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: November 30, 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
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(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.
3,475,050 shares of Common Stock, $0.01 par value as of
January 13, 1999
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 and MAY 31, 1998 (unaudited)
ASSETS
NOVEMBER 30, MAY 31,
1998 1998
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CURRENT ASSETS
Cash and cash equivalents $629,394 $347,876
Trade receivables, less allowance for doubtful accounts
of $417,000 and $292,340 2,424,956 5,147,819
Income taxes receivable 786,463 786,463
Inventories 4,818,850 5,171,402
Prepaid expenses 209,360 118,693
Other current assets 175,637 405,299
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Total current assets 9,044,660 11,977,552
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PROPERTY AND EQUIPMENT, NET 9,217,781 9,105,545
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DEFERRED TAX ASSET 647,832 263,000
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OTHER ASSETS
Note receivable 150,000 150,000
Goodwill and other assets 452,653 469,229
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602,653 619,229
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$19,512,926 $21,965,326
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings $300,000 $850,000
Current maturities of long-term debt 223,714 59,007
Bank overdraft - 431,380
Accounts payable 1,186,963 1,733,122
Accrued expenses 464,948 1,115,915
Customer deposits 476,237 681,825
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Total current liabilities 2,651,862 4,871,249
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LONG-TERM DEBT, NET OF CURRENT MATURITIES 2,059,734 1,769,722
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COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, authorized 10,000,000 shares,
$.01 par value, none issued and outstanding - -
Common stock, authorized 30,000,000 shares,
$.01 par value, issued: 3,476,050 and 3,465,050
shares as of November 30, 1998 and May 31, 1998 34,761 34,658
Additional paid-in capital 13,643,947 13,566,800
Retained earnings 1,132,137 1,722,897
Less: Treasury stock, at cost, 2,000 and 0 shares (9,515) -
------------- -------------
14,801,330 15,324,355
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$19,512,926 $21,965,326
============= =============
See notes to condensed consolidated financial statements.
2
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------------ ----------------------------
1998 1997 1998 1997
------------- ------------ ------------ ------------
Revenues $5,466,639 $6,093,221 $11,165,048 $11,639,804
Cost of revenues 4,203,890 4,784,912 8,597,249 9,526,491
------------- ------------ ------------ ------------
Gross profit 1,262,749 1,308,309 2,567,799 2,113,313
Selling, general and
administrative 1,660,478 1,720,166 3,383,271 3,287,706
expenses ------------- ------------ ------------ ------------
Operating loss (397,729) (411,857) (815,472) (1,174,393)
Other income 6,635 28,940 16,228 90,441
Interest expense (57,917) (2,793) (108,516) (7,647)
------------- ------------ ------------ ------------
Loss before income (449,011) (385,710) (907,760) (1,091,599)
taxes
Income tax benefit 156,438 138,092 317,000 395,741
------------- ------------ ------------ ------------
Net loss ($292,573) ($247,618) ($590,760) ($695,858)
============= ============ ============ ============
Loss per share:
Basic ($0.08) ($0.07) ($0.17) ($0.20)
============= ============ ============ ============
Diluted ($0.08) ($0.07) ($0.17) ($0.20)
============= ============ ============ ============
See notes to condensed consolidated financial statements.
3
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS ENDED
NOVEMBER 30,
-------------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $13,578,551 $11,258,448
Cash paid to suppliers and employees (12,373,217) (13,168,004)
Interest received 8,186 61,305
Interest paid (108,516) (7,647)
Income taxes paid, net (145,568) (260,479)
-------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 959,436 (2,116,377)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on sale of equipment 3,000 7,350
Purchase of property and equipment, net (653,372) (1,811,028)
-------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (650,372) (1,803,678)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 500,000 1,800,000
Proceeds from exercise of options 77,250 135,160
Purchases of treasury stock (9,515) -
Principal payments on short-term borrowings (550,000) -
Principal payments on long-term borrowings (45,281) (23,986)
-------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (27,546) 1,911,174
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 281,518 (2,008,881)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 347,876 2,753,152
-------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $629,394 $744,271
============== =============
RECONCILIATION OF NET LOSS TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss ($590,760) ($695,858)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 533,338 483,152
Provision for bad debts 120,000 45,434
Loss on sale of assets 4,798 3,663
Change in assets and liabilities:
(Increase) decrease in accounts receivable 2,602,863 (591,466)
Increase in income tax benefit receivable - (337,290)
(Increase) decrease in inventories 352,552 (612,245)
Increase in prepaid expenses (90,667) (121,041)
Increase in deferred tax asset (384,832) -
(Increase) decrease in other current assets 229,662 (260,822)
(Increase) decrease in other assets 16,576 (150,247)
Decrease in accounts payable and accrued expenses (1,197,126) (276,562)
Decrease in bank overdraft (431,380) -
Increase (decrease) in customer deposits (205,588) 715,835
Decrease in income taxes payable - (318,930)
-------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $959,436 ($2,116,377)
============== =============
See notes to condensed consolidated financial statements.
