UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

 

FORM 10-K

 

(Mark One)
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from             to            

Commission file number 0-23588

 

GAMING PARTNERS INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

NEVADA		88-0310433
(State of incorporation)		(I.R.S. Employer Identification No.)

1700 Industrial Road, Las Vegas, Nevada 89102
(Address of principal executive offices)

Registrant's telephone number, including area code: (702) 384-2425
Registrant's 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company 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, 2012, based on the closing price as reported on the NASDAQ Global Market of $6.18 per share: $23,190,000.

The number of shares outstanding of each of the registrant's classes of common stock, as of March 13, 2013 was 7,958,364 shares of common stock.

Documents Incorporated by Reference:

Portions of our Proxy Statement relating to the 2013 annual stockholders’ meeting are incorporated herein by reference in Part III. Such Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after conclusion of the registrant’s year ended December 31, 2012.

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PART I
Item 1. Business.			1
Item 1A. Risk Factors.			8
Item 1B. Unresolved Staff Comments.			12
Item 2. Properties.			12
Item 3. Legal Proceedings.			12
Item 4. Mine Safety Disclosures			12
PART II			13
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities			13
Item 6. Selected Financial Data.			14
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.			25
Item 8. Financial Statements and Supplementary Data.			26
Report of Independent Registered Public Accounting Firm			28
Consolidated Balance Sheets			29
Consolidated Statements of Income			30
Consolidated Statements of Comprehensive Income			31
Consolidated Statements of Stockholders’ Equity			32
Consolidated Statements of Cash Flows			33
Notes to Consolidated Financial Statements			34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.			50
Item 9A. Controls and Procedures.			50
Item 9B. Other Information.			51
PART III			51
Item 10. Directors, Executive Officers, and Corporate Governance.			51
Item 11. Executive Compensation.			51
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.			51
Item 13. Certain Relationships and Related Transactions and Director Independence.			51
Item 14. Principal Accountant Fees and Services.			51
PART IV			52
Item 15. Exhibits, Financial Statement Schedules			52

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PART I

Item 1.  Business

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.”

Company Overview

Gaming Partners International Corporation (GPIC or the Company) is headquartered in Las Vegas, Nevada and has three operating subsidiaries: Gaming Partners International USA, Inc. (GPI USA) (including maquiladora manufacturing operations in Mexico), Gaming Partners International SAS (GPI SAS), and Gaming Partners International Asia Limited (GPI Asia). Our subsidiaries have the following distribution and product focus:

GPIC was formed in 2002 through a reverse merger between Paul-Son Gaming Corporation and Bourgogne et Grasset initiated by the late Francois Carrette, whose firm, Holding Wilson, SA, remains GPIC’s controlling shareholder. The Company has established brand names such as Paulson®, Bourgogne et Grasset® (BG®), and Bud Jones®. GPIC and each of its subsidiaries are sometimes collectively referred to herein as the “Company,” “us,” “we,” or “our.” GPI USA was founded in 1963 as Paul-Son Gaming Supplies, Inc. by Paul S. Endy, Jr., and initially manufactured and sold dice to casinos in Las Vegas. GPI SAS was founded in 1923 as Etablissements Bourgogne et Grasset S.A. by Etienne Bourgogne and Claudius Grasset in Beaune, France to produce and sell counterfeit-resistant chips to casinos in Monaco.

We are one of the gaming industry’s leading manufacturers and suppliers of casino table game equipment. We custom manufacture and supply casino chips, table layouts, playing cards, gaming furniture and table accessories, dice, RFID readers and software, and roulette wheels, all of which are used with casino table games such as blackjack, poker, baccarat, craps, and roulette. Our products fall into two categories — non-consumable and consumable. Non-consumable products consist of casino chips, gaming furniture, and RFID solutions. These products have a useful life of several years or longer. Sales of non-consumables are based on casino openings, expansions, and rebrandings, as well as replacement in the normal course of business. Consumable products consist of table layouts, cards, dice, and table accessories and, due to their use, represent recurring revenue for the Company. These products have a useful life that ranges from several hours for playing cards and dice to several months for layouts.

The majority of our products are specifically designed and produced to meet our customers’ requirements, whether they are related to use, branding, aesthetic appeal, security, or anti-counterfeiting features. Our ability to produce products with a variety of styles and features, in combination with years of reliable delivery, enhances our competitive position. When a new casino opens, we strive to supply all the products in our line to operate the casino’s table games. Through this strategy, 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 customer base.

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Product Segments

We operate in one operating segment — casino game equipment products in multi-geographic areas. (See Part II — Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 13.)

Products

The following summarizes sales of our products by product line (in thousands) for the years ended December 31:

		2012								2011
Casino chips:
American-style casino chips without RFID		$	25,253				40.2	%		$	14,777				24.2	%
American-style casino chips with RFID			4,382				7.0	%			8,552				14.0	%
American-style casino chips			29,635				47.2	%			23,329				38.2	%
European-style casino chips without RFID			4,607				7.3	%			2,207				3.6	%
European-style casino chips with RFID			7,423				11.8	%			15,692				25.7	%
European-style casino chips			12,030				19.1	%			17,899				29.3	%
Total casino chips			41,665				66.3	%			41,228				67.5	%
Playing cards			5,551				8.8	%			5,145				8.5	%
Table layouts			4,425				7.0	%			4,101				6.7	%
Table accessories and other products			3,323				5.3	%			3,017				5.0	%
Gaming furniture			2,882				4.6	%			2,098				3.4	%
Dice			2,287				3.6	%			2,161				3.5	%
RFID solutions			839				1.3	%			1,598				2.6	%
Shipping			1,924				3.1	%			1,736				2.8	%
Total		$	62,896				100.0	%		$	61,084				100.0	%

Casino Chips and Currency

Casino chips act as the currency of casinos for traditional table games. Our broad range of currency products enables us to meet our customers’ preferences and specifications, including branding, aesthetic, security, and anti-counterfeiting features. Because casino chips, like real currency, are subject to counterfeiting, we incorporate a variety of custom security and anti-counterfeit features, such as UV pigments, UV inks, four-color process UV markings, gold lace materials, laser pigments, alpha dots, customized rims, number serializations, holograms, and micro-text. Our most sophisticated anti-counterfeiting feature is an RFID device, which is a microchip that can be embedded in our casino chips making them counterfeit resistant and trackable when combined with our Chip Inventory System (CIS) software.

Another feature that is important in the manufacture of secure casino chips is the use of more complex multi-shot molds to enhance chip design complexity, which allows customers to add multiple security features in our B&G and Bud Jones injection-molded chips. To improve our mold making capability, we purchased certain assets of OMC SARL and its subsidiary OMC Industries (OMC), a private French-based manufacturer of high-quality plastic injection molds, in April 2011.

Typically, a casino will order all of its casino chips, including replacement chips, from a single supplier. Accordingly, we strive to become the original chip supplier to a casino upon its opening, thereby enhancing our opportunity to receive additional sales when the casino places replacement orders. 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 depends on customization, quantities, design, and security features. Casino chips can be divided into two basic styles: American-style casino chips and European-style casino chips, known as jetons and plaques. We hold the leading worldwide market share in casino chips.

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American-style Casino Chips

American-style casino chips are used worldwide. There are currently three main manufacturing technologies used to produce these types of chips: injection molding, thermo-compression molding, and sublimation. We produce casino chips using all three of these methods. We sell American-style casino chips under the Paulson®, Bud Jones®, and BG® brand names.

European-style Casino Currency

Jetons and plaques are European-style casino currency. Jetons are circular with multiple diameters. Plaques are rectangular, square, oval, or custom-shaped. While these styles of chips are primarily sold in Europe and Asia, we delivered a significant order of plaques to a Las Vegas casino in the fourth quarter of 2012. Jetons and plaques are made of laminated cellulose acetate with a large range of colors, shapes, security, and anti-counterfeit components such as UV pigment, number serialization, laser pigment, gold lace material, and RFID technology. GPI SAS created its original product line in 1925 and has held the leading position in this market since that time.

RFID Casino Chips

Since 1996, we have been at the forefront of developing applications of RFID technology for use in casino chips. RFID in gaming started with low-frequency (125 KHz) RFID being used for anti-counterfeiting security and chip tracking. In addition to low frequency RFID, we developed and introduced, in 2006, a high-frequency (13.56 MHz) line of RFID products which offer a higher level of security.

We offer a full line of RFID casino chips and readers available in both low and high frequency. Our products, including readers for cage, table, and vault applications, are integrated to provide chip authentication and tracking across multiple locations within a casino. RFID enables quick and accurate accounting and verification of casino chips, either one at a time or in large quantities, whether in stacks, boxes, trays, cabinets, or on the tables.

We hold several international patents related to the embedding process of an RFID microchip into a gaming chip, a jeton, or a plaque. We also hold an exclusive license on two patents owned by International Game Technology (IGT) which allows us to manufacture and sell RFID casino chips and readers in the United States. These licensed patents expire in 2015. Our patents and exclusive license apply to all RFID frequencies.

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RFID Solutions

RFID solutions for casino currency consist of low- and multiple 13.56 MHz high-frequency RFID technologies for chip readers and antennas, as well as our CIS software, hardware, and maintenance services, and are sold as a system to authenticate RFID casino currency. Many jurisdictions require approval of updated versions of our CIS software from regulatory agencies before use by casinos.

In August 2010, we entered into an RFID License and Transfer Agreement with IGT that expanded our access to additional RFID intellectual property. This agreement gave us exclusive rights to IGT’s high-frequency RFID patents and included the purchase of IGT’s CIS communication platform which integrates RFID data into a variety of casino management systems. Through this agreement, we also acquired rights to assume IGT’s existing installed RFID system base throughout the United States and Asia.

