UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: August 31,1996
OR
( ) 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
PAUL-SON GAMING CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0310433
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2121 Industrial Road, Las Vegas, Nevada 89102
(Address of principal executive offices) (Zip Code)
(702) 384-2425
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
3,324,000 shares of Common Stock, $0.01 par value as of October
11, 1996
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1996 and MAY 31, 1996
ASSETS (Note 3)
AUGUST 31, MAY 31,
1996 1996
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $1,981,448 $997,509
Trade receivables, less allowance for doubtful accounts
($305,712, August 31, 1996; $281,712, May 31, 1996) 2,458,684 2,601,910
Inventories (Note 2) 5,401,261 5,604,630
Prepaid expenses 147,553 170,903
Other current assets 335,883 296,660
Total current assets $10,324,829 $9,671,612
PROPERTY AND EQUIPMENT, net (Note 4) $7,141,585 $7,259,423
OTHER ASSETS 464,788 470,090
$17,931,202 $17,401,125
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 4) $80,065 $85,914
Accounts payable (Note 5) 559,639 661,521
Accrued expenses 225,364 403,627
Customer deposits 1,343,868 865,438
Income tax payable 101,103 54,170
Total current liabilities 2,310,039 2,070,670
LONG-TERM DEBT, net of current maturities
Due to related parties (Note 5) - 15,000
Other (Note 4) 439,832 456,161
439,832 471,161
STOCKHOLDERS' EQUITY
Preferred stock, authorized 10,000,000 shares,
$.01 par value, none issued and outstanding - -
Common stock, authorized 30,000,000 shares,
$.01 par value, issued and outstanding 3,324,000 shares 33,240 33,240
Additional paid-in capital 12,256,698 12,256,698
Retained earnings 2,891,393 2,569,356
15,181,331 14,859,294
$17,931,202 $17,401,125
2
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
AUGUST 31,
1996 1995
(unaudited)
Revenues $6,042,758 $5,773,629
Cost of revenues:
Related party 229,977
Other 4,126,393 3,956,498
4,126,393 4,186,475
Gross profit 1,916,365 1,587,154
Selling, general and
administrative expenses 1,415,549 1,789,865
Operating income (loss) 500,816 (202,711)
Other income 19,722 51,948
Interest expense (13,394) (19,196)
Income (loss) before income taxes 507,144 (169,959)
Income tax benefit (expense) (185,108) 59,486
Net income (loss) $322,036 ($110,473)
Net income (loss) per share $0.10 ($0.03)
Weighted average common 3,324,000 3,324,000
shares outstanding
3
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
AUGUST 31,
1996 1995
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $6,650,752 $6,818,371
Cash paid to suppliers and employees (5,396,179) (7,495,526)
Interest received 9,384 32,881
Interest paid (13,394) (21,494)
Income taxes paid (156,050) (6,750)
Net cash provided by (used in) operating activities 1,094,513 (672,518)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on sale of equipment - 13,000
Decrease in short-term investments - 1,493,536
Purchase of property and equipment (73,397) (339,173)
Net cash provided by (used in) investing activities (73,397) 1,167,363
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on due to related party (15,000) (125,000)
Principal payments on long-term borrowings (22,177) (24,158)
Net cash (used in) financing activities (37,177) (149,158)
Net increase in cash and cash equivalents 983,939 345,687
CASH AND CASH EQUIVALENTS, beginning 997,509 1,253,987
CASH AND CASH EQUIVALENTS, ending $1,981,448 $1,599,674
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net Income (loss) $322,036 ($110,473)
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities:
Depreciation and amortization 191,235 170,720
Provision for bad debts 24,000 20,000
Loss on sale of assets - 5,407
Change in assets and liabilities:
(Increase) decrease in accounts receivable 119,226 863,855
(Increase) decrease in inventories 203,369 (668,032)
(Increase) decrease in prepaid expenses 23,350 (149,270)
(Increase) decrease in other current assets (39,223) 746
(Increase) decrease in other assets 5,302 (8,452)
Increase (decrease) in account payable and accrued (280,145) (943,855)
Increase (decrease) in customer deposits 478,430 146,836
Increase (decrease) in income taxes payable 46,933 -
Net cash provided by (used in) operating activities $1,094,513 ($672,518)
4
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Paul-Son Gaming Corporation and its subsidiaries ("Paul-Son"
or "Company") is the leading manufacturer and supplier of casino
table game equipment in the United States. The Company's
products include casino chips, table layouts, playing cards,
dice, furniture, table accessories and other products, which are
used with casino table games such as blackjack, poker, baccarat,
craps and roulette. The Company sells its products in every
state in which casinos operate in the United States.