4
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Paul-Son Gaming Corporation, including its subsidiaries
(collectively "Paul-Son" or the "Company"), is a leading
manufacturer and supplier of casino table game equipment in
the United States. The Company's products include casino
chips, table layouts, playing cards, dice, furniture, table
accessories and other products which are used with casino
table games such as blackjack, poker, baccarat, craps and
roulette. The Company sells its products in every state in
which casinos operate in the United States and in various
countries throughout the world.
BASIS OF CONSOLIDATION AND PRESENTATION
The condensed consolidated financial statements include
the accounts of Paul-Son and its wholly-owned subsidiaries,
Paul-Son Gaming Supplies, Inc. ("Paul-Son Supplies"), Paul-Son
Mexicana, S.A. de C.V. ("Mexicana") and Authentic Products,
Inc. All material intercompany balances and transactions have
been eliminated in consolidation. 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 Company's Form 10-K for the year ended May 31, 1998.
The condensed consolidated balance sheet as of November
30, 1998 and statements of operations and cash flows for the
three and six month periods ended November 30, 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 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 follows:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments and
repurchase agreements with maturities of three months or less
to be cash and cash equivalents.
5
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING 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 doubtful accounts, and charges against the
allowance have been within management's expectations.
INVENTORIES
Inventories are stated at the lower of cost or market,
net of reserves for slow-moving, excess and obsolete items.
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
-----
Buildings and improvements 18-27
Furniture and equipment 5-10
Vehicles 5-7
GOODWILL
Goodwill is amortized on a straight-line basis over 20
years.
REVENUE RECOGNITION
Substantially all revenue is recognized when products are
shipped to customers. The Company typically sells its
products with payment terms of net 30 days or less.
INCOME TAXES
The Company uses Statement of Financial Accounting
Standards ("SFAS") No. 109 for financial accounting and
reporting for income taxes. A current tax liability or asset
is recognized for the estimated taxes payable or refundable on
tax returns for the current year.
6
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
A deferred tax liability or asset is recognized for the
estimated future tax effects, based on provisions of the
enacted law, attributable to temporary differences and
carryforwards.
FOREIGN TRANSACTIONS
Sales outside of the United States are not significant
and substantially all transactions occur in United States
dollars.
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 and slow-moving, excess
and obsolete inventories. Actual results could differ from
those estimates.
RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (the "FASB")
issued SFAS No. 130, "Reporting Comprehensive Income" in June
1997. This statement, which is effective for fiscal years
beginning after December 31, 1997, requires a company to
classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance
of other comprehensive income separately from retained
earnings and additional paid-in capital in the stockholders'
equity section of the consolidated balance sheet. The
adoption of SFAS No. 130 did not affect the Company's
condensed consolidated financial statements for the three and
six-month periods ended November 30, 1998 and 1997.
The FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" in June 1997. This
statement, which is effective for fiscal years beginning after
December 15, 1997, establishes standards for segment reporting
in the financial statements. This is a disclosure item only
and will have no impact on reported earnings per share.
The American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of
Position 98-5 "Reporting on the Costs of Start-Up Activities
"("SOP 98-5"). This standard provides guidance on the
financial reporting for start-up costs and organization
costs and requires costs of start-up activities
and organization costs to be expensed as incurred.