Playing Cards

We manufacture and sell two lines of paper casino playing cards under the Paulson brand in single, multi-deck, and pre-shuffled packages. Based on casino controls and practices, cards, which are consumable products, are generally replaced at least every 24 hours. A casino typically enters into a one- or two-year purchase commitment with a supplier to supply its cards at regular intervals, generally monthly. Our cards are compatible with all card shufflers.

Table Layouts

We manufacture table layouts for the North American and European markets. All live gaming tables are covered with a layout printed with artwork particular to each specific game and casino preference. We have developed a comprehensive range of layout fabric and printing processes using wool, polyester, and our proprietary Paul-Son FX material, to give our customers maximum flexibility when developing their design preferences. Our printing processes include screen printing, custom hand painting, full graphic sublimation, and digital direct printing. All graphic designs are developed by our art department in concert with our casino customers to ensure complete satisfaction.

We install layouts on new GPIC gaming tables prior to delivery. As a consumable product, table layouts are replaced on a regular basis.

Gaming Furniture

We sell a variety of casino gaming furniture, including tables, bases, and pit podiums. Our hand-crafted gaming tables are custom-designed to integrate seamlessly with each casino customer’s interior and branded design, and we offer a variety of base, finish, and accessory options. Our tables support our proprietary accessories and RFID systems and are able to incorporate third-party casino equipment products, including card shufflers, card readers, monitors, bill validators, and IT products. Gaming furniture is typically sold in combination with table accessories.

Table Accessories and Other Products

We offer our customers a full line of casino table game accessories, including roulette reader boards, foot rails, chip trays, and drop boxes. These products are generally sold in conjunction with the sale of gaming tables and tend to have long useful lives. Consumable table accessories include shoes, cut cards, dice sticks, lammers, markers, buttons, and our patented Air Rail System ventilation device that creates an air flow at the gaming table to push odors away from the dealer. We have aligned ourselves with key casino accessory vendors to provide many of these products. We are a licensed manufacturer of roulette wheels and sell these worldwide.

Dice

Our precision dice brands are manufactured in conformity with the strictest standards of gaming regulations, and we offer a variety of customization options, including size, finish type, customer logo, color, serialization, and security features such as laser pigment. In a busy casino, a stick of dice (two and one-half pair) does not generally remain in play for more than eight hours.

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Backlog

At December 31, 2012, our backlog of signed orders for 2013 was $8.4 million, consisting of $6.0 million for GPI Asia, $2.1 million for GPI USA, and $0.3 million for GPI SAS. At December 31, 2011, our backlog of signed orders for 2012 was $11.7 million, consisting of $2.7 million for GPI Asia, $4.7 million for GPI USA, and $4.3 million for GPI SAS.

Sales, Advertising, and Promotion

We maintain global sales representation in all gaming jurisdictions with legalized table game operations and use our sales network to sell our products to casinos worldwide. In the Americas, we generally sell and service our full suite of products through our US-based sales force, who sell throughout the United States. In Europe and Africa, we generally sell and service our products through our Beaune, France-based sales force. In the Asia-Pacific region, we distribute products through our Macau S.A.R., China-based sales force.

Our reputation for quality products, reliable service, and unparalleled currency security features are key factors upon which we successfully sell in the market place. This reputation is enhanced by our long-standing customer relationships that have been developed over the years by our individual sales representatives and our executive team. When direct selling is not feasible because of local conditions, we may enter into agreements with carefully selected local sales agents or distributors. However, in this case, we maintain direct contact with the designated representative and the end customers to ensure that our brand integrity is not compromised.

We maintain in-house product design services groups in the United States, France, and Asia to support our sales staff to develop artwork for custom products and to support our manufacturing operations.

We actively promote our product lines, service capabilities, and product quality in a variety of traditional and emerging media. We place advertising in trade publications, support frequent editorial inquiries, and participate in major casino industry trade shows, including the Global Gaming Expo (G2E) events in Las Vegas, Nevada and Macau S.A.R. China, the International Casino Exhibition (ICE) show in London, and the Australasian Gaming Expo in Sydney. We also promote our products through periodic direct-to-customer print and e-mail campaigns and maintain a website dedicated to providing our customers with an easy-to-use product information resource.

We also market casino-specific themed products in certain gaming jurisdictions, including casino chips, layouts, cards, and dice. These themed products are used by our customers to promote special events, including sporting events, conventions, holidays, casino anniversaries, and premier entertainment events.

Competition

We compete against a variety of casino table game equipment suppliers across our product lines. We believe our competitive advantages include our reputation, manufacturing capability, sales staff experience, distribution channels, regulatory and jurisdictional licenses, financial strength, and our ability to provide a complete line of products which allows customers the ease of dealing with a single company.

Casino Chips Our major competitors for casino chips are Gemaco Playing Card Company and ICON Poker, Inc., both based in the United States; Abbiati Casino Equipment Snc., based in Italy; Dolphin Products Pty Ltd., based in Australia; and Matsui Gaming Machine Co., Ltd., based in Japan. We believe our key competitive factors for gaming chip sales are reputation, quality, widespread jurisdictional licensing, emphasis on and the range of security features and configurable custom design options, understanding of players’ and dealers’ preferences, and value.

RFID Solutions We believe the primary competitive advantages for RFID solutions sales are our exclusive licenses and patents, CIS software, and RFID readers, as well as product quality, security, service, and value.

Playing Cards Our major competitors for playing cards are The United States Playing Card Company and Gemaco Playing Card Company, based in the United States, as well as the Angel Playing Cards Co., Ltd, based in Japan. We believe our key competitive factors for playing cards are intrinsic card characteristics including finish, weight of paper, and snap memory, as well as other factors such as jurisdictional licensing, security, manufacturing quality control, delivery reliability, and value.

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Table Layouts Our primary competitors for casino table layouts are Midwest Game Supply Co., Gemaco Playing Card Company, and Rye Park Gaming LLC, all based in the United States, as well as TCS/John Huxley based in the United Kingdom. In addition, there are multiple small, regional competitors in virtually all markets. We believe our key competitive factors for table layout sales are fabric quality and durability, lead times, printing processes, and value.

Gaming Furniture Our principal competitors for casino gaming furniture are USA Gaming Supply Inc., Avalon Gaming Inc., and KP Gaming Supplies Inc., all based in the United States, as well as TCS/John Huxley, Abbiati Casino Equipment, and smaller regional wood shops. We believe our primary competitive factors are our ability to design and produce customized furniture, a wide range of table types and configurations, production lead times, craftsmanship, jurisdictional approvals, and value.

Table Accessories and Other Products Our principal competitors for distributing table accessories and other products including drop boxes, dealing shoes, chip trays, chip bank covers, and foot rails are small local distributors. We believe that our key competitive factors for these products are our ability to be a single-source supplier, as well as our service and product quality.

Dice Our principal competitors for casino dice sales are The United States Playing Card Company and the Midwest Game Supply Co. We believe our primary competitive factors for dice sales are product quality, service, and value.

Materials and Supplies

Where possible, we attempt to diversify our supplier base to avoid a disruption of supply. For critical supplies, we inventory, when possible, additional quantities to minimize risk. However, some key raw materials for our principal products, such as RFID tags, have unique suppliers. In the fall of 2011, we experienced a temporary disruption in the receipt of these RFID tags due to flooding in Thailand. 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 the availability of these materials is adequate to meet our ongoing manufacturing needs.

Manufacturing

We produce most of the products we sell on a build-to-order basis due to the customized nature of our customers’ orders. Our two main manufacturing facilities are in Beaune, France and San Luis Rio Colorado, Mexico. The major products produced in France are our Bourgogne et Grasset brand of American-style casino chips, as well as plaques and jetons. In Mexico, we produce Paulson, Bud Jones, and Bourgogne et Grasset brands of American-style casino chips, as well as cards, layouts, gaming furniture, table accessories, and dice.

We have the facilities, equipment, and personnel necessary to meet expected customer demand and the flexibility to adjust our production capacity to meet ongoing fluctuations in our business and allow us to be responsive to our customers’ requirements.

Research and Development

In response to our customers’ changing and more complex product needs, we have increased our spending in developing new and improved products. This research and development includes new casino currency, RFID technologies, and a broad range of chip security features and materials, as well as new tables and cards. During 2012, we developed a new casino currency that combines features of our different currency products and in late 2012, we received our first order for this new casino currency, which was delivered in the first quarter of 2013.

Our research staff perform these research activities at our facilities in France, Mexico, and the United States, while also working closely with our customers to develop market-driven product features and applications. We also subcontract certain research related to technologies that we are seeking to apply to our products. Our research and development expenses increased to $2.0 million in 2012 from $1.2 million in 2011.

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Intellectual Property

We own a portfolio of trademarks, patents, copyrights, and trade secrets. We own United States, foreign, or common-law trade registrations (®) for the following marks:

Air Rail		Paulson
BG		Paul-Son FX
Bourgogne et Grasset		Paul-son Gaming
Bud Jones		Paulson Pro Series
Casino Currency Control		Poker RFID
Chipsoft		PSV Series
ECS		RFID Poker
Eready		SafeChip by Bourgogne et Grasset
eReady logo		SmartChip
Gaming Partners International		T-K
GPI		We Make the Money the World Plays With
Casino de Isthmus City		Grand Pip
Tagchip		Harlequin
GPI logo		WheelCheck Plus
LaserTrack

Many of our trademarks have international protections.

We own numerous United States and international patents. We also retain an exclusive license to manufacture and sell casino 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 our operations 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 vigorously defend against any infringement or dilution of our trademarks, logos, or patent rights.

Environmental Matters

Our operations are designed to be in compliance with international, federal, state, and local laws and regulations that have been enacted or adopted relating to the protection of the environment. Any liability for environmental remediation or costs will be accrued by us if it is considered probable and the costs can be reasonably estimated.

