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, 1999
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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
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)
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 23, 1999, based on the
closing price as reported on the Nasdaq National Market of $9.00
per share, was approximately $15,194,610.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of August 23, 1999.
Common Stock, $.01 par value, 3,455,757 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
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Paul-Son Gaming Corporation, a Nevada Corporation (the
"Company" or "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 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
sales are made to the general public of its table game products,
some of which are factory overruns, returns or excess items. 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 former Chairman,
Paul S. Endy, Jr., 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; in
Ontario, Quebec and British Columbia, Canada; and in Mpumalanga
and Gauteng, South Africa. The Company's current 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) improve its
manufacturing processes and aggressively pursue market share for
products, such as playing cards, in which the Company does not
have a leading market share; (iii) expand internationally into
growing casino markets, including those in Canada, Australia,
Europe, South America, Central America, Asia, Africa and the
Caribbean; (iv) develop or acquire new products which the Company
can sell through its existing distribution network; and (v)
market and sell variations of its gaming products to non-gaming
markets.
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, quantities, 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. During the past several
years, 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 50 million chips (based on two
production shifts and increased labor availability). Management
believes that given its current production level of approximately
11 million chips per year, the Company will have sufficient
manufacturing capacity to meet potential increases in future
demand.
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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 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 cloths,
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 to 150 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 1999, the Company
produced approximately 37,000 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 $.75 and $1.50 and, based on casino
industry practices, is generally replaced every eight hours or
less. A casino typically enters into a one or two year purchase
commitment with a supplier to supply its cards at regular
intervals, generally monthly. Casinos occasionally 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 third 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 growth opportunity for the Company.
The Company produces all of its playing cards in its Mexico
facilities. The Company purchased and leased additional
equipment in fiscal 1999 to increase its production capacity to
approximately 25 million decks per year (based on two production
shifts), up from the Company's previous annual production
capacity of approximately 13 million decks. Expanded playing
card production capacity will permit management to aggressively
seek new playing card
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business from its existing casino customer base, from other
casinos and from customers outside of the casino industry. In
fiscal 1999, the Company produced approximately 7.5 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 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 $2.50 and $3.00 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 800,000 pairs of dice per year
(based upon one production shift). In fiscal 1999, the Company
produced approximately 600,000 pairs of dice.
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TABLE ACCESSORIES AND OTHER PRODUCTS
In order to offer its customers a full product line, the
Company sells a number of ancillary casino table game products
which it typically does not manufacture. These include plastic
money paddles, discard holders, drop boxes, dealing shoes, trays
and covers, dice sticks and on/off pucks. These products are
generally sold in conjunction with the sale of gaming tables and
tend 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 May 1997,
certain of its own plastic products in limited quantities.
SALES, ADVERTISING AND PROMOTION
The Company generally distributes its products through its
approximately 17 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 sales representative in Lima, Peru. Management believes
that the long-standing customer relationships which have been
developed over the years by its individual sales representatives,
as well as 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.
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 advertises 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, 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 20, 1999, the Company employed approximately 525
persons. Approximately 450 of the employees are located at the
Company's Mexico facilities and the remainder are located in Las
Vegas and in other regional, domestic sales offices. None of the
Company's employees is covered by collective bargaining
agreements.
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
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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.
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
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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 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
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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 subject to the Nevada
Act and the Nevada Gaming Regulations. However, the Nevada
Commission has not imposed such a requirement to date.
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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.
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,
12
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 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.
13
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 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.
14
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 a
Company-owned facility in Las Vegas, Nevada and currently
assembles and manufactures its primary products at facilities in
San Luis, Mexico.
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 and houses the Las Vegas sales office and
corporate offices, 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
15
product manufacture and delivery to the Company's customers. The
Las Vegas Headquarters secures a deed of trust issued under the
Company's bank line of credit and outstanding term loans. 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, plastic products and layouts at three facilities in
San Luis, Mexico. These facilities include a 34,000 square foot
leased facility in which casino chips and dice are manufactured
(the "Main Facility"), an adjacent 45,000 square foot facility
purchased by the Company in December 1994, in which the layout,
machine shop and plastic departments are currently located, and
an approximately 66,000 square foot facility purchased in
November 1997 (the "New San Luis Facility") (located
approximately 400 yards from the Company's other San Luis
facilities) used for playing card production. 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 approximately 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.
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 closing prices of the Common
Stock, as reported by the Nasdaq National Market, during the
periods indicated.
16
Fiscal High Low
Year
- -------- -------- --------
1998 First Quarter 14 7/8 13
1998 Second Quarter 23 1/2 13 5/8
1998 Third Quarter 16 3/4 11 5/8
1998 Fourth Quarter 12 3/8 8
1999 First Quarter 9 7/8 6 3/4
1999 Second Quarter 8 3/8 4
1999 Third Quarter 9 5 5/8
1999 Fourth Quarter 9 5 1/2
2000 First Quarter (through August 23, 1999) 9 1/2 5 3/4
The last reported closing price of the Common Stock on the
Nasdaq National Market on August 23, 1999 was $9.00 per share.
There were approximately 135 holders of record of the Common
Stock as of August 23, 1999.
(b) Dividend Policy
The Company has never paid cash dividends. Payments of
dividends are within the discretion of the CompanyRs 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 CompanyRs
Consolidated Financial Statements and related notes, and
"ManagementRs Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere herein. The selected
consolidated financial data for the years ended May 31, 1999,
1998 and 1997 and as of May 31, 1999 and 1998 have been derived
from the audited Consolidated Financial Statements of the Company
included elsewhere herein. The selected consolidated financial
data for the years ended May 31, 1996 and 1995 and as of May 31,
1997, 1996 and 1995 have been derived from the CompanyRs audited
financial statements not included herein.