BASIS OF PRESENTATION
Paul-Son Gaming Corporation was incorporated on December 22,
1993. The consolidated statements of operations and cash flows
of Paul-Son for the period ended August 31, 1995 include the
accounts of Paul-Son, Paul-Son Gaming Supplies, Inc. ("Paul-Son
Supplies"), Paul-Son Mexicana, S.A. de C.V. ("Mexicana") and
Commercial Paul-Son, S.A. de C.V. ("Commercial"). The
consolidated statements of operations and cash flows of Paul-Son
for the period ended August 31, 1996 include the accounts of Paul-
Son, Paul-Son Supplies and Mexicana. In July 1994, Paul-Son
Supplies' name was changed from Paul-Son Dice and Card, Inc., to
its current name. All material intercompany balances and
transactions have been eliminated in consolidation.
The consolidation balance sheet as of August 31, 1996 and
the related consolidated statements of operations and statements
of cash flows for the three month periods ended August 31, 1996
and August 31, 1995 are unaudited, but in the opinion of
management, reflect all adjustments, which consist of only normal
recurring adjustments, necessary for a fair presentation of
results for such periods. The results of operations for an
interim period are not necessarily indicative of the results for
the full year.
A summary of the Company's significant accounting policies
are as follows:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with
original maturities of three months or less to be cash and cash
equivalents.
INVENTORY
Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out method.
5
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
GOODWILL
Goodwill is amortized on a straight-line basis over 20
years.
EARNINGS PER SHARE
Earnings per share is computed based on the weighted average
number of shares outstanding during the period. Common stock
equivalents were not material.
NOTE 2 - INVENTORIES
Inventories consist of the following:
August 31, May 31,
1996 1996
Raw materials $2,800,450 $2,778,329
Work in process 388,789 436,726
Finished goods 2,212,022 2,389,575
NOTE 3 - SHORT-TERM BORROWINGS
The Company has available a revolving line of credit with a
financial institution which allows maximum borrowings of the
lesser of $750,000 or 75% of eligible accounts receivable, and is
collateralized by a general pledge agreement covering all assets.
There was no balance outstanding under the line of credit at
August 31, 1996 and May 31, 1996. Interest on the outstanding
balance of the line of credit is based on the financial
institution's prime rate plus 2%, payable monthly. The credit
agreement contains restrictive covenants, generally requiring the
Company to maintain certain financial ratios as defined in the
agreement. The maturity date of the line of credit is
November 30, 1996.
6
NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt, other than amounts due to related parties,
consists of the following:
August 31, May 31,
1996 1996
Note payable to an equipment financing
company, collateralized by a vehicle,
with interest at 7.9%, principal and
interest payments of $561 are due
monthly through June 1998 $8,908 $10,397
Notes payable to mortgage companies,
collateralized by real estate,
interest at 7.5% to 9.5%, principal
and interest payments of $898 are due
monthly through 2016 67,734 68,056
Note payable to a bank, collateralized
by a deed of trust, interest at 8%,
principal and interest payments of
$6,067 are due monthly through
December 1998 397,411 406,376
Various capital lease obligations for
equipment, interest imputed at 15.5%
to 25.2%, payable in monthly payments
of $5,220 through January 1998 45,844 57,246
$519,897 $542,075
Less current portion 80,065 85,914
$439,832 $456,161
NOTE 5 - RELATED PARTIES
The Company purchases plastic coated playing cards from an
entity owned in part by one of the former Directors of the
Company. Included in accounts payable at August 31, 1996 and
May 31, 1996 are payables to the related entity for purchases in
the amounts of $27,105 and $33,859, respectively. Included in
interest expense is related party interest of approximately $0
and $3,168 for the three months ended August 31, 1996 and 1995
respectively.