Employees

At December 31, 2012, we employed 966 people, consisting of 757 employees in Mexico, 134 in France, 69 in the United States, and six in Macau. Additionally, we had 69 temporary contract workers in France. None of our employees are covered by collective bargaining agreements and we believe that our relations with our employees are good.

Regulation and Licensing

The gaming operations of each of our subsidiaries, as well as the operations of casinos, are subject to extensive regulation by 175 state, federal, tribal, and international agencies, with the majority of oversight by individual state gaming control boards and tribal gaming agencies.

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 and competitively and is free of corruption.

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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. We have never been denied a gaming-related license.

Certain regulators not only govern the activities within their jurisdiction, but also oversee activities that occur in other jurisdictions to ensure that we comply with local standards on a worldwide basis. As a Nevada corporation, state regulatory authorities require us to maintain, at a minimum, Nevada gaming standards for all operations worldwide. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions. A more detailed description of the regulations to which we are subject is provided in Exhibit 99.01 of this Annual Report on Form 10-K.

Financial Information about Geographic Areas

See Part II — Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 13 for certain financial information by geographic area.

Available Information

Our website is www.gpigaming.com. There we make available, free of charge, our Annual Report on 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 with the SEC 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.

Item 1A.  Risk Factors

Throughout this Annual Report on 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, any of which could have an adverse effect on our financial condition and results of operations. These include, but are not limited to, the following:

Demand for our products could be adversely affected by:

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Our success in the gaming industry depends in part on our ability to develop and introduce innovative products and could be adversely affected by:

Our intellectual property rights are subject to risks, including:

Our business is vulnerable to changing economic conditions, including:

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We operate in a number of tribal jurisdictions with sovereign immunity, which presents risks we generally do not encounter in U.S. jurisdictions. We also operate in many countries outside of the United States which subjects us to certain inherent risks, including:

We operate in a highly regulated industry and our ability to sell our products in existing jurisdictions or expand into new jurisdictions could be adversely affected by:

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We are subject to risk related to litigation and claims asserted against us, including:

We have a stockholder with effective control of the Company, which means:

Pursuing or implementing acquisitions could have a material adverse effect on our business, financial condition, and results of operations, including:

Any acquisition we implement may fail to produce the revenues, earnings, or business synergies we anticipate for a variety of reasons, including:

Our business operations are subject to other risks, including:

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Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties

Our headquarters is in a Company-owned facility in Las Vegas, Nevada. We manufacture our primary products at facilities in San Luis Rio Colorado, Mexico and Beaune, France. We also lease sales offices in Atlantic City, New Jersey; Gulfport, Mississippi; and Macau S.A.R. China.

Las Vegas, Nevada.  In Las Vegas, we own a 60,000 square-foot building. This facility houses our corporate and Las Vegas sales offices, as well as a warehouse and our product design services department.

San Luis Rio Colorado, Mexico.  We manufacture casino chips, playing cards, dice, plastic products, layouts, and tables at three facilities in San Luis Rio Colorado, Mexico. These facilities include a 34,000 square-foot leased facility, a 46,000 square-foot leased facility, and a 66,000 square-foot facility, which we own. The leased facilities are leased through December 2013 at the monthly rent amount of $0.35 per square foot, or $28,000.

San Luis, Arizona.  In May 2012, we leased an 8,000 square-foot warehouse facility in San Luis, Arizona, across the border from our Mexican manufacturing facility. This warehouse is leased through June 2015.

Beaune, France.  In Beaune, we own a 34,000 square-foot manufacturing facility in which we produce European- and American-style casino chips and a 15,000 square-foot administrative and sales building located nearby. Additionally, in April 2011, we leased a 5,000 square-foot building through March 2017, which houses our mold-making operations.

Macau S.A.R. China.  In October 2012, we leased a 4,000 square-foot sales office in Macau S.A.R. China through September 2015.

Facility Capacity.  With approximately 272,000 square feet of manufacturing, warehouse, and administrative facilities as of December 31, 2012, we believe we have sufficient production capacity to meet anticipated future demand for all of our products in the United States and abroad.

Item 3.  Legal Proceedings

See Part II — Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 11 for information regarding legal proceedings and contingencies.

Item 4.  Mine Safety Disclosures

Not applicable.

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PART II

Market Information

Our common stock is traded on the NASDAQ Global Market under the symbol GPIC. The following table sets forth the quarterly high and low prices for trades of our common stock as reported by NASDAQ during the periods indicated. All stock prices reflect a fiscal year ending December 31. On March 13, 2013, the closing price was $8.02 per share.

		Fiscal Year 2012								Fiscal Year 2011
		High				Low				High				Low
First Quarter		$	7.10			$	6.00			$	7.72			$	6.25
Second Quarter			7.00				6.04				7.71				6.65
Third Quarter			6.40				5.94				8.40				6.06
Fourth Quarter			7.21				6.10				7.14				5.81

Holders

There were 82 holders of record of our common stock as of March 13, 2013.

Dividend Policy

Our Board of Directors has no current plans to pay a regular dividend on our common stock, but intends to evaluate the merit of paying a dividend from time to time. We paid a $1.48 million dividend, or $0.1825 per share, in December 2012 and paid a $1.50 million dividend, or $0.1825 per share, in December 2011.

Transfer Agent

Our stock transfer agent and registrar is American Stock Transfer & Trust Co., located at 6201 15^th Avenue, Brooklyn, New York 11219. Its telephone number is (718) 921-8200 or (800) 937-5449.

Purchases of Equity Securities by the Issuer

The following is a summary of common shares repurchased by us by month during the fourth quarter of 2012 under our stock repurchase program:

Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)				Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
October 1 to 31			—				—				—				—
November 1 to 30			—				—				—				—
December 1 to 31			54,600			$	7.20				54,600				345,400
Total			54,600			$	7.20				54,600				345,400

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Item 6.  Selected Financial Data

The selected consolidated financial data included in the following tables should be read in conjunction with our Consolidated Financial Statements and related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere herein. The selected consolidated financial data for the years ended December 31, 2012 and 2011 have been derived from our audited consolidated financial statements included elsewhere herein. The selected consolidated financial data for the years ended December 31, 2010, 2009, and 2008 have been derived from our audited consolidated financial statements not included herein.

		Years Ended December 31,
		2012				2011				2010				2009				2008
		(in thousands, except per-share amounts)
STATEMENT OF INCOME DATA:
Revenues		$	62,896			$	61,084			$	59,875			$	49,527			$	60,546
Cost of revenues(1)			40,384				40,728				37,038				33,253				40,442
Gross profit			22,512				20,356				22,837				16,274				20,104
Selling, administrative, and research and development(1)			15,352				15,888				16,398				13,487				14,764
Impairment of goodwill			—				—				—				1,572
Operating income			7,160				4,468				6,439				1,215				5,340
Other income and (expense)			290				463				352				289				486
Income before income taxes			7,450				4,931				6,791				1,504				5,826
Income tax provision			1,375				1,262				2,372				457				1,339
Net income		$	6,075			$	3,669			$	4,419			$	1,047			$	4,487
Earnings per share:
Basic		$	0.75			$	0.45			$	0.54			$	0.13			$	0.55
Diluted		$	0.75			$	0.45			$	0.53			$	0.13			$	0.55
Weighted-average shares of common stock outstanding:
Basic			8,122				8,199				8,199				8,107				8,103
Diluted			8,149				8,225				8,207				8,189				8,184
BALANCE SHEET DATA:
Cash and cash equivalents		$	14,038			$	9,282			$	11,400			$	3,238			$	5,547
Marketable securities			13,546				14,867				18,350				15,600				7,561
Working capital			31,348				28,492				26,757				22,694				21,931
Property and equipment, net			11,190				11,836				11,926				13,454				14,158
Total assets			63,282				56,042				61,807				53,278				49,549
Current liabilities			14,487				12,854				20,308				12,806				8,405
Long-term debt			—				15				32				314				1,743
Total stockholders' equity(2)			46,621				42,484				40,935				39,490				38,816

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.”

For a Company Overview and information on our products, as well as general information, see Part I — Item 1. “Business.”

Overview of Our Business

We custom manufacture and supply casino currency under the brand names of Paulson®, Bourgogne et Grasset®, and Bud Jones® (including low- and high-frequency RFID casino chips), RFID solutions for casino currency (consisting of low- and high-frequency RFID chip readers, antennas, chip authentication software, chip inventory software applications, and software maintenance services), 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. GPIC is headquartered in Las Vegas, Nevada, with offices in Beaune, France; Macau S.A.R., China; San Luis Rio Colorado, Mexico; Atlantic City, New Jersey; and Gulfport, Mississippi. We sell our products to licensed casinos worldwide. We operate in one segment and have three operating subsidiaries: GPI USA (including maquiladora manufacturing operations in Mexico), GPI SAS, and GPI Asia. Our subsidiaries have the following distribution and product focus:

Historically, we have experienced significant fluctuations in our quarterly operating results and expect such fluctuations to continue. These fluctuations primarily reflect the opening of new casinos, the expansion of existing casinos, or large replacement orders for casino chips, our primary product line, which typically represents over 60% of our revenues. The timing of these events is difficult to forecast and largely beyond our ability to influence, which creates variability in our revenues and earnings. While we pursue most large projects years in advance, both large and small sales opportunities arise with little prior notice. An indicator of future sales is found in our backlog, which reflects signed orders that we expect to ship during the following year. Our backlog at December 31, 2012 and December 31, 2011 was as follows (in millions):

GPI SAS

GPI USA

GPI ASIA

Total

December 31, 2012

$

0.3 million

$

2.1 million

$

6.0 million

$

8.4 million

December 31, 2011

$

4.3 million

$

4.7 million

$

2.7 million

$

11.7 million

The change in the GPI SAS and GPI Asia backlogs reflects the transition during 2012 to GPI Asia as the exclusive distributor for our products in Asia.

