Gaming Partners International 10-K 2007
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
GAMING PARTNERS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
1700 South Industrial Road, Las Vegas, Nevada 89102
(Address of principal executive offices)
Registrants telephone number, including area code: (702) 384-2425
Registrants website: www.gpigaming.com
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. o Yes x No
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 o 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 registrants 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (check one): Large accelerated Filer o Accelerated Filer o Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No
The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2006, based on the closing price as reported on the NASDAQ National Market of $24.40 per share: $71,015,736.
The number of shares outstanding of each of the registrants classes of common stock, as of May 1, 2007 was 8,103,401 shares of Common Stock.
Documents Incorporated by Reference:
The following Business section contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors. See Item 1A, Risk Factors.
Effective September 1, 2004, Paul-Son Gaming Corporation, a Nevada corporation, completed its name change to Gaming Partners International Corporation (GPIC). GPIC and each of its subsidiaries are sometimes collectively referred to herein as the Company, us, we or our. The name change was approved by a vote of stockholders at the Companys annual meeting held on May 26, 2004. The Companys established brand names such as Paulson®, Bourgogne et GrassetÒ, or B&G, Bud JonesÒ, and T-K®, remain unchanged. GPICs subsidiary, Paul-Son Gaming Supplies, Inc., changed its name to Gaming Partners International USA, Inc. (GPI USA). GPICs subsidiary, Etablissements Bourgogne et Grasset S.A., changed its name to Gaming Partners International SAS (GPI SAS). GPI USAs subsidiary, Paul-Son Mexicana, S.A. de C.V., changed its name, effective as of January 22, 2005, to GPI Mexicana S.A. de C.V. (GPI Mexicana).
On September 12, 2002, the businesses of GPIC, GPI SAS and GPI SAS then wholly-owned subsidiary, The Bud Jones Company, Inc. (Bud Jones) were combined, with GPI SAS and Bud Jones becoming wholly-owned subsidiaries of GPIC, or the Combination. The Combination was accounted for as a purchase transaction for financial accounting purposes. Because the former GPI SAS stockholders owned a majority of the outstanding GPIC common stock as a result of the Combination, the Combination was accounted for as a reverse acquisition in which GPI SAS was the purchaser of GPIC. On December 31, 2002, Bud Jones merged into GPI USA, which was a wholly-owned subsidiary of GPIC, and GPI USA was the surviving entity. Bud Jones was a gaming supply manufacturing company, which was also headquartered in Las Vegas. Both former operations (GPI USA and Bud Jones) were consolidated into one facility at the Companys headquarters in Las Vegas, Nevada with the new name of GPI USA. (See Part IIItem 8. Financial Statements and Supplementary DataNotes to Consolidated Financial StatementsNote 1.)
GPI USA, formerly Paul-Son Gaming Supplies, Inc., was founded in 1963 by our former Chairman, Paul S. Endy, Jr., and initially manufactured and sold dice to casinos in Las Vegas. The former Bud Jones Company was founded in 1965 by Bud Jones and this entity eventually merged into GPI USA. GPI SAS, formerly Bourgogne et Grasset, was formed by Mr. Bourgogne and Mr. Grasset in 1923 and became operational in 1925 in Beaune, France.
We believe we are one of the leading manufacturers and suppliers of casino table game equipment in the world. Our business activities include the manufacture and/or supply of gaming chips, table layouts, playing cards, dice, gaming furniture, roulette wheels 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.
We are headquartered in Las Vegas, Nevada with manufacturing facilities located in Las Vegas, Nevada; San Luis Rio Colorado, Mexico; and Beaune, France. Our sales offices are in Las Vegas, Nevada; Atlantic City, New Jersey; and Gulfport, Mississippi for the United States, and Beaune, France for the remainder of the world. Through our GPI USA subsidiary, we sell our casino products manufactured in North America to licensed casinos primarily throughout the United States and Canada. Through our GPI SAS subsidiary, we sell our European-manufactured casino products and some North American products to licensed casinos internationally primarily in countries other than the United States. Our revenues are derived primarily from the sale of casino table game products to casinos throughout the world. Most of our
products are sold directly to end-users. In some regions of the world, however, we sell through distributors. We also sell our non-casino poker chips to a wholesaler in the United States.
We manufacture products to meet particular customer and industry specifications, which may include a wide range of shapes and sizes, varied color schemes and other graphics, and numerous security and anti-counterfeit features. The useful lives of our 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, our primary business is the ongoing replacement sale of these products and providing initial products to new casinos. When a new casino opens, we strive to supply most of the products required to operate the casinos table games. 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 our primary customer base.
We operate in one operating segmentcasino game equipment products in multi-geographic areas. (See Part IIItem 8. Financial Statements and Supplementary DataNotes to Consolidated Financial StatementsNote 14.)
We design and manufacture gaming chips, including casino chips, plaques and jetons (the European equivalent of casino chips) to meet a variety of customer preferences and specifications, including size, weight, ability to stack, ease of handling, texture, color, graphics, durability, security and anti-counterfeit features. Because casino chips, jetons and plaques, like real currency, are subject to counterfeiting, we incorporate a variety of custom security and anti-counterfeit features into each chip. Our most sophisticated anti-counterfeiting feature is a radio frequency identification device, or RFID, which is a microchip that can be embedded in our gaming chips making them extremely counterfeit resistant.
A casino will generally order all of its gaming chips, including replacement chips after wear and usage, from a single supplier. Accordingly, we strive to become the original chip supplier to a casino upon its opening. A new casino order will typically include at least five to seven distinct chip denominations, colors and styles, ranging in denominations from $0.50 to in excess of $1 million. Our selling price is variable, based on the customization, quantities, design and security features, with a price range generally between $0.75 and $2.50 per chip in the United States. A typical Paulson® brand clay chip with a microchip will sell for approximately $1.90 or $2.50 per chip depending on the RFID frequency. Given this relatively low price and a gaming chips expected lifespan of several years, we believe that competition is generally based upon factors other than price. In 2006, we sold and manufactured approximately 25 million gaming chips, including casino gaming chips, plaques and jetons.
Gaming chips can be divided into three basic families: (a) European-style jetons and plaques; (b) American-style casino chips; and (c) commemorative chips. Jetons, plaques and all casino chips can also be manufactured with an embedded RFID microchip. Casino chips accounted for approximately 72% of total sales in 2006.
European-style Jetons and Plaques
Jetons and plaques are European-style casino chips. Our jetons and plaques are manufactured by GPI SAS at our facility in France. Jetons are circular with standard diameters in 13 different sizes, ranging from 32 mm to 60 mm. Plaques are rectangular, square or oval with standard sizes ranging from 30 mm x 30 mm to 151 mm x 105 mm. Jetons and plaques are used mainly for traditional European games and also
extensively in Asian countries. Jetons and plaques are made of laminated cellulose acetate with a very large range of colors, shapes and security and anti-counterfeit components, such as, UV pigment, number serialization, laser pigment or Laser Lock, gold lace material and RFID technology. GPI SAS created its original product line in 1925 and has held a leading position in this market since that time. Our production capacity in France for European-style jetons and plaques is approximately 5 to 8 million units on a three shift basis.
American-style Casino Chips
Casino chips are used worldwide for games originating in the United States. Originally, casino chips in the United States were made of clay and called clay chips. Clay was replaced many years ago by plastic materials. There are currently three main technologies used to produce these types of chips: injection molding, sublimation and compression molding. We produce casino chips using all three of these methods. GPI USA manufactures our American-style casino chips under our brand names, Paulson® and Bud JonesÒ, at our facilities in San Luis Rio Colorado, Mexico and in Las Vegas, Nevada. GPI SAS also manufactures American-style casino chips in Beaune, France.
· Injection Molded Chips. Plastic injection molded chips were created in the late 1960s under the Bud Jones brand, manufactured in the United States. Such chips are made with several injection-molded colors, typically with a central metal piece for the weight and printed decals. There are several standard diameters and a wide range of design and color combinations. Various security features are used to make the chips counterfeit resistant, including UV pigments, laser pigments, holograms and RFID technology. The Bud Jones brand offers a wide range of such chips, made of acrylic with very vivid colors and with ground and smooth surface. Since 1990, the B&G brand, which is manufactured in France, has developed a full line of injection molded chips with designs different from the Bud Jones brand and using a different type of plastic material with less vivid colors but requiring no grinding and allowing a rougher surface. A particular line of injection molded gaming chips specifically designed and sold for optical reading identification are also manufactured by GPI SAS. GPI USAs and GPI SAS lines of injection-molded chips allow a very good coverage of most casinos requirements, which vary greatly around the world. Annual production capacity for injection molded chips in the United States and France is approximately 15 million, considering the use of 2-3 shifts.
· Sublimation Chips. Sublimation chips are made of one disc of white plastic material (usually injection molded). The decor of these chips is traditionally transferred from printed paper to the plastic material by pressing and heating the printed paper onto the plastic disc. The printed colors sublimate and go from the paper into the plastic material. In 1996, GPI SAS created a new way of manufacturing this type of casino chip by using a printing technology called pad printing. This technology permits simultaneous printing on the face and the edge of the chip. GPI SAS holds several patents and patent applications for this technology, and refers to this casino chip as Full Face. Security features for sublimation chips include UV pigments and laser pigments. Annual production capacity at GPI SAS is approximately two million chips, considering utilizing three shifts.
· Compression Molded Chips. Compression molded casino chips are manufactured from a proprietary formulation of more than 10 raw materials using a compression molding process. Printed decals or inlays are incorporated in the chips during the compression steps. Customized designs, security and identifying features are incorporated into the chips. GPI USA holds a leading market share in compression molded chips, which are similar to the original clay chips of the past. They have a unique feel and easy handling and are often referred to as clay chips. Compression molded chips are manufactured under the Paulson® brand at its GPI Mexicana facilities in San Luis Rio Colorado, Mexico. Various security features are used to make the chips more
counterfeit resistant, including UV pigments, Laser Lock, alpha-dot, customized rim and RFID technology. Our annual production capacity at our Mexico facilities is approximately 20 million compression molded chips (based on a single shift and increased labor availability). We believe that given our current anticipated production level of compression molded chips per year, there will be sufficient manufacturing capacity to meet potential increases in future demand. In 2006, GPI Mexicana produced approximately 11 million compression molded chips.
Commemorative Gaming Chips
Since 1994, GPIC has marketed gaming chips that commemorate certain types of special events such as title boxing matches, significant anniversaries and premier entertainment events. Casino patrons often retain commemorative chips as souvenirs. Casinos benefit to the extent that gaming chips purchased are not redeemed, thereby resulting in added cash flow to the casino.
Gaming Chips with RFID Microchips and Reading Equipment
Need for RFID
Gaming chips are the principal currency of each casino, and each casino has its own unique gaming chips or currency. A gaming chip that appears or feels or even sounds slightly different than the others can warrant review by the casino personnel. There are several possible security and anti-counterfeit features that can be incorporated into the chip material itself and/or in the chip appearance.
The most sophisticated anti-counterfeiting devices are the microchips or RFID, which can be embedded in gaming chips without modifying the appearance or handling characteristics of the chips. These are not only high quality gaming chips, but they are also reliable carriers of the data needed by the casinos to efficiently and securely manage their table game operations.
A sophisticated RFID microchip transponder is embedded in each gaming chip. Read/write devices communicate quickly and accurately with a large number of these RFID embedded gaming chips without human contact. The authenticity and denomination of each gaming chip is established, and then the data is transferred to the casino information systems.