The following amounts were paid for legal, accounting and
consulting fees to individuals who were members of the Company's
Board of Directors.
7
Three Months Ended
August 31,
1996 1995
Laurence A. Speiser $31,304 $33,153
Wayne H. White 0 18,058
Michael E. Cox 4,877 20,663
Due to related parties consists of the following:
August 31, May 31,
1996 1996
Unsecured note payable to majority
stockholder, annual payments of
$125,000 plus interest at 6% with a
maturity date of March 1998 $0 $15,000
$0 $15,000
Less current portion - -
$0 $15,000
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Paul-Son is the leading manufacturer and supplier of casino
table game equipment in the United States. The Company's
products include casino chips, table layouts, playing cards,
dice, gaming furniture, and miscellaneous table accessories such
as chip trays, drop boxes, and dealing shoes, which are used in
conjunction with casino table games such as blackjack, poker,
baccarat, craps and roulette. The Company is headquartered in
Las Vegas, Nevada, with manufacturing facilities located in Las
Vegas and San Luis, Mexico and sales offices in Las Vegas and
Reno, Nevada; Atlantic City, New Jersey; New Orleans, Louisiana;
Fort Lauderdale, Florida; Gulfport, Mississippi; Portland,
Oregon; and Ontario, Canada. The Company sells its products in
every state in which casinos operate in the United States, and
management believes that it has the leading market share for most
of its major product lines.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Comparison of Operations for the Three Months Ended August 31,
1996 and August 31, 1995
REVENUES. For the three months ended August 31, 1996,
revenues were just over $6.0 million, a 4.7% or almost a $270,000
increase over the approximately $5.8 million in revenues in the
comparable period of the prior year. This increase was due
principally to an increase in revenues from new casino openings.
During the three months ended August 31, 1996 the Company
supplied products totaling approximately $1.7 million to five new
casinos (including one new opening which generated sales reported
in the prior quarter), versus approximately $1.0 million to five
new casinos in the comparable period of the prior year. Core
sales revenue, however, decreased by approximately $300,000 to
approximately $4.0 million for the three months ended August 31,
1996, versus approximately $4.3 million in core sales for the
same period in the prior year. Core sales, which are sales of
consumable gaming supplies and equipment to the Company's
existing customer base, decreased during the quarter ended
August 31, 1996 principally due to a decrease in playing card
sales during the quarter. Playing card sales were down due to a
number of factors including the slowdown in shipments to many of
the Company's contract playing card customers who had a temporary
overstock of playing cards in their facilities during the
quarter. Also during the quarter, the Company restructured its
playing card sales force, which resulted in a temporary slowdown
in playing card sales efforts, but which should provide greater
sales coverage in all geographical areas in the future. The
Company has also initiated the development of an improved playing
card product which the Company believes will increase sales of
playing cards in the future.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, decreased to 68.3% for the current period as compared to
72.5% for the three months ended August 31, 1995. This
percentage decrease was due to a number of factors including
higher sales volume and corresponding higher operating
efficiencies (i.e. increased sales resulting in a higher number
of
9
units produced over the same fixed production costs), lower fixed
production costs following the transition of the remainder of
layout production from Las Vegas to Mexico during the last year,
and a change in product mix sold during the quarter. Chip sales,
for which the Company generates the highest gross margin, were
$2.3 million during the quarter versus $1.2 million in the
comparable quarter of the prior year.
During several of its reporting quarters in the past, the
Company has generally benefited from the decrease in the value of
the Mexican peso. Over the last several months the value of the
Mexican peso has stabilized. The Company cannot predict what
impact peso fluctuations will have on future costs of the
Company's products manufactured in Mexico.
