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: February 28, 1998
--------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
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Commission file number: 0-23588
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PAUL-SON GAMING CORPORATION
- --------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 88-0310433
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 S. Industrial Road, Las Vegas, Nevada 89102
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(Address of principal executive offices) (Zip Code)
(702) 384-2425
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ ------
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
3,465,750 shares of Common Stock, $0.01 par value as of April 10, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1998 and MAY 31, 1997 (unaudited)
ASSETS
FEBRUARY 28, MAY 31,
1,998 1,997
CURRENT ASSETS
Cash and cash equivalents $ 257,192 $ 2,753,152
Trade receivables, less allowance for doubtful accounts
($338,211, February 28, 1998; $269,140, May 31, 1997) 4,466,879 3,669,139
Inventories (Note 2) 5,884,789 5,350,446
Prepaid expenses 232,082 140,962
Income tax benefit receivable 382,395 -
Other current assets 896,356 627,808
------------ ------------
Total current assets 12,119,693 12,541,507
------------ ------------
PROPERTY AND EQUIPMENT, net (Note 4) 8,802,714 7,250,030
OTHER ASSETS
Note receivable 150,000 150,000
Goodwill and other assets 542,922 455,205
------------ ------------
TOTAL ASSETS $21,615,329 $20,396,742
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings (Note 3) $ 875,000 $ -
Current maturities of long-term debt (Note 4) 67,150 24,052
Accounts payable 598,721 727,196
Accrued expenses 458,583 584,212
Customer deposits 1,151,818 1,579,161
Income tax payable - 318,930
------------ ------------
Total current liabilities 3,151,272 3,233,551
------------ ------------
LONG-TERM DEBT, net of current maturities
Notes payable (Note 4) 1,778,673 67,424
Deferred tax liability, net 11,060 11,060
------------ ------------
1,789,733 78,484
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 3,452,000
and 3,417,000 shares as of February 28, 1998 and
May 31, 1997 34,520 34,170
Additional paid-in capital 13,391,625 13,108,998
Retained earnings 3,248,179 3,941,539
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16,674,324 17,084,707
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,615,329 $20,396,742
============ ============
See notes to the condensed consolidated financial statements
2
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1997 1998 1997
Revenues $ 6,977,958 $ 6,874,845 $ 18,617,762 $ 19,224,621
Cost of revenues 5,625,917 4,821,270 14,613,884 13,048,489
------------- ------------- ------------- -------------
Gross profit $ 1,352,041 $ 2,053,575 $ 4,003,878 $ 6,176,132
Selling, general and
administrative expenses 1,864,118 1,539,791 5,151,824 4,417,305
------------- ------------- ------------- -------------
Operating income (loss) (512,077) 513,784 (1,147,946) 1,758,827
Other income 38,096 360,125 128,537 407,209
Interest expense (Note 4) (64,849) (1,247) (72,496) (36,659)
------------- ------------- ------------- -------------
Income (loss) before income taxes (538,830) 872,662 (1,091,905) 2,129,377
Income tax (expense)/benefit 196,673 (302,039) 398,545 (764,755)
------------- ------------- ------------- -------------
Net income (loss) $ (342,157) $ 570,623 $ (693,360) $ 1,364,622
============= ============= ============= =============
Basic net income (loss) per share $ (0.10) $ 0.17 $ (0.20) $ 0.41
============= ============= ============= =============
Average shares outstanding 3,439,472 3,324,000 3,428,882 3,324,000
============= ============= ============= =============
Diluted net income (loss) per share $ (0.10) $ 0.17 $ (0.20) $ 0.41
============= ============= ============= =============
Dliuted shares 3,439,472 3,418,240 3,428,882 3,356,477
============= ============= ============= =============
See notes to the condensed consolidated financial statements
3
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NINE MONTHS ENDED
FEBRUARY 28,
----------------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 17,226,904 $ 18,041,084
Cash paid to suppliers and employees (20,137,871) (16,756,283)
Interest received 85,207 57,056
Interest paid (72,496) (36,659)
Income tax refund - 842
Income taxes paid (299,117) (344,700)
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Net cash (used in) provided by operating activities (3,197,373) 961,340
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on sale of equipment 7,350 464,161
Investment in note receivable (note 6) - (150,000)
Purchase of property and equipment (2,218,261) (733,803)