The RFID embedded gaming chips can be read with 100% accuracy, either one at a time or in large quantities, with the same efficiency whether in stacks, boxes, trays, cabinets or on the tables. This increases the security of the chip production, transportation and utilization.
Traditional jetons, plaques and casino chips could not easily and precisely be accounted for by the casinos and the games that call for them, thus the tables could not be managed by casinos as efficiently as slot machines. Casinos have a need for more streamlined and automated accounting transactions between the pit and cage operations, thus the RFID solution.
Bourgogne & Grasset (now GPI SAS) started making RFID chips before 1994. Some 10 years ago GPIC and Mikohn Gaming Corporation, now Progressive Gaming International Corporation, started working together and selected Philips 125 KHz or low frequency RFID technology as it was particularly well adapted to the gaming chip security and chip tracking applications. PGIC developed players tracking applications with this technology. GPIC acquired the rights to the reader technology from Philips in 2001 and very significantly developed the reading capabilities of this reader. Ten years ago GPIC readers could read only stacks of 10 chips, now several hundred chips in stacks of 20 can be read in a matter of a few seconds and new improvements keep coming. The 125 KHz Philips RFID microchip used by GPIC is now in its third generation and a fourth generation is planned.
Over the years RFID chips capabilities went up and costs came down. The first B&G gaming chips with RFID technology that GPIC sold in 1996, were priced above $6.00, more than $4.50 above the regular price of standard gaming chips. Today GPIC charges substantially less for an embedded 125 KHz RFID microchip transponder in a Paulson® gaming chip, programming and royalty included. In parallel, the prices of the readers went down while their capabilities increased.
GPIC offers a full line of standard or customized RFID readers such as cashiers desk, table to authenticator, chip tray reader, chip bank reader and vault reader.
Over the last few years, GPIC has sold several million RFID chips and hundreds of readers mainly for chip tracking and chip security to casinos all over the world, including the United States. GPIC holds several international patents related to the embedding process of an RFID microchip into a gaming chip, a jeton or a plaque and an exclusive license on two patents owned by IGT to make and sell in the United States RFID chips and readers for chip tracking. Our patents and exclusive license apply to all RFID frequencies.
In 2003, PGIC started developing new player systems and other readers based on the higher frequency 13.56 MHz RFID microchips and readers developed by an Australian company called Magellan Technology Pty. Ltd (Magellan). PGIC has an exclusive agreement with Magellan for all gaming applications of these 13.56 MHz RFID microchips and readers. As casinos have expressed an interest in PGICs project, we developed efficient ways to embed this 13.56 MHz RFID tag in all of our well known and widely accepted B&G and Paulson® gaming chips including B&G jetons and plaques. In January 2006, PGIC and GPIC signed an agreement by which we have the right to buy the 13.56 MHz RFID tags to make casino chips, exclusive for the United States market and non-exclusive for the rest of the world. Casinos now have the choice between the two RFID technologies: 125 KHz from Phillips and 13.56 MHz from Magellan. Other RFID technologies are being researched.
The RFID gaming chips and readers significantly increase the casino protection against counterfeit gaming chips. In addition, the RFID gaming chips and readers, with appropriate software programs, open the door to significant increases in efficiency and cost savings. Chips can be tracked and accounted for automatically and reliably everywhere in the casino. With appropriate systems developed and sold by other companies, players can also be tracked for more objective comping. As a result of RFID embedded gaming chips, readers and computer systems, the necessary tools are now available for the casinos to track their gaming chips and players and to manage their tables as efficiently as their slots.
We manufacture our dice at our GPI Mexicana facilities, from cellulose acetate specifically formulated to provide the required clarity, hardness and dimensional stability. All dice are sold directly by GPI USA in North America and the Caribbean Islands. GPI SAS distributes dice to the other parts of the world. We offer a variety of spot designs, which are inserted in the body of the dice and machined flat to the surface. We offer two different finishes and up to two monograms on the dice. A casino may request the imprinting of its name and logo (in a variety and combination of colors), the insertion of a hidden security key, a special reverse spot, the addition of a security glow spot, the use of Laser Lock, the serialization of the dice, or all, or a combination of, the above.
All of our brands of dice are manufactured with a high degree of accuracy in conformity with the strictest standards of gaming regulations. Generally, a stick of dice (two and one-half pair) does not remain in play for more than eight hours on a given table, in a busy casino.
The typical sales price of casino dice currently ranges between approximately $2.50 and $3.50 per pair. We currently have the capacity to produce approximately one million pairs of dice per year (based upon
one production shift) in Mexico. In 2006, we produced approximately 780,000 pairs of dice. We believe our capacity for dice production is sufficient to accommodate an increase in production requirements.
Every gaming table is covered with a layout printed with patterns particular to each specific game, as well as multi-colored logos and other markings according to individual casino preferences. GPI USA has developed a comprehensive range of different quality layouts and various printing processes. GPI USA manufactures PaulsonÒ felt and synthetic layouts made of Paul-Son FXÒ material for which GPI USA holds an exclusivity of supply in the United States, as well as full graphic layouts. We have a creative art department that can design any specific layout to meet the casino needs.
We believe we are a leading manufacturer of layouts in the United States, utilizing high quality cloths, enhanced graphics, and proprietary dye formulations which we believe result in the widest variety of customized colors. Since 2000, when we acquired certain patent rights covering methodology and processes relating to the screening of inks on synthetic cloth for casino tabletop layouts, we have also offered synthetic layouts in a wide variety of colors and customer preferences. The patent rights which expire in 20 years enable us to provide a full line of table game supplies and equipment.
We typically install layouts on new gaming tables prior to delivery to a casino. The table layouts are replaced by casinos on a regular basis, in order to maintain their appearance, which is generally within 60 to 150 days. Layouts typically sell in a price range of approximately $100 to $300 in the United States, depending on the type of table, the complexity of the patterns and the variety and difficulty of color combinations.
We primarily manufacture our layouts at our Mexico facilities and occasionally, in Las Vegas; we also may sell a small quantity of full graphic sublimation layouts using an outside vendor. Our layout production capacity is approximately 20,000 felt layouts and approximately 25,000 synthetic layouts per year. In fiscal 2006, we produced approximately 38,000 layouts, of which approximately 12,000 were felt and 26,000 were synthetic. We believe the capacity of our layout production facilities in Mexico will allow us to increase layout production as needed.
We manufacture and sell our own line of paper casino playing cards under the PaulsonÒ brand. A deck of cards typically sells to casinos within a price range of approximately $0.80 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. Our cards are compatible with all card shufflers.
Given our relatively low market share of the playing cards market, our established distribution system for table game supplies and our low cost manufacturing facilities, we believe that playing cards represent a reasonable growth opportunity for us.
We produce all of our playing cards at our GPI Mexicana facilities. We purchased additional equipment in fiscal 2004 to increase our production capacity to satisfy the marketplace. The appropriate marketing approach will permit management to offer better service to selected customers. In 2006, the Company produced approximately 4.7 million decks of playing cards.
Traditionally, the California card room market prefers plastic playing cards while the traditional hotel-casino markets generally prefer paper cards. Our capacity, assuming a single shift, is approximately 8 million decks per year.
GPI SAS manufactures American and French roulette wheels in Beaune, France and sells them primarily in Europe and in certain United States and Canadian-based jurisdictions where GPI SAS is licensed (such as New Jersey, Louisiana, Iowa, Washington State and Mississippi). Production in France consists of designing and assembling the different parts produced by very specialized sub-contractors. In 2006, GPI SAS produced and sold approximately 70 roulette wheels and in 2005 approximately 100 roulette wheels mostly in Europe and in the United States. Our annual capacity is approximately 300 wheels.
Until the Combination, the two former United States companies, Paul-Son and Bud Jones, manufactured roulette wheels and Big Six wheels in their plants in Las Vegas. In October 2000 and September 2002, respectively, the former Paul-Son and the former Bud Jones administratively and voluntarily surrendered their Nevada gaming manufacturer and distributor licenses due to excessive license costs, and were no longer permitted to assemble or manufacture wheels in Nevada or sell wheels from Nevada. On November 18, 2004, the Nevada Gaming Commission granted GPI SAS and GPI USA approval, by way of transactional waivers, to manufacture and distribute roulette wheels to Nevada casinos. Effective August 30, 2006, the transactional waivers were expanded to permit GPI USA to sell GPI SAS roulette wheels outside the State of Nevada. GPI USA sold 6 roulette wheels in 2006.
We sell a variety of casino gaming furniture. Tables range in price approximately between $1,500 and $3,000 for a blackjack table to approximately $3,000 to $5,000 for a roulette table (excluding the roulette wheel) and up to approximately $5,000 to $8,000 for a craps table. We vigorously pursue gaming table sales because the sale of a gaming table will generally bolster our ability to sell gaming chips and consumable products such as layouts, dice, cards, and other accessories to the table purchasers. Prior to 2000, we purchased our gaming tables from a third party. Subsequently we began manufacturing our own table game furniture components in our Mexico facility. Tables are assembled by us in Mexico and completed by adding the layout, drop boxes, trays and other table accessories in Las Vegas. Table game seating is produced by nonaffiliated manufacturers and distributed by us. We have seen a growth in our sales of gaming furniture due to the reopening of casinos in the south (Mississippi and Louisiana) and the remodeling of several high limit rooms. In 2006, GPI Mexicana produced approximately 2,500 tables; our current capacity is up to 3,500 tables. GPI SAS also manufactures a variety of casino gaming furniture, including tables (blackjack, roulette, etc.) in Beaune, France.
Table Accessories and Other Products
In order to offer our customers a full product line, we sell a number of ancillary casino table game products, which we typically do not manufacture. We have expanded our manufacturing of certain plastic products, including dealing shoes in our GPI Mexicana facility. Ancillary products 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. In 2006, GPI Mexicana produced a large number of ancillary products that were sold in conjunction with our gaming furniture.
We also sell an air ventilation device specifically for gaming tables called the Air-RailÒ System. This ventilation system creates a positive flow of air at the gaming table, which pushes smoke away from the dealer and assists nonsmokers in contending with secondhand smoke. Small air vent devices secured underneath the table draw smoke from the surface and recycle it, dispensing the air outward where the casinos primary ventilation systems can distribute it. By filtering and dispersing the smoke-filled air, the
Air-RailÒ System makes the casinos primary air circulation systems perform more efficiently and improves the comfort of the nonsmoking casino dealers and patrons.
We generally distribute our products in North America and the Caribbean Islands through our four-person sales force, which operates out of regional offices in Las Vegas, Nevada; Atlantic City, New Jersey; and Gulfport, Mississippi. We generally distribute our products in the international market through our four-person sales force, which operates out of our Beaune, France office.
We believe that the long-standing customer relationships, which have been developed over the years by our individual sales representatives, as well as our reputation for quality, reliability and security features, are key factors upon which we successfully compete in the market place. Experience, production, flexibility, service and a wide range of products are the keys to selling customized products and position us as the casinos partner for table operations. When direct selling is not feasible because of local conditions, we may enter into agreements with carefully selected local distributors. But, even in this case, we always maintain direct contact with the end customers.
We place advertising in trade publications and participate in major casino industry trade shows. We keep abreast of new casino openings through personal contact with casino management, legislative and trade publications and wire service press releases. When new casino projects are identified, our representatives make personal contact with appropriate officers and/or purchasing agents in order to solicit the sale of our products to such potential new customers.
