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, 1999
--------------------------
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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
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.
3,455,757 shares of Common Stock, $0.01 par value, as of
April 7, 1999
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
FEBRUARY 28, 1999 AND MAY 31, 1998
ASSETS
FEBRUARY 28, MAY 31,
1999 1998
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents $762,085 $347,876
Trade receivables, less allowance for doubtful accounts
of $301,000 and $292,340 3,057,197 5,147,819
Income taxes receivable - 786,463
Inventories 4,918,396 5,171,402
Prepaid expenses 161,682 118,693
Other current assets 396,224 405,299
-------------- --------------
Total current assets 9,295,584 11,977,552
-------------- --------------
PROPERTY AND EQUIPMENT, NET 8,819,970 9,105,545
-------------- --------------
DEFERRED TAX ASSET 580,000 263,000
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OTHER ASSETS
Note receivable - 150,000
Goodwill and other assets 459,725 469,229
-------------- --------------
Total other assets 459,725 619,229
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$19,155,279 $21,965,326
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ - $850,000
Current maturities of long-term debt 228,900 59,007
Bank overdraft - 431,380
Accounts payable 1,354,651 1,733,122
Accrued expenses 509,255 1,115,915
Customer deposits 546,440 681,825
-------------- --------------
Total current liabilities 2,639,246 4,871,249
-------------- --------------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 1,996,409 1,769,722
-------------- --------------
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: 3,477,050 and 3,465,750
shares as of February 28, 1999 and May 31, 1998 34,770 34,658
Additional paid-in capital 13,652,937 13,566,800
Retained earnings 1,015,069 1,722,897
Less: Treasury stock, at cost, 21,293 and 0 shares (183,152) -
-------------- --------------
Total stockholders' equity 14,519,624 15,324,355
-------------- --------------
$19,155,279 $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 NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------------------------ -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
Revenues $6,023,069 $6,977,958 $17,188,117 $18,617,762
Cost of revenues 4,694,177 5,625,917 13,291,426 15,152,408
------------- ------------- ------------- --------------
Gross profit 1,328,892 1,352,041 3,896,691 3,465,354
Selling, general and
administrative expenses 1,759,428 1,864,118 5,142,699 5,151,824
------------- ------------- ------------- --------------
Operating loss (430,536) (512,077) (1,246,008) (1,686,470)
Other income 367,299 38,096 383,527 128,537
Interest expense (53,831) (64,849) (162,347) (72,496)
------------- ------------- ------------- --------------
Loss before income taxes (117,068) (538,830) (1,024,828) (1,630,429)
Income tax benefit - 196,673 317,000 592,414
------------- ------------- ------------- --------------
Net loss ($117,068) ($342,157) ($707,828) ($1,038,015)
============= ============= ============= ==============
Loss per share:
Basic ($0.03) ($0.10) ($0.20) ($0.30)
Diluted ($0.03) ($0.10) ($0.20) ($0.30)
See notes to condensed consolidated financial statements.
3
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
FEBRUARY 28,
------------------------------
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $19,177,290 $17,226,904
Cash paid to suppliers and employees (18,658,310) (20,137,871)
Interest received 14,612 85,207
Interest paid (162,347) (72,496)
Income tax refund 786,463 -
Income taxes paid, net (184,213) (299,117)
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 973,495 (3,197,373)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on sale of property and equipment 632,165 7,350
Purchase of property and equipment (814,765) (2,218,261)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (182,600) (2,210,911)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 500,000 1,800,000
Proceeds from short-term borrowings - 875,000
Proceeds from exercise of options 86,249 282,977
Purchases of treasury stock (9,515) -
Principal payments on short-term borrowings (850,000) -
Principal payments on long-term borrowings (103,420) (45,653)
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (376,686) 2,912,324
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 414,209 (2,495,960)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 347,876 2,753,152
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $762,085 $257,192
============= =============
RECONCILIATION OF NET LOSS TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss ($707,828) ($1,038,015)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 810,396 654,564
Provision for bad debts 120,000 69,071
(Gain) loss on sale of assets (337,307) 3,663
Change in assets and liabilities:
(Increase) decrease in accounts receivable 1,960,975 (328,287)
(Increase) decrease in income tax benefit receivable 786,463 (382,395)
(Increase) decrease in inventories 253,006 (534,343)
Increase in prepaid expenses (42,989) (91,120)
Increase in deferred tax asset (317,000) -
(Increase) decrease in other current assets 9,075 (268,548)
Increase in other assets (9,400) (87,717)
Decrease in accounts payable and accrued expenses (985,131) (254,104)
Decrease in bank overdraft (431,380) -
Decrease in customer deposits (135,385) (427,343)
Decrease in income taxes payable - (512,799)
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $973,495 ($3,197,373)
============= =============
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. 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 February
28, 1999 and statements of operations for the three and nine
month periods ended February 28, 1999 and 1998 and the
statements of cash flows for the nine month periods ended
February 28, 1999 and 1998 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
nine-month periods ended February 28, 1999 and 1998.