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Net cash (used in) investing activities (2,210,911) (419,642)
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CASH FLOWS FROM FINANCING ACTIVITIES
Payments on due to related party - (15,000)
Proceeds from short-term borrowings 875,000 150,000
Proceeds from long-term borrowings 1,800,000 -
Proceeds from exercise of options 282,977 -
Principal payments on long-term borrowings (45,653) (444,487)
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Net cash provided by (used in) financing activities 2,912,324 (309,487)
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Net (decrease) increase in cash and cash equivalents (2,495,960) 232,211
CASH AND CASH EQUIVALENTS, beginning of period 2,753,152 997,509
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CASH AND CASH EQUIVALENTS, end of period $ 257,192 $ 1,229,720
============= =============
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY (USED IN) PROVIDED BY OPERATING ACTIVITIES
Net income (loss) (693,360) 1,364,622
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 654,564 628,273
Provision for bad debts 69,071 72,000
(Gain) loss on sale of assets 3,663 (322,549)
Change in assets and liabilities:
(Increase) in accounts receivable (866,811) (1,615,032)
(Increase) in income tax benefit receivable (382,395) -
Decrease (increase) in inventories (534,343) 7,253
Decrease (increase) in prepaid expenses (91,120) 65,796
(Increase) in other current assets (268,548) (37,588)
Decrease (increase) in other assets (87,717) 8,584
(Decrease) in account payable and accrued expenses (254,104) (45,798)
(Decrease) increase in customer deposits (427,343) 403,892
(Decrease) increase in income taxes payable (318,930) 431,887
------------- -------------
Net cash (used in) provided by operating activities $ (3,197,373) $ 961,340
============= =============
See notes to the condensed consolidated financial statements
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
The condensed consolidated balance sheets as of February 28,
1998 and May 31, 1997 include the accounts of Paul-Son, Paul-Son
Gaming Supplies, Inc. ("Paul-Son Supplies") and Paul-Son
Mexicana, S.A. de C.V. ("Mexicana"). The condensed consolidated
statements of operations and cash flows of Paul-Son for the three
month and nine month periods ended February 28, 1998 and 1997
include the accounts of Paul-Son, Paul-Son Supplies and
Mexicana. All material intercompany balances and transactions
have been eliminated in consolidation. The condensed
consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and do not include all of the
information and notes required by generally accepted accounting
principles for complete financial statements. These statements
should be read in conjunction with the Company's annual audited
consolidated financial statements and related notes included in
the 10-K for the year ended May 31, 1997.
The condensed consolidated balance sheet as of February 28,
1998 and statements of operations and cash flows for the three
and nine month period ended February 28, 1998 and 1997 are
unaudited, but in the opinion of management, reflect all
adjustments, which consist of only normal recurring adjustments,
necessary for a fair presentation of results for such period.
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 and
repurchase agreements with original maturities of three months or
less to be cash and cash equivalents.
5
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTNG POLICIES
(continued)
ACCOUNTS RECEIVABLE AND CUSTOMER DEPOSITS
The Company performs ongoing credit evaluations of its
customers and generally requires a fifty percent deposit for
manufactured or purchased products at the discretion of
management. These customer deposits are classified as a current
liability on the balance sheet. The Company maintains an
allowance for potential credit losses, and such losses have been
within management's expectations.
INVENTORY
Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of
depreciation. Depreciation is computed primarily on the straight
line method for financial reporting purposes over the following
estimated useful lives:
YEARS
-----
Building and Improvements 18-27
Furniture and Equipment 5-10
Vehicles 5-7
GOODWILL
Goodwill is amortized on a straight-line basis over 20
years.
EARNINGS PER SHARE
During the third quarter of fiscal 1998, the Company adopted
the statement of financial accounting standard ("SFAS") No. 128,
"Earnings per Share." SFAS No. 128 requires the presentation of
basic net income (loss) per share and diluted net income (loss)
per share for all periods in which a statement of operations is
presented. Basic per share is computed by dividing net income by
the average shares outstanding for the respective period.