This standard is effective for fiscal years beginning
after December 15, 1998 though earlier adoption is
encouraged. Management has not yet adopted
7
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
this standard but does not believe the adoption thereof will
have a significant impact on its consolidated financial
statements.
The FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits -- an
amendment of FASB Statements No. 87, 88, and 106" in February
1998. This statement, which is effective for fiscal years
beginning after December 15, 1997, revises employers'
disclosures about pensions and other postretirement benefit
plans. The Company believes the adoption of this standard
will not have a significant impact on its consolidated
financial statements.
NOTE 2 - INVENTORIES
Inventories consist of the following:
November 30, May 31,
1998 1998
---------------- -------------
Raw materials $1,812,362 $1,734,738
Work in process 358,745 333,182
Finished goods 2,920,743 3,303,482
---------------- -------------
5,091,850 5,371,402
Less inventory reserves 273,000 200,000
---------------- -------------
$4,818,850 $5,171,402
================ =============
NOTE 3 - SHORT-TERM BORROWINGS
The Company has a $1.0 million line of credit agreement with
a bank. Interest on outstanding borrowings currently accrues at
the bank's prime rate of interest (8.0% at November 30, 1998)
plus one per cent. This facility, which is cross collateralized
with a $1.8 million and a $500,000 note (collectively "the
Facilities"), is secured by a first deed of trust on certain real
estate owned by Paul-Son Supplies and by a secured interest in
all accounts, equipment, inventory and general intangibles of
Paul-Son Supplies (see Note 4). The Company is also the
guarantor of these facilities. Borrowings under the line of
credit at November 30, 1998 and May 31, 1998 were $300,000 and
$850,000, respectively. The line of credit agreement contains
restrictive covenants, generally requiring the Company to
maintain certain quarterly and annual financial ratios, as
defined in the agreement. As of November 30, 1998, the Company
was in compliance with the quarterly ratios.
8
NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt consists of the following:
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
November 30, May 31,
1998 1998
-------------- ------------
Note payable to a 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 November 2003,
secured by a first deed of trust on the Company's
main facility in Las Vegas, Nevada and a first
security interest on all Company assets $1,741,926 $1,771,076
Note payable to a bank in monthly principal
installments of $13,889 plus interest at 9.75% due
August 2001, secured by a first deed of trust on
the Company's main facility in Las Vegas, Nevada
and a first security interest on all Company $486,111 -
assets
Notes payable to mortgage companies, collateralized
by real estate, interest at 7.5% to 9.5%, with
principal and interest payments of $898 due
monthly through 2016 55,411 57,653
-------------- ------------
2,283,448 1,828,729
Less current portion 223,714 59,007
-------------- ------------
$2,059,734 $1,769,722
============== ============
NOTE 5 - EARNINGS PER SHARE
The following table provides a reconciliation of basic and
diluted loss per share as required by SFAS No. 128, "Earnings per
Share":
Dilutive
Stock
Basic Options Diluted
------------ ----------- -------------
For the 6 month period ending November 30, 1998
- -----------------------------------------------
Net loss ($590,760) ($590,760)
Weighted Average Shares 3,473,732 - 3,473,732
Per Share Amount ($0.17) ($0.17)
For the 6 month period ending November 30, 1997
- -----------------------------------------------
Net loss ($695,858) ($695,858)
Weighted Average Shares 3,422,102 - 3,422,102
Per Share Amount ($0.20) ($0.20)
9
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Dilutive stock options for the six months ended November 30,
1998 (111,000) and November 30, 1997 (918,250) have not been
included in the computation of diluted net loss per share as
their effect would be antidilutive.
The Company has granted certain stock options to purchase
common stock which had an exercise price greater than the average
market price. These antidilutive options have been excluded from
the computation of diluted net loss per share for the respective
six-month periods. These outstanding antidilutive options for
the six months ended November 30, 1998 and 1997 were 623,250 and
0, respectively.
NOTE 6 - RELATED PARTIES
Included in selling, general and administrative expenses for
the six month periods ended November 30, 1998 and 1997 are
approximately $0 and $54,000, respectively, for legal services
of the Company's Board of Directors.
