
other agreement or loan Borrower has with Lender. (c) Any
representation or statement made or furnished to Lender by
Borrower or on Borrower's behalf is false or misleading in any
material respect either now or at the time made or furnished.
(d) Borrower becomes insolvent, a receiver is appointed for any
part of Borrower's property, Borrower makes an assignment for the
benefit of creditors, or any proceeding is commenced either by
Borrower or against Borrower under any bankruptcy or insolvency
laws. (e) Any creditor tries to take any of Borrower's property
on or in which Lender has a lien or security interest. This
includes a garnishment of any of Borrower's accounts with Lender.
(f) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this
Agreement. (g) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment
or performance of the indebtedness is impaired.
LENDER'S RIGHTS. Upon default, Lender may declare the entire
unpaid principal balance on this Agreement and all accrued unpaid
interest immediately due, without notice, and then Borrower will
pay that amount. Upon default, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted
under applicable law, do one or both of the following: (a)
increase the variable interest rate on this Agreement to 18.000%
per annum, and (b) add any unpaid accrued interest to principal
and such sum will bear interest therefrom until paid at the rate
provided in this Agreement (including any increased rate). The
interest rate will not exceed the maximum rate permitted by
applicable. This Agreement has been delivered to Lender and
accepted by Lender in the State of Nevada. If there is a
lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of Clark County, the State of Nevada
(Initial Here EPE). Lender and Borrower hereby waive the right
to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Borrower against the other. This
agreement shall be governed by and construed in accordance with
the laws of the State of Nevada.
RIGHT OF SETOFF. Borrower grants to Lender a contractual
possessory security interest in, and hereby assigns, conveys,
delivers, pledges, and transfers to Lender all Borrower's right,
title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else
and all accounts Borrower may open in the future, excluding
however all IRA and Keogh accounts, and all trust accounts for
which the grant of a security interest would be prohibited by
law. Borrower authorizes Lender, to the extend permitted by
applicable law, to charge or setoff all sums owing on this
Agreement against any and all such accounts.
LINE OF CREDIT. This Agreement evidences a revolving line of
credit. Advances under this Agreement may be requested either
orally or in writing by Borrower or by an authorized person.
Lender may, but need not, require that all oral requests be
confirmed in writing. All communications, instructions, or
directions by telephone or otherwise to Lender are to be directed
to Lender's office shown above. The following party or parties
are authorized to request advances under the line of credit until
Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: Eric P. Endy.
Borrower agrees to be liable for all sums either: (a) advanced
in accordance with the instructions of an authorized person or
(b) credited to any of Borrower's accounts with Lender. The
unpaid principal balance owing on this Agreement at any time may
be evidenced by endorsements on this Agreement or by Lender's
internal records, including daily computer print-outs. Lender
will have no obligation to advance funds under this Agreement if:
(a) Borrower or any guarantor is in default under the terms of
this Agreement or any agreement that
<PAGE>
10-23-1998 CHANGE IN TERMS AGREEMENT Page 2
Loan No. 227529/9003 (Continued)
==================================================================
Borrower or any guarantor has with Lender, including any
agreement made in connection with the signing of this Agreement;
(b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts
to limit, modify or revoke such guarantor's guarantee of this
Agreement or any other loan with Lender; or (d) Borrower has
applied funds provided pursuant to this Agreement for purposes
other than those authorized by Lender.
CONTINUING VALIDITY. Except as expressly changed by this
Agreement, the terms of the original obligation or obligations,
including all agreements evidenced or securing the obligation(s),
remain unchanged and in full force and effect. Consent by Lender
to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender
to make any future change in terms. Nothing in this Agreement
will constitute a satisfaction of the obligation(s). It is the
intention of Lender to retain as liable parties all makers and
endorsers of the original obligation(s), including accommodation
parties, unless a party is expressly released by Lender in
writing. Any maker or endorser, including accommodation makers,
will not be released by virtue of this Agreement. If any person
who signed the original obligation does not sign this Agreement
below, then all persons signing below acknowledge that this
Agreement is given conditionally, based on the representation to
Lender that the non-signing party consents to the changes and
provisions of this Agreement or otherwise will not be released by
it. The waiver applies not only to any initial extension,
modification or release, but also to all such subsequent actions.