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."
This statement 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 statement is effective for fiscal years
beginning after December 15, 1998 though earlier adoption is
encouraged. Management has not yet adopted this statement
but does not believe the adoption thereof will have a
significant impact on its consolidated financial statements.
7
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 statement
will not have a significant impact on its consolidated
financial statements.
The FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" in June 1998. This
statement, which is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999, establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for
hedging activities. The Company believes that adoption of
this statement will not have a material effect on its
consolidated financial statements.
[CAPTION]
NOTE 2 - INVENTORIES
Inventories consist of the following:
February 28, May 31,
1999 1998
--------------- ------------
Raw materials $1,782,287 $1,734,738
Work in process 304,581 333,182
Finished goods 3,093,528 3,303,482
--------------- ------------
5,180,396 5,371,402
Less inventory reserves 262,000 200,000
--------------- ------------
$4,918,396 $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 (7.75% at February 28, 1999)
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 the Facilities. Borrowings under the line of credit
at February 28, 1999 and May 31, 1998 were $0 and $850,000,
respectively. The Facilities contain restrictive covenants,
generally requiring the Company to maintain certain quarterly and
annual financial ratios, as defined in the agreement. The bank
has informed the Company that the bank believes the Company is
not in compliance with the quarterly ratios; and while the bank
has agreed to issue the Company a formal waiver of default with
respect to the outstanding notes payable (see Note 4), the bank
has expressed its intent to withdraw the revolving line of credit
facility.
8
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[CAPTION]
NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt consists of the following:
February 28, May 31,
1999 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
headquarters in Las Vegas, Nevada and a first security interest $1,730,984 $1,771,076
on all Company assets (see Note 3)
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 headquarters in Las Vegas,
Nevada and a first security interest on all Company assets
(see Note 3) 444,444 -
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 49,881 57,653
-------------- ---------------
2,225,309 1,828,729
Less current portion 228,900 59,007
-------------- ---------------
$1,996,409 $1,769,722
============== ===============
NOTE 5 - EARNINGS PER SHARE
The weighted average shares outstanding for the three months
ended February 28, 1999 and 1998 were 3,474,830 and 3,439,472,
respectively. The weighted average shares outstanding for the
nine months ended February 28, 1999 and 1998 were 3,472,697 and
3,439,472, respectively.
Dilutive stock options for the nine months ended February
28, 1999 (106,000) and February 28, 1998 (857,500) 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 income (loss) per share for the
respective three and nine-month periods. These outstanding
antidilutive options for the nine months ended February 28, 1999
and 1998 were 556,750 and 0, respectively.
9
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6 - RELATED PARTIES
Included in selling, general and administrative expenses for
the nine month periods ended February 28, 1999 and 1998 are
approximately $0 and $81,000, respectively, for legal services
rendered by an individual while a member of the Company's Board
of Directors.
Included in accounts receivable are amounts owed to the
Company from the Company's former Chairman and Chief Executive
Officer of approximately $53,000.
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 enforced 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. As a result of the enforcement, the Company
received 19,293 shares of common stock from the Paul S. Endy, Jr.
trust to satisfy the unpaid obligation of the director. The
value of the shares on the date of default was used in recording
the shares which were put into treasury by the Company.
NOTE 7 - CASH FLOW INFORMATION
During the quarter ended February 28, 1999, a significant
noncash investing activity occurred in which the Company received
treasury stock with a value of approximately $174,000 in exchange
for certain notes and accounts receivable of the same value.
NOTE 8 - SUBSEQUENT EVENT
In March 1999, the Company leased certain equipment for its
manufacturing facility. The lease terms require total monthly
payments of approximately $12,300 for a non-cancelable period of
84 months.