On November 22, 1996 the Company advanced to a director a
$150,000 line of credit. The line of credit was due in full on
December 1, 1998. As a result of nonpayment of the loan, the
Company is proceeding to enforce its rights under certain
agreements, including foreclosure on shares of the Company's
common stock pledged on behalf of the director by the Company's
principal stockholder and cancellation of certain stock options
granted by the Company to the director.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Paul-Son is a leading manufacturer and supplier of casino
table game equipment in the United States. The Company's
products include casino chips, table layouts, playing cards,
dice, gaming furniture, and miscellaneous table accessories such
as chip trays, drop boxes, and dealing shoes, which are used in
conjunction with casino table games such as blackjack, poker,
baccarat, craps and roulette. The Company is headquartered in
Las Vegas, Nevada, with its primary manufacturing facilities
located in San Luis, Mexico and sales offices in Las Vegas and
Reno, Nevada; Atlantic City, New Jersey; 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.
COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30,
1998 AND NOVEMBER 30, 1997
REVENUES. For the three months ended November 30, 1998,
revenues were approximately $5.5 million, a decrease of
approximately $627,000, or 10%, versus revenues of approximately
$6.1 million for the three months ended November 30, 1997. The
decrease in revenues for the 1998 period was caused principally
by a decrease in sales of distributed products not manufactured
by the Company, such as furniture and seating accessories, of
approximately $1.3 million offset, in part, by an increase in
sales of Company manufactured products of approximately $700,000.
The decline in sales of products not manufactured by the Company
sold was attributable to fewer new openings and expansions of
casinos in the 1998 period versus the prior year period. The
increase in the sale of manufactured products was caused
principally by increases in playing card sales versus the prior
period. Sales of products manufactured by the Company totaled
approximately $4.0 million in the 1998 period versus approximately
$3.3 million in the same period of the prior year.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, decreased to 76.9% for the three months ended November 30,
1998, as compared to 78.5% for the three months ended November
30, 1997. This improvement in the gross margin occurred as sales
of the Company's manufactured, higher-margin products
(principally playing cards, casino chips, dice and table layouts)
increased by approximately $600,000 over the prior year three-
month period. Increases in playing card sales accounted for the
majority of the increase. Additionally, improvements in the
Company's gross margin in the 1998 quarter were attributable to
the elimination of dual playing card production facilities. The
Company previously manufactured playing cards in San Luis, Mexico
and, to a limited extent, in Las Vegas, Nevada. Certain
inefficiencies, which resulted in higher manufacturing costs in
the prior year quarter, were eliminated with the transition of
the Las Vegas playing card production to San Luis in May 1998.
GROSS PROFIT. Gross profit for the three months ended
November 30, 1998 decreased in absolute dollars by approximately
$45,000 from the comparable period in the prior year as a result
of the aforementioned lower revenues offset, in part, by the
aforementioned lower cost of revenues as a percentage of sales
from 78.5% to 76.9%.
11
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three
months ended November 30, 1998, selling, general and
administrative ("SG&A") expenses decreased approximately $59,000
or 3.4%, compared to the comparable period of the prior year.
This decrease was primarily attributable to a decrease in certain
personnel related costs offset, in part, by increases in
depreciation expense related to property and equipment purchases
during the fiscal year ended May 31, 1998 and an increased
standard monthly provision for doubtful accounts.
INTEREST EXPENSE. For the three months ended November 30,
1998, interest expense increased to approximately $58,000 from
approximately $3,000 in the 1997 period. This increase was due
principally to the acquisition of debt (approximately $1.8
million) associated with the purchase of a new manufacturing
facility in San Luis and certain manufacturing equipment acquired
in November 1997, the acquisition of an additional $500,000 of
debt in October 1998 and average outstanding borrowings of
approximately $500,000 under the Company's existing line of
credit facility.
OTHER INCOME. For the three months ended November 30, 1998,
other income decreased to approximately $7,000 from approximately
$29,000 in the 1997 period. This decrease was caused principally
by a reduction in the amount of interest income received during
the three months ended November 30, 1998 as compared to the
comparable 1997 quarterly period (based on average outstanding
cash balances during the quarters).