17
YEARS ENDED MAY 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
OPERATIONS STATEMENT DATA: (in thousands, except per share data)
Revenues $23,914 $25,886 $24,914 $23,379 $24,595
Cost of revenues 18,169 21,944 17,224 16,323 17,137
---------- ----------- ----------- ----------- ----------
Gross profit 5,745 3,942 7,690 7,056 7,458
Selling, general and adminis-
trative expenses 6,904 7,146 5,968 6,577 7,739
---------- ----------- ----------- ----------- ----------
Operating income (loss) (1,159) (3,204) 1,722 479 (281)
Other income 173 19 412 52 140
---------- ----------- ----------- ----------- ----------
Income (loss) before income tax
(expense) benefit (986) (3,185) 2,134 531 (141)
Income tax (expense) benefit 305 966 (762) (194) -
---------- ----------- ----------- ----------- ----------
Net income (loss) $(681) $(2,219) $1,372 $337 $(141)
========== =========== =========== =========== ==========
Earnings (loss) per share:
Basic $(0.20) $(0.65) $0.41 $0.10 $(.04)
Average shares outstanding 3,468,427 3,437,894 3,330,764 3,324,000 3,324,000
Diluted $(0.20) $(0.65) $0.40 $0.10 $(.04)
Diluted shares 3,468,427 3,437,894 3,443,376 3,325,125 3,324,000
MAY 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
BALANCE SHEET DATA: (in thousands)
Cash and cash equivalents $656 $348 $2,753 $998 $1,254
Working capital 6,753 7,106 9,308 7,601 9,832
Property and equipment, net 9,417 9,106 7,250 7,259 4,990
Total assets 20,128 21,965 20,397 17,401 19,040
Current liabilities 3,008 4,871 3,234 2,071 3,729
Long-term debt, less current
maturities 2,564 1,770 67 471 788
Stockholders' equity 14,556 15,324 17,085 14,859 14,522
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. The
majority of the Company's revenues are generated by sales to
customers with which the
18
Company has an established relationship. Complementing these
revenues is the significant additional revenue the Company
realizes when providing a full range of products to new casino
openings. 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.
RESULTS OF OPERATIONS
The following table summarizes selected items from the
Company's Consolidated Statements of Operations as a percentage
of revenues for the periods indicated:
YEARS ENDED MAY 31,
---------------------------------------
1999 1998 1997
---------- ---------- ----------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 76.0% 84.8% 69.1%
Gross profit 24.0% 15.2% 30.9%
Selling, general and administrative expenses 28.9% 27.6% 24.0%
Operating income (loss) (4.8)% (12.4)% 6.9%
Interest expense 0.9% 0.5% 0.2%
Net income (loss) (2.8)% (8.6)% 5.5%
The following table details the Company's historical
revenues by product line:
YEARS ENDED MAY 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
REVENUES: (IN THOUSANDS)
Casino chips $5,709 $5,174 $9,516
Table layouts 3,518 3,202 3,205
Playing cards 6,330 4,714 3,265
Gaming furniture 4,427 9,085 4,970
Dice 1,698 1,395 1,576
Table accessories and other products 2,232 2,316 2,382
---------- ---------- ----------
Total $23,914 $25,886 $24,914
========== ========== ==========
19
COMPARISON OF OPERATIONS FOR THE YEARS ENDED MAY 31, 1999 AND
MAY 31, 1998
REVENUES. For the fiscal year ended May 31, 1999,
Paul-Son's revenues totaled approximately $23.9 million. The
fiscal 1999 revenue figure represents a $2.0 million, or 8%,
decrease from the $25.9 million in revenues which the Company
generated during the previous fiscal year. The decrease in
revenues for the 1999 period resulted principally from a decrease
in gaming furniture and accessory sales (products not
manufactured by the Company) of approximately $4.7 million
offset, in part, by an increase in playing card sales of
approximately $1.6 million, an increase in casino chip sales of
approximately $535,000, an increase in layout sales of
approximately $316,000, and an increase in dice sales of
approximately $303,000. Gaming furniture and accessory sales,
which are products purchased from third party suppliers and then
sold to the customer, decreased principally due to the absence of
significant orders from certain customers associated with new
openings and casino expansions which occurred in the previous
fiscal year. Partially offsetting the decrease in gaming
furniture and accessory sales was an increase in playing card
sales in fiscal 1999 of approximately 34% from fiscal 1998.
Management believes its ability to meet customers' quality
expectations, competitive pricing, and its aggressive pursuit of
new card contracts have contributed to this growth. Sales of
Company manufactured products were approximately 73% of total
revenues in fiscal 1999 compared to approximately 53% in fiscal
1998.
In fiscal 1999, sales of products to the Company's existing
customer base, excluding sales to newly opened casinos, decreased
to $21.6 million from $22.7 million in fiscal 1998. This
decrease was caused by a significant decline in furniture and
seating sales offset, in part, by increases in playing card,
chip, dice and layout sales.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, decreased to 76.0% for the fiscal year ended May 31, 1999,
as compared to 84.8% in the prior fiscal year. This improvement
in gross margins was principally caused by two significant
factors: (i) the aforementioned change in the mix of products
sold from marginally profitable distributed items in fiscal 1998,
such as gaming tables and seating furniture, to higher-margin,
Company-manufactured products (casino chips, cards, dice and
layouts) in fiscal 1999 and (ii) the absence of certain cost
inefficiencies in fiscal 1999 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 which occurred in late fiscal 1998.
During certain previous reporting periods, the Company had
experienced a positive impact from the decrease in the value of
the Mexican peso. During the fiscal year ended May 31, 1999, the
value of the Mexican peso versus the U.S dollar again declined;
however, the decline was not significant and thus did not
significantly impact the overall gross margins of the Company.
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 increased in absolute dollars by
approximately $1.8 million to approximately $5.7 million as
compared to approximately $3.9 million in the prior fiscal year.
This improvement in gross profit was a result of the decrease in
cost of revenues as a percentage of sales from 84.8% to 76.0% due
to the cost of revenue factors discussed above offset, in part,
by decreased revenues in fiscal 1999.