Our experience has been that once a casino buys from a table game supplier, it tends to purchase replacement products from the same supplier, provided that the quality, service and competitive pricing on the products are maintained. As a result, our sales efforts are primarily focused on selling and promoting a wide range of table gaming products to casinos while they are in the development and licensing stage. By thereafter maintaining a frequent contact program, we seek to realize a steadily increasing base of recurring sales for our consumable products such as layouts, dice and cards, while capturing incremental sales to new casinos.
We maintain good relationships with our suppliers and have, where possible, diversified our supplier base so as to avoid a disruption of supply. However, some key raw materials for our principal products have unique suppliers. In most other cases, our raw materials are staple goods, such as paper, plastic, wood, felt and synthetic fabric, which are readily available from several suppliers. We believe that our practice of purchasing from diversified sources minimizes the risk of interrupting the supply of raw materials.
Our backlog of production orders amounted to approximately $3.9 million for our United States operations and $1.6 million for our France operations as of December 31, 2006. At December 31, 2005, our backlog was approximately $4.5 million for our United States operations and $21.2 million for our France operations, a result of large pending orders for new casino openings in 2006; such orders have now been filled. We believe that all of our backlog will be filled in 2007.
There are a number of companies that compete with us in the sale of each of our product lines:
Gaming Chips The gaming chip product line has in recent years become an increasingly competitive area of the gaming supply business. Currently, our major competitors and their respective locations are Chipco International and The United States Playing Card Company in the United States, Abbiati Casino Equipment in Italy, Dolphin Products Pty Ltd. in Australia, and Matsui Gaming Machine Co., Ltd. in Japan. We believe key competitive factors for gaming chip sales are: well established product and process security, respect of players and dealers habits, attractiveness, durability, quality of service and price.
Table Layouts Our primary competitors for casino table layouts are Midwest Game Supply Co. and Gemaco Playing Card Co. in the United States, and TCS/John Huxley in the United Kingdom. We believe the key competitive factors for table layout sales are cloth quality, durability, printing processes and price.
Playing Card Our major competitors in the domestic playing card market are The United States Playing Card Company and Gemaco Playing Card Co. Our major competitors internationally are Angel Co., Ltd. in Japan, primarily servicing the Asian market, and Cartamundi in Belgium, primarily servicing the European market. We believe the primary competitive factors for playing cards are price, intrinsic characteristics (snap memory, ease of handling, etc.), security, quality control, brand name identification, process security and reputation.
Gaming Furniture Our principal competitors for casino gaming furniture are TCS/John Huxley in the United Kingdom and Abbiati Casino Equipment in Italy and smaller regional wood shops in certain geographic areas. Competition is based on product ranges, quality service, industry know-how, and price.
Dice Our principal competitor for domestic casino dice sales is Midwest Game Supply Co. and The United States Playing Card Company. There is no significant market internationally for casino dice. We believe the primary competitive factors for dice sales are quality of the product and services 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 Our principal competitors for distributing table accessories and other products, which include drop boxes, dealing shoes, chip trays and chip bank covers, foot rails are several local vendors. We believe that key competitive factors for these products are the ability to be a single source supplier, service, convenient locations, and product quality.
We own a portfolio of trademarks, copyrights, trade secrets and patents that provide us with a competitive advantage, fostering future profitability and growth. We own United States federal trademark registrations (®) for the following marks:
We own common law rights in these trademarks ():
We Make the Money the World Plays With
Casino Currency Control
In addition we have international protection for many of our trademarks.
We own numerous United States and international patents. We also retain an exclusive license to manufacture and sell gaming chips with embedded RFID microchips and RFID readers for chip tracking and accounting in the United States until 2015. We believe that our trademarks, logos and patent rights are valuable to the operation of our Company and are important to our marketing strategy. Our policy is to actively pursue and maintain registration of our trademarks and logos where our business strategy requires us to do so and to oppose vigorously any infringement or dilution of our trademarks, logos or patent rights. However, we cannot predict whether steps taken by us to protect our proprietary rights will be adequate to prevent misappropriation of these rights or the use by others. It may be difficult for us to prevent others from copying elements of our concepts, or our trade secrets, and any litigation to enforce our rights will likely involve significant costs.
We believe we are in compliance with international, federal, state and local laws and regulations that have been enacted or adopted relating to the protection of the environment. The liability for environmental remediation or costs will be accrued by us when or if it is considered probable and the costs can be reasonably estimated.
On or about August 25, 2006, the Company received a 60-day notice from the Center for Environmental Health (CEH), a private environmental advocacy firm, stating that CEH intended to bring suit against the Company in California for alleged failure to provide a warning required under the California Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65 or the Act). Previously a number of card room operators throughout California received similar 60-day notice letters from CEH alleging they failed to meet warning requirements contained in the Act. We have sold gaming chips to some of these card room operators. The Act requires, among other things, that certain businesses in California must provide a clear and reasonable warning if they expose persons to chemical listed by the State of California as a carcinogen and/or reproductive toxicant, unless the business can demonstrate the exposure is below a No Significant Risk Level for that chemical. Failure to provide the warning can be enforced by the government or private citizens in an action for civil penalties and injunctive relief. In this case, the environmental group alleges that gaming chips contain lead and/or lead compounds and that no warning was given by the card room operators to its employees or customers. We have engaged outside counsel who is pursuing discussions with counsel for CEH. We have entered into a joint defense agreement with several of the card room operators and a tolling agreement with CEH in order to continue discussions. No litigation has been commenced in the matter to date. In the meantime, we are now providing a Proposition 65 warning on all gaming chips sold in the State of California. We are pursuing rigorous efforts to reformulate our gaming chips to eliminate the need to provide such warnings in connection with future chip sales. While the maximum amount of statutory penalties for failing to provide a required Proposition 65 warning are substantial, based on our preliminary analysis, we do not believe that our liability, if any, in this matter will have a material adverse effect on us or our business, operations or financial position.
At March 31, 2007, we employed approximately 760 people. Approximately 459 of the employees were located at our Mexico facilities, 203 employees were located in our Beaune, France facility with the remainder located primarily in Las Vegas, Nevada and Atlantic City, New Jersey. None of our employees are covered by collective bargaining agreements and we believe that our relations with our employees are good.
General Gaming Regulation
The gaming operations of each of our subsidiaries are subject to extensive regulation, and each of our subsidiaries hold registrations, approvals, gaming licenses or permits in each jurisdiction in which it operates gaming activities. A list of the geographical locations of the jurisdictions in which we, through our subsidiaries, are subject to licensing and/or regulatory control of the gaming authorities is set forth below.
While the regulatory requirements vary from jurisdiction to jurisdiction, most require licenses, permits, findings of suitability, documentation of qualification including evidence of financial stability and/or other required approvals for companies who manufacture and distribute gaming equipment, as well as the individual suitability of officers, directors, major stockholders and key employees. Under the various gaming regulations, key personnel generally include the current and/or proposed corporate officers and directors of a corporation and its subsidiaries. Laws of the various gaming regulatory agencies are generally intended to protect the public and ensure that gaming related activity is conducted honestly, competitively, and free of corruption.
Various gaming regulatory agencies have issued licenses allowing our wholly owned subsidiaries to manufacture and/or distribute our products. Our subsidiaries and their key personnel, as applicable, have obtained or applied for all government licenses, permits, registrations, findings of suitability and approvals necessary allowing for the manufacture and distribution of gaming supplies and equipment in the jurisdictions where it is required. These companies have never been denied a gaming related license, nor have any licenses been suspended or revoked.
Nevada Gaming Regulation
The manufacture and distribution of gaming equipment in Nevada are subject to extensive state and local regulation. Our operations were subject to the licensing and regulatory control of the Nevada Gaming Commission, the Nevada State Gaming Control Board and various local regulatory agencies, or the Nevada gaming authorities, due to our prior manufacture of roulette wheels and Big Six wheels, which are considered gaming devices.
The complex regulatory scheme governing the licensing of gaming device manufacturers and distributors in Nevada imposed administrative burdens which far exceed those of most other gaming jurisdictions when applied to our new combined corporate structure and our foreign stockholders. From the time of the Combination and up to mid-2004, in the opinion of our management, the anticipated time and expense of a foreign investigation that would be conducted by the Nevada gaming authorities would far outweigh any benefit to be gained by maintaining licensure in Nevada. Specifically, based upon an analysis of three factors: the potential market for our roulette and Big Six wheels in Nevada; the benefits gained through our choice of corporate structure; and the administrative costs associated with compliance with certain requirements of the Nevada gaming authorities, we concluded that the costs of maintaining licensure in Nevada upon the completion of the Combination significantly exceeded our potential profits. We thus administratively and voluntarily surrendered the Nevada gaming licenses of the former Paul-Son Gaming Supplies, Inc. upon the completion of the Combination, a procedure that allowed us to forego licensure in Nevada without impacting our licensure in other gaming jurisdictions or our ability to continue to manufacture roulette wheels and Big Six wheels in and for other jurisdictions. The above license surrender did not impact the manufacture or sale of our other products in Nevada.
In mid-2004, however, with the construction of new casino properties in Nevada on the horizon, the Company applied to the Nevada gaming authorities for certain exemptions from provisions of the Nevada gaming laws and for the limited licensure of GPI USA and GPI SAS to manufacture and distribute roulette wheels in Nevada. Company research showed that no current licensed manufacturers or distributors in Nevada were actively in the business of manufacturing or selling roulette wheels and it was anticipated that Nevada casino operators were in need of a source for such products.
By Nevada State Gaming Commission Order entered November 18, 2004, GPIC was exempted from registration as a publicly traded corporation and GPI USA and GPI SAS were each licensed as manufacturers and distributors strictly limited to the manufacture, distribution and service of roulette wheels in Nevada, and subject to administrative approval prior to the distribution of any roulette wheel and further subject to specified conditions set forth in the Order, including but not limited to the filing of periodic reports with and notifications to Nevada gaming authorities. The result of this Order is to grant GPI USA and GPI SAS transactional waivers so that they may manufacture roulette wheels for sale to Nevada casino licensees. Effective August 30, 2006, the approvals were expanded by the Nevada gaming authorities to permit GPI USA to sell GPI SAS roulette wheels outside of Nevada. The waivers granted were specifically found by the Nevada State Gaming Commission to be consistent with the policies set forth for in the Nevada gaming laws. These waivers may, however, be withdrawn by the Nevada State Gaming Control Board for any cause deemed reasonable. Upon such withdrawal, the Company would be subject to full registration and licensing.
New Jersey Gaming Regulation
Our subsidiaries are currently required to be licensed under the New Jersey Casino Control Act, or the New Jersey Act, as casino service industries qualified to manufacture and sell gaming-related products to casinos in New Jersey. As part of such licensure, parent companies, holding companies and certain officers and directors of the companies are required to be found suitable by the New Jersey Casino Control Commission, or the New Jersey Commission. The sale and distribution of gaming equipment 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 a 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, 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, and reputation for honesty, business ability and experience of the applicant and its directors, officers, management and supervisory personnel, principal employees and stockholders as well as the adequacy of the financial resources of the applicant. New Jersey licenses are granted for a period of three or four years, depending on the length of time a company has been licensed, and if they 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 applicant or licensee 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 licensee for services rendered or otherwise. Failure of such stockholder to dispose of such stockholders stock could result in the loss of the 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.
Our new combined structure required that each subsidiary company submit a new application for licensure. Following a complete investigation of each subsidiarys respective license application, in October 2006, the New Jersey Commission granted plenary gaming-related casino service industry licenses to GPI USA, GPI SAS and GPI Mexicana.