NET LOSS. For the three months ended November 30, 1998 the
Company's net loss was approximately $293,000, a decline in net
operating results of approximately $45,000 from the net loss of
approximately $248,000 for the quarter ended November 30, 1997.
This decline in net operating results was primarily due to the
aforementioned decrease in revenues offset, in part, by the
aforementioned improvement in gross profit margin percentages and
decrease in SG&A expenses. Net loss per diluted share was $.08
for the three months ended November 30, 1998 as compared to a net
loss per diluted share of $.07 per share for the three months
ended November 30, 1997.
During several of the Company's prior reporting quarters,
the Company has experienced a positive impact from the decrease
in the value of the Mexican peso. Over the last year, the value
of the Mexican peso has remained relatively stable. The Company
cannot predict what impact fluctuations in the valuation of the
Mexican peso will have on the cost of the Company's products
manufactured in Mexico.
COMPARISON OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30,
1998 AND NOVEMBER 30, 1997
REVENUES. For the six months ended November 30, 1998,
revenues totaled approximately $11.2 million, an approximately 4%
decrease from the approximately $11.6 million of revenues in the
comparable period of the prior year. The decrease in revenues
for the 1998 period was due principally to a decrease in sales of
non-manufactured, distributed products, such as furniture and
seating accessories, of approximately $2.3 million offset, in
part, by an increase in sales of manufactured products of
approximately $1.9 million. The decline in non-manufactured
products sold was attributable to fewer new openings or
expansions of casinos in the 1998 period versus
12
the prior year period. The significant increase in manufactured
products sold occurred principally from an increase in playing
card sales of approximately $1.6 million (or approximately 102%).
Sales of products manufactured by the Company totaled
approximately $8.2 million in the 1998 period vs. approximately
$6.4 million in the same period of the prior year.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, decreased to 77.0% for the current period as compared to
81.8% for the six months ended November 30, 1997. This
improvement in the gross margin occurred as sales of the
Company's manufactured, higher-margin products (principally
playing cards, casino chips, dice and table layouts) increased by
approximately $1.8 million over the prior year six-month period.
Additionally, improvements in the Company's gross margin were
attributable to the elimination of dual playing card production
facilities. During the six-month period ended November 30, 1997,
the Company manufactured playing cards in San Luis, Mexico and,
to a limited extent, in Las Vegas, Nevada. Certain
inefficiencies, which resulted in higher manufacturing costs in
the prior year six-month period, were eliminated with the
transition of the Las Vegas playing card production to San Luis
in May 1998.
GROSS PROFIT. Gross profit for the six months ended
November 30, 1998, increased in absolute dollars by approximately
$450,000 over the comparable period in the prior year. This
improvement was primarily a result of the aforementioned
improvement in the cost of revenues as a percentage of sales in
the 1998 period versus the 1997 period offset, in part, by the
aforementioned lower revenue levels for the six months ended
November 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the six
months ended November 30, 1998, SG&A expenses increased
approximately $95,000, or 2.9%, to approximately $3.4 million as
compared to approximately $3.3 million in the comparable period
of the prior year. This increase was primarily attributable to
increased depreciation expenses related to property and equipment
purchases during the fiscal year ended May 31, 1998 and increased
standard monthly provisions for doubtful accounts offset, in
part, by a decrease in certain personnel costs.
INTEREST EXPENSE. For the six months ended November 30,
1998, interest expense increased to approximately $109,000, from
approximately $8,000 in the 1997 period. This increase was due
principally to the acquisition of debt (approximately $1.8
million) associated with the purchase of a new manufacturing
facility in San Luis and certain manufacturing equipment acquired
in November 1997, the acquisition of an additional $500,000 of
debt in October 1998, and average outstanding borrowings of
approximately $600,000 under the Company's existing line of
credit facility.
OTHER INCOME. For the six months ended November 30, 1998,
other income decreased to approximately $16,000 from
approximately $90,000 in the 1997 period. This decrease was
caused principally by a reduction in the amount of interest
income received during the six months ended November 30, 1998, as
compared to the comparable 1997 period (based on average
outstanding cash balances during the periods).