20
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative ("SG&A") expenses for the fiscal year
ended May 31, 1999 decreased approximately $242,000, or 3%, to
approximately $6.9 million, or 28.9% of revenues, compared to
approximately $7.1 million, or 27.6% of revenues, in the previous
fiscal year. This decrease was primarily attributable to a
reduction in payroll related expenses, and a decrease in
provisions for bad debts caused by lower sales volume in the
current year and certain recoveries of previously written off bad
debts. These decreases were partially offset by increases in
depreciation expense, costs associated with the continued
development and formation of the Company's non-gaming business
operations and increased licensing and regulatory investigative
costs related to the continued worldwide proliferation of gaming.
INTEREST EXPENSE. For the year ended May 31, 1999, interest
expense increased approximately 73% to $222,000 as compared to
$128,000 in the prior fiscal year. This increase was caused by
(i) increased average outstanding borrowings under the Company's
line of credit during fiscal 1999, (ii) the acquisition of a
$500,000 note in October 1998 to finance additional playing card
equipment, and (iii) the full year impact, in fiscal 1999, of
$1.8 million of certain debt acquired to finance a new building
and certain equipment in San Luis, Mexico in November 1997.
OTHER INCOME. In fiscal 1999, other income, including
interest income, increased to approximately $395,000, or 170%,
over the previous fiscal year. This increase was attributable
principally to a gain before income taxes of approximately
$340,000 which resulted from the sale of certain real estate in
fiscal 1999.
NET INCOME (LOSS). For the year ended May 31, 1999, the
Company incurred a net loss of approximately $681,000, an
improvement of approximately $1.5 million from the net loss of
approximately $2.2 million in the prior fiscal year. This
improvement was primarily due to the aforementioned increases in
gross profit, other income, and decreases to SG&A expenses from
the 1998 period, offset, in part, by the decrease in revenues
from the prior fiscal year. Basic net loss per share was $.20 for
the year ended May 31, 1999 as compared with basic net loss of
$.65 for the year ended May 31, 1998.
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 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
21
card sales was 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.
Sales of products to the Company's existing customer base in
fiscal 1998 were approximately $22.7 million compared to
approximately $18.9 million in fiscal 1997, an increase of
approximately $3.8 million. Such sales increased during the year
primarily due to an increase in gaming furniture, including
seating equipment, and playing card sales offset by a decline in
casino chip and dice 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. 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
approximately $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 and newly opened sales offices.
Additionally, bad debt expense increased due to an increase in
accounts receivable amounts
22
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, including
interest 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.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. Management believes that the combination of its
existing cash balances and projected cash flows from operations
will provide sufficient liquidity, both on a short-term and long-
term basis.
WORKING CAPITAL. Working capital totaled approximately $6.8
million at May 31, 1999, versus approximately $7.1 million at
May 31, 1998. Working capital decreased approximately $350,000
during the year primarily due to the Company's reduction of
outstanding short-term borrowings under its line of credit and a
bank overdraft of approximately $1,080,000, and net cash invested
in property, plant and equipment of approximately $400,000
offset, in part, by net income before depreciation of
approximately $400,000 and proceeds received from an income tax
refund of approximately $800,000.
CASH FLOW. Cash provided by operating activities totaled
approximately $1.0 million during fiscal 1999 compared to cash
used of approximately $2.6 million in fiscal 1998. The primary
contributing factors to this improvement were an approximately
$2.0 million improvement in operating income, net reductions of
accounts receivable of approximately $1.0 million and the receipt
of an approximately $800,000 federal income tax refund. Other
significant cash activities during fiscal 1999 included the
receipt of approximately $700,000 from the sale of certain real
estate, net cash invested in property, plant and equipment of
approximately $400,000 and reductions in debt obligations from
its line of credit and other credit facilities of approximately
$1.1 million.
23
LINE OF CREDIT. The Company maintains a line of credit (the
"Line of Credit") with Norwest Bank of Nevada ("Norwest") which,
under the terms of the agreement, allows the Company to borrow up
to $1.0 million. The Line of Credit matures on October 31, 1999.
As of May 31, 1999, no advances were 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 (8.0% at
May 31, 1999) plus 1%.
Under the Line of Credit and other credit facilities, 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, certain minimum cash flow amounts and an annualized
profitability of not less than $250,000 in net income, all as
defined in the agreement. During the year ended May 31, 1999, it
was determined the Company was in violation of certain of its
covenants. As a result of the violations, the Company has agreed
to surrender its rights to borrow against the line of credit
without the express written consent of the bank through the
maturity date of the line of credit. Management believes the
Line of Credit will not be renewed when it matures on October 31,
1999 and the Company is seeking another line of credit from a
different lender. However, no assurance can be given that the
Company will be able to secure a new line of credit at rates or
terms acceptable to the Company. While management of the Company
believes the absence of a line of credit would not significantly
impair the operations of the Company in the near term, it may
impair the Company's operations in future years and may limit the
Company's ability to expand operations.
SECURED DEBT. In November 1997, the Company obtained a $1.8
million loan (the "$1.8 million 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 $1.8 million note bears interest at
8.87% per annum, with monthly payments of principal and interest
totaling $18,118. The $1.8 million note calls for monthly
payments through November 2002, at which time the remaining
principal balance of approximately $1.5 million is due.
Additionally, in October 1998, the Company obtained an additional
$500,000 note (the "500,000 note") to acquire additional playing
card equipment. The $500,000 note bears interest at 9.75% per
annum, with monthly principal installments of $13,889 and a final
payment of approximately $42,000 in August 2002. Both of these
notes are 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. These
notes contain the same financial covenant and ratio requirements
as under the Line of Credit. As of May 31, 1999, the Company was
in violation of certain of its financial covenants; however, the
Company has obtained a formal waiver from Norwest through May 31,
2000.
SEASONALITY. The Company does not typically experience
seasonality relative to its operations.