Diluted per share is computed by dividing net income by the
average share outstanding and the dilutive effect of common share
equivalents for the respective period. These common share
equivalents are options to purchase common stock whose exercise
price is less than the average market price (see Note 5). Since
the Company incurred a net loss for the three and nine months
ended February 28, 1998, both basic and diluted per share
calculations are based upon the average shares outstanding during
these periods and the effect of options outstanding to purchase
common stock were not included in the diluted calculations.
6
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTNG POLICIES
(continued)
ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Estimates and assumptions have been made in determining
the depreciable life of assets and the allowance for doubtful
accounts. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131 "Disclosure About Segments of an Enterprise and
Related Information." SFAS No. 130 and 131 are effective for
periods beginning after December 15, 1997. SFAS No. 130 requires
classifying items of other comprehensive income by their nature
in a financial statement. SFAS No. 131 establishes additional
standards for segment disclosures in the financial statements.
Management has not determined the effect of these statements on
its financial statement disclosures.
NOTE 2 - INVENTORIES
Inventories consist of the following:
February 28, May 31,
1998 1997
------------ ------------
Raw materials $2,162,306 $1,977,089
Work in process 575,446 465,514
Finished goods 3,147,037 2,907,843
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$5,884,789 $5,350,446
=========== ===========
NOTE 3 - SHORT-TERM BORROWINGS
In November 1997, the Company acquired a line of credit with
a bank which allows maximum borrowing of $1 million. The line of
credit is payable in monthly installments of interest only at the
bank's prime rate of interest (interest rate at February 28, 1998
was 8.75%) and expires on October 31, 1998. The line of credit
and note payable (see Note 4 ) are collateralized by a first
deed of trust on the Company's main warehouse and corporate
offices in Las Vegas, Nevada, and a first security interest
covering the Company's assets. There was a outstanding balance
of $875,000 under the line of credit at February 28, 1998.
7
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt consists of the following:
February 28, May 31,
1998 1997
Note payable to bank in monthly
installments of $18,118 including
interest of 8.87% through October 2003
with a balloon payment of approximately
$1,450,000 due December 2003; secured
by first deed of trust on the Company's
main facility in Las Vegas, Nevada and a
first security interest covering the
Company's assets $ 1,785,437 -
Various notes payable for equipment,
interest at 14.5% to 25.5%, payable in
monthly payments of $6,300 through 1997 - $ 27,472
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 60,386 64,004
------------- ----------
1,845,823 91,476
Less current portion 67,150 24,052
------------- ----------
$ 1,778,673 $ 67,424
============= ==========
NOTE 5 - EARNINGS PER SHARE
The following table provides a reconciliation of basic and
diluted earnings per share as required by SFAS No. 128, "Earning
per Share":
Dilutive
Stock
Basic Options Diluted
- ------------------------------------------------ ------------ ----------- ------------
For the 3 month period ending February 28, 1997
Net Income $ 570,623 - $ 570,623
Shares 3,324,000 94,240 3,418,240
Per Share Amount $ 0.17 $ 0.17
For the 9 month period ending February 28, 1997
Net Income 1,364,622 - 1,364,622
Shares 3,324,000 32,477 3,356,477
Per Share Amount $ 0.41 $ 0.41
The Company had options to purchase common stock, whose exercise
price was greater than the average market price, that have been
excluded from the computation of diluted earning per share. The
antidilutive options outstanding for the three and nine months
ended February 28, 1997 were 130,000 and 414,000 respectively.
8
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - RELATED PARTIES
A member of the Company's Board of Directors received fees
for legal and consulting fees of $108,122 and $107,861 for the
nine months ended February 28, 1998 and 1997, respectively.
On November 22, 1996 the Company advanced to a director a
$150,000 line of credit The line of credit is to be repaid in
full on or before December 1998, with interest only payable
quarterly to the Company at an interest rate equal to prime plus
2%. The loan is secured by a general pledge agreement covering
all of the director's assets, rights to purchase certain shares
of the Company's stock, and a pledge of certain shares of the
Company's common stock by the Company's principal stockholder.
9
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.
COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28,
1998 AND FEBRUARY 28, 1997
REVENUES. For the three months ended February 28, 1998,
revenues were approximately $7.0 million, a 1.5% or a $103,000
increase from the approximately $6.9 million in revenues in the
comparable period of the prior year. This increase was due
principally to an increase in core sales, which are sales of
consumable gaming supplies and equipment to the Company's
existing customer base. Core sales revenue increased by 15.2% or
approximately $600,000, to approximately $4.5 million for the
three months ended February 28, 1998, versus approximately $3.9
million in core sales for the same period in the prior year. The
increase in core sales was due principally to increases in
playing card sales during the quarter, as the Company sold over
$1.1 million in playing cards during the quarter, an increase of
81.2% over the approximately $600,000 sold in the comparable
period of the prior year. However, revenues from new casino
openings and major expansions declined by approximately $500,000
or 16.9% during the three months ended February 28, 1998, as the
Company supplied products totaling approximately $2.4 million to
9 new casinos and casino expansions versus approximately $2.9
million sold to 14 new casinos in the comparable period of the
prior year
COST OF REVENUES. Cost of revenues, as a percentage of
sales, increased to 80.6% for the current period as compared to
70.1% for the three months ended February 28, 1997. This high
percentage increase was due principally to an unfavorable product
mix sold during the quarter in comparison to the historical
results of the Company. Chip sales, for which the Company
normally generates the highest gross margin (almost 50%) were
only $1.4 million during the quarter ended February 28, 1998,
versus $2.2 million in the comparable quarter of the prior year.
Because of the extremely low volume in chip production, the
higher per unit costs of manufacturing resulted in the Company
achieving a less than 30% margin on the chips that were sold
during the quarter ended February 28, 1998. Conversely, furniture
and seating sales, for which the Company generates its lowest
profit margins (normally less than 20%, and as low as 5%) made up
almost 38% of the sales for the quarter, twice the historical
ratio. Overall sales of Company manufactured products during the
quarter ended February 28, 1998, dropped approximately 11% to
$3.6 million versus approximately $4.1 in the same quarter of the
prior year. Included in the $3.6 million of Company manufactured
products sold during the quarter ended February 28, 1998, were
$1.1 million in playing cards, whose per unit costs were
negatively impacted by the duplication of overhead costs incurred
with the
10
operation of dual playing card facilities in both Las Vegas and
San Luis, Mexico during the period. Management anticipates that
the transition of all playing card manufacturing operations to
San Luis, Mexico will be completed prior to the Company's fiscal
year end (May 31, 1998).
In the past, the Company has generally had a positive impact
from the decrease in the value of the Mexican peso. Over the last
several reporting periods, the value of the Mexican peso has
stabilized, having relatively little impact on the cost of
manufacturing. In the future, the Company cannot predict what
impact fluctuations in the value of the peso will have on the
cost of the Company's products manufactured in Mexico.
GROSS PROFIT. Gross profit for the quarter ended February
28, 1998, decreased in absolute dollars by approximately $700,000
over the comparable period in the prior year as a result of the
higher cost of revenues as a percentage of sales from 70.1% to
80.6% due to the factors discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES For the three
months ended February 28, 1998, selling, general and
administrative ("SG&A") expenses increased approximately $324,000
or 21.2%, to $1.9 million as compared the $1.5 million in the
comparable period of the prior year. Major increases in SG&A
expenses included increases in salaries and wages ($119,000),
travel, advertising and promotion ($48,000), and gaming
licensing costs ($20,000) as a result of the Company's efforts to
expand market share for its products and expand sales coverage in
both new and existing markets. Also included in the increase in
the SG&A expenses is the write off of expenses totaling
approximately $58,000 related to the Company's investment in the
Brand One Marketing joint venture with DeBartolo Entertainment
which was terminated in February 1998.
INTEREST EXPENSE. For the three months ended February 28,
1998, interest expense increased $64,000 to $65,000, up from
approximately $1,000 incurred in the same fiscal quarter of the
prior year, as a result of the Company's borrowing under the
Norwest Bank Note and Deed of Trust (defined below) dated
November 14, 1998 and the Company's outstanding advances from
time to time under the Line of Credit (defined below).