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 FEBRUARY 28,
1999 AND FEBRUARY 28, 1998
REVENUES. For the three months ended February 28, 1999,
revenues were approximately $6.0 million, a decrease of
approximately $1.0 million or 14%, versus revenues of
approximately $7.0 million for the three months ended February
28, 1998. The decrease in revenues for the 1999 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 $1.8 million offset, in part, by an
increase in sales of Company manufactured products of
approximately $800,000. The decline in sales of products not
manufactured by the Company sold was attributable to fewer sales
of seats, chairs and tables distributed by the Company in
connection with fewer new casino openings or expansions of
existing casinos as compared to the previous period. The increase
in the sale of manufactured products was caused principally by
increases in playing card sales of approximately $500,000 over
the prior period. Sales of products manufactured by the Company
totaled approximately $4.6 million in the 1999 period versus
approximately $3.7 million in the same period of the prior year.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, improved to 77.9% for the three months ended February 28,
1999, as compared to 80.6% for the three months ended February
28, 1998. 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 $800,000 over the prior year three-
month period. Additionally, improvements in the Company's gross
margin in the 1999 quarter were attributable to the consolidation
of playing card production facilities into a single facility.
The Company previously manufactured playing cards in both 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
consolidation of all playing card production to San Luis in May
1998.
GROSS PROFIT. Gross profit for the three months ended
February 28, 1999 decreased in absolute dollars by approximately
$23,000 from the comparable period in the prior year as a result
11
of the aforementioned decrease in revenues offset, in part, by
the aforementioned improvement in the gross margin percentage
from 19.4% in the 1998 period to 22.1% in the 1999 quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three
months ended February 28, 1999, selling, general and
administrative ("SG&A") expenses decreased approximately $105,000
or 6%, 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.
INTEREST EXPENSE. For the three months ended February 28,
1999, interest expense decreased to approximately $54,000 from
approximately $65,000 in the 1998 period. This decrease was due
to a decrease in the average outstanding debt during the 1999
period.
OTHER INCOME. For the three months ended February 28, 1999,
other income increased to approximately $367,000 from
approximately $38,000 in the 1998 period. This increase was
caused principally from the sale of certain Company-owned real
estate in the 1999 period. The Company's former headquarters in
Las Vegas were sold at a pre-tax gain from the sale of
approximately $340,000.
NET LOSS. For the three months ended February 28, 1999 the
Company incurred a net loss of approximately $117,000, an
improvement of approximately $225,000 from the net loss of
approximately $342,000 for the quarter ended February 28, 1998.
This improvement was primarily due to the aforementioned increase
in other income caused by the sale of certain real estate, the
aforementioned improvement in gross profit margin percentages and
the decrease in SG&A expenses offset, in part, by the
aforementioned decline in revenues from the 1998 period. Net
loss per diluted share was $.03 for the three months ended
February 28, 1999 as compared to a net loss per diluted share of
$.10 per share for the three months ended February 28, 1998.
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 future fluctuations between the
Mexican peso and the U.S. dollar, if any, may have on the cost of
the Company's products manufactured in Mexico.
COMPARISON OF OPERATIONS FOR THE NINE MONTHS ENDED FEBRUARY 28,
1999 AND FEBRUARY 28, 1998
REVENUES. For the nine months ended February 28, 1999,
revenues totaled approximately $17.2 million, an approximate 8%
decrease from the approximate $18.6 million of revenues in the
comparable period of the prior year. The decrease in revenues
for the 1999 period was due principally to a decrease in sales of
non-manufactured, distributed products, such as furniture and
seating accessories, of approximately $4.1 million offset, in
part, by an increase in sales of the Company's manufactured
products of approximately $2.7 million. The decline in non-
manufactured products sold was attributable to fewer new openings
or expansions of casinos in the 1999 period versus the prior year
period. The significant increase in Company manufactured
12
products sold occurred principally from an increase in playing
card sales of approximately $2.1 million (or approximately 77%).
Sales of products manufactured by the Company totaled
approximately $12.7 million in the 1998 period as compared to
approximately $10.0 million in the same period of the prior year.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, decreased to 77.3% for the nine months ended February 28,
1999 as compared to 81.4% for the nine months ended February 28,
1998. 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 $2.7 million over the prior year nine-month period.
Additionally, improvements in the Company's gross margin were
attributable to the consolidation of all of playing card
production facilities into a single facility. During the nine-
month period ended February 28, 1998, 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 nine-month period,
were eliminated with the consolidation of all playing card
production to San Luis in May 1998.
GROSS PROFIT. Gross profit for the nine months ended
February 28, 1999, increased in absolute dollars by approximately
$431,000 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 1999 period versus the 1998 period offset, in part, by the
aforementioned lower revenue levels for the nine months ended
February 28, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the nine
months ended February 28, 1999, SG&A expenses decreased
approximately $9,000 as compared to the prior year nine month
period. This slight decrease was primarily attributable to a
decrease in certain personnel costs offset, in part, by increased
depreciation expenses related to property and equipment purchases
during the fiscal year ended May 31, 1998 and increased standard
provisions for doubtful accounts.