LAS VEGAS FACILITIES. In May 1997, the Company relocated its
corporate headquarters from its previous headquarters, which was
sold in January 1999, to the Las Vegas Headquarters, an
approximately 62,000 square foot building purchased in September
of 1995 for approximately
24
$2,000,000. The Las Vegas Headquarters secures a deed of trust
issued under the Line of Credit and the $1.8 million and $.5
million notes.
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.
CAPITAL EXPENDITURES. The Company does not have plans to
purchase any significant capital equipment for the year ended May
31, 2000.
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 20, 1999, the Company has purchased 2,000 shares at an
average price of $4.75 per share. The Company intends to fund
any future repurchases from cash on hand.
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 has determined that SOP 98-5 will not
have a material impact on the Company's consolidated financial
statements.
The FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" in June 1998. This statement
establishes accounting and reporting standards for derivative
instruments and hedging activities. This statement is effective
for all fiscal quarters of fiscal years which begin after June
2000. The statement requires entities to recognize all
derivatives as either assets or liabilities in the statement of
financial position and to measure instruments at fair value.
Management believes that SFAS No. 133 will not have a material
impact on its 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 nearing completion 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 this project and the resources required, the
timing and costs involved may, although it is not anticipated to,
differ materially from that anticipated by the Company.
Management believes that the Company's critical systems will be
remediated by December 31, 1999. The Company's overall estimated
status for the Company for the year 2000 issues at May 31, 1999
shows identification of potential problems at 95% complete,
assessment at approximately 90% complete and testing at 75%
complete.
25
The Company believes that there will be no material adverse
impact on its production capabilities, processes or other
operational departments reliant on computer systems resulting
from the year 2000 issues. The Company also believes that there
will be no material impact from the year 2000 issues on its
consolidated financial position, results of operations or cash
flows. However, certain risks exist relative to the non-
compliance of third parties with operational significance to the
Company, such as key suppliers to its manufacturing operations in
Mexico. Although management believes the conversion process will
be completed by December 31, 1999, 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 Company continues to develop a contingency plan
should planned corrections or third party compliance to year 2000
issues prove unsuccessful. The Company's contingency plan is
expected to be developed by December 31, 1999.
The estimated costs directly or indirectly associated with
the conversion project is currently expected to be less than
$100,000, a significant portion of which will be in the form of
capital expenditures. As of May 31, 1999, the Company has
incurred approximately $40,000 of costs or capital expenditures
as a result of the Year 2000 issue implementation.
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. Nearly all of the
Company's revenue is generated by sales relating to casino
openings and expansions. Although the Company is pursuing
opportunities to sell and market its products to industries
outside of the casino industry, the Company's future growth may
be dependent 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.
26
GAMING REGULATIONS. The manufacture and distribution of
gaming equipment and supplies are subject to extensive federal,
state and local regulation. Although these regulations vary
among jurisdictions, virtually all jurisdictions require
licenses, permits and approvals to be held by the Company and its
key personnel in connection with the manufacture and distribution
of some or all of the Company's products. The failure of the
Company or its key personnel to obtain or retain required
licenses, permits or approvals in one or more jurisdictions could
have an adverse effect on the Company and could adversely affect
the ability of the Company and its key personnel to obtain or
retain licenses in other jurisdictions. No assurance can be
given that such licenses, permits or approvals will be obtained,
retained or renewed in the future in existing or emerging
jurisdictions.
The regulatory environment in which the Company operates
requires, among other things, that the Company develop and adhere
to certain internal "due diligence" procedures to ensure its
gaming regulatory licenses are not jeopardized relative to its
customer base and business practices. As such, the Company may
require information from, and perform inquiries into, potential
customers beyond what certain competitors may require depending
on the competitors' licensing status and procedural requirements
or the absence of such. To the extent potential customers are
adverse to these procedures, the Company may be at a competitive
disadvantage relative to its competitors.
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
27
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. 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.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends
to a significant degree on the performance of Eric P. Endy,
Chairman of the Board and Chief Executive Officer. The Company
carries key man life insurance on Eric P. Endy, and the loss of
the services of him 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, in late fiscal 1998
and early fiscal 1999, had two successive senior management
persons depart, while at the same time it experienced relatively
flat sales and lower than historical gross margins.
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.
ABSENCE OF AVAILABLE CREDIT LINE. As described above, the
Company may not currently obtain advances under its credit line
and as of the date hereof, the Company has not yet negotiated a
new credit line. Although the Company believes that it has
adequate cash to fund operations, if an unanticipated need for a
material amount of cash should arise, the Company may not be able
to meet such material cash demands if such cash demands exceed
the Company's cash on hand and other liquid assets.
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
28
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. Eric
P. Endy is the beneficial owner of approximately 52% of the
outstanding Common Stock of the Company. As a result, Mr. Endy
effectively controls the election of all of the members of the
Board of Directors of the Company and effectively controls
virtually all matters requiring approval by the stockholders of
the Company. Such ownership may discourage acquisition of large
blocks of the Company's securities and could have an anti-
takeover effect, possibly depressing the price of the Common
Stock. In addition, Nevada corporation law and the Company's
Articles of Incorporation and Bylaws contain provisions that may
have the effect of delaying, deferring or preventing a change in
control of the Company.