Other Gaming Jurisdictions
In addition to New Jersey, our subsidiaries are currently licensed in a number of other jurisdictions. Although the regulations in these jurisdictions are not identical to the states of Nevada or New Jersey, their material attributes are substantially similar, and are summarized below.
The manufacture, sale and distribution of gaming supplies in each jurisdiction are subject to various state, county and/or municipal laws, regulations and ordinances, which are administered by the relevant regulatory agency or agencies in that jurisdiction. These laws, regulations and ordinances primarily concern the responsibility, financial stability and character of gaming supply and equipment owners, distributors, sellers and operators, as well as persons financially interested or involved in gaming or liquor operations. In many jurisdictions, selling or distributing gaming supplies may not be conducted unless proper licenses are obtained. An application for a license may be denied for any cause which the gaming regulators deem reasonable. In order to ensure the integrity of manufacturers and distributors of gaming supplies, most jurisdictions have the authority to conduct background investigations of a 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. Our subsidiaries and their respective key personnel have obtained all licenses necessary for the conduct of their respective business in the jurisdictions in which they sell and distribute gaming equipment and supplies. Suspension or revocation of such licenses could have a material adverse effect on our operations.
Federal Gaming Registration
The Federal Gambling Devices Act of 1962 (Federal Act) makes it unlawful for a person to manufacture, transport, or receive gaming machines, gaming devices (including roulette wheels) or components across interstate lines unless that person has first registered with the Attorney General of the United States Department of Justice. In addition, the Federal Act imposes gambling device identification and record keeping requirements. Violation of the Federal Act may result in seizure and forfeiture of the
equipment, as well as other penalties. Our subsidiaries, which are involved in the manufacture and transportation of gaming devices, are required to register annually.
Native American Gaming Regulation
Gaming on Native American lands is governed by federal law, tribal-state compacts, and tribal gaming regulations. The Indian Gaming Regulatory Act of 1988 (IGRA) provides the framework for federal and state control over all gaming on Native American lands and is administered by the National Indian Gaming Commission and the Secretary of the United States Department of the Interior. The IGRA requires that a tribe and the state in which the tribe is located enter into a written agreement, a tribal-state compact, which governs the terms of the gaming activities. Tribal-state compacts vary from state-to-state and in many cases require equipment manufacturers and/or distributors to meet ongoing registration and licensing requirements. In addition, tribal gaming commissions have been established by many Native American tribes to regulate gaming-related activity on Indian lands. Our subsidiaries manufacture and distribute gaming supplies to Native American tribes who have negotiated compacts with their respective states and have received federal approval. Currently, GPI USA is authorized to sell products to Native American casinos in seventeen states and GPI SAS is authorized to sell products to Native American casinos in five states.
International Gaming Regulation
Certain foreign countries permit the importation, sale and operation of gaming supplies in casino and non-casino environments. Certain jurisdictions require the licensing of manufacturers and distributors of gaming supplies. We and our subsidiaries manufacture and/or distribute gaming supplies to various international markets including Australia, the Caribbean, Canada, and other foreign countries. We have obtained the required licenses to manufacture and distribute our products in the various foreign jurisdictions where we do business.
While the regulatory requirements vary from jurisdiction to jurisdiction, most require licenses, permits, findings of suitability, documentation of qualification including evidence of financial stability and/or other required approvals for companies who manufacture and distribute gaming equipment, as well as the individual suitability of officers, directors, major stockholders and key employees. Under the various gaming regulations, key personnel generally include the current and/or proposed corporate officers and directors of a corporation and its subsidiaries. Laws of the various gaming regulatory agencies are generally intended to protect the public and ensure that gaming related activity is conducted honestly, competitively, and free of corruption.
See Part IIItem 8. Financial Statements and Supplementary DataNotes to Consolidated Financial StatementsNote 14 for certain financial information by geographic area.
Our current website is www.gpigaming.com. There we make available, free of charge, our annual Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information found on our website is not part of this or any other report we file or furnish to the SEC. You may also submit written information requests by mail to: Attn: Investor Relations, Gaming Partners International Corporation, 1700 Industrial Road, Las Vegas, Nevada 89102.
Throughout this annual Form 10-K, we make some forward-looking statements, which do not relate to historical or current facts, but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable that, while considered reasonable by us, are inherently subject to significant business, economic and competitive risks and uncertainties, many of which are beyond our control and are subject to change. The statements also relate to our future prospects and anticipated performance, development and business strategies. These statements are identified by their use of terms and phrases such as anticipate, believe, could, would, estimate, expect, intend, may, plan, predict, project, pursue, will, continue, feel, or the negative or other variations thereof, and other similar terms and phrases, including references to assumptions.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those expressed or implied. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent known and unknown risks and uncertainties. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances.
We urge you to carefully review the following discussion of the specific risks and uncertainties that affect our business. These include, but are not limited to, the following:
Demand for our products would be adversely affected by:
· a lack of acceptance of our RFID technology;
· a reduction in the growth rate of new and existing casinos and markets, particularly in Asia;
· delays of scheduled openings of newly constructed or planned casinos; and
· a decline in the public acceptance of gaming.
Our intellectual property rights are subject to risks, including:
· development of new proprietary technologies that could be applied by our competitors to make our products obsolete or less desirable;
· potential inability to obtain, maintain and defend patents, trademarks, copyrights, and trade secrets to protect our newly developed products and technology;
· competitors infringement upon our existing trademarks, patents, trade secrets copyrights;
· costs in defending our intellectual property rights against unexpected claims;
· approval of competitors patent applications that may restrict our ability to compete effectively;
· successful challenge of the patents underlying our exclusive license in the United States regarding our RFID embedded gaming chips; and
· ineffective or lack of enforcement of patents by our licensors.
· uncertainties related to changing economic conditions including those that affect the relative health of the gaming industry;
· higher than anticipated manufacturing, selling, administrative, legal and/or distribution costs;
· unfavorable changes in United States or foreign state or federal taxation laws or application of such laws that could reduce our profitability;
· political or economic instability in international markets, particularly those where we have higher sales concentrations and growth;
· changes in interest rates causing a reduction of investment income or in the value of market rate sensitive instruments;
· fluctuations in foreign exchange rates, tariffs and other trade barriers;
· an inability to effectively hedge our foreign currency exposures; and
· consolidations within the casino industry.
· unfavorable public referendums or anti-gaming legislation, especially in other countries;
· unfavorable legislation affecting or directed at manufacturers or gaming operators, such as referendums to increase taxes on gaming revenues;
· adverse changes in or findings of non-compliance with applicable governmental gaming regulations;
· delays in approvals from regulatory agencies;
· a limitation, conditioning, suspension or revocation of any of our gaming licenses; and
· unfavorable determinations or challenges of suitability by gaming regulatory authorities with respect to our officers, directors or key employees.
· failure of the casino industry to accept RFID technology with respect to gaming chips and readers; and/or the 125 KHz or the 13.56 MHz RFID technologies in particular;
· the development of competing new technologies, making ours obsolete or undesirable;
· a decline in the popularity of our gaming products with players and casinos;
· a lack of success in developing or adequately servicing new products, in particular our products with security features; and
· an increase in the popularity of competitors products.
· the current executive officers and directors of the Company beneficially own approximately 60.4% of the outstanding common stock as of March 24, 2007. As a result, the executive officers and directors of the Company can control the management and affairs of the Company and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions;
· this concentration of ownership could have the effect of delaying or preventing a change in control of the Company, even when such change of control is in the best interests of stockholders; and
· this concentration of ownership also might adversely affect the market price of the common stock and the voting and other rights of our Companys other stockholders.
· increasing our vulnerability to general adverse economic and industry conditions;
· limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and other general corporate requirements;
· requiring a substantial portion of our cash flows from operations for the payment of interest on our indebtedness and reducing our ability to use our cash flows to fund working capital, capital expenditures, acquisitions and general corporate requirements;
· limiting our flexibility in planning for, or reacting to, changes in or business and the industry; and
· creating a disadvantage to us compared to competitors with less indebtedness.
· difficulty in moving cash between GPI SAS and GPI USA, primarily due to negative tax consequences; and
· volatility in our intercompany international operations.
A significant percentage of our revenues result from the sale of our gaming chips to new casinos in Macau, including approximately 75% of GPI SAS revenues and approximately 45% of the Companys revenues on a consolidated basis. As such:
· upon the eventual reduction in the rate of new casino openings, and the expansion of existing casinos, in Macau our business could be adversely affected if we are unable to find new growth markets to replace those sales;
· the exceptional growth of the Macau market over the last three years has resulted in an increase in the number of competitors in the gaming chip market and in the intensity of such competition.
· the loss of Mr. Charlier or our other key personnel, or the limitation of their availability, could adversely affect our business. To a substantial extent, we rely on the ability and experience of Mr. Charlier for our strategic plan, financial plans, growth, marketing and other objectives;
· Mr. Charliers employment agreement expires in September 2007; however, we are currently in the process of negotiating an extension of his employment agreement. We cannot assure you that we will be able to successfully negotiate such an extension.
· since our 1994 Long-Term Incentive Plan expired in 2004, we have not had an equity-based incentive program for our executive officers and key personnel.
· Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report of management in our 2007 and post-2007 annual Form 10-K. While we intend to fully comply with these new laws and regulations, a failure to comply may impact market perception of our financial condition and could materially harm our business and operating results;
· the lack of adequate internal controls, as exhibited by the material weaknesses disclosed in Item 9AControls and Procedures, could result in misstated financial statements which could require us to restate our financial statements.
· limited or unique suppliers for certain key raw materials for significant products;
· the loss or retirement of our key executives or other key employees;
· adverse changes in the creditworthiness or parties with whom we have receivables;
· issuance of a substantial number of shares of our common stock, or the perception that this will occur;
· the discovery of facts with respect to legal actions pending against us not presently known to us or determinations by judges, juries or other finders of fact which do not accord with our evaluation of the possible liability or outcome of existing litigation;
· increased costs due to reliance on third party suppliers and contract manufacturers;
· casualty, theft or loss of our gaming chips, prior to delivery to casinos;
· agreements with casinos in Native American jurisdictions which may subject us to sovereign immunity risk;
· natural disasters, pandemic illnesses, travel or tourism decline risks, increased fuel prices, other travel limitations, or acts of God that are concentrated in major gambling locations;
· acts of war, potential domestic or international terrorist incidents; and
· any failures, difficulties or significant delays in implementing or maintaining our computer information systems could result in material adverse consequences to our business, including disruption of operations, loss of information and unanticipated increases in costs.
We are based in, and operate domestically from, company-owned facilities in Las Vegas, Nevada, and internationally from Beaune, France. We currently assemble and manufacture our primary products at facilities in Las Vegas, Nevada, San Luis Rio Colorado, Mexico and Beaune, France. We also lease sales offices in Atlantic City, New Jersey and Gulfport, Mississippi.
Las Vegas, Nevada. Our Las Vegas headquarters are located in an approximately 60,000 square foot building. Our Las Vegas headquarters was purchased in September 1995 for approximately $2.0 million. This facility houses the Las Vegas sales and corporate offices, including a centralized warehouse for certain of our finished goods inventory, several manufacturing departments, and a graphics art department. In our
Las Vegas headquarters, we also maintain a certain inventory of templates, graphic designs, logos, and tools and dies for casino customers gaming equipment. Maintaining such an inventory results in time and cost savings for product manufacturing and delivery to our customers. Our Las Vegas headquarters secures a deed of trust issued under our outstanding term loan. In the second quarter of 2005, we acquired an approximately one acre parcel of land adjacent to our Las Vegas headquarters for approximately $800,000. We currently use the property primarily for additional employee and visitor parking. (See Part IIItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources.)