INTEREST EXPENSE. For the nine months ended February 28,
1999, interest expense increased to approximately $162,000, from
approximately $72,000 in the 1998 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 November 1998, and average outstanding borrowings, which
were outstanding for the entire nine month period in the 1999
period, of approximately $500,000 under the Company's existing
line of credit facility. The line of credit facility was
acquired in November 1997.
OTHER INCOME. For the nine months ended February 28, 1999,
other income increased to approximately $384,000, from
approximately $129,000 in the 1998 period. This increase was due
primarily to the sale of certain real estate owned by the Company
in the 1999 period which created a pre-tax gain of approximately
$340,000.
NET LOSS. For the nine months ended February 28, 1999 the
Company sustained a net loss of approximately $708,000, versus a
net loss of approximately $1,038,000 in the comparable prior
13
year period. This improvement was primarily due to the
aforementioned increase in gross profit margins, as well as the
increase in other income due to the aforementioned sale of
certain real estate and a slight decrease in SG&A expenses
offset, in part, by the aforementioned decrease in revenues from
the 1998 period. The net loss per diluted share was $.20 for the
nine months ended February 28, 1999, as compared to a net loss
per diluted share of $.30 per share for the nine months ended
February 28, 1998.
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 future fluctuations between the
Mexican peso and the U.S. dollar, if any, may 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 and cash on hand will provide sufficient
liquidity on a short term basis. On a long term basis,
management of the Company believes that, depending on future
cash flow from operations, the Company may be required to
secure additional financing.
WORKING CAPITAL. Working capital totaled approximately $6.7
million at February 28, 1999, a decrease of approximately
$400,000 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 nine months ended February 28, 1999,
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 $3.2 million, collection of
the Company's income tax receivable of nearly $800,000 and
reductions of inventories of approximately $250,000.
Additionally, these sources of cash were supplemented by the sale
of certain Company-owned real estate for approximately $612,000.
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 $1.4 million as well as the payment of
the Company's outstanding advances under its line of credit of
$850,000. Overall the Company experienced an increase in cash of
approximately $414,000.
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 February 28, 1999 there were no advances
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 (7.75% at February 28, 1999)
plus 1%.
14
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 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 and a minimum quarterly cash flow ratio, as defined
in the agreement. Norwest has informed the Company that Norwest
believes the Company is not in compliance with the quarterly
ratios; and while Norwest has agreed to issue the Company a
formal waiver of default with respect to the outstanding notes,
Norwest has expressed its intent to withdraw the revolving line
of credit facility. If the line of credit is withdrawn, the
Company will seek a line of credit with another financial
institution; however, no assurance can be given that the Company
will be able to secure another line of credit on terms acceptable
to the Company.
EQUIPMENT PURCHASES. In March 1999, the Company leased
certain equipment for its manufacturing facility. The lease
terms require total monthly payments of approximately $12,300 for
a non-cancelable period of 84 months.
STOCK REPURCHASE PROGRAM. The Company's Board of Directors
authorized the open market repurchase of up to approximately
170,000 shares of the Company's common stock. As of April 8,
1999, 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 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.
15
Overall estimated status for the Company as of February 28,
1999 shows identification of potential problems at 90% complete,
assessment at 70% complete and testing at 50% complete.
The estimated cumulative costs directly or indirectly
associated with the conversion project is currently expected to
be less than $125,000, a significant portion of which will be in
the form of capital expenditures. As of February 28, 1999, the
Company has incurred approximately $30,000 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
PART II. OTHER INFORMATION
ITEM 5 OTHER EVENTS
On February 10, 1999, Martin S. Winick resigned as a
Director and became President of Authentic Products, Inc. On
April 1, 1999, Michael Detommaso was appointed Senior Vice-
President of Sales of Paul-Son Supplies. On April 10, 1999,
the Company's founder and former Chairman of the Board and
Chief Executive Officer, Paul S. Endy, Jr., died.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
27.01 Financial Data Schedule
(b) Reports on Form 8-K
None.
17
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 9, 1999 By: /s/ Eric P. Endy
-------------------------------------
Eric P. Endy, Chief Executive Officer
(Duly Authorized Officer)
Date: April 9, 1999 By: /s/ John M. Garner
-----------------------------------
John M. Garner, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
18
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION PAGE
------- ----------- ----
27.01 Financial Data Schedule 20
19
EXHIBIT 27.01
20