RELIANCE ON SUPPLIERS. For certain of its products, the
Company is dependent upon a limited number of suppliers to
provide the Company with raw materials for manufacturing and
finished goods for distribution. The failure of one or more of
these suppliers to meet the Company's performance specifications,
quality standards or delivery schedules could have a material
adverse effect on the Company.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
-------------------------------------------------------
RISK
----
Not applicable.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Independent Auditors' Report
Consolidated Balance Sheets at May 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended
May 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the
Years Ended May 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
May 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
30
PAUL-SON GAMING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
MAY 31, 1999
31
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, 1999 and 1998, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of
the three years in the period ended May 31, 1999. 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, 1999 and
1998, and the results of their operations and their cash flows
for each of the three years in the period ended May 31, 1999, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
August 6, 1999
32
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1999 AND 1998
ASSETS 1999 1998
- -----------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 656,299 $ 347,876
Trade receivables, net 3,909,732 5,147,819
Income taxes receivable - 786,463
Inventories, net 4,788,382 5,171,402
Prepaid expenses 174,664 118,693
Other current assets 232,431 405,299
------------------------------
TOTAL CURRENT ASSETS 9,761,508 11,977,552
------------------------------
Property and Equipment, net 9,416,656 9,105,545
------------------------------
Deferred Tax Asset 568,000 263,000
------------------------------
Other Assets:
Note receivable - 150,000
Other assets 382,153 469,229
------------------------------
TOTAL OTHER ASSETS 382,153 619,229
------------------------------
TOTAL ASSETS $ 20,128,317 $ 21,965,326
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ - $ 850,000
Current maturities of long-term debt 329,201 59,007
Bank overdraft - 431,380
Accounts payable 1,641,419 1,733,122
Accrued expenses 508,426 1,115,915
Customer deposits 479,936 681,825
Income taxes payable 49,298 -
------------------------------
TOTAL CURRENT LIABILITIES 3,008,280 4,871,249
------------------------------
Long-Term Debt, less current maturities 2,564,244 1,769,722
------------------------------
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;
3,477,050 and 3,465,750 shares in 1999 and 1998 34,771 34,658
Additional paid-in capital 13,652,936 13,566,800
Treasury stock, at cost; 21,293 and 0 shares in 1999 and 1998 (173,505) -
Retained earnings 1,041,591 1,722,897
------------------------------
TOTAL STOCKHOLDERS' EQUITY 14,555,793 15,324,355
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,128,317 $ 21,965,326
==============================
See Notes to Consolidated Financial Statements.
33
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31, 1999, 1998 AND 1997
1999 1998 1997
- -----------------------------------------------------------------------------------------------
Revenues $ 23,914,408 $ 25,885,627 $ 24,913,706
Cost of revenues 18,169,433 21,943,781 17,223,759
-----------------------------------------------
GROSS PROFIT 5,744,975 3,941,846 7,689,947
Selling, general and administrative expenses 6,903,789 7,145,552 5,967,735
-----------------------------------------------
OPERATING INCOME (LOSS) (1,158,814) (3,203,706) 1,722,212
Other income (expense)
Interest income 19,330 92,096 82,066
Interest expense (222,486) (127,597) (42,700)
Other 375,664 54,299 372,436
-----------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (986,306) (3,184,908) 2,134,014
Income tax (expense) benefit 305,000 966,266 (761,831)
-----------------------------------------------
NET INCOME (LOSS) $ (681,306) $ (2,218,642) $ 1,372,183
===============================================
Earnings (loss) per share:
Basic $ (0.20) $ (0.65) $ 0.41
===============================================
Diluted $ (0.20) $ (0.65) $ 0.40
===============================================
See Notes to Consolidated Financial Statements.
34
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1999, 1998 AND 1997
Common Stock Treasury Stock Additional
----------------------------------------- Paid-in Retained
Shares Dollars Shares Dollars Capital Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 1, 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
Shares issued from the exercise of options 11,300 113 - - 86,136 - 86,249
Treasury shares purchased and received in lieu of
note receivable - - (21,293) (173,505) - (173,505)
Net loss - - - - - (681,306) (681,306)
------------------------------------------------------------------------------
Balance, May 31, 1999 3,477,050 $34,771 (21,293) $(173,505) $13,652,936 $1,041,591 $14,555,793
==============================================================================
See Notes to Consolidated Financial Statements.
35
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1999, 1998 AND 1997
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) $ (681,306) $ (2,218,642) $ 1,372,183
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,082,757 967,475 791,643
Provision for doubtful accounts 130,000 213,938 96,000
Provision for inventory obsolescence 40,000 200,000 -
(Gain) loss on sale/disposal of assets (346,094) 3,663 (326,439)
Change in operating assets and liabilities:
Accounts receivable 1,094,082 (1,692,618) (1,163,229)
Income taxes receivable 786,463 (731,463) -
Inventories 343,020 (20,956) 254,184
Prepaid expenses (55,971) 22,269 29,941
Other assets 234,642 208,485 (316,263)
Deferred tax asset (305,000) (263,000) -
Accounts payable and accrued expenses (699,192) 1,537,629 246,260
Bank overdraft (431,380) 431,380 -
Deferred tax liability - (11,060) 11,060
Customer deposits (201,889) (897,336) 713,723
Income taxes payable 49,298 (318,930) 345,760
---------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,039,430 (2,569,166) 2,054,823
---------------------------------------------
Cash Flows from Investing Activities
Proceeds received on sale of property and equipment 714,599 7,350 464,161
Purchase of property and equipment (947,071) (2,834,003) (919,972)
Investment in note receivable - - (150,000)
---------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (232,472) (2,826,653) (605,811)
---------------------------------------------
Cash Flows from Financing Activities
Payments on due to related party - - (15,000)
Proceeds from short-term borrowings - 850,000 150,000
Proceeds from long-term borrowings 500,000 1,800,000 -
Principal payments on short-term borrowings (850,000) - (150,000)
Principal payments on long-term borrowings (225,284) (62,747) (450,599)
Payments for acquisition of treasury stock (9,500) - -
Proceeds from the exercise of stock options 86,249 403,290 772,230
---------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (498,535) 2,990,543 306,631
---------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 308,423 (2,405,276) 1,755,643
Cash and cash equivalents, beginning of year 347,876 2,753,152 997,509
---------------------------------------------
Cash and cash equivalents, end of year $ 656,299 $ 347,876 $ 2,753,152
=============================================
Supplemental cash flows information:
Operating activities include cash payments for interest and income
taxes as follows:
Interest paid $ 222,486 $ 127,597 $ 42,700
Income taxes paid $ 208,472 $ 299,117 $ 404,778
Investing and financing activities exclude the following non-cash
activity:
Reduction of note and interest receivable in exchange for common $ 164,005 - -
stock placed into treasury
Acquisition of capitalized lease equipment through lease $ 790,000 - -
arrangement
See Notes to Consolidated Financial Statements.