San Luis Rio Colorado, Mexico. We manufacture casino chips, all playing cards, dice, all plastic products, layouts and tables at three facilities in San Luis Rio Colorado, Mexico. These facilities include a 34,000 square foot leased facility in which casino chips, dice and plastic products are manufactured, approximately 32,500 square feet where layouts are produced and an approximately 66,000 square foot facility used for producing playing cards and tables. We own the 66,000 square foot facility. In April 2004, we extended the lease of our main 34,000 square foot facility for an additional five years at the same monthly rent amount of approximately $0.35 per square foot, or $12,000, except that the amount may be prorated, commensurate with the space we elect to use, since then we have added to our lease an additional 32,500 square feet at the same monthly rent amount of approximately $0.35 per square foot, or $11,300. (See Part IIItem 8. Financial Statements and Supplementary DataNotes to Consolidated Financial Statements Note 13.)
Beaune, France. We own an approximately 34,000 square foot manufacturing and administrative facility, in Beaune, France. On May 7, 2004, GPI SAS entered into a 350,000 Euro (or approximately $423,000 as of May 7, 2004) loan transaction, with Banque Nationale de Paris (B.N.P), a French bank, for a building expansion, which included approximately 3,600 square feet of additional office and production space and 1,350 square feet of storage space. This expansion was completed in the third quarter of 2004.
On December 22, 2004, we entered into a construction contract for a 1,600 square foot additional expansion to extend the jeton and plaque production area. This extension was completed in the second quarter of 2005. The total cost of approximately $320,000, was paid for out of our operating funds.
On July 7, 2006, we bought an approximately 10,700 square foot manufacturing and administrative facility in Beaune, France for 650,000 Euros (approximately $828,000 at July 7, 2006).
Facility Capacity With the current approximate 244,000 square feet of manufacturing facilities as of December 31, 2006, we believe that we will have sufficient production capacity to meet anticipated future demand for all of our products in the United States and abroad.
See Part IIItem 8. Financial Statements and Supplementary DataNotes to Consolidated Financial Statements Note 9. for information regarding legal proceedings and contingencies.
No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2006.
The following graph reflects the cumulative stockholder return (change in stock price plus reinvested dividends) of a $100 investment in our common stock for the five-year period from December 31, 2001 through December 31, 2006, in comparison with the Standard & Poors 500 Composite Stock Index and our self-determined industry peer group index(1). The comparisons are not intended to forecast or be indicative of possible future performance of our common stock.
Partners International Corp. The S & P 500 Index
* $100 invested on 12/31/01 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.
Copyright © 2007, Standard & Poors, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm
(1) The companies in the peer group include: Bally Technologies Inc. (formerly Alliance Gaming Corp.), Fortune Diversified Industries Inc. (formerly American Gaming & Entertainment), Innovative
Gaming Corp. America, International Game Technology, Progressive Gaming International Corp. (formerly Mikohn Gaming Corp.), Scientific Games Corp. (formerly Autotote Corp.) and ShuffleMaster Inc. GTech Holdings Corp., which was included in the peer group for fiscal year 2005, is no longer trading and has therefore been removed from the peer group.
As of March 10, 2005, the Company moved its stock trading from the NASDAQ Small Cap Market to the NASDAQ National Market, and continued trading under the symbol GPIC. Prior to the name change on September 1, 2004, the Companys stock traded under the symbol PSON. The following table sets forth the quarterly high and low closing prices of our common stock as reported by NASDAQ during the periods indicated. All stock prices reflect a fiscal year ending December 31. On April 25, 2007, the closing price was $18.50 per share.
On April 18, 2007, as a result of the delay in filing of the Companys annual Form 10-K for the year ended 2006, the Company received a NASDAQ staff determination letter indicating that the Company was not in compliance with timely filing of periodic reports and that the Companys common stock is subject to delisting. The Company requested a hearing to appeal the staffs determination thus staying the possible delisting of the Companys common stock. If the Company is unable to demonstrate an ability to comply with these requirements to NASDAQs satisfaction, its common stock could be delisted from the NASDAQ Global Market.
There were 93 holders of record of our common stock as of March 31, 2007. We estimate that there are approximately 1,200 beneficial holders of our common stock based on the proxies distributed in connection with the May 2006 meeting of stockholders.
On November 8, 2006, the Companys Board of Directors declared a non-recurring cash dividend of $0.125 per share paid on December 15, 2006 to stockholders of record at the close of business on November 27, 2006. The cash was paid from the Companys normal operations. This was the second time a cash dividend has been paid. The other cash dividend was paid in December 2005. The Board of Directors presently does not intend to declare or pay any dividends for the foreseeable future.
Our stock transfer agent and registrar is American Stock Transfer & Trust Co., located at 6201 15th Avenue, Brooklyn, New York 11219; the telephone number is (718) 921-8247.
The Company made no purchases of GPIC equity securities during the fourth quarter of 2006.
The selected consolidated financial data included in the following tables should be read in conjunction with our Consolidated Financial Statements and related notes, and Managements Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere herein. The selected consolidated financial data for the years ended December 31, 2006, 2005, and 2004, have been derived from our audited consolidated financial statements included elsewhere herein. The selected consolidated financial data for the years ended December 31, 2003 and 2002 have been derived from our audited consolidated financial statements not included herein.
A Combination Agreement was executed on September 12, 2002, combining GPIC (formerly known as Paul-Son Gaming Corporation) with GPI SAS (formerly known as Etablissements Bourgogne et Grasset S.A.). At the closing, the businesses of GPIC, GPI SAS and GPI SAS then wholly-owned subsidiary, the Bud Jones Company, Inc., or Bud Jones, were combined, with GPI SAS and Bud Jones becoming wholly-owned subsidiaries of GPIC, or the Combination. The Combination was accounted for as a purchase transaction for financial accounting purposes. Because the former GPI SAS stockholders owned a majority of the outstanding GPIC common stock as a result of the Combination, the Combination was accounted for as a reverse acquisition in which GPI SAS was the purchaser of GPIC. On December 31, 2002, Bud Jones merged into GPI USA, which was a wholly-owned subsidiary of GPIC and GPI USA was the surviving entity. Bud Jones was a gaming supply manufacturing company, which was also headquartered in Las Vegas. Both former operations (GPI USA and Bud Jones) were consolidated into one facility at the Companys headquarters in Las Vegas, Nevada with the new name of GPI USA. (See Part IIItem 8. Financial Statements and Supplementary DataNotes to Consolidated Financial StatementsNote 1.)
The table below reflects information for the year ended December 31, 2002 which includes information for GPI SAS, the former Bud Jones Company, Trend Plastics, T-K Specialty Company, Inc. for the entire year and the former Paul-Son Gaming Corporation and its subsidiaries from September 12, 2002. The years ended December 31, 2003 to 2006 include full years for all entities described above.
(1) Certain amounts have been reclassified from Selling, general and administrative expenses to Cost of revenues; as such they would not have had an impact on net income or earnings per share. The reclassification related to administrative expenses associated with our manufacturing facility in Mexico. The amounts reclassified were $2,065,000 for 2006, $2,014,000 for 2005; $1,433,000 for 2004; $1,386,000 for 2003 and $401,000 for 2002.
(2) Cash dividends paid were approximately $1,011,000 and $787,000 for the periods ended December 31, 2006 and 2005, respectively. Dividends were not paid in any other years presented.
In July 2006, GPI SAS closed on the purchase of an existing, two-story building in Beaune, France located near GPI SAS existing facility for a purchase price of 650,000 Euros (approximately $828,000) in order to accommodate the high demand for its gaming chips from Macau casinos, including particularly RFID chips in both low and high frequencies. The building serves as the administrative and sales headquarters and non-gaming chip production facility for GPICs operations outside of the United States, resulting in additional space for gaming chip production at GPICs existing facility in Beaune, France. GPI SAS has also added several additional and sophisticated pieces of equipment in order to properly serve the needs of the Macau casinos that are purchasing RFID and non-RFID gaming chips from GPI SAS. The new space has allowed GPIC to increase its gaming chip production capacity without any significant interference with ongoing production and business operations.
In November 2006, GPIC and Progressive Gaming International Corporation (PGIC) formed a strategic alliance further expanding the two companies prior relationship of January 2006 to develop and market casino currency control equipment incorporating 13.56 MHz RFID microchip technology. Under the terms of this agreement, PGIC is promoting GPIC as its exclusive chip manufacturer in the United States and preferred chip manufacturer abroad. GPIC is the sole chip manufacturer dedicated by PGIC to sell 13.56 MHz RFID based peripheral readers in the United States and abroad. Additionally, the two companies agreed to further integrate equipment, software and other products and technologies that make use of PGICs 13.56 MHz RFID platform. GPIC and PGIC are working closely to develop and accelerate the availability of more comprehensive management and tracking systems to enable casinos to make greater use of the data provided by RFID embedded casino currency.
In anticipation of several large potential orders in the fourth quarter of 2006 from an existing customer in Macau, GPI SAS maintained its labor force for full production; however, the orders were unexpectedly delayed. Results for the fourth quarter of 2006 were negatively impacted due to higher expenses resulting from increased labor costs as GPI SAS could not immediately reduce its labor force under French laws. The Company had expected to begin to recognize revenue from these orders in the first quarter of 2007. The potential orders remain unsigned and first quarter results will show a significant loss.
Gaming Partners International Corporation, a Nevada corporation (GPIC) and each of its subsidiaries are sometimes collectively referred to herein as the Company, us, we, or our. The following discussion is intended to assist in the understanding of our results of operations and our present financial condition. The consolidated financial statements and the accompanying notes contain additional detailed information that should be referred to when reviewing this material. Statements in this discussion may be forward-looking. Such forward-looking statements involve risks and uncertainties that could cause actual results to differ significantly from those expressed. See Item 1A, Risk Factors.
A Combination Agreement was executed on September 12, 2002, combining GPIC (formerly known as Paul-Son Gaming Corporation) with GPI SAS (formerly known as Etablissements Bourgogne et Grasset S.A.). At the closing, the businesses of GPIC, GPI SAS and GPI SAS then wholly-owned subsidiary, the Bud Jones Company, Inc. (Bud Jones) were combined, with GPI SAS and Bud Jones becoming wholly-owned subsidiaries of GPIC, or the Combination. The Combination was accounted for as a purchase transaction for financial accounting purposes. Because the former GPI SAS stockholders owned a majority of the outstanding GPIC common stock as a result of the Combination, the Combination was accounted for as a reverse acquisition in which GPI SAS is the purchaser of GPIC. On December 31, 2002, Bud Jones merged into GPI USA, which was a wholly-owned subsidiary of GPIC and GPI USA was
the surviving entity. Bud Jones was a gaming supply manufacturing company, which was also headquartered in Las Vegas. Both former operations (GPI USA and Bud Jones) have been consolidated into one facility at the Companys headquarters in Las Vegas, Nevada with the new name of GPI USA. (See Part IIItem 8. Financial Statements and Supplementary DataNotes to Consolidated Financial StatementsNote 1.)
Our business activities include the manufacture and/or supply of gaming equipment and supplies such as gaming chips, table layouts, playing cards, dice, gaming furniture, roulette wheels, table accessories and other products that are used with casino table games such as blackjack, poker, baccarat, craps and roulette. We generally sell our casino products to licensed casinos for new openings and to existing casino operations, worldwide. We are headquartered in Las Vegas, Nevada, with offices in Beaune, France; San Luis Rio Colorado, Mexico; Atlantic City, New Jersey and Gulfport, Mississippi.