GROSS PROFIT. Gross profit increased by approximately
$330,000 over the comparable period in the prior year as a result
of higher revenues and the lower cost of revenues, which cost of
revenues, as a percentage of sales, improved from 72.5% to 68.3%
due to the factors discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the
three months ended August 31, 1996, selling, general and
administrative expenses ("SG&A") decreased approximately $374,000
or 20.9%, to $1.4 million as compared to the $1.8 million in the
comparable period of the prior year. SG&A reductions were
achieved in most categories. Major reductions in SG&A expenses
included reductions in salaries and wages ($60,000), outside
labor and consultants ($27,000), advertising and promotion
($50,000), outside commissions ($70,000), legal and accounting
($27,000), postage and shipping ($28,000), and travel and
entertainment ($60,000). Most reductions were due to the cost
cutting and restructuring program initiated by the Company during
the second quarter of fiscal 1995. There were no major increases
in any expense category during the quarter ended August 31, 1996
when compared to the quarter ended August 31, 1995.
INTEREST EXPENSE. For the three months ended August 31,
1996, interest expense decreased approximately 30% from $19,000
to $13,000 compared to the same fiscal quarter of the prior year,
as a result of the Company's efforts to pay down long-term debt
and fund operations and capital expenditures out of cash
generated from operations.
NET INCOME. For the three months ended August 31, 1996 the
Company had a net income of approximately $322,000, an
improvement in net income of $432,000 compared to the net loss
for the three months ended August 31, 1995 of approximately
$110,000, primarily as a result of increases in sales and gross
profit, and decreases in SG&A expenses over the comparable period
in the prior year. Net income per share was $.10 for the three
months ended August 31, 1996 as compared to a net loss of ($0.03)
per share for the three months ended August 31, 1995, based on
the weighted average number of shares outstanding.
MATERIAL CHANGES IN FINANCIAL CONDITION
Liquidity and Capital Resources
OVERVIEW. Management believes that the combination of cash
flow from operations and cash on hand will provide sufficient
liquidity both on a short term and long term basis.
10
WORKING CAPITAL. Working capital totaled approximately
$8.0 million at August 31, 1996, versus approximately $7.6
million at May 31, 1996. Working capital increased during the
three months ended August 31, 1996, primarily due to the
Company's net income before depreciation of approximately
$513,000, and the Company's relatively low amount of investment
in property, plant and equipment, ($73,000) during the quarter.
CASH FLOW. Operating activities provided almost $1.1
million in cash during the three months ended August 31, 1996, as
compared to cash used of approximately $675,000 during the same
period in the prior year. Net income before depreciation and
income taxes contributed approximately $560,000 to the increase
in cash provided by operations. Also contributing to the increase
in cash provided by operations were the collection of accounts
receivable and deposits from customers totaling approximately
$600,000 and the reduction of inventories by approximately
$200,000. Partially offsetting these increases was the
approximately $280,000 used to reduce accounts payable and
accrued expenses.
LINE OF CREDIT. The Company maintains a line of credit (the
"Line of Credit") with First Interstate Bank of Nevada ("First
Interstate") which presently allows the Company to borrow up to
the lesser of $750,000 or 75% of eligible accounts receivable.
The Line of Credit matures on November 30, 1996. As of August
31, 1996, no advances were outstanding and the total amount of
the Line of Credit was available. The Line of Credit is
collateralized by a first priority security interest in
substantially all of the Company's depository accounts at First
Interstate, accounts receivable, inventory, furniture, fixtures
and equipment, and bears interest at a variable rate of 2.0% over
First Interstate's prime lending rate.
Under the Line of Credit, the Company has agreed to comply
with certain financial covenants and ratios. Specifically, the
Company has agreed to maintain a current ratio (current assets to
current liabilities) of not less than 1.5 to 1, a debt to worth
ratio (total liabilities divided by stockholders' equity) of less
than 1 to 1 and a fixed charge coverage ratio ((net income plus
depreciation plus interest plus rent) divided by (prior period
current maturities of long term debt plus interest plus rent)) of
at least 1.5 to 1.