NET LOSS. For the six months ended November 30, 1998 the
Company sustained a net loss of approximately $591,000, versus a
net loss of approximately $696,000 in the comparable prior
13
year period. This improvement in net operating results was
primarily due to the aforementioned increase in gross profit
margins offset, in part, by the aforementioned decrease in
revenues and increase in SG&A expenses. The net loss per diluted
share was $.17 for the six months ended November 30, 1998, as
compared to a net loss per diluted share of $.20 per share for
the six months ended November 30, 1997.
During certain previous reporting periods, the Company has
generally had a positive impact from the decrease in the value of
the Mexican peso. Over the last year, the value of the Mexican
peso has remained relatively stable. The Company cannot predict
what impact fluctuations between the Mexican peso and the U.S.
dollar will have on the cost of the Company's products
manufactured in Mexico.
MATERIAL CHANGES IN FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW. Management believes that the combination of cash
flow from operations, cash on hand and bank financing
alternatives will provide sufficient liquidity both on a short
term and long term basis.
WORKING CAPITAL. Working capital totaled approximately $6.4
million at November 30, 1998, a decrease of approximately
$714,000 in working capital from approximately $7.1 million in
working capital at May 31, 1998.
CASH FLOW. Operating activities provided approximately $1.1
million in cash during the six months ended November 30, 1998, as
compared to cash used of approximately $2.1 million during the
same period in the prior year. The primary operational sources
of cash during the period were related to collections on accounts
receivable balances of approximately $2.6 million and reductions
of inventories of approximately $353,000. These sources of cash
were offset, in part, by cash used to reduce balances in accounts
payable, accrued expenses and a bank overdraft of approximately
$1.6 million and to finance the Company's net loss before
depreciation and income taxes of approximately $300,000. Overall
the Company experienced an increase in cash of approximately
$282,000.
LINE OF CREDIT. In October 1998, the Company renewed its
existing line of credit with Norwest Bank of Nevada ("Norwest"),
which allows the Company to borrow up to $1.0 million. The
renewed line of credit (the "Line of Credit") matures on October
31, 1999. As of November 30, 1998, advances of $300,000 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 (8% at November 30, 1998) plus 1%.
Under the Line of Credit and other Norwest credit
facilities, the Company has agreed to comply with certain
financial covenants and ratios which are primarily calculated on
an annual basis. Specifically, the Company has agreed to
have annual profitability of at least $250,000, have
14
an annual tangible net worth (stockholders' equity less
intangible assets and amounts due from, and investments in,
related parties) of at least $14 million and maintain a quarterly
debt to tangible worth ratio (total liabilities divided by
tangible net worth) of less than 0.5 to 1. As of November 30,
1998, the Company was in compliance with the quarterly ratios.
NORWEST BANK NOTE. In October 1998, the Company borrowed
$500,000 (the "1998 Norwest Note") from Norwest. The proceeds
from the 1998 Norwest Note were used to purchase certain
additional playing card equipment. The 1998 Norwest Note bears
interest at 9.75%, payable in monthly principal installments of
$13,889 through August 2001. The 1998 Norwest Bank Note is
secured by a first deed of trust on certain real estate owned by
Paul-Son Supplies and by a secured interest in all accounts,
equipment, inventory and general intangibles of
Paul-Son Supplies. The 1998 Norwest Note contains
similar financial covenants to the Line of Credit.
SEASONALITY. The Company has occasionally experienced some
seasonality relative to new casino openings, particularly in Las
Vegas, as new openings have tended to occur near the end of a
calendar year; however, there does not appear to be any
seasonality associated with the Company's core sales to existing
customers.
SALE OF REAL ESTATE. On January 5, 1999 the Company
completed the sale to Gary Fox, an individual, of certain real
estate previously utilized as the Company's business headquarters
in Las Vegas, Nevada. The real estate, which carried a book
value of approximately $351,000, was sold for approximately
$685,000 and, after the payment of certain closing costs and
improvements, generated approximately $610,000 in net cash
proceeds.
STOCK REPURCHASE PROGRAM. The Company announced that its
Board of Directors authorized the open market repurchase of up to
approximately 170,000 shares of the Company's common stock. As
of January 12, 1998, the Company had repurchased 2,000 shares on
the open market at a total cost of approximately $9,515 under
this authorization. The Company has funded the purchases made to
date and intends to fund any future repurchases from cash on
hand.
RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS. See Note
1 to the Condensed Consolidated Financial Statements for a
discussion of recently issued or adopted accounting standards and
their expected impact on the Company's condensed consolidated
financial statements.
YEAR 2000 PROJECT. The Company has conducted a review of
its computer systems to identify those areas that could be
affected by year 2000 issues and is in the process of updating
its existing critical systems to improve overall business
performance and to accommodate business for the year 2000.
However, given the inherent risks for this project and the
resources required, the timing and costs involved could differ
materially from that anticipated by the Company. The Company is
confident that its critical systems will be remediated by year-
end 1999. The Company plans to test problems related to year
2000 issues and also plans to solicit and evaluate responses from
its primary suppliers and business partners. The
Company plans to test year 2000 corrections in
sufficient time to allow for an alternative contingency
plan if the planned corrections are not completely successful.
The Company's contingency plan is expected to be
15
developed by the end of its fiscal quarter ending August 31,
1999. Due to the speculative nature of contingency planning, it
is uncertain whether future contingency plans will be sufficient
to reduce the risk of material impacts on our operations for year
2000 issues. Although no material difficulties are anticipated
at this time, there can be no assurance that the conversion
project will be completed on schedule, that the systems of other
companies on which the Company may rely also will be timely
converted or that such failure to convert by another company
would not have an adverse impact on the Company's systems.
Overall estimated status for the Company as of November 30,
1998 shows identification of potential problems at 80% complete,
assessment at 50% complete and testing at 10% complete.
The estimated cumulative costs directly or indirectly
associated with the conversion project is currently expected to
be less than $50,000, a significant portion of which will be in
the form of capital expenditures. As of November 30, 1998, the
Company has incurred approximately $10,000 of costs which are
directly or indirectly related to the Year 2000 project.
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included herein contains statements that
may be considered forward-looking, such as statements relating to
anticipated performance and financing sources. 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, 1998, 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
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on
October 13, 1998, to elect the following directors:
Name of Director For Against Abstain
------------------ ----------- --------- ----------
Jerry G. West 3,288,613 90,157 0
Martin S. Winick 3,288,613 90,157 0
ITEM 5 OTHER EVENTS
On November 25, 1998, the Board of Directors appointed Eric
Endy Chairman of the Board, President and Chief Executive Officer,
a position Eric Endy had held in an interim capacity since October
30, 1998. See "Item 6 Exhibit and Reports on Form 8-K, (b)
Reports on Form 8-K."
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
10.01 Modification/Change in Terms Agreement
dated October 23, 1998 between Paul-Son
Gaming Supplies, Inc. and Norwest Bank
Nevada, N.A.; Promissory Note made by
Paul-Son Gaming Supplies, Inc., in favor
of Norwest Bank Nevada, N.A., dated
October 23, 1998; Change in Terms
Agreement dated October 23, 1998, between
Paul-Son Gaming Supplies, Inc. and Norwest
Bank Nevada, N.A.
27.01 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K dated October 30, 1998,
under Item 5, "Other Events," reporting that Paul S. Endy,
Jr. had suffered a stroke and that Eric P. Endy had been
appointed interim chief executive officer of the Company.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned thereunto duly
authorized.
PAUL-SON GAMING CORPORATION
Date: January 12, 1999 By: /s/ Eric P. Endy
------------------------------
Eric P. Endy, Chief Executive
Officer (Duly Authorized
Officer)
Date: January 12, 1999 By: /s/ John M. Garner
------------------------------
John M. Garner, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
10.01 Modification/Change in Terms Agreement dated 20
October 23, 1998 between Paul-Son Gaming Supplies,
Inc. and Norwest Bank Nevada, N.A.; Promissory Note
made by Paul-Son Gaming Supplies, Inc., in favor of
Norwest Bank Nevada, N.A., dated October 23, 1998;
Change in Terms Agreement dated October 23, 1998,
between Paul-Son Gaming Supplies, Inc. and Norwest
Bank Nevada, N.A.
27.01 Financial Data Schedule 34
19