Our products on display at the 2006 Global Gaming Expo in Las Vegas, Nevada and the 2007 ICE show in London, England included our gaming chips with embedded RFID technology in high and low frequency and corresponding chip readers. We have been working for several years to apply the RFID technologies to gaming chips. RFID microchips are available for each brand and type of our gaming chips. We hold several patents concerning the embedding process of RFID microchips and an exclusive license for the manufacturing and selling of these RFID gaming chips and readers for chip tracking in the United States. We also sell several types of related RFID gaming chip readers that can be used by the casinos at the cages, vaults, tables, or by the pit bosses. Our gaming chips with embedded RFID microchips and readers help to protect the casinos from redeeming counterfeit or stolen chips and to improve the efficiency of table game management.
The following are the most important factors and trends that contribute to our operating performance:
· A number of foreign countries are currently considering legislation to legalize or expand gaming. Such legislation presents potential opportunities to sell our gaming supplies to new properties and thus increase revenue. The timing and occurrence of these events remain uncertain. Therefore, we may experience quarters that are more profitable than others due to the timing and nature of new casino openings and expansions throughout the world. There has also been accelerated expansion of United States based gaming companies overseas. Of particular importance has been the opening of new casinos and expansions of existing casinos in Macau in 2006 and the anticipated openings in 2007.
· The receipt of higher volume orders enhances our profit margins through production efficiencies. The timing and occurrence of these orders remain uncertain and difficult to predict. Therefore, we may experience quarters that are more profitable than others due to the timing and volume of product demand.
· The introduction of new technologies such as high frequency RFID is always a challenge, as a ramp up period is necessary to increase the manufacturing efficiency and bring such efficiencies to the level reached in other technologies for which accumulated experience has already allowed significant cost reduction.
· The level of desire or acceptance, or lack thereof, for our product innovations regarding our security features and various degrees of desire for increased efficiency of table management information systems by the casino industry are important factors to our Company. In particular, the increased acceptance of RFID gaming chips for accounting, security, tracking, and wager recognition in table games may be a significant trend, impacting our business.
The following table summarizes selected items from the Companys Consolidated Statements of Income as a percentage of revenues for the periods indicated:
(1) Certain amounts have been reclassified from Selling, general and administrative expenses to Cost of revenues; as such they would not have had an impact on net income or earnings per share. The reclassification related to administrative expenses associated with our manufacturing facility in Mexico. These amounts as a percentage of revenue were 3.5% for 2005 and 3.2% for 2004.
The following table details the Companys historical revenues by product line:
Revenues For the year ended December 31, 2006, revenues were $74.0 million, an increase of approximately $16.8 million, compared to revenues of $57.1 million for the year ended December 31, 2005. Of this increase, $16.3 million was attributable to GPI SAS and principally the result of higher sales in Asia. Sales by GPI USA amounted to $31.5 million for the year 2006, an increase of $.5 million.
Cost of Revenues Cost of revenues, as a percentage of sales, increased to 67.0% for 2006, compared to 63.3% for 2005. The increase in cost of revenues as a percentage of sales occurred principally as a result of the cost associated with starting production on new product lines to fulfill large orders from Asia.
Gross Profit Gross profit for the year ended December 31, 2006 increased by approximately $3.4 million from 2005. This occurred as a result of the aforementioned increase in revenues of approximately $16.8 million offset by the increase in cost of revenues as a percentage of sales.
Selling, general and administrative expenses
(1) Certain amounts have been reclassified from General and administrative expenses to Cost of revenues; as such they would not have had an impact on net income or earnings per share. The reclassification related to administrative expenses associated with our manufacturing facility in Mexico. For the year ended 2005, $2,014,000 or 3.5% of revenue has been reclassified.
Selling, general and administrative expenses, which include product development; marketing and sales; depreciation and amortization; and general and administrative costs, increased to $15.9 million for the year ended December 31, 2006 from $15.1 million for the year ended December 31, 2005. This increase of approximately $800,000 was primarily attributable to an increase in general and administrative expenses. The increase in general and administrative expenses was primarily the result of an increase in salary expense in both GPI USA and GPI SAS of approximately $442,000 as a result of additional personnel, promotions and an overall salary increase of 6% for 2006; a one-time expense to the Louisiana sales tax authorities of $421,000 as a result of audits from several parishes which resulted in payments exceeding sales tax collected; an increase in the reorganization and relocation expense at GPI SAS of approximately $165,000 due to the purchase of the new building; and, an increase in legal fees at GPI USA of approximately $158,000 due to the resolution of several legal matters. These increases were offset by a decrease in stock compensation expense. Expense recorded in 2005 was approximately $778,000 relating to the 100,000 performance-based options granted to the Chief Executive Officer that vested due to performance conditions being met. Stock compensation expense recorded in 2006 of approximately $234,000 was due to the adoption of SFAS 123(R) Share-Based Payment.
Other Income (Expense)
During the year ended December 31, 2006, other income (expense), including gain (loss) on foreign currency transactions, interest income, gains on sales of marketable securities, and other income (expense) decreased to $31,000 from $245,000 for the year ended December 31, 2005. This net decrease of $214,000 was principally the result of the change in foreign currency exchange rates, resulting in a loss of $349,000 in 2006 compared to a gain of $133,000 in 2005. Foreign currency transaction losses occurred as a result of the decrease in the U.S. dollar to Euro exchange rates during 2006. Gain on the sale of marketable securities increased by $36,000 between the periods. Interest income showed an increase of $248,000 primarily due to the interest earned on marketable securities held in 2006. Interest expense decreased to
$175,000 for the year ended December 31, 2006, from $199,000 for the year ended December 31, 2005. This decrease of $24,000 was primarily caused by a decrease in the average outstanding debt amounts in 2006 as compared to 2005 due to normal payments.
Income Taxes During the year ended December 31, 2006, our effective tax rate was 39.7% as compared to 28.9% for the year ended December 31, 2005. The increase in our effective rate for the year ended December 31, 2006 was primarily a result of the foreign dividend inclusions and related valuation of foreign tax credits. The Companys effective tax rate for the year ended December 31, 2006 differed from the statutory rate as a result of the Companys repatriation of non-cash dividend from GPI SAS and the related increase in the valuation allowance related to foreign tax credits which are expected to expire before usage. The Companys effective tax rate for the year ended December 31, 2005 differed from the statutory rate as a result of a change in the valuation allowance to reflect the expected utilization of federal net operating loss carry forwards, the Companys repatriation of non-cash dividend from GPI SAS, and book-to-return adjustments primarily resulting from a refinement of the Companys previous estimate of deemed dividends under IRC Sec 956. It is likely that in the future the Company will distribute additional non-cash dividends from GPI SAS to GPI USA. If such dividends occur the Company will generate excess foreign tax credits, which will carry forward for 10 years. The utilization of the foreign tax credits will depend upon the Companys ability to generate foreign source income prospectively.
Revenues For the year ended December 31, 2005, revenues were approximately $57.1 million, an increase of approximately $12.5 million, versus revenues of approximately $44.6 million for the year ended December 31, 2004. The increase in revenues for 2005 was principally the result of GPI SAS sales to new casinos in Asia of approximately $8.0 million. Sales by GPI USA amounted to $31.0 million for the year 2005, an increase of approximately $5.0 million, primarily as a result of sales to a new casino that opened in Las Vegas of approximately $1.8 million, sales to a wholesaler totaling $1.0 million and large reorders of approximately $2.2 million.
Cost of Revenues Cost of revenues, as a percentage of sales decreased to 63.3% for 2005, compared to 64.3% for 2004. The decrease in cost of revenues as a percentage of sales occurred principally due to the better absorption of fixed costs due to the higher sales volume, and the increased efficiency achieved by the realignment and restructuring of our production facilities.
Gross Profit Gross profit for the year ended December 31, 2005 increased by approximately $5.0 million from 2004. This occurred as a result of the aforementioned increase in revenues of approximately $12.5 million and the decrease in cost of revenues as a percentage of sales.
Selling, general and administrative
(1) Certain amounts have been reclassified from General and administrative expenses to Cost of revenues; as such they would not have had an impact on net income or earnings per share. The reclassification related to administrative expenses associated with our manufacturing facility in
Mexico. For years ended 2005 and 2004, $2,014,000 and $ 1,433,000, respectively, have been reclassified which represents 3.5% and 3.2%, respectively, of revenue.
Selling, general and administrative expenses, which include product development; marketing and sales; depreciation and amortization; and general and administrative costs, increased to approximately $15.1 million for the year ended December 31, 2005 from approximately $11.8 million for the year ended December 31, 2004. This increase of $3.3 million was primarily attributable to an increase in general and administrative expenses of $2.7 million. The increase in general and administrative expenses was primarily the result of one-time expenses of $2.7 million; consisting of stock compensation expense of $778,000, due to 100,000 shares of performance-based options which vested in fourth quarter of 2005; $122,000 in NASDAQ National Market listing expenses; $344,000 in building repairs in our Las Vegas, Mexico and France facilities; $346,000 in salary adjustments and reorganization costs; and $352,000 in information technology. Additionally, we incurred expenses of $525,000, which were related to work performed towards future compliance with the Sarbanes-Oxley Act of 2002 and $48,000 related to new patent acquisition costs. We also incurred costs of $241,000 related to the Hurricane Katrina and Rita disasters, of which $191,000 was related to the increase in the bad debt reserve on receivables due from casinos and $50,000 was related to donations. Additionally, product development and marketing and sales expenses increased $587,000. The increases were mainly due to costs associated with sales commissions of $160,000 related to the increase in sales, the cost of reorganization of personnel in France of $353,000, and the cost of remodeling the Global Gaming Expo Convention booth of $74,000.
Other Income (Expense)
During the year ended December 31, 2005, other income (expense) increased to $245,000 in income from $310,000 in expense during the year ended December 31, 2004. This increase of $555,000 was principally the result of the change in foreign currency exchange rates, resulting in a loss of $155,000 in 2004 and a gain of $133,000 in 2005. Foreign currency transaction gains occurred as a result of an increase in the U.S. dollar to Euro exchange rates during 2005. Interest income increased by $123,000 primarily due to the interest earned on a higher balance of marketable securities in 2005. Gain on sale of marketable securities increased by $47,000 between the periods. For the year ended December 31, 2005, interest expense decreased to approximately $199,000 from approximately $253,000 for the year ended December 31, 2004. This decrease of approximately $54,000 was primarily caused by a decrease in the average outstanding debt amounts in 2005 as compared to 2004, due to normal payments.
Income Taxes During the year ended December 31, 2005, we recorded an income tax expense of approximately $1.8 million as compared to a tax expense of approximately $1.2 million for the year ended December 31, 2004. The increase in income tax expense for the year ended December 31, 2005 was primarily a result of the Companys higher foreign income. The Companys effective tax rate for the year ended December 31, 2005 differed from the statutory rate as a result of a change in the valuation allowance to reflect the expected utilization of federal net operating loss carry forwards, the Companys repatriation of non-cash dividend from GPI SAS, and book-to-return adjustments primarily resulting from
a refinement of the Companys previous estimate of deemed dividends under IRC Sec 956. It is likely that in the future the Company will distribute additional non-cash dividends from GPI SAS to GPI USA. If such dividends occur, it is likely that the Companys net operating losses will be diminished, and that the Company will generate excess foreign tax credits, which will carry forward for 10 years. The utilization of the foreign tax credits will depend upon whether the Company generates foreign source income prospectively.