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Outlook

During 2012, an increase in casino openings, expansions, and rebrandings in the United States led to an increase in sales of Paulson chips, furniture, and accessories. Additionally, in the fourth quarter of 2012, we showed increases in Asia-Pacific sales due to new and expansion orders. Our backlog at the end of 2012 includes the introduction of a new chip currency with more customized designs and security features.

We will continue to evaluate potential strategic acquisitions and partnerships to grow our business and have engaged financial advisors to assist us in this regard; however, no assurance can be given that these efforts will result in completed transactions or that any completed transactions will be successful. Additionally, we will pursue growth internally by continuing our focus on market-driven research and development of new products and product enhancements.

Financial and Operational Highlights

For the fourth quarter of 2012, our revenues were $17.5 million, an increase of $2.9 million, or 19.6%, compared to revenues of $14.6 million in 2011. For the fourth quarter of 2012, our net income was $1.7 million, an increase of $1.1 million, or 213.2%, compared to net income of $0.6 million in 2011.

For the year ended December 31, 2012, our revenues were $62.9 million, an increase of $1.8 million, or 3.0%, compared to revenues of $61.1 million in 2011. Our net income for 2012 was $6.1 million, an increase of $2.4 million, or 65.6%, compared to net income of $3.7 million for 2011.

GPI SAS uses the euro as its functional currency. At December 31, 2012 and 2011, the US dollar to euro exchange rates were $1.3218 and $1.2950, respectively, which represents a 2.1% weaker dollar compared to the euro. The average exchange rates for the years ended December 31, 2012 and 2011 were $1.2861 and $1.3924, respectively, which represents a 7.6% stronger dollar compared to the euro.

Our Mexican manufacturing plant uses the US dollar as its functional currency. At December 31, 2012 and 2011, the Mexican peso to US dollar exchange rates were 13.0101 and 13.9787, respectively, which represents a 6.9% weaker dollar compared to the peso. The average exchange rates for the years ended December 31, 2012 and 2011 were 13.1683 pesos and 12.4274 pesos to the US dollar, respectively, which represents a 6.0% stronger dollar compared to the Mexican peso.

GPI Asia, our exclusive distributor for GPI USA and GPI SAS products in the Asia-Pacific region, uses the US dollar as its functional currency. At December 31, 2012 and 2011, the Macanese pataca to US dollar exchange rates were 7.9800 and 7.8299, respectively, which represents a 1.9% stronger dollar compared to the pataca. The average exchange rates for the years ended December 31, 2012 and 2011 were 7.8329 patacas and 7.8747 patacas to the US dollar, respectively, which represents a 0.5% weaker dollar compared to the Macanese pataca.

Other Matters

On December 18, 2012, we paid a $1.48 million dividend, or $0.1825 per share, to our common stockholders. On December 12, 2011, we paid a $1.50 million dividend, or $0.1825 per share, to our common stockholders.

On December 1, 2011, our Board of Directors approved a stock repurchase program, which authorized us to repurchase up to five percent, or 409,951 shares, of our then-outstanding shares of common stock. We purchased 98,512 shares under this plan through November 30, 2012, at which time our Board of Directors increased the number of shares available for repurchase under the program to 400,000 shares; an increase of 88,561 shares. We purchased 54,600 shares after the November 30, 2012 increase, leaving 345,400 shares available for repurchase as of December 31, 2012. Since the inception of the stock repurchase program on December 1, 2011, we have repurchased 153,112 shares, as of December 31, 2012.

The other terms of the program as previously adopted by the Board of Directors remain in full force and effect. Repurchases are subject to market conditions, share price, and other factors, as well as periodic review by the Board of Directors. Repurchases have been and will be made in accordance with applicable securities laws in the open market, or in privately negotiated transactions and/or pursuant to Rule 10b5-1 trading plans.

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To assist the implementation of the program, our Board of Directors adopted a 10b5-1 Purchase Plan on December 3, 2012. The repurchase program does not specify an expiration date and it may be suspended or discontinued at any time.

During the year ended December 31, 2012, we repurchased a total of 141,860 shares of our common stock under the program at a cost of $983,029, or a weighted-average price of $6.93 per share. Since the inception of this program in the fourth quarter of 2011 through March 13, 2013, we have repurchased a total of 240,652 shares at a cost of $1,726,382, or a weighted-average price of $7.17 per share.

Results of Operations

The following table summarizes selected items from the Company’s Consolidated Statements of Income (in thousands) and as a percentage of revenues for the years ended December 31:

		2012								2011								Year to Year Change
Revenues		$	62,896				100.0	%		$	61,084				100.0	%		$	1,812				3.0	%
Cost of revenues(1)			40,384				64.2	%			40,728				66.7	%			(344	)			(0.8	)%
Gross profit			22,512				35.8	%			20,356				33.3	%			2,156				10.6	%
Selling, administrative, and research and development(1)			15,352				24.4	%			15,888				26.0	%			(536	)			(3.4	)%
Operating income			7,160				11.4	%			4,468				7.3	%			2,692				60.3	%
Other income and (expense)			290				0.5	%			463				0.8	%			(173	)			(37.4	)%
Income before income taxes			7,450				11.9	%			4,931				8.1	%			2,519				51.1	%
Income tax provision			1,375				2.2	%			1,262				2.1	%			113				9.0	%
Net income		$	6,075				9.7	%		$	3,669				6.0	%		$	2,406				65.6	%

The following table presents certain data by geographic location (in thousands) and as a percentage of revenues for the years ended December 31:

		2012								2011
Revenues
The Americas		$	32,891				52.3	%		$	24,944				40.8	%
Asia Pacific			25,532				40.6	%			33,106				54.2	%
Europe and Africa			4,473				7.1	%			3,034				5.0	%
Total		$	62,896				100.0	%		$	61,084				100.0	%

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The following table details the Company’s revenues by product line (in thousands) and as a percentage of revenues for the years ended December 31:

		2012								2011								Year to Year Change
Casino chips:
American-style casino chips without RFID		$	25,253				40.2	%		$	14,777				24.2	%		$	10,476				70.9	%
American-style casino chips with RFID			4,382				7.0	%			8,552				14.0	%			(4,170	)			(48.8	)%
American-style casino chips			29,635				47.2	%			23,329				38.2	%			6,306				27.0	%
European-style casino chips without RFID			4,607				7.3	%			2,207				3.6	%			2,400				108.7	%
European-style casino chips with RFID			7,423				11.8	%			15,692				25.7	%			(8,269	)			(52.7	)%
European-style casino chips			12,030				19.1	%			17,899				29.3	%			(5,869	)			(32.8	)%
Total casino chips			41,665				66.3	%			41,228				67.5	%			437				1.1	%
Playing cards			5,551				8.8	%			5,145				8.5	%			406				7.9	%
Table layouts			4,425				7.0	%			4,101				6.7	%			324				7.9	%
Table accessories and other products			3,323				5.3	%			3,017				5.0	%			306				10.1	%
Gaming furniture			2,882				4.6	%			2,098				3.4	%			784				37.4	%
Dice			2,287				3.6	%			2,161				3.5	%			126				5.8	%
RFID solutions			839				1.3	%			1,598				2.6	%			(759	)			(47.5	)%
Shipping			1,924				3.1	%			1,736				2.8	%			188				10.8	%
Total		$	62,896				100.0	%		$	61,084				100.0	%		$	1,812				3.0	%

Comparison of Operations for the Years Ended December 31, 2012 and 2011

Revenues  For the year ended December 31, 2012, revenues were $62.9 million, an increase of $1.8 million, or 3.0%, compared to revenues of $61.1 million in 2011. This increase in revenues in 2012 was due primarily to the following:

Cost of Revenues  For the year ended December 31, 2012, cost of revenues was $40.3 million, a decrease of $0.4 million, or 0.9%, compared to cost of revenues of $40.7 million for 2011. As a percentage of revenues, our cost of revenues decreased to 64.2% in 2012 compared to 66.7% in 2011. The reduced cost of revenues was driven by the same factors described under Gross Profit below.

Gross Profit  For the year ended December 31, 2012, gross profit was $22.5 million, an increase of $2.1 million, or 10.8%, compared to gross profit of $20.4 million for 2011. As a percentage of revenues, our gross profit increased from 33.3% to 35.8%. This gross profit percentage increase was primarily driven primarily by the following:

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Selling, Administrative, and Research and Development Expenses  The following table details the selling, administrative, and research and development expenses (in thousands) and as a percentage of revenues for the years ended December 31:

		2012								2011								Year to Year Change
Marketing and sales(1)		$	6,111				9.7	%		$	5,512				9.0	%		$	599				10.9	%
General and administrative(1)			7,252				11.5	%			9,139				15.0	%			(1,887	)			(20.6	)%
Research and development(1)			1,989				3.2	%			1,237				2.0	%			752				60.8	%
Total selling, administrative, and research and development		$	15,352				24.4	%		$	15,888				26.0	%		$	(536	)			(3.4	)%

For the year ended December 31, 2012, selling, administrative, and research and development expenses were $15.4 million, a decrease of $0.5 million, or 3.1%, compared to selling, administrative, and research and development expenses of $15.9 million in 2011. Selling, administrative, and research and development expenses decreased as a percent of revenue to 24.4% in 2012 from 26.0% in 2011.

Marketing and sales expenses increased from 2011 to 2012 by $0.6 million. This increase is primarily due to an increase of $0.3 million related to compensation expenses and $0.3 million related to trade shows and other marketing activities.