36
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 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, to a limited extent, 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:
RECLASSIFICATION
- ----------------
Certain amounts presented in prior years' consolidated financial
statements have been reclassified to conform with the
presentation of the May 31, 1999 consolidated financial
statements.
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.
37
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are stated at cost, net of depreciation.
The Company includes capitalized lease equipment in its property
and equipment for financial statement purposes. 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
Normal repairs and maintenance are chanrged to expense as
incurred. Expenditures which extend useful lives of assets are
typically capitalized.
GOODWILL
- --------
Goodwill is amortized on a straight-line basis over 20 years.
DEBT
- ----
The Company includes obligations from capitalized leases in its
long and short-term debt captions for financial statement
purposes.
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 sales transactions occur in United States
dollars.
EARNINGS PER SHARE
- ------------------
The Company presents basic net earnings (loss) per share and
diluted net earnings (loss) per share for all periods in which a
statement of operations is presented in accordance with SFAS
38
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
No. 128, "Earnings Per Share". 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, 1999, 1998 and
1997, the average number of common shares outstanding used in
computing basic net earnings (loss) per share was 3,468,427,
3,437,894 and 3,330,764, respectively, and the weighted average
number of common and common equivalent shares used in computing
diluted net earnings (loss) per share was 3,468,427, 3,437,894
and 3,443,376 for fiscal 1999, 1998, and 1997, 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 recoverability of deferred
tax assets, the allowance for doubtful accounts receivable, and
the allowance for obsolete or slow moving inventories. Actual
results could differ from those estimates and assumptions.
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 Accounting Principles Board
("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).
39
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
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, 1999 for the
Company's financial instruments approximate fair value.
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, 1999.
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 has determined that SOP 98-5 will not
have a material impact on the Company's consolidated financial
statements.
The FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" in June 1998. This statement
establishes accounting and reporting standards for derivative
instruments and hedging activities. This statement is effective
for all fiscal quarters of fiscal years which begin after June
2000. The statement requires entities to recognize all
derivatives as either assets or liabilities in the statement of
financial position and to measure instruments at fair value.
Management believes that SFAS No. 133 will not have a material
impact on its consolidated financial statements.
NOTE 2. INVENTORIES
Inventories consist of the following at May 31:
1999 1998
----------------------------------
Raw materials $ 1,777,212 $ 1,734,738
Work in process 346,761 333,182
Finished goods 2,989,409 3,303,482
----------------------------------
5,113,382 5,371,402
Less inventory reserves 325,000 200,000
----------------------------------
$ 4,788,382 $ 5,171,402
==================================
40
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at May 31:
1999 1998
----------------------------------
Land $ 663,970 $ 804,370
Buildings and improvements 6,491,881 7,354,821
Furniture and equipment 6,301,425 4,682,806
Vehicles 732,920 925,856
------------------------------
14,190,196 13,767,853
Less accumulated depreciation 4,773,540 4,662,308
------------------------------
$ 9,416,656 $ 9,105,545
==================================
Included in furniture and equipment at May 31, 1999 is certain
capitalized lease equipment with an original cost of $790,000 and
a current net book value of approximately $770,000.
NOTE 4. SHORT-TERM BORROWINGS
The Company has a $1.0 million line of credit agreement with a
bank which matures in October 1999. Interest on outstanding
borrowings currently accrues at the bank's prime rate of interest
(8.0% at May 31, 1999). This line of credit facility is cross
collateralized with a $1.8 million note and a $500,000 note
(collectively the "Facilities") (see Note 5). The Facilities are
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 the Facilities.
Borrowings under the line of credit at May 31, 1999 and 1998 were
$0 and $850,000, respectively. The Facilities 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, 1999 the Company was in violation of certain covenants.
As a result of the violations, the Company and the bank have
reached an agreement whereby the Company has agreed to relinquish
its rights to borrow under the line of credit, without the
express written consent of the bank, through the maturity date of
the line of credit. The bank has granted the Company a formal
waiver of default regarding the covenants associated with the
Facilities through the Company's fiscal year ending May 31, 2000.
41
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
NOTE 5. LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt consists of the following at May 31:
1999 1998
------------------------------
Note payable to bank in monthly
installments of $18,118 including
interest of 8.87% through October
2002 with a balloon payment of
approximately $1,500,000 due
November 2002, secured by a first
deed of trust on the Company's
facility in Las Vegas, Nevada and
a first security interest on all
Company assets (see Note 4 for
discussion of covenants) $ 1,709,443 $ 1,771,076
Note payable to bank in monthly
principal installments of $13,889
plus interest of 9.75% through
July 2001 with a balloon payment
of approximately $42,000 due
August 2002, secured by a first
deed of trust on the Company's
facility in Las Vegas, Nevada and
a first security interest on all
Company assets (see Note 4 for
discussion of covenants) 402,779 --
Notes payable to mortgage company,
collateralized by real estate,
interest at 7.5%, with principal
and interest payments of $898 due
monthly through 2016 11,563 57,653
Capital lease obligation payable
for equipment, variable interest
(approximately 8.5% at May 31,
1999), payable in monthly
installments of approximately
$12,250 through March 2006,
collateralized by a second
security interest on principally
all Company assets 769,660 --
------------------------------
2,893,445 1,828,729
Less current portion 329,201 59,007
------------------------------
$ 2,564,244 $ 1,769,722
==============================
[CAPTION]
Estimated annual principal maturities of long-term debt and
future minimum payments under capital lease obligations at
May 31, 1999 are as follows:
Capital Long-Term
Leases Debt
-------------- ---------------
2000 $ 147,048 $ 240,521
2001 147,048 247,266
2002 147,048 151,713
2003 147,048 1,484,285
2004 147,048 --
Thereafter 258,096 --
-------------- ---------------
Total 993,336 2,123,785
Less amount representing interest 223,676 --
--------------- ---------------
$ 769,660 $ 2,123,785
=============== ===============
42
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
NOTE 6. RELATED PARTIES
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:
1999 1998 1997
--------------------------------------
Laurence A. Speiser $ - $ 108,000 $ 134,317
Included in accounts receivable are amounts owed from an officer
of the Company of approximately $52,000 and $30,000 at May 31,
1999 and 1998, respectively.