Overview We believe that the combination of cash flow from operations and cash on hand should be sufficient to fund expenses from routine operations for a minimum of the next twelve months. As of December 31, 2006, we had $5.9 million in cash and cash equivalents and $4.7 million in current marketable securities. For the longer term, in addition to these cash sources, management will evaluate other cash source alternatives, including other lending facilities in the United States or abroad. Due to negative tax consequences, there may be difficulty in moving cash between France and the United States. There can be no assurance that the other cash sources will be available to us on terms and conditions acceptable to us.
Working Capital and Cash Flow (See Consolidated Balance Sheets) Working capital totaled approximately $14.8 million at December 31, 2006, compared to approximately $9.6 million at December 31, 2005. Working capital increased by approximately $5.2 million in 2006 primarily due to a decrease in current assets of $4.1 million, offset by an decrease in current liabilities of $9.3 million. Overall, cash increased by approximately $1.3 million from December 31, 2005 to December 31, 2006.
The decrease in total current assets in 2006 was due primarily to a decrease in marketable securities of $4.4 million. This was related to the decrease in current liabilities in 2006 in customer deposits of approximately $9.3 million.
Net Cash Flow (See Consolidated Statements of Cash Flow) Net cash flow used in operating activities was $1.3 million during 2006 compared to net cash provided by operating activities of $9.0 million during 2005. The $10.3 million decrease is primarily due to a $17.7 million decrease in cash provided from customer deposits offset by a $7.0 million increase in cash provided from inventories and accounts receivable.
Our investing activities resulted in net cash provided of $1.1 million for 2006, compared to net cash used of $10.6 million in 2005. During 2006, we show net proceeds of $6.4 million due to the sale of marketable securities as compared to net cash used to purchase marketable securities in 2005 of $6.4 million. In addition, we used cash of $5.3 million to purchase property and equipment to facilitate increased production as compared to cash utilized in 2005 of $3.8 million for the acquisition of property and equipment.
Net cash flow provided by financing activities was $1.2 million during 2006 compared to net cash used in financing activities of $1.1 million during 2005. The $2.3 million increase is primarily due to an increase of $593,000 in cash provided from stock option exercises and an increase of $1.9 million related to proceeds from long term debt.
Long-Term Debt (See Consolidated Balance Sheets) In February 2001, GPI SAS borrowed approximately $2.2 million from an unaffiliated party. Principal and interest payments are due quarterly until February 2008. Interest accrues at the fixed rate of 5.1% per annum. The loan is guaranteed by our majority stockholder, Holding Wilson, S.A. Under the terms of the GPI SAS loan agreement, GPI SAS must comply with certain financial covenants that are calculated annually based on the financial statements of GPI SAS. Specifically, GPI SAS ratio of total loans and similar debt (inclusive of capital lease obligations) to operating cash flow (defined under French GAAP as operating income before depreciation
and provisions) must not exceed 1.7, and the ratio of total loans and similar debt (inclusive of capital lease obligations) to stockholders equity must not exceed 0.5. GPI SAS actual ratio of total loans and similar debt (inclusive of capital lease obligations) to operating cash flow and ratio of total loans and similar debt (inclusive of capital lease obligations) to stockholders equity were 0.27 and 0.17, respectively, as of December 31, 2006.
In March 2002, GPI USA entered into a $995,000 loan transaction secured by a Deed of Trust on its Las Vegas building, which matures on March 1, 2012, at an interest rate equal to the greater of (i) 8% per annum, or (ii) 362.5 basis points over the average of the London Interbank Offered Rates for six-month dollar deposits in the London market based on quotations of major banks, or LIBOR, but may not exceed 12% per annum. This loan is payable in arrears in equal monthly installments through and including March 1, 2012, at which time the entire remaining principal balance of approximately $883,000 will be due and payable. There is no prepayment penalty.
On May 7, 2004, GPI SAS entered into a 350,000 Euro (approximately $423,000) loan transaction, with Banque Nationale de Paris, a French bank, for the purposes of building expansion in France. Monthly principal and interest payments are 4,720 Euro; with a fixed interest rate of 3.6% per annum. The loan is secured by a mortgage on the building premises and is due May 2011.
In June 2006, GPI SAS entered into a 1.5 million Euro (approximately $1.9 million) loan agreement with Lyonnaise de Banque, a French bank. The loan has a five-year term at a fixed rate of 3.40% per annum. The loan is repayable in fixed quarterly installments. The loan is secured by GPI SAS marketable securities at the bank in which GPI SAS must maintain a minimum balance of at least 500,000 Euros ($658,500 at December 31, 2006). There are no prepayment penalties or acceleration payment provisions in the loan agreement. The proceeds of the loan are being used primarily to purchase (or to replace available cash previously used to purchase) part of the production equipment that will total approximately 2.0 million Euros (approximately $2.6 million). The production equipment is being used to increase the production capacity at GPI SAS facility in France due to increased demand. GPI SAS has acquired a portion, and is in the process of acquiring the balance, of the production equipment from several different manufacturers.
Seasonality We do not typically experience seasonality relative to our revenues, except, potentially, for the third quarter of each year, when the French location (office and manufacturing facility) is closed for a substantial part of the month of August, due to holiday. Due to the high sales volume and related deadlines in the third quarter of 2006, part of the production employees postponed their holiday.
Las Vegas, Nevada Facilities In May 1997, we purchased our current corporate headquarters, an approximately 60,000 square foot building located in Las Vegas. The Las Vegas headquarters secures the $995,000 loan pursuant to the Deed of Trust. See Long-Term Debt above. In connection with the Combination, the former Bud Jones relocated its operations to the Las Vegas headquarters during the fourth quarter of 2002. In April 2005 we purchased an approximately one acre parcel of land adjacent to our Las Vegas headquarters for $800,000 in a cash transaction. This property is being used for additional employee and visitor parking.
San Luís Rio Colorado, Mexico Facilities We lease two manufacturing facilities totaling 66,500 square feet. In April 2004 we extended the lease for an additional five years at the same monthly rent amount of approximately $0.35 per square foot, except that the rent amount may be prorated, commensurate with the space that we elected to use. We also own an approximately 66,000 square foot facility adjacent to the leased building. (See Part IIItem 8. Financial Statements and Supplementary DataNotes to Consolidated Financial StatementsNote 13.)
Beaune, France Facilities We own an approximately 34,000 square foot manufacturing and administrative facility in Beaune, France. In May 2004, GPI SAS entered into a 350,000 Euro (or approximately $423,000) loan agreement, with Banque Nationale de Paris, a French bank, for building expansion. See Long-Term Debt above. In December 2004, we entered into a construction contract for a 1,600 square foot additional expansion which was completed in the second quarter of 2005, to extend the jeton and plaque production area.
In July 2006, we completed the purchase of a two story building of approximately 10,700 square foot in Beaune, France, located near our existing facility. We purchased the building for 650,000 Euros (approximately $828,000) plus certain statutory costs. The building serves as the administrative and sales headquarters and non-gaming chip production facility for our operations outside of the United States. The new space allowed us to increase our gaming chip production capacity in France without any significant interference with our ongoing business operations. The additional space created at our existing facility is finished and functional. We used available cash to pay for the building.
Capital Expenditures We currently plan to purchase approximately $3.0 million in capital equipment and improvements in 2007. In 2006, we incurred $5.2 million for property, plant and equipment. Most of this was to increase production capacity of GPI SAS.
(1) These amounts have been restated from the amounts previously reported in the Form 10-Q issued on November 13, 2006. The amounts reported in the 10-Q included a clerical error of $100,000; in addition, the amounts presented above include a reclassification between Selling, general and administrative expenses and Cost of revenues of $379,000. The nine-month information was correct as originally reported. The previously reported amounts in the previous quarter were as follows (in thousands, except per share amounts):
(2) Certain amounts have been reclassified from Selling, general and administrative expenses to Cost of revenues; as such they would not have had an impact on net income or earnings per share. The reclassification related to administrative expenses associated with our manufacturing facility in Mexico. The amounts reclassified were $2,065,000 for 2006 ($545,000, $546,000, $535,000 and $439,000 for first, second third and fourth quarter, respectively) and $2,014,000 for 2005 ($402,000, $458,000, $604,000, $550,000 for first, second third and fourth quarter, respectively).
In the first, second and third quarters of 2006, the increases in net revenues were primarily due to large casino openings in Asia.
Results were lower for the fourth quarter 2006 due mainly to an unexpected delay of large orders from one of GPI SAS Macau customers. GPI SAS was organized for full production and could not immediately reduce its labor under French labor laws.
The following table presents the impact that our contractual obligations and commercial commitments at December 31, 2006 are anticipated to have on our liquidity and cash flow in future periods. We have no other significant contractual obligations or commercial commitments either on or off balance sheet as of December 31, 2006. Operating leases on a month-to-month basis are not included. (See Part IIItem 8. Financial Statements and Supplementary DataNotes to Consolidated Financial StatementsNote 9.)
(1) The total represents the expected cash payments of our long-term debt, including the current portion of the long-term debt, but excluding any fair value adjustments.
(2) Amounts represent purchase obligations, agreements to purchase goods or services, obligations that relate to an intellectual property agreement, and employment agreements that are enforceable and legally binding on us and that specify all significant terms, including: fixed, minimum or variable price provisions; and the approximate timing of the transaction, but excluding any agreements that are cancelable without penalty. A portion of the amounts for years 1-4 consists of estimated payments under contractual commitments to purchase materials. Such estimated payments due are variable
based on the actual mix of the materials to be purchased by us and are also subject to increase based on the suppliers costs.
We lease two manufacturing facilities totaling 66,500 square feet located in San Luis Rio Colorado, Mexico from an entity controlled by the family of the General Manager of GPI Mexicana. The lease was extended in April 2004, for an additional five years, at the same monthly rent amount of approximately $0.35 per square foot, or $23,300. If we elect, at our discretion, to use more or less square footage, our rent will be increased or decreased accordingly on a pro rata basis. Also, in the second quarter of 2006, we began renting, on a month-to-month basis, a residential property from the General Managers brother at approximately $800 per month.
An employee of our manufacturing facility in Mexico owns and operates a small independent machine shop. In 2006 we used his machine shop to build small metal parts. For the fiscal year ended December 31, 2006 GPI USA paid this employee, through his business, approximately $30,000.
Neither of these employees is a director nor an executive officer. The charter of the Audit Committee of the Board of Directors requires the Audit Committee to review and approve related party transactions involving our directors and executive officers.
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Certain of our accounting estimates, including revenue recognition, accounting for stock-based compensation, the depreciable lives of our assets, the recoverability of deferred tax assets, the allowance for doubtful accounts receivable, write-downs of obsolete, excess or slow moving inventories, and the estimated cash flows in assessing the recoverability of long-lived assets, require that we apply significant subjective judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on our historical experience, terms of existing contracts, our observance of industry trends, information provided by or gathered from our customers and information available from other outside sources, as appropriate. There can be no assurance that actual results will not differ from our estimates. The estimates discussed below are considered by management to be those in which our estimates and judgments have a significant impact on issues that are inherently uncertain. To provide a further understanding of the methodology we apply, our significant accounting estimates are discussed below and in the notes to our consolidated financial statements.
Revenue may be recognized under different methods, depending on the circumstances. In general, we recognize revenue when the following criteria are met: persuasive evidence of an arrangement between our customer and us exists, shipment has occurred or services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured.