General and administrative expenses decreased from 2011 to 2012 by $1.9 million. This is primarily due to a decrease of $0.8 million in legal expenses, including a credit related to the settlement of employment litigation in France, a $0.4 million reduction in gaming license expenses, and a decrease of $0.4 million in bad debt expense related to the collection of accounts past due and previously reserved.

Research and development expenses increased from 2011 to 2012 by $0.8 million. This increase is primarily due to an increased number of research and development projects related to new currency products, chip information software, and casino chip security features.

Other Income and (Expense)  The following table details other income and (expense) items (in thousands) and as a percentage of revenues for the years ended December 31:

		2012								2011								Year to Year Change
Interest income		$	382				0.6	%		$	475				0.8	%			(93	)			(19.6	)%
Interest expense			(8	)			(0.0	)%			(56	)			(0.1	)%			48				85.7	%
(Loss) on foreign currency transactions			(91	)			(0.1	)%			(11	)			(0.0	)%			(80	)			727.3	%
Other income, net			7				0.0	%			55				0.1	%			(48	)			(87.3	)%
Total other income and (expense)		$	290				0.5	%		$	463				0.8	%		$	(173	)			(37.4	)%

For the year ended December 31, 2012, other income and (expense) decreased by $0.2 million compared to the prior year. This was primarily due to a $0.1 million decrease in net interest income related to lower average yields on marketable securities during 2012 than 2011, and a $0.1 million decrease in foreign currency transactions.

Income Taxes  During the year ended December 31, 2012, our effective tax rate was 18.5%, compared to 25.6% for the year ended December 31, 2011. Our effective tax rate for the year ended December 31, 2012 differed from the statutory rate as a result of the utilization of our foreign tax credit carryforwards, combined with the foreign rate differential on the income from our Macau subsidiary, GPI Asia, and the benefit from a research credit from our French subsidiary, GPI SAS. Our effective tax rate for the year ended December 31,

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2011 differed from the statutory rate primarily because of the foreign rate differential on the income from our Macau subsidiary, GPI Asia, combined with the benefit from a research credit from our French subsidiary, GPI SAS.

Pre-tax income (loss) by taxing jurisdictions for the years ended December 31 (in thousands) was as follows:

		2012				2011
France (GPI SAS)		$	1,244			$	5,454
United States (GPIC and GPI USA)			3,053				(1,406	)
Macau (GPI Asia)			2,343				643
Mexico (GPI Mexicana)			810				240
Total pre-tax income		$	7,450			$	4,931

Our corporate tax rate is calculated on a consolidated basis. Included in the United States numbers are the costs of GPIC, which include such items as regulatory fees, board of director expenses, investor relations expenses, auditing and review fees, and corporate legal expenses. We do not allocate these costs to our subsidiaries. In 2012 and 2011, these costs totaled $1.3 million and $1.6 million, respectively.

Liquidity and Capital Resources

Sources of Liquidity and Capital Resources  Historically, our primary source of liquidity and capital resources has been cash from operations. Other potential sources of capital include, but are not limited to, marketable securities and bank credit facilities both in the United States and abroad. We believe that the combination of these resources will satisfy our needs for working capital, capital expenditures, purchases of common stock under our stock repurchase program, debt service, and litigation, as well as other potential cash requirements, such as any dividends or acquisitions, for our operations for a minimum of the next 12 months.

At December 31, 2012, we had $14.0 million in cash and cash equivalents and $13.5 million in marketable securities, totaling $27.5 million. Of this amount, $14.6 million is held by GPI SAS, $8.1 million is held by GPI USA, and $4.8 million is held by GPI Asia.

Working Capital (See Consolidated Balance Sheets) The following summarizes our cash and cash equivalents (in thousands), working capital (in thousands), and current ratio for the years ended December 31:

		2012				2011				Year to Year Change
Cash and cash equivalents		$	14,038			$	9,282			$	4,756				51.2	%
Working capital			31,348				28,492				2,856				10.0	%
Current ratio			3.2				3.2

At December 31, 2012, working capital totaled $31.3 million, an increase of $2.9 million, or 10.0%, compared to working capital of $28.5 million at December 31, 2011. This increase is due to an increase in current assets of $4.5 million, offset by an increase in current liabilities of $1.6 million. The increase in current assets was due primarily to an increase in cash and cash equivalents of $4.8 million. The increase in current liabilities was due primarily to an increase in customer deposits and deferred revenue of $1.5 million.

Cash Flows (See Consolidated Statements of Cash Flows)  The following summarizes our cash flow (in thousands) for the years ended December 31:

		2012				2011				Year to Year Change
Operating Activities		$	7,017			$	5,716			$	1,301				22.8	%
Investing Activities			216				887				(671	)			(75.6	)%
Financing Activities			(2,493	)			(8,544	)			6,051				(70.8	)%
Effect of exchange rates			16				(177	)			193				(109.0	)%
Net change		$	4,756			$	(2,118	)		$	6,874				(324.6	)%

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Net cash flows provided by operating activities were $7.0 million during 2012, an increase of $1.3 million, compared to net cash flows provided by operating activities of $5.7 million for 2011. In 2012, $8.6 million of cash was provided by net income-related activities; $0.2 million was used to acquire operating assets (excluding cash); and $1.4 million was used to reduce current liabilities. In 2011, $6.0 million of cash was provided by net income-related activities; $0.4 million was provided by a reduction in operating assets (excluding cash); and $0.6 million was used to reduce current liabilities.

Net cash flows provided by investing activities were $0.2 million in 2012, a decrease of $0.7 million, compared to net cash flows provided by investing activities of $0.9 million in 2011. This decrease in net cash flows provided by investing activities was primarily due to a reduction in net sales of marketable securities of $1.6 million in 2012, compared to 2011, by the $0.7 million acquisition of assets from OMC in April 2011, and a decrease in capital expenditures of $0.3 million in 2012, compared to 2011.

Net cash flows used in financing activities were $2.5 million in 2012, a decrease of $6.0 million, compared to net cash flows used in financing activities of $8.5 million in 2011. This decrease in net cash flows used in financing activities was primarily due to the repayment of debt obligations of $7.0 million in 2011, offset by the repurchase of common stock of $0.9 million in 2012.

Debt In December 2010, GPI SAS borrowed 5.0 million euros (approximately $6.7 million in December 2010) from a French bank at a variable interest rate based on the Euro Interbank Offered Rate plus 0.5% per annum and secured by 3.75 million euros (approximately $4.9 million) in GPI SAS certificates of deposit. This loan was paid in full in June 2011.

Facilities

Las Vegas, Nevada.  In Las Vegas, we own a 60,000 square-foot building. This facility houses our corporate and Las Vegas sales offices, as well as a warehouse and our product design services department.

San Luis Rio Colorado, Mexico.  We manufacture casino chips, playing cards, dice, plastic products, layouts, and tables at three facilities in San Luis Rio Colorado, Mexico. These facilities include a 34,000 square-foot leased facility, a 46,000 square-foot leased facility, and a 66,000 square-foot facility, which we own. The leased facilities are leased through December 2013 at the monthly rent amount of $0.35 per square foot, or $28,000.

San Luis, Arizona.  In May 2012, we leased an 8,000 square-foot warehouse facility in San Luis, Arizona, across the border from our Mexican manufacturing facility. This warehouse is leased through June 2015.

Beaune, France.  In Beaune, we own a 34,000 square-foot manufacturing facility in which we produce European- and American-style casino chips and a 15,000 square-foot administrative and sales building located nearby. Additionally, in April 2011, we leased a 5,000 square-foot building through March 2017, which houses our mold-making operations.

Macau S.A.R. China.  In October 2012, we leased a 4,000 square-foot sales office in Macau S.A.R. China through September 2015.

Capital Expenditures  We plan to purchase approximately $1.4 million in property, plant, and equipment in 2013, which includes $1.0 million in machinery and equipment. In 2012, we purchased $1.4 million of property, plant, and equipment. Of that amount, $1.2 million was used to purchase machinery and equipment.

Cash Dividend  Our Board of Directors has no current plans to pay a regular dividend on our common stock, but intends to evaluate the merit of paying a dividend from time to time. We paid a $1.48 million dividend, or $0.1825 per share, in December 2012 and a $1.50 million dividend, or $0.1825 per share, in December 2011.

Backlog  At December 31, 2012, our backlog of signed orders for 2013 was $8.4 million, consisting of $6.0 million for GPI Asia, $2.1 million for GPI USA, and $0.3 million for GPI SAS. At December 31, 2011, our backlog of signed orders for 2012 was $11.7 million, consisting of $2.7 million for GPI Asia, $4.7 million for GPI USA, and $4.3 million for GPI SAS.