In November 1996, the Company advanced to a former 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 enforced its rights under certain agreements, including
foreclosure of the Company's common stock pledged by the
Company's former principal stockholder, and cancellation of
certain stock options granted by the Company to the former
director. As a result of the enforcement, the Company received
19,293 shares of common stock from the trust of the Company's
former principal stockholder to satisfy the unpaid obligation of
the former director. The Company recorded the receipt of the
shares into treasury based on their market value.
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, with remaining lease terms of
greater than 1 year at May 31, 1999, are as follows:
2000 $ 222,423
2001 210,558
2002 66,796
2003 60,000
2004 60,000
Thereafter 110,000
------------
$ 729,777
============
The Company has a twelve year option to extend the lease at one
of its production facilities. The annual rent during the first 8
year term, which ends in April 2001, is $142,380. The rent
payments during the option period will increase 5% annually.
Rent expense totaled $306,517, $264,154 and $233,633 for the
fiscal years ended May 31, 1999, 1998 and 1997, respectively.
The Company is party to various claims and commitments arising in
the normal course of business. Management believes that these
matters are expected to be resolved or fulfilled with no material
impact on the Company's financial position, liquidity, or results
of operations.
43
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
NOTE 8. INCOME TAX MATTERS
The (expense) benefit for income taxes reflected in the
Consolidated Statements of Operations for the years ended May 31,
1999, 1998 and 1997 consisted of:
1999 1998 1997
----------------------------------------------
Current $ -- $ 678,805 $ (799,238)
Deferred 305,000 278,461 37,407
----------------------------------------------
$ 305,000 $ 966,266 $ (761,831)
==============================================
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, 1999, 1998 and 1997 is
as follows:
1999 1998 1997
-----------------------------------------
Computed expected income tax
(expense) benefit at 34% $335,344 $1,082,869 $(725,565)
Adjustments:
-----------
State taxes 11,250 32,503 (35,348)
Meals and entertainment (17,125) (22,987) (21,697)
Prior year items and other (24,469) (126,119) 20,779
-----------------------------------------
Income tax (expense) benefit $305,000 $966,266 $(761,831)
=========================================
The primary components of the deferred tax asset, the realization
of which is dependent upon future taxable income generated by the
Company, at May 31 were approximately as follows:
1999 1998
-------------------------
Operating loss carryforwards $300,000 $70,000
Inventory and bad debt reserves 225,000 130,000
Intangible assets 35,000 40,000
Other 8,000 23,000
-------------------------
$568,000 $263,000
=========================
44
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
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":
Dilutive
Stock
Basic Options Diluted
------------- ----------- ------------
For the year ended May 31, 1999
- -------------------------------
Net loss $(681,306) $(681,306)
Shares 3,468,427 -- 3,468,427
Per Share Amount $(.20) $(.20)
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
Dilutive stock options for the years ended May 31, 1999 (111,000)
and 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, 1999, 1998 and 1997, were 541,750, 4,000, and
197,500, 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 "Directors' Plan"). The
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 Directors' Plan provides that each
outside director, upon joining the Board of Directors,
will receive an option to purchase 3,000 shares of common
45
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
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 outside 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, 9 months after retirement or 2 years after death.
Options covering 7,000, 4,000 and 3,000 shares were granted to
outside directors during the years ended May 31, 1999, 1998 and
1997 at $8.50, $10.56 and $8.06, respectively.
The following is a summary of option activity for the 3 years
ended May 31, 1999:
Weighted
Options Shares Average
Available Under Exercise
for Grant Plan Price
-------------------------------------------
Outstanding at June 1, 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
Granted (112,000) 112,000 5.31
Canceled 313,200 (313,200) 9.16
Exercised 11,300 (11,300) 7.63
-------------------------------------------
Outstanding at May 31, 1999 422,250 652,750 $8.34
===========================================
1999 1998 1997
------ ------ ------
The weighted average fair value of options granted $2.46 $4.78 $4.27
46
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
The following table summarizes information concerning currently
outstanding and exercisable options:
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------------------
$ 5.00 to 8.25 323,750 7.93 $7.06 109,750 $7.96
$ 8.26 to 13.88 329,000 7.18 $9.62 206,750 $9.49
- ---------------------------------------------------------------------------------------
652,750 316,500
- ---------------------------------------------------------------------------------------
The Company accounts for these plans under APB Opinion No. 25,
under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with
SFAS No. 123, "Accounting for Stock Based Compensation", the
Company's net income (loss) and earnings (loss) per share would
have been reduced to the following pro forma amounts.