ARBITRATION. Except for "Core Proceedings" under the United
States Bankruptcy Code, the Bank and the Borrower agree to submit
to binding arbitration all claims, disputes and controversies
between or among them, whether in tort, contract or otherwise
(and their respective employees, officers, directors, attorneys,
and other agents) arising out of or relating to in any way (i)
the loan and related loan and security documents which are the
subject of this Agreement and its negotiation, execution,
collateralization, administration, repayment, modification,
extension, substitution, formation, inducement, enforcement,
default or termination; or (ii) be governed by the Federal
Arbitration Act (Title 9 of the United States Code); and (iii) be
conducted in accordance with the Commercial Arbitration rules of
the American Arbitration Association ("AAA").
The arbitration requirement does not limit the right of either
party to (i) foreclose against real or personal property
collateral; (ii) exercise self-help remedies relating to
collateral or proceeds of collateral such as setoff or
repossession; or (iii) obtain provisional ancillary remedies such
as replevin, injunctive relief, attachment or the appointment of
a receiver, before, during or after the pendency or any
arbitration proceeding. This exclusion does not constitute a
waiver of the right or obligation of either party to submit any
dispute to arbitration, including those arising from the exercise
of the actions detailed in sections (i), (ii) and (iii) of this
paragraph.
Any arbitration proceeding will be before a single arbitrator
selected according to the Commercial Arbitration Rules of the
AAA. The arbitrator will be a neutral attorney who has practiced
in the area of commercial law for a minimum of ten years. The
arbitrator will determine whether or not an issue is arbitratable
and will give effect to the statutes of limitation in determining
any claim. Judgment upon the award rendered by the arbitrator
may be entered in any court having jurisdiction.
MOTION PRACTICE. In any arbitration proceeding the arbitrator
will decide (by documents only or with a hearing at the
arbitrator's discretion) any pre-hearing motions which are
similar to motions to dismiss for failure to state a claim or
motions for summary adjudication.
DISCOVERY. In any arbitration proceeding discovery will be
permitted and will be governed by the Nevada Rules of Civil
Procedure. All discovery must be completed no later than 20 days
before the hearing date and within 180 days of the commencement
of arbitration proceedings. Any requests for an extension of the
discovery periods, or any discovery disputes, will be subject to
final determination by the arbitrator upon a showing that the
request for discovery is essential for the party's presentation
and that no alternative means for obtaining information is
available.
PAYMENT OF ARBITRATION COSTS AND FEES. The arbitrator shall
award costs and expenses of the arbitration proceeding in
accordance with the provisions of the loan agreement, promissory
note and/or other loan documents.
MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing
any of its rights or remedies under this Agreement without losing
them. Borrower and any other person who signs, guarantees or
endorses this Agreement, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor.
Upon any change in the terms of this Agreement, and unless
otherwise expressly stated in writing, no party who signs this
Agreement, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties
agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to
anyone. All such parties also agree that Lender may modify this
loan without the consent of or notice to anyone other than the
party with whom the modification is made.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL
THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST
RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT
AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT.
BORROWER:
Paul-Son Gaming Supplies, Inc.
By: /s/
Eric P. Endy, Executive Vice President/
COO/Secretary and Director
LENDER:
Norwest Bank Nevada, National Association
By: /s/
Authorized Officer
=================================================================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet and statements of income of
Paul-Son Gaming Corporation, as of and for the quarter ended November 30,
1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> NOV-30-1998
<CASH> 629
<SECURITIES> 0
<RECEIVABLES> 2,842
<ALLOWANCES> 417
<INVENTORY> 4,819
<CURRENT-ASSETS> 9,045
<PP&E> 14,135
<DEPRECIATION> 4,917
<TOTAL-ASSETS> 19,513
<CURRENT-LIABILITIES> 2,652
<BONDS> 0
0
0
<COMMON> 35
<OTHER-SE> 14,766
<TOTAL-LIABILITY-AND-EQUITY> 19,513
<SALES> 5,467
<TOTAL-REVENUES> 5,467
<CGS> 4,204
<TOTAL-COSTS> 4,204
<OTHER-EXPENSES> 1,660
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> (449)
<INCOME-TAX> 156
<INCOME-CONTINUING> (293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (293)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