OTHER INCOME. For the quarter ended February 28, 1998,
other income was approximately $38,000 as compared with $360,000
in the corresponding period of the prior year. The major
difference was that in the corresponding period of the prior
year, the Company sold an approximately 9,000 square foot
building located at 2133 Industrial Road in Las Vegas on February
28, 1997, which was part of the original Las Vegas Facility, (see
the Company's discussion of Material Changes In Financial
Condition below) for $450,000. The Company's depreciated cost
basis of the building was $129,000, resulting in a capital gain
of $204,000 net of income taxes ($321,000 before income taxes),
which is included in the Company's other income for the three
months ended February 28, 1997.
NET INCOME. For the three months ended February 28, 1998
the Company sustained a net loss of approximately $342,000, a
decrease in net income of $913,000 compared to the February 28,
1997 quarterly net income of approximately $571,000, primarily as
a result of decreases in gross profit and other income (which
included a one-time capital gain of $204,000 after taxes last
year), and increases in SG&A expenses over the comparable period
in the prior year. The net loss per share was $.10 for the three
months ended February 28, 1998 as compared to net income per
share of $.17 per share for the three months ended February 28,
1997, based on the weighted average number of shares outstanding.
11
COMPARISON OF OPERATIONS FOR THE NINE MONTHS ENDED FEBRUARY 28,
1998 AND FEBRUARY 28, 1997
REVENUES. For the nine months ended February 28, 1998,
revenues totaled approximately $18.6 million, a $607,000 decrease
over the approximately $19.2 million sold in the comparable
period of the prior year. This 3.2% decrease was due primarily
to a decrease in new casino openings, as the Company supplied
products totaling approximately $6.0 million to 16 new casinos
and 3 major expansions during the nine months ended February 28,
1998, versus approximately $7.6 million to 25 new casinos and 6
major expansions in the comparable period of the prior year. Core
sales revenue however, increased by approximately $1.0 million to
approximately $12.7 million for the nine months ended February
28, 1998, versus approximately $11.7 million in core sales for
the same period in the prior year. Core sales increased during
the nine months ended February 28, 1998 principally due to an
increase in paper playing card sales during the period as the
Company supplied more than $2.7 million in playing cards during
the nine months ended February 28, 1998, versus $1.8 million in
the comparable period of the prior year.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, increased to 78.5% for the nine months ended February 28,
1998 period as compared to 67.9% for the nine months ended
February 28, 1997. The increase in cost of revenues for the nine
months was due principally to two factors; lower sales volume and
corresponding lower operating efficiencies (i.e. decreased sales
resulting in a lower number of units produced over the same fixed
production costs), coupled with an extreme distortion in the
product mix sold in the first and third quarters of the fiscal
year (quarters ended August 31, 1997 and February 28, 1998) in
comparison to the historical results of the Company. Chip sales,
for which the Company normally generates the highest gross margin
(almost 50%) were only $3.6 million during the nine months versus
$7.4 million in the comparable period of the prior year. Because
of the extremely low volume in chip production, the higher per
unit costs of manufacturing resulted in the Company achieving a
less than 30% margin on the chips that were sold during the nine
months ended February 28, 1998. Conversely, furniture and seating
sales, for which the Company generates its lowest profit margins
(normally less than 20%, and as low as 5%) made up more than 36%
of the sales for the period, twice the historical ratio. Overall
sales of Company manufactured products during the nine months
ended February 28, 1998, dropped approximately 24.7% to $9.6
million versus approximately $12.8 in the same period of the
prior year. Included in the $9.6 million of Company manufactured
products sold during the nine months ended February 28, 1998,
were $2.7 million in playing cards, whose per unit costs were
negatively impacted by the duplication of overhead costs incurred
with the operation of dual playing card facilities in both Las
Vegas and San Luis, Mexico during the period. Management
anticipates that the transition of all playing card manufacturing
operations to San Luis, Mexico will be completed prior to the
Company's fiscal year end (May 31, 1998).