1999 1998 1997
-------------- ------------- -------------
Net income (loss): As reported: $(681,306) $(2,218,642) $1,372,183
Pro forma: $(1,123,435) $(2,820,169) 11,115
Earnings (loss) per share: As reported:
Basic $(.20) $(.65) $.41
Diluted $(.20) $(.65) $.40
Pro forma:
Basic $(.32) $(.82) $.00
Diluted $(.32) $(.82) $.00
Pro forma earnings (loss) reflect only options granted from
fiscal 1997 to fiscal 1999. 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 1997
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
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
As of May 31, 1999 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 AND INVENTORY VALUATION
The Company records, based on periodic reviews of its trade
receivables and inventories, allowances for estimated
uncollectible trade accounts receivable and slow-moving or
obsolete inventories. A summary of provisions for estimated bad
debts and obsolete or slow-moving inventories and the related
charges to the allowances for doubtful accounts and inventory
valuation reserves are as follows:
[CAPTION]
ACCOUNTS RECEIVABLE:
BEGINNING CHARGE-OFFS, END
OF YEAR NET OF OF YEAR
Years Ended May 31, BALANCE PROVISIONS RECOVERIES BALANCE
-------------------------------------------------------------------------------------
1999 $ 374,994 $ 130,000 $ 104,994 $ 400,000
============================================================
1998 $ 269,140 $ 213,938 $ 108,084 $ 374,994
============================================================
1997 $ 281,712 $ 96,000 $ 108,572 $ 269,140
============================================================
INVENTORIES:
BEGINNING CHARGE-OFFS/ END
OF YEAR RECLASSI- OF YEAR
Years Ended May 31, BALANCE PROVISIONS FICATIONS BALANCE
- -----------------------------------------------------------------------------------------
1999 $ 200,000 $ 40,000 $ (85,000) $ 325,000
============================================================
1998 $ - $ 200,000 $ - $ 200,000
============================================================
1997 $ - $ - $ - $ -
============================================================
NOTE 11. BUSINESS SEGMENTS
The FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" effective for financial
statements for fiscal years beginning after December 1997. This
statement, which supersedes SFAS No. 14, establishes standards
for reporting information about operating segments in annual
financial statements. The statement requires public business
enterprises to report selected reporting information about
operating segments in annual financial statements and requires
public business enterprises to report selected information about
operating segments in interim financial reports. The Company's
reportable segments have been identified as follows:
48
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
* Sale of Gaming Supply Products to New Casino Openings --
Significant sales of products to casinos which opened
during the fiscal year, the majority of which sales are
not replaced on a regular, recurring basis.
* Sale of Gaming Supply Products to Established Casinos --
Sales of products to casino customers which had opened
prior to the fiscal year and are principally considered
on-going, recurring sales.
The accounting policies of the segments are the same as those
described in the "Summary of Significant Accounting Policies."
The Company evaluates the performance of each segment by
allocating certain overhead expenses to the segments based on
management's estimates. The following information represents the
disclosure requirements and information management utilizes in
measuring the profit or loss of each significant segment:
The table below presents information about the reported operating
income of the Company for the years ended May 31, 1999, 1998 and
1997. Asset information by reportable segment is not reported
since no segregation of assets exists between segments.
Product Sales -- Product Sales --
New Casino Openings Established Casinos Consolidated Totals
--------------------------------------------------------------------
1999
- ----
Revenues $2,296,459 $21,617,949 $23,914,408
--------------------------------------------------------------------
Operating income (loss) $(138,701) $(1,020,113) $(1,158,814)
--------------------------------------------------------------------
1998
- ----
Revenues $3,185,377 $22,700,250 $25,885,627
--------------------------------------------------------------------
Operating income (loss) $(229,489) $(2,974,217) $(3,203,706)
--------------------------------------------------------------------
1997
- ----
Revenues $6,010,106 $18,903,600 $24,913,706
--------------------------------------------------------------------
Operating income (loss) $1,258,323 $463,889 $1,722,212
--------------------------------------------------------------------
Corporate expenses and certain overhead expenses have been
allocated to each segment based on management's estimate of the
segment's utilization of the resources or expenses. During the
fiscal years ended May 31, 1999, 1998 and 1997, management
estimated gross margins of the reportable segments to be equal.
However, management's estimation used in the operating income
(loss) for the segments' overhead and corporate expenses was 90%
from product sales to established casinos and 10% from product
sales to new casino openings.
49
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
The Company's long-lived assets are domiciled in the United
States and Mexico. The table below presents information
regarding the long-lived assets as of May 31:
MEXICO: 1999 1998 1997
---------------------------------------------------
Property and equipment, cost $9,248,820 $7,656,140 $5,050,289
Less accumulated depreciation 2,887,990 2,169,682 1,597,696
---------------------------------------------------
Net property and equipment $6,360,830 $5,486,458 $3,452,593
UNITED STATES:
Property and equipment, cost $4,941,376 $6,111,713 $5,944,260
Less accumulated depreciation 1,885,550 2,492,626 2,146,823
---------------------------------------------------
Net property and equipment $3,055,826 $3,619,087 $3,797,437
---------------------------------------------------
$9,416,656 $9,105,545 $7,250,030
===================================================
50
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 November 9, 1999.
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 November 9,
1999.
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 November 9,
1999.
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 November 9, 1999.
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, 1999 and 1998.
Consolidated Statements of Operations for the Years
Ended May 31, 1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity for
the Years Ended May 31, 1999, 1998 and 1997.
51
Consolidated Statements of Cash Flows for the Years
Ended May 31, 1999, 1998 and 1997.
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.
52
10.04 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.
10.05 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., incorporated by reference from
the Company's quarterly report on Form 10-Q for
the quarter ended November 30, 1998.
21.01 List of subsidiaries of Paul-Son Gaming
Corporation.
23.01 Consent of Deloitte & Touche LLP.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PAUL-SON GAMING CORPORATION
August 25, 1999 By /s/ Eric P. Endy
-----------------------------------------
Eric P. Endy
Chairman of the Board, President and
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 25, 1999 By /s/ Eric P. Endy
-----------------------------------------
Eric P. Endy
Chairman of the Board, President and
Chief Executive Officer
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
By /s/ Richard W. Scott
-----------------------------------------
Richard W. Scott, Director
54
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 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,
55
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.
10.05 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., incorporated by reference from
the Company's quarterly report on Form 10-Q for
the quarter ended November 30, 1998.
21.01 List of subsidiaries of Paul-Son Gaming 57
Corporation.
23.01 Consent of Deloitte & Touche LLP. 59
27.01 Financial Data Schedule. 61
56