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Selected Quarterly Financial Information

		Year Ended December 31, 2012
		First				Second				Third				Fourth				Total
		(in thousands, except per-share data)
Revenues		$	15,425			$	13,030			$	16,939			$	17,502			$	62,896
Cost of revenues(1)			10,028				8,098				11,372				10,886				40,384
Gross profit			5,397				4,932				5,567				6,616				22,512
Selling, administrative, and research and development expenses(1)			3,853				3,167				4,040				4,292				15,352
Operating income			1,544				1,765				1,527				2,324				7,160
Other income, net			110				17				185				(22	)			290
Income before income taxes			1,654				1,782				1,712				2,302				7,450
Income tax provision			383				(28	)			455				565				1,375
Net income		$	1,271			$	1,810			$	1,257			$	1,737			$	6,075
Net income per share:
Basic(2)		$	0.16			$	0.22			$	0.16			$	0.22			$	0.75
Diluted		$	0.16			$	0.22			$	0.15			$	0.22			$	0.75

		Year Ended December 31, 2011
		First				Second				Third				Fourth				Total
		(in thousands, except per-share data)
Revenues		$	17,821			$	14,791			$	13,834			$	14,638			$	61,084
Cost of revenues(1)			11,278				9,758				9,475				10,217				40,728
Gross profit			6,543				5,033				4,359				4,421				20,356
Selling, administrative, and research and development expenses(1)			4,041				3,928				3,902				4,017				15,888
Operating income			2,502				1,105				457				404				4,468
Other income, net			110				121				125				107				463
Income before income taxes			2,612				1,226				582				511				4,931
Income tax provision			883				318				105				(44	)			1,262
Net income		$	1,729			$	908			$	477			$	555			$	3,669
Net income per share:
Basic		$	0.21			$	0.11			$	0.06			$	0.07			$	0.45
Diluted		$	0.21			$	0.11			$	0.06			$	0.07			$	0.45

Obligations and Commercial Commitments

The following table presents the impact that our contractual obligations and commercial commitments at December 31, 2012, 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

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December 31, 2012. Operating leases and contracts that are on a month-to-month basis are not included. (See Part II — Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 11)

		Payments Due by Period (in thousands)
Contractual Obligations		Total				0 – 1 years				2 – 3 years				4 – 5 years				Beyond
Purchase and other commitment obligations(1)		$	5,623			$	5,348			$	225			$	50			$	—
Operating leases			1,373				651				533				189				—
Total contractual cash obligations		$	6,996			$	5,999			$	758			$	239			$	—

Impact of Inflation  To date, inflation has not had a material effect on our operations.

Critical Accounting Estimates

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; the allowance for doubtful accounts; write-downs of obsolete, excess, or slow-moving inventories; the valuation and amortizable lives of intangible assets; and the recoverability of deferred tax 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, 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 Recognition

We receive revenues from the sales of our gaming products, as well as licensing and services. Revenues are recognized when all of the following have been satisfied:

Determining whether these requirements have been met may require us to make assumptions and exercise judgment that could significantly impact the timing and amount of revenue reported each period. In addition, we may enter into arrangements which include software and/or multiple elements or deliverables, such as RFID solutions, which include RFID equipment, embedded software licenses, and software maintenance services. In such cases, additional judgments and estimates are necessary to ensure the appropriate amounts of revenue are recorded for a given period.

The application of our revenue recognition policies and changes in our assumptions or judgments affect the timing and amounts of our revenues and costs, as well as deferred revenue.

Allowance for Doubtful Accounts

We estimate an allowance for doubtful accounts receivable 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. Additional amounts are recorded in the allowance based on our awareness of a particular customer’s ability to meet its financial obligations. A change in our estimates of the allowance for doubtful accounts could have a material adverse effect on our consolidated results of operations.

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Inventories

Inventories are stated at the lower of cost or market. Market value is determined by comparing inventory item carrying values to estimates of net realizable value. The analysis of net realizable value includes reviewing overall inventory levels, historical and projected sales or usage of these items, the projected markets for our products, and selling costs. Inventory that we estimate will not be used within the next year is considered non-current inventory. A change in our inventory estimates could have a material adverse effect on our consolidated results of operations.

Intangible Assets

Intangible assets with definite lives, such as our patents, are amortized using the straight-line method over their estimated economic useful lives. Judgments are made in determining the estimated useful lives of intangible assets and if or when an asset has been impaired. These estimates affect the amount of amortization expense recognized in the financial results. We assign lives to our assets based on specific legal and economic characteristics. We evaluate these intangible assets with definite lives for potential impairment annually and whenever events or changes in circumstances indicate the carrying value may not be recoverable, and we record an impairment charge when the carrying amount of the intangible asset is not recoverable and the carrying amount exceeds the estimated fair value. This impairment charge could have a material adverse effect on our consolidated results of operations.

Deferred Taxes

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. Additionally, 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 global tax laws, changes to statutory tax rates, and changes to future taxable income estimates.

The amount of income taxes we pay is subject to audits by federal, state, and foreign tax authorities, which may result in tax assessments. Our estimate for the potential outcome for any uncertain tax issue may be highly subjective and judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these tax issues. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities due to closure of income tax audits, new regulatory or judicial pronouncements, or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.

We review all of our uncertain tax positions and make a determination as to whether our position is more likely than not to be sustained upon audit by taxing authorities. If a tax position meets this more-likely-than-not standard, then the related tax benefit is measured based on a cumulative probability analysis of the amount that is more likely than not to be realized upon ultimate settlement or disposition of the underlying tax issue.

If actual results differ unfavorably from 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 basis 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.

Recently Issued Accounting Standards

Effective January 1, 2012, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2011-05, Presentation of Comprehensive Income and ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. These ASUs eliminate the option to present the components of other comprehensive income in the statement of changes in stockholders’ equity. Instead, entities have the option to present the components of net income, the

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components of other comprehensive income, and total comprehensive income in a single continuous statement or in two separate, but consecutive, statements. The amendments did not change the items reported in other comprehensive income or when an item of other comprehensive income is reclassified to net income. As a result, the adoption of this guidance did not affect our consolidated financial position, results of operations, or cash flows. We have presented the components of net income, the components of other comprehensive income, and total comprehensive income in two separate, but consecutive, statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, to amend fair value measurement to achieve convergence between US GAAP and IFRS. The ASU changes some fair value measurement principles and disclosure requirements, is effective for fiscal quarters and years beginning on or after December 15, 2011, and has not had a material impact on our consolidated financial statements.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

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 exchange risk.

There are two types of foreign currency exchange risks that we may be subject to: transaction and translation gains and losses. Foreign exchange transaction gains or losses are distinguished from translation gains or losses as follows: (i) transaction gains or losses are based on actual transactions that occur in a currency other than the functional currency of that entity, whereas, (ii) translation adjustments do not involve the movement of cash; they are accounting conversion calculations of an existing functional currency to a reporting currency.

We are subject to foreign currency exchange risk relating to the translation of GPI SAS’ assets, liabilities, and income and expense accounts. GPI SAS uses the euro as its functional currency. 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.

The assets and liabilities of GPI SAS were translated into US dollars at the rate of exchange at December 31, 2012 and December 31, 2011. 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. These gains and losses are reflected in our consolidated statements of income. At December 31, 2012 and 2011, the US dollar to euro exchange rates were $1.3218 and $1.2950, respectively, which represents a 2.1% weaker dollar compared to the euro. The average exchange rates for the years ended December 31, 2012 and 2011 were $1.2861 and $1.3924, respectively, which represents a 7.6% stronger dollar compared to the euro.

For GPI Mexicana and GPI Asia, the US 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 gain (loss) on foreign currency transactions.

Transaction gains and losses that arise from exchange rate fluctuations on transactions with third parties denominated in a currency other than the functional currency are included in the results of operations as incurred. From time to time we may enter into derivative currency contracts in order to hedge currency exposure.

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Item 8.  Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm			28
Consolidated Balance Sheets at December 31, 2012 and 2011			29
Consolidated Statements of Income for the Years Ended December 31, 2012 and 2011			30
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012 and 2011			31
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2012 and 2011			32
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011			33
Notes to Consolidated Financial Statements			34

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GAMING PARTNERS INTERNATIONAL CORPORATION
AND SUBSIDIARIES
 
CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Gaming Partners International Corporation and Subsidiaries
Las Vegas, Nevada

We have audited the accompanying consolidated balance sheets of Gaming Partners International Corporation and Subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 audits 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 audits include 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 Company’s 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 consolidated 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 consolidated financial position of Gaming Partners International Corporation and Subsidiaries as of December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Moss Adams LLP

San Diego, California
March 26, 2013

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GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands, except share amounts)

		2012				2011
ASSETS
Current Assets:
Cash and cash equivalents		$	14,038			$	9,282
Marketable securities			13,546				14,867
Accounts receivable, net			5,802				5,976
Inventories			7,337				7,749
Prepaid expenses			893				1,015
Deferred income tax asset			2,908				893
Other current assets			1,311				1,564
Total current assets			45,835				41,346
Property and equipment, net			11,190				11,836
Intangibles, net			540				646
Deferred income tax asset			3,857				1,740
Inventories, non-current			207				160
Other assets, net			1,653				314
Total assets		$	63,282			$	56,042
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt			—			$	17
Accounts payable			2,842				2,376
Accrued liabilities			5,179				5,876
Customer deposits and deferred revenue			3,037				4,585
Deferred income tax liability			2,858				—
Income taxes payable, net			571				—
Total current liabilities			14,487				12,854
Long-term debt			—				15
Deferred income tax liability			2,174				689
Total liabilities			16,661				13,558
Commitments and contingencies – see Note 11
Stockholders' Equity:
Preferred stock, authorized 10,000,000 shares, $.01 par value, none issued and outstanding			—				—
Common stock, authorized 30,000,000 shares, $.01 par value, 8,207,077 and 8,045,904 issued and outstanding, respectively, as of December 31, 2012, and 8,207,077 and 8,187,764 issued and outstanding, respectively, as of December 31, 2011			82				82
Additional paid-in capital			19,563				19,401
Treasury stock at cost: 161,173 and 19,313 shares			(1,250	)			(267	)
Retained earnings			27,039				22,442
Accumulated other comprehensive income			1,187				826
Total stockholders' equity			46,621				42,484
Total liabilities and stockholders' equity		$	63,282			$	56,042

 
 
See Notes to Consolidated Financial Statements

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GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(in thousands, except earnings per share)

		2012				2011
Revenues		$	62,896			$	61,084
Cost of revenues			40,384				40,728
Gross profit			22,512				20,356
Marketing and sales			6,111				5,512
General and administrative			7,252				9,139
Research and development			1,989				1,237
Operating income			7,160				4,468
Other income, net			290				463
Income before income taxes			7,450				4,931
Income tax provision			1,375				1,262
Net income		$	6,075			$	3,669
Earnings per share:
Basic		$	0.75			$	0.45
Diluted		$	0.75			$	0.45
Weighted-average shares of common stock outstanding:
Basic			8,122				8,199
Diluted			8,149				8,225