In the past, the Company has generally had a positive impact
from the decrease in the value of the Mexican peso. Over the last
several reporting periods, the value of the Mexican peso has
stabilized, having relatively little impact on the cost of
manufacturing. In the future, the Company cannot predict what
impact fluctuations in the value of the peso will have on the
cost of the Company's products manufactured in Mexico.
GROSS PROFIT. Gross profit for the nine months ended
February 28, 1998, decreased in absolute dollars by approximately
$2.17 million over the comparable period in the prior year as a
result of lower
12
revenues and the higher cost of revenues as a percentage of
sales from 67.9% to 78.5% due to the factors discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the nine
months ended February 28, 1998, SG&A expenses increased
approximately $735,000 or 16.6%, to $5.2 million as compared the
$4.4 million in the comparable period of the prior year. Major
increases in SG&A expenses included increases in salaries and
wages ($292,000) and travel, advertising and promotion
($105,000) as a result of the Company's efforts to expand market
share for its products and expand sales coverage in new and
existing markets, and depreciation ($51,000) as a result of the
Company's installation of additional production facilities in
the past several reporting periods. Also included in the
increase in the SG&A expenses is the write off of expenses
totaling approximately $58,000 related to the Company's
investment in the Brand One Marketing joint venture with
DeBartolo Entertainment which was terminated in February 1998.
INTEREST EXPENSE. For the nine months ended February 28,
1998, interest expense increased $36,000, or 97.8% to $72,000, up
from approximately $37,000 incurred in the same period of the
prior year, as a result of the Company's borrowing under the
Norwest Bank Note and Deed of Trust dated November 14, 1998 and
the Company's outstanding advances from time to time under the
Line of Credit.
OTHER INCOME. For the nine months ended February 28, 1998,
other income was approximately $128,000 as compared with $407,000
in the corresponding period of the prior year. The major
difference was that in the corresponding period of the prior
year, the Company sold an approximately 9,000 square foot
building located at 2133 Industrial Road in Las Vegas on February
28, 1997, which was part of the original Las Vegas Facility, (see
the Company's discussion of Material Changes In Financial
Condition below) for $450,000. The Company's depreciated cost
basis of the building was $129,000, resulting in a capital gain
of $204,000 net of income taxes ($321,000 before income taxes),
which is included in the Company's other income for the nine
months ended February 28, 1997.
NET INCOME. For the nine months ended February 28, 1998,
the Company sustained a net loss of approximately $693,000, a
decrease in earnings of approximately $2.1 million versus the net
income of approximately $1.36 million earned during the nine
month period ended February 28, 1997. The decrease was primarily
as a result of decreases in sales, gross profit and other income
(which included a one-time capital gain of $204,000 after taxes
last year), and increases in SG&A expenses over the comparable
period in the prior year. The net loss per share was $.20 for the
nine months ended February 28, 1998 as compared to net income of
$0.41 per share for the nine months ended February 28, 1997,
based on the weighted average number of shares outstanding.
13
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.
WORKING CAPITAL. Working capital totaled approximately $8.9
million at February 28, 1998, as compared to the approximately
$9.3 million at May 31, 1997.
CASH FLOW. Operating activities used approximately $3.2
million in cash during the nine months ended February 28, 1998,
as compared to cash generated of approximately $1.0 million
during the same period in the prior year. The major operational
uses of cash during the period were in increased accounts
receivable ($1.3 million net of customer deposits), additional
inventories ($534,000, due to the operation of and duplication of
inventories at playing card factories in both Las Vegas and
Mexico and an increase in inventories for large orders expected
to be delivered in the next fiscal quarter), the Company's net
loss before depreciation and income taxes of approximately
$379,000, and the reduction of accounts payable and accrued
expenses of $254,000. Overall the Company experienced a decrease
in cash of approximately $2.5 million with $3.2 million used by
operations, and $2.2 million used to purchase property and
equipment during the period. $1.8 million in cash was provided by
new bank financing (see the "Norwest Bank Note and Deed of Trust"
below), $875,000 from advances under the Line of Credit, and
$283,000 from the issuance of common stock pursuant to the
exercise of stock options.