SECURED DEBT. In December 1993, the Company obtained a
$500,000 loan for capital expenditures and working capital
purposes (the "Note") from a financial institution. The Note
bears interest at 8% per annum, with monthly payments of
principal and interest totaling $6,067. The Note matures on
December 1, 1998 and is secured by a deed of trust on the
Company's Las Vegas headquarters (the "Las Vegas Facility").
SEASONALITY. The Company has traditionally experienced some
seasonality, as new casino openings, particularly in Las Vegas,
have tended to occur near the end of a calendar year (typically
during the Company's second fiscal quarter). There does not
appear to be any seasonality associated with the Company's "core
sales" to existing customers.
BACKLOG. Open orders as of August 31, 1996 totaled
approximately $1.9 million, compared to approximately $2.5
million as of August 31, 1995. Management believes that
substantially all of these orders will be filled within the next
six months, with the majority filled within the next fiscal
quarter.
11
NEW LAS VEGAS FACILITY. In September of 1995 the Company
purchased a 62,000 square foot facility in Las Vegas, Nevada (the
"New Las Vegas Facility"), which is located near the Las Vegas
Facility, for $2,000,000. Since September 1995, the Company has
made improvements totaling approximately $300,000 to the New Las
Vegas Facility.
On January 18, 1996 the Company announced that its Board of
Directors authorized management to install a playing card
production line in its San Luis, Mexico facility. The use of
existing space at its Mexico facility will provide additional
playing card production capacity while the Company evaluates
production costs and efficiencies that may be achieved in the
Mexico facility. The additional production line will also augment
the Company's ability to solicit orders from larger and multi-
site casinos both in the United States and from the international
market, which provides additional opportunities to the Company.
The Company's ability to compete for additional market share in
playing card sales should be enhanced by lowering per unit
production costs. Management is analyzing whether the anticipated
lower production costs in the additional playing card production
facility will further direct the transition of other portions of
its manufacturing facilities to Mexico. The Company anticipates
that playing card production in the San Luis, Mexico facility
will commence by the end of calendar year 1996. The recently
expanded playing card production line at the New Las Vegas
Facility will continue to operate during the evaluation period.
During the evaluation period, the Company has decided to
postpone relocation of its present Las Vegas operations to the
New Las Vegas Facility. At the present time the Company has
placed both its New Las Vegas Facility and the original Las Vegas
Facility on the market. Should either facility be sold prior to
an offer being made on the other facility, the Company will
relocate all of its office, manufacturing and warehouse
operations to the remaining facility. Should both facilities be
sold, the Company will buy or lease other facilities within the
Las Vegas metropolitan area.
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included herein contains statements that
may be considered forward-looking, such as statements relating to
anticipated performance, financing sources and the relocation of
certain operations. Any forward-looking statement made by the
Company necessarily is based upon a number of estimates and
assumptions that, while considered reasonable by the Company, is
inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are
beyond the control of the Company, and are subject to change.
Actual results of the Company's operations may vary materially
from any forward-looking statement made by or on behalf of the
Company. Forward-looking statements should not be regarded as a
representation by the Company or any other person that the
forward-looking statements will be achieved. Undue reliance
should not be placed on any forward-looking statements. Some of
the contingencies and uncertainties to which any forward-looking
statement contained herein is subject include, but are not
limited to, those relating to dependence on existing management,
gaming regulation (including action affecting licensing),
leverage and debt service (including sensitivity to fluctuations
in interest rates), domestic or global economic conditions and
changes in federal or state tax laws or the administration of
such laws.
12
For a summary of additional factors affecting forward-
looking information, see the Company's annual report on Form 10-K
for the year ended May 31, 1996, Part II, Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Statement on Forward-Looking Information."
NOTE: Dollar amounts have been rounded for narrative
purposes while percentages were calculated using actual amounts.
13
II. PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
27.01 Financial Data Schedule
(b) Reports on Form 8-K
None.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
PAUL-SON GAMING CORPORATION
Date: October 15, 1996 By:/s/ Eric P. Endy
Eric P. Endy, President
(Duly Authorized Officer)
Date: October 15, 1996 By:/s/ Kirk Scherer
Kirk Scherer, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
27.01 Financial Data Schedule 17
16