 
 
See Notes to Consolidated Financial Statements

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GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
(in thousands)

		2012				2011
Net income		$	6,075			$	3,669
Other comprehensive income:
Foreign currency translation adjustment			371				(768	)
Unrealized gain on securities, net of tax			2				22
Amortization of pension transition asset, net of tax			(12	)			(12	)
Other comprehensive income (loss), net of tax			361				(758	)
Total other comprehensive income		$	6,436			$	2,911

 
 
See Notes to Consolidated Financial Statements

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GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2012 and 2011
(in thousands, except share amounts)

		Common Stock								Additional Paid-In Capital				Treasury Stock				Retained Earnings				Accumulated Other Comprehensive Income				Total
		Shares				Amount
Balance, January 1, 2011			8,199,016			$	82			$	19,196			$	(196	)		$	20,269			$	1,584			$	40,935
Net income			—				—				—				—				3,669				—				3,669
Repurchases of common stock			(11,252	)			—				—				(71	)			—				—				(71	)
Unrealized gain on securities, net of tax			—				—				—				—				—				22				22
Stock compensation expense			—				—				205				—				—				—				205
Dividends paid ($0.1825 per share)			—				—				—				—				(1,496	)			—				(1,496	)
Amortization of pension transition asset, net of tax			—				—				—				—				—				(12	)			(12	)
Foreign currency translation adjustment			—				—				—				—				—				(768	)			(768	)
Balance, December 31, 2011			8,187,764			$	82			$	19,401			$	(267	)		$	22,442			$	826			$	42,484
Net income			—				—				—				—				6,075				—				6,075
Repurchases of common stock			(141,860	)			—				—				(983	)			—				—				(983	)
Unrealized gain on securities, net of tax			—				—				—				—				—				2				2
Stock compensation expense			—				—				188				—				—				—				188
Dividends paid ($0.1825 per share)			—				—				—				—				(1,478	)			—				(1,478	)
Forfeiture of stock options			—				—				(26	)			—				—				—				(26	)
Amortization of pension transition asset, net of tax			—				—				—				—				—				(12	)			(12	)
Foreign currency translation adjustment			—				—				—				—				—				371				371
Balance, December 31, 2012			8,045,904			$	82			$	19,563			$	(1,250	)		$	27,039			$	1,187			$	46,621

 
 
See Notes to Consolidated Financial Statements

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GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in thousands)

		2012				2011
Cash Flows from Operating Activities
Net income		$	6,075			$	3,669
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			2,160				2,102
Amortization of intangible assets			107				203
Amortization of bond premium			10				14
Provision for bad debt			(214	)			174
Deferred income taxes			181				(357	)
Stock compensation expense			188				205
Loss on sale of property and equipment			54				13
(Gain) on sale of marketable securities			(10	)			(43	)
Change in operating assets and liabilities:
Accounts receivable			383				641
Inventories			402				(192	)
Prepaid expenses and other current assets			387				(186	)
Non-current other assets			(1,326	)			122
Accounts payable			342				(839	)
Customer deposits and deferred revenue			(1,536	)			702
Accrued liabilities			185				(216	)
Income taxes payable			564				(296	)
Other current liabilities			(935	)			—
Net cash provided by operating activities			7,017				5,716
Cash Flows from Investing Activities
Purchases of marketable securities			(23,728	)			(28,803	)
Proceeds from sale of marketable securities			25,325				32,026
Capital expenditures			(1,406	)			(1,669	)
Purchase of business assets			—				(718	)
Proceeds from sale of property and equipment			25				51
Net cash provided by investing activities			216				887
Cash Flows from Financing Activities
Repayment of debt obligations			(32	)			(6,977	)
Repurchases of common stock			(983	)			(71	)
Dividends paid			(1,478	)			(1,496	)
Net cash (used in) financing activities			(2,493	)			(8,544	)
Effect of exchange rate changes on cash			16				(177	)
Net increase (decrease) in cash and cash equivalents			4,756				(2,118	)
Cash and cash equivalents, beginning of period			9,282				11,400
Cash and cash equivalents, end of period		$	14,038			$	9,282
Supplemental disclosures of cash flow information:
Cash paid for interest		$	3			$	48
Cash paid for income taxes, net of refunds		$	1,965			$	2,322

 
 
See Notes to Consolidated Financial Statements

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GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Significant Accounting Policies

Organization and Nature of Business

Gaming Partners International Corporation (GPIC or the Company) is headquartered in Las Vegas, Nevada and has three operating subsidiaries: Gaming Partners International USA, Inc. (GPI USA) (including maquiladora manufacturing operations in Mexico), Gaming Partners International SAS (GPI SAS), and Gaming Partners International Asia Limited (GPI Asia). Our subsidiaries have the following distribution and product focus:

GPIC was formed in 2002 through a reverse merger between Paul-Son Gaming Corporation and Bourgogne et Grasset initiated by the late Francois Carrette, whose firm, Holding Wilson, SA, remains GPIC’s controlling shareholder. The Company has established brand names such as Paulson®, Bourgogne et Grasset® (BG®), and Bud Jones®. GPIC and each of its subsidiaries are sometimes collectively referred to herein as the “Company,” “us,” “we” or “our.” GPI USA was founded in 1963 as Paul-Son Gaming Supplies, Inc. by Paul S. Endy, Jr., and initially manufactured and sold dice to casinos in Las Vegas. GPI SAS was founded in 1923 as Etablissements Bourgogne et Grasset S.A. by Etienne Bourgogne and Claudius Grasset in Beaune, France to produce and sell counterfeit-resistant chips to casinos in Monaco.

We are one of the gaming industry’s leading manufacturers and suppliers of casino table game equipment. We custom manufacture and supply casino chips, table layouts, playing cards, gaming furniture and table accessories, dice, RFID readers and software, and roulette wheels, all of which are used with casino table games such as blackjack, poker, baccarat, craps, and roulette. Our products fall into two categories — non-consumable and consumable. Non-consumable products consist of casino chips, gaming furniture, and RFID solutions. These products have a useful life of several years or longer. Sales of non-consumables are based on casino openings, expansions, and rebrandings, as well as replacement in the normal course of business. Consumable products consist of table layouts, cards, dice, and table accessories and, due to their use, represent recurring revenue for the Company. These products have a useful life that ranges from several hours for playing cards and dice to several months for layouts.

The majority of our products are specifically designed and produced to meet our customer’s requirements, whether they are related to use, branding, aesthetic appeal, or security. Our ability to produce products with a variety of styles and features, in combination with years of reliable delivery, enhances our competitive position. When a new casino opens, we strive to supply all the products in our line to operate the casino’s table games. Through this strategy, 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 customer base.

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GAMING PARTNERS INTERNATIONAL CORPORATION AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Significant Accounting Policies  – (continued)

Significant Accounting Policies

Basis of Consolidation.  The consolidated financial statements include the accounts of GPIC and its wholly-owned subsidiaries GPI USA, GPI SAS, GPI Asia, and GPI Mexicana, our maquiladora manufacturing operation. All material intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

Cash and Cash Equivalents.  We consider all highly-liquid investments with original maturities of three months or less to be cash and cash equivalents. The Company maintains cash and cash equivalents in various United States banks. Several accounts are in excess of the federally-insured limit of $250,000. The Company also maintains cash and cash equivalents in foreign banks that are not insured.

Fair Value of Financial Instruments.  The fair value of cash and cash equivalents, marketable securities, accounts receivable, and accounts payable approximates the carrying amount of these financial instruments due to their short-term nature.

Marketable Securities.  We account for our investments in marketable securities as available-for-sale and, as such, they are recorded on our consolidated balance sheets at estimated fair value. Unrealized holding gains and losses are excluded from earnings and are, instead, reported within accumulated other comprehensive income.

Accounts Receivables and Customer Deposits.  We perform ongoing credit evaluations of our customers and generally require a deposit prior to commencing work on a customer order. These customer deposits are classified as a current liability on the consolidated balance sheets. We also maintain an allowance for doubtful accounts to state trade receivables at their estimated realizable value. This allowance applies to all customers and is estimated 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. Changes are made to the allowance based on our awareness of a particular customer’s ability to meet its financial obligations. Receivables are written-off when management determines that collectability is remote.

Inventories.  Inventories are stated at the lower of cost or market. Cost is determined using a weighted-average method for GPI SAS and a first-in, first-out method for GPI USA and GPI Asia. Market value is determined by comparing inventory item carrying values to estimates of net realizable value. The analysis of net realizable value includes reviewing overall inventory levels, historical and projected sales or usage of these items, the projected markets for our products, and selling costs. Inventory that we estimate will not be used within one year is considered non-current inventory.

Property and Equipment.  Property and equipment are stated at cost, net of accumulated depreciation. We include capitalized lease equipment in our property and equipment for financial reporting purposes. Depreciation is computed using the straight-line method for financial reporting purposes over the following estimated useful lives:

		Years
Buildings and Improvements			3 – 40
Furniture and Equipment			2 – 15
Vehicles			5 – 7

Long-lived and Intangible Assets.  The Company evaluates the carrying value of long-lived assets (including property and equipment and intangible assets) for possible impairment when events or change in circumstances indicate that the carrying value of an asset may not be recoverable. Intangible assets are tested for impairment annually each December 31. In general, we will recognize an impairment loss when the sum

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Note 1. Nature of Business and Significant Accounting Policies  – (continued)

of undiscounted expected cash flows from the asset is less than the carrying amount of such asset. Intangible assets, such as patents and trademarks, are amortized using the straight-line method over their economic lives.