LINE OF CREDIT. The Company has a line of credit (the
"Line of Credit") from Norwest Bank of Nevada ("Norwest"), which
now allows the Company to borrow up to $1,000,000. The Line of
Credit matures on October 31, 1998. As of February 28, 1998,
advances of $875,000 were outstanding under the Line of Credit.
The Line of Credit is collateralized by a first priority security
interest in substantially all of the Company's depository
accounts at Norwest, accounts receivable, inventory, furniture,
fixtures and equipment, and bears interest at a variable rate
equal to Norwest's prime lending rate.
Under the Line of Credit, the Company has agreed to comply
with certain financial covenants and ratios. Specifically, the
Company has agreed to maintain profitability on an annualized
basis of at least $250,000, maintain a tangible net worth
(stockholders' equity less intangible assets, and amounts due from
and investments in related parties) of at least $14.5 million and
a debt to tangible worth ratio (total liabilities divided by
tangible net worth) of less than 0.5 to 1 on a quarterly basis.
NORWEST BANK NOTE AND DEED OF TRUST. On November 14, 1997,
the Company borrowed $1.8 million (the "Norwest Bank Note and
Deed of Trust") from Norwest. The proceeds from the Norwest Bank
Note and Deed of Trust were used to replenish the funds expended
by the Company for the purchase of the New San Luis Facility (see
below), additional playing card equipment and working capital
needs. The Norwest Bank Note and Deed of Trust bears interest at
8.87%, payable in fixed monthly payments of $18,118 through
November 14, 2002, at which time the loan matures and all
remaining principal is due. The Norwest Bank Note and Deed of
Trust is secured by a first trust deed on the New Las Vegas
Facility (see below) and a blanket security agreement on
substantially all of the Company's assets filed in combination
with the Line of Credit. In addition, the Company has agreed to
comply with the same financial covenants as specified under the
Line of Credit.
14
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). In the past, there
has not appeared to be any seasonality associated with the
Company's "core sales" to existing customers, however, the
Company is currently evaluating whether this continues to be the
case
BACKLOG. Open orders as of February 28, 1998 totaled
approximately $3.0 million, compared to approximately $3.2
million at February 28, 1997. 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.
LAS VEGAS FACILITIES. In May 1997, the Company relocated
its corporate headquarters to a new facility which the Company
purchased in September 1995. The Company has made improvements
totaling approximately $425,000 to the New Las Vegas Facility.
The New Las Vegas Facility now houses the casino sales office, a
centralized warehouse of finished goods inventory, the Las Vegas
playing card production line, Roulette and Big Six wheel
manufacturing and the table layout art and chip art departments.
The Company s retail sales showroom has been relocated to leased
space on the Las Vegas "Strip" which management believes will
provide greater visibility and foot traffic for its retail
operations. Some limited warehousing is located at the Company's
former headquarters which the Company has owned since 1966 and
which is listed for sale.
NEW SAN LUIS BUILDING. In November 1997, the Company
purchased an existing approximately 66,000 square foot in San
Luis, Mexico (the "New San Luis Building") located approximately
400 yards from the previously existing facility for $1,100,000.
The funds for the purchase of the New San Luis Building were
generated by the $1.8 million Norwest Bank Note and Deed of
Trust. The Company has completed the process of installing the
equipment and improvements necessary to use the New San Luis
Building for additional playing card manufacturing. By the end of
the fiscal year (May 31, 1998) the Company anticipates that all
of its playing card production will be transferred to the New San
Luis Building and that it will be able to accommodate the
additional playing card contracts already signed as well as the
anticipated future increase in demand for the Company's playing
cards. The Company s ability to compete for additional market
share in playing card sales should be enhanced by the Company's
anticipated decrease in per unit production costs at its San Luis
facilities.
15
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.
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, 1997, Part II, Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Statement on Forward-Looking Information."
Note: Dollar amounts have been rounded for narrative
purposes while the percentages were calculated using actual
amounts.
16
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.
17
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.
18
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: April 13, 1998 By: /s/ Eric P. Endy
Eric P. Endy, President
(Duly Authorized Officer)
Date: April 13, 1998 By: /s/ Kirk Scherer
Kirk Scherer, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
27.01 Financial Data Schedule. 21
20