Generally, this means we recognize revenue when our products are shipped to our customers and title to the products and risk of loss are transferred according to the shipping terms, at which time, the products are deemed delivered. Shipping costs billed to our customers have the related expense included in cost of revenues. We typically sell our products with payment terms of net 30 days or less and generally require a 50% down payment.
We offer a limited standard warranty on some of our products, primarily in France. Warranty reserves are provided under the accrual basis and are based on estimates of future costs associated with fulfilling the warranty obligation. The estimates are derived from historical cost experience.
Property and Equipment
We have significant capital invested in our property and equipment, which represented approximately 31% and 23%, respectively, of our total assets at December 31, 2006 and 2005. Judgments are made in determining the estimated useful lives of assets, salvage value to be assigned to the assets and if or when an asset has been impaired. These estimates and the accuracy thereof affect the amount of depreciation expense recognized in the financial results and whether we have a gain or a loss on the disposal of the asset. We assign lives to our assets based on our standard policy, which is established by management as representative of the useful life of each category of asset. The carrying value of property and equipment is reviewed whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. The factors considered by management in performing this assessment include: current operating results, trends and prospects, historical data, useful life changes, as well as the effect of obsolescence, market price changes, demand, competition and other economic factors. Our estimates have been within our expectations of the useful life and depreciation amounts established. However, a change in our estimates may result in an adjustment to depreciation expense or to the gain or loss realized on the disposal of assets, which could have a material adverse effect on our consolidated results of operations.
Goodwill and Other Intangible Assets
Effective November 1, 2002, in connection with the implementation of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), goodwill and trademarks with indefinite useful lives are not amortized. We review goodwill and all intangibles with indefinite lives for impairment, annually as of December 31, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable in accordance with SFAS 142. We completed the annual goodwill impairment test in 2006, and as a result of this test, no impairment of goodwill was deemed necessary. Management made its judgment about the fair value of our goodwill with assistance from an independent accountant.
Other intangible assets such as patents, non-compete agreements and others with definite lives are amortized using the straight-line method over their economic useful lives, ranging from three to fourteen years. We evaluate these intangible assets with definite lives for potential impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.
We would record an impairment loss if the carrying amount of the intangible asset is not recoverable and the carrying amount exceeds the estimated fair value. Factors that could trigger an impairment review or adjustment to determine if the carrying value is recoverable include the following:
· a significant adverse change in legal factors or in the business climate
· an adverse action or assessment by a regulator
· unanticipated competition
· negative historical experience
· a negative change in the estimate of the useful lives of products
· technological obsolescence potential
· a negative estimate of the commercial viability of our patents and licenses
· the loss of key personnel
· a significant change in the manner we use our acquired assets or in the strategy we use in our business operations
· a significant decrease in the market price of an asset
· a current period operating or cash flow loss, combined with a history of operating or cash flow losses or a projection or forecast that demonstrates reduced profitability associated with the use of an asset
· a current belief or expectation that, more likely than not, an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life
All of these assessments require management judgment. Any changes in the key assumptions about the business and its prospects, or changes in the market conditions or other external conditions, could result in an impairment charge and such charge could have a material adverse effect on our consolidated results of operations.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered estimated future taxable income and ongoing tax planning strategies in assessing the amount needed for the valuation allowance. In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in prior carry back years, the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes to tax laws, both foreign and domestic, changes to statutory tax rates and changes to future taxable income estimates.
The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly subjective and judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities due to closure of income tax examinations, new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.
If actual results differ unfavorably from those estimates used, we may not be able to realize all or part of our net deferred tax assets and additional valuation allowances may be required. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect any changes in our estimates in the valuation allowance, with a corresponding adjustment to earnings or equity, as appropriate.
Bad Debt Reserves
We recognize an allowance for doubtful accounts (bad debt reserves) to ensure trade receivables are not overstated due to uncollectibility. This allowance is maintained for all customers, and reviewed on an ongoing basis, based on a variety of factors, including the length of time the receivables are past due, economic conditions and trends, significant one-time events and historical experience. Various percentages are applied to the aged receivables. Additional amounts are recorded to the allowance based on our awareness of a particular customers ability to meet its financial obligations. As with many estimates, management must make judgments about potential actions by third parties in establishing and evaluating
our reserves for bad debts. Our estimates have been within our expectations and the provisions established. However, a change in the financial condition of specific customers or in overall trends experienced may result in future adjustments to our bad debt reserves.
We evaluate our inventory for slow-moving, excess, and obsolete inventory that may not be saleable or recoverable. Analysis of inventory levels, market conditions and future sales forecasts are some of the methodologies for estimating the inventory write-downs. Historical inventory usage activity, industry trends, and scrap rates are considered in determining the level of reserves. As with many estimates, management must make judgments about potential actions by third parties, including customer demand, in establishing and evaluating our inventory reserves.
In December 2004, the FASB issued SFAS 123(R) Share-Based Payment, which replaces SFAS 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123(R) requires companies to measure compensation costs for share-based payments including stock options, to employees and non-employees, at fair value and to expense such compensation over the service period beginning with the first annual period beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 is no longer an alternative to financial statement recognition. The Company adopted SFAS 123(R) effective January 1, 2006. See Part IIItem 8. Financial Statements and Supplementary DataNotes to Consolidated Financial StatementsNotes 1 and 11.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation will be effective for the Company on January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We have completed an initial evaluation of the impact of the adoption of FIN 48 and determined that adoption will not have a material impact on our financial position or result of operations.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered by management in quantifying a current year misstatement by evaluating errors using both a balance sheet and an income statement approach and concluding whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for the fiscal years ending after November 15, 2006. We applied the guidance in SAB 108 in the fourth quarter of 2006.
During our 2006 year-end financial closing process, we discovered that, as the result of an error related to our conversion of fixed asset software in late 2003, depreciation was improperly recorded on a group of assets in 2005 and 2004. This error caused depreciation expense to be understated by $240,000 and $54,000 for the years ended December 31, 2005 and 2004, respectively.
SAB 108 permits the Company to adjust for the cumulative effect of errors relating to prior years in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of retained earnings in the year of adoption. We have analyzed these
amounts both quantitatively and qualitatively and have concluded that they are not material to the periods affected. Accordingly, these errors are reflected as a cumulative adjustment reduction to retained earnings of $194,000, net of tax, as of January 1, 2006.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Pension and Other Postretirement Plansan amendment of FASB Statement No. 87, 88, 106 and 132(R) (SFAS 158). SFAS 158 requires companies to (1) fully recognize, as an asset or liability, the overfunded or underfunded status of defined pensions and other postretirement benefit plans; (2) recognize changes in the funded status through other comprehensive income in the year in which the changes occur; (3) measure the funded status of defined pension and other postretirement benefit plans as of the date of the Companys fiscal year-end; and (4) provide enhanced disclosures. The provisions of SFAS 158 are effective for our year-end December 31, 2006. The Company has assessed the impact of the adoption of SFAS 158 on its financial statements. For additional information about our defined benefit pension and other post retirement benefit plans, refer to Note 15 of the Consolidated Financial Statements in our Form 10-K.
In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115 (SFAS 159). The new statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company lacks the fair value option for an eligible item, changes in that items fair value and subsequent reporting periods must be recognized in current earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential impact of SFAS 159 on our financial position and results of operations.
Market risk refers to the potential losses arising from changes in interest rates, foreign currency fluctuations and exchange rates, equity prices and commodity prices including the correlation among these factors and their volatility. We are primarily exposed to foreign currency fluctuations and exchange risk and interest rate risk.
Foreign Currency Risk There are two types of foreign currency exchange risks that we may be subject totransaction and translation gains and losses. Foreign exchange transaction gains or losses are distinguished from translation gains or losses as follows: (i) translation adjustments do not involve the movement of cash, they are accounting conversion calculations of an existing functional currency to a reporting currency and (ii) transaction gains or losses which are based on an actual transaction that requires formal payment at a future point in time.
We are subject to foreign currency exchange risk relating to the translation of GPI SAS assets, liabilities, and income and expense accounts. The translation adjustment for assets and liabilities is reflected in the accumulated other comprehensive income (loss) caption included in the stockholders equity section on our consolidated balance sheets. GPI SAS uses the Euro as its functional currency.
The assets and liabilities of GPI SAS were translated into U.S. dollars at the rate of exchange at December 31, 2006. The income and expense accounts were translated using the average rate of exchange during the period. GPI SAS typically incurs gains or losses of specified foreign currency transactions and these amounts are occasionally material. These gains and losses are reflected in our statements of income. The U.S. dollar weakened against the Euro to $0.75800 at December 31, 2006 from $0.84440 at December 31, 2005. For the year ended December 31, 2006, we did not have any forwards, options or other derivative contracts in force.
For GPI Mexicana, the U.S. dollar is the functional currency. Non-monetary assets and liabilities are translated at historical exchange rates, and monetary assets and liabilities are translated at current exchange rates. Exchange gains and losses arising from translation are included in other income, (expense).
Because of our significant international operations, we are exposed to currency fluctuations and exchange risk on all loans and contracts in foreign currencies. We may engage in hedging as it relates to sale contracts between GPI SAS and other foreign countries, which have currencies that are different than the Euro. Although we have not entered into any hedging agreements during the periods reflected in this report, there is a possibility that we may enter into a hedging agreement, depending on world money market conditions and other foreign currency fluctuation considerations.
Interest Rate Risk Changes in interest rates may result in changes in the fair market value of our financial instruments, interest income and interest expense. As of December 31, 2006, we had total interest bearing debt and capital lease obligations of approximately $3.8 million. Of this amount, approximately $2.9 million has a fixed rate of interest; we believe that the fair value of these agreements approximate reported amounts.
The remaining approximately $0.9 million of interest bearing obligations has a variable interest rate which is tied to the London Interbank Offered Rate (LIBOR), for six-month dollar deposits, plus 362.5 basis points. For each 1.0% increase in LIBOR, we would incur increased interest expense of approximately $10,000 over the next twelve-month period.
To the Board of Directors and Stockholders of
We have audited the accompanying consolidated balance sheet of Gaming Partners International Corporation (formerly known as Paul-Son Gaming Corporation) and Subsidiaries (the Company) as of December 31, 2006, and the related consolidated statements of income, stockholders equity and other comprehensive income, and of cash flows for the year ended December 31, 2006. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Gaming Partners International Corporation and Subsidiaries as of December 31, 2006, and the results of their operations and their cash flows for the year ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, GPIC adopted SFAS No. 123 (Revised 2004), Share Based Payment, using the modified prospective method. As discussed in Note 1 to the consolidated financial statements, the Company recorded a cumulative effect adjustment as of January 1, 2006, in connection with the adoption of the Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.
/s/ MOSS ADAMS LLP
San Diego, California
To the Board of Directors and Stockholders of
We have audited the accompanying consolidated balance sheet of Gaming Partners International Corporation (formerly known as Paul-Son Gaming Corporation) and subsidiaries (the Company) as of December 31, 2005, and the related consolidated statements of income, stockholders equity and other comprehensive income, and cash flows for each of the two years in the period ended December 31, 2005. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Gaming Partners International Corporation and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
INTERNATIONAL CORPORATION AND SUBSIDIARIES
See Notes to Consolidated Financial Statements
INTERNATIONAL CORPORATION AND SUBSIDIARIES
See Notes to Consolidated Financial Statements
INTERNATIONAL CORPORATION AND SUBSIDIARIES