Capitalized Leases.  We include obligations from capitalized leases in our long- and short-term debt captions for financial statement purposes.

Revenue Recognition.  For casino table game product sales, we record revenue, net of excise and sales taxes, when it is realized, or realizable, and earned. We consider these criteria met when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, collectability is reasonably assured and, if required, acceptance is received from the customer. Shipping costs billed to our customers are reflected in revenues, with the related expense included in cost of revenues. Sales tax collected from customers is excluded from revenue and included in accrued expenses.

Starting in 2011, we entered into multiple-element arrangements with our customers to provide RFID solutions. Such transactions may include deliverables such as RFID equipment, installation and training services, embedded RFID software licenses, and limited software support services. In such arrangements, RFID equipment and embedded RFID software work together to deliver the functionality purchased by our customer. Therefore, we apply the provisions of multiple-element accounting to separate the deliverables and allocate the total arrangement consideration based upon relative estimated selling prices. Each unit of accounting is then accounted for under the applicable revenue recognition guidance. For RFID equipment and related services, revenue generally is recorded when all customer-defined acceptance criteria are satisfied. For RFID software support services, revenue generally is amortized over the term of the support contract.

Research and Development.  Research and development costs are the costs related to developing new and improved products and manufacturing processes and are charged to expense when incurred and are included in our consolidated statements of operations. These costs include staff compensation and related expenses, subcontract costs, materials, and supplies.

Income Taxes.  We recognize a current tax liability or asset for estimated taxes payable or refundable on tax returns for the current year and a deferred tax liability or asset for estimated future tax effects, attributable to temporary differences and carryforwards.

GPIC and its subsidiaries file separate income tax returns in their respective jurisdictions. Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes.

The Company reviews all of its tax positions and makes a determination as to whether its position is more likely than not to be sustained upon examination by tax authorities. If a tax position meets the more-likely-than-not standard, then the related tax benefit is measured based on the cumulative probability that the amount is more likely than not to be realized upon ultimate settlement or disposition of the underlying issue. The Company recognizes interest and penalties related to unrecognized tax positions in the provision for income taxes on the consolidated statement of income.

Foreign Currency Transactions.  The financial statements of GPI SAS are measured using the euro as the functional currency. Assets and liabilities of GPI SAS are translated into the US dollar at exchange rates at the balance sheet date. Revenues and expenses are translated into the US dollar at average rates of exchange in effect during the year. The resulting cumulative translation adjustments are recorded within accumulated other comprehensive income.

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Note 1. Nature of Business and Significant Accounting Policies  – (continued)

The financial statements of GPI Asia and GPI Mexicana are measured using the US dollar as 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 and expense in the consolidated statements of income.

Transaction gains and losses that arise from exchange rate fluctuations on transactions with third parties denominated in a currency other than the functional currency are included in the results of operations as incurred.

Comprehensive Income.  Comprehensive income includes net income, unrealized gains and losses on available-for-sale securities recorded net of tax, pension-related costs, and foreign currency translation adjustments.

Estimates.  The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions have been made in determining the allowance for doubtful accounts receivable; write-downs of slow moving, excess, and obsolete inventories; the depreciable lives of fixed assets; estimates for the recoverability of long-lived assets, including intangible assets; the recoverability of deferred tax assets; and potential exposures relating to litigation, claims, and assessments. Actual results could differ from those estimates and assumptions.

Reclassifications.  Certain amounts for 2011 and 2012 have been reclassified between cost of revenues and marketing, sales, general, administrative, and research and development expenses to conform to the 2012 presentation. These reclassifications had no impact on revenues, net income, total assets, or total liabilities.

Recently Issued Accounting Standards.  Effective January 1, 2012, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2011-05, Presentation of Comprehensive Income and ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. These ASUs eliminate the option to present the components of other comprehensive income in the statement of changes in stockholders’ equity. Instead, entities have the option to present the components of net income, the components of other comprehensive income, and total comprehensive income in a single continuous statement or in two separate, but consecutive, statements. The amendments did not change the items reported in other comprehensive income or when an item of other comprehensive income is reclassified to net income. As a result, the adoption of this guidance did not affect our consolidated financial position, results of operations, or cash flows. We have presented the components of net income, the components of other comprehensive income, and total comprehensive income in two separate, but consecutive, statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, to amend fair value measurement to achieve convergence between US GAAP and IFRS. The ASU changes some fair value measurement principles and disclosure requirements, is effective for fiscal quarters and years beginning on or after December 15, 2011, and has not had a material impact on our consolidated financial statements.

Note 2. Acquisition

In April 2011, the Company purchased certain assets of OMC SARL and its subsidiary OMC Industries (OMC), a private French-based manufacturer of high-quality plastic injection molds. The acquisition enables the Company to develop and manufacture more secure casino chips through the use of more complex multi-shot molds. The Company completed the acquisition of OMC on April 6, 2011 for a total cash

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Note 2. Acquisition  – (continued)

consideration of $0.7 million. We did not present pro-forma results of operations, actual results of operations from the acquisition date through December 31, 2011, or other disclosure, because the acquisition was not material. The consolidated statement of income for the year ended December 31, 2011 includes the results of OMC from the acquisition date.

Note 3. Cash, Cash Equivalents, and Marketable Securities

The Company holds its cash, cash equivalents, and marketable securities in financial institutions in various countries throughout the world. The following summarizes the geographic location of our holdings (in thousands):

		2012												2011
		Cash and Cash Equivalents				Marketable Securities				Total				Cash and Cash Equivalents				Marketable Securities				Total
France		$	1,084			$	13,546			$	14,630			$	281			$	13,500			$	13,781
United States			8,120				—				8,120				7,537				1,367				8,904
Macau S.A.R. China			4,834				—				4,834				1,464				—				1,464
Total		$	14,038			$	13,546			$	27,584			$	9,282			$	14,867			$	24,149

Available-for-sale marketable securities consist of investments in securities such as certificates of deposit offered by French and US banks, bond mutual funds, and term bonds (in thousands):

		2012												2011
		Cost				Unrealized Gain/(Loss)				Fair Value				Cost				Unrealized Gain/(Loss)				Fair Value
Certificates of deposit		$	7,137			$	—			$	7,137			$	12,537			$	(1	)		$	12,536
Bond mutual funds			6,409				—				6,409				1,942				—				1,942
Term bonds			—				—				—				390				(1	)			389
Total marketable securities		$	13,546			$	—			$	13,546			$	14,869			$	(2	)		$	14,867

We present our marketable securities at their estimated fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has determined that all of its marketable securities are Level 1 financial instruments, with asset values recorded at quoted prices in active markets for identical assets.

Note 4. Accounts Receivable and Allowance for Doubtful Accounts

At December 31, 2012, we had two casino customers that accounted for 12% and 17% of our accounts receivable balance. At December 31, 2011, we had one casino customer that accounted for 28% of our accounts receivable balance.

The allowance for doubtful accounts consists of the following (in thousands):

		Balance at Beginning of Year				Provision				Write-offs, Net of Recoveries				Exchange Rate Effect				Balance at End of Year
2012		$	366			$	(214	)		$	—			$	—			$	152
2011		$	208			$	174			$	(9	)		$	(7	)		$	366

The allowance benefit of $214,000 for 2012 was primarily due to the collection of accounts past due and previously reserved.

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Note 5. Inventories

Inventories consist of the following at December 31 (in thousands):

		2012				2011
Raw materials		$	4,147			$	3,762
Work in progress			1,875				2,031
Finished goods			1,522				2,116
Total inventories		$	7,544			$	7,909

At December 31, 2012 and December 31, 2011, we classified a portion of our inventories as non-current because we do not expect this portion to be used within one year. The classification of our inventories on our consolidated balance sheets is as follows (in thousands):

		2012				2011
Current		$	7,337			$	7,749
Non-current			207				160
Total inventories		$	7,544			$	7,909

Note 6. Other Current Assets

Other current assets consist of the following at December 31 (in thousands):

		2012				2011
Refundable value-added tax		$	447			$	341
Deposits			434				165
Income tax-related assets			227				626
Other			203				432
Total other current assets		$	1,311			$	1,564

Note 7. Property and Equipment

Property and equipment consists of the following at December 31 (in thousands):

		2012				2011
Land		$	1,779			$	1,773
Buildings and improvements			8,662				8,480
Equipment and furniture			20,189				19,003
Vehicles			432				493
			31,062				29,749
Less accumulated depreciation			(19,872	)			(17,913	)
Property and equipment, net		$	11,190			$	11,836

Depreciation expense for the years ended December 31, 2012 and 2011 was $2,160,000 and $2,102,000 respectively.

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Note 8. Intangible Assets

Intangible assets consist of the following at December 31 (in thousands):

		2012												2011
		Gross Carrying Amount				Accum Amort				Net Carrying Amount				Gross Carrying Amount				Accum Amort				Net Carrying Amount				Estimated Useful Life (Years)
Patents		$	690			$	(633	)		$	57			$	690			$	(621	)		$	69				13 – 14
Trademark			620				(191	)			429				620				(143	)			477				12
Licenses			225				(200	)			25				225				(163	)			62				1 – 3
Other intangible assets			44				(15	)			29				65				(27	)			38				5
Total intangible assets		$	1,579			$	(1,039	)		$	540			$	1,600			$	(954	)		$	646

In April 2011, the Company acquired in its OMC acquisition certain intangibles, including a customer list.

Amortization expense for intangible assets for the years ended December 31, 2012 and 2011 was $107,000 and $203,000, respectively.

The following table provides estimated amortization expense for the years ending December 31 (in thousands):

Year		Expense
2013		$	95
2014			68
2015			66
2016			59
2017			57
Thereafter			195
Total		$	540