UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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, 1997
----------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
----------- -------------
Commission file number: 0-23588
----------------------------------------
PAUL-SON GAMING CORPORATION
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 88-0310433
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
jurisdiction of incorporation Identification No.)
or organization)
1700 S. Industrial Road, Las Vegas, Nevada 89102
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(702) 384-2425
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- -----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15
(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practicable date.
3,474,850 shares of Common Stock, $0.01 par value as of
August 24, 1998
<PAGE>
[CAPTION]
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (AS RESTATED)
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1997 (UNAUDITED) AND MAY 31, 1997
ASSETS
<S> <C> <C>
(AS RESTATED -
SEE NOTE 6)
NOVEMBER 30 MAY 31,
1997 1997
------------- -----------
CURRENT ASSETS
Cash and cash equivalents $744,271 $2,753,152
Trade receivables, less allowance for doubtful accounts
($ 314,574, November 30, 1997; $269,140, May 31, 1997) 4,215,171 3,669,139
Inventories (Note 2) 5,962,691 5,350,446
Prepaid expenses 262,003 140,962
Income tax benefit receivable 337,290 -
Other current assets 1,046,120 627,808
-------------- -----------
Total current assets 12,567,546 12,541,507
-------------- -----------
PROPERTY AND EQUIPMENT, NET (NOTE 4) 8,566,893 7,250,030
-------------- -----------
OTHER ASSETS
Note receivable (Note 5) 150,000 150,000
Goodwill and other assets 447,962 455,205
-------------- -----------
597,962 605,205
-------------- -----------
$21,732,401 $20,396,742
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 4) $65,698 $24,052
Accounts payable 596,108 727,196
Accrued expenses 438,738 584,212
Customer deposits 2,294,996 1,579,161
Income tax payable - 318,930
-------------- -----------
Total current liabilities 3,395,540 3,233,551
-------------- -----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES (NOTE 4) 1,801,792 67,424
DEFERRED TAX LIABILITY, NET 11,060 11,060
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 3,433,500 and
3,417,000 shares as of November 30, 1997 and 34,335 34,170
May 31, 1997
Additional paid-in capital 13,243,993 13,108,998
Retained earnings 3,245,681 3,941,539
-------------- -----------
16,524,009 17,084,707
-------------- -----------
$21,732,401 $20,396,742
============== ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
[CAPTION]
<TABLE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------------- ------------------------
<S> <C> <C> <C> <C>
(AS RESTATED - (AS RESTATED -
SEE NOTE 6) SEE NOTE 6)
1997 1996 1997 1996
-------------- -------------- -------------- --------------
Revenues $6,093,221 $6,307,018 $11,639,804 $12,349,776
Cost of revenues 4,784,912 4,100,826 9,526,491 8,227,219
-------------- -------------- -------------- --------------
Gross profit 1,308,309 2,206,192 2,113,313 4,122,557
Selling, general and
administrative expenses 1,720,166 1,461,965 3,287,706 2,877,514
(Note 5) -------------- -------------- -------------- --------------
Operating income (loss) (411,857) 744,227 (1,174,393) 1,245,043
Other income 28,940 27,362 90,441 47,084
Interest expense (2,793) (11,018) (7,647) (24,412)
-------------- -------------- -------------- --------------
Income (loss) before income (385,710) 760,571 (1,091,599) 1,267,715
taxes
Income tax benefit (expense) 138,092 (277,608) 395,741 (462,716)
-------------- -------------- -------------- --------------
Net income (loss) ($247,618) $482,963 ($695,858) $804,999
============== ============== ============== ==============
Net income (loss) per share ($0.07) $0.15 ($0.20) $0.24
============== ============== ============== ==============
Weighted average common 3,423,997 3,324,000 3,422,102 3,324,000
shares outstanding ============== ============== ============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
[CAPTION]
<TABLE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
NOVEMBER 30,
-------------------------------
<S> <C> <C>
(AS RESTATED -
SEE NOTE 6)
1997 1996
---------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 11,258,448 $ 12,618,784
Cash paid to suppliers and employees (13,168,004) (10,969,358)
Interest received 61,305 32,617
Interest paid (7,647) (24,412)
Income tax refund - 842
Income taxes paid (260,479) (319,700)
---------------- ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,116,377) 1,338,773
---------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on sale of equipment 7,350 3,600
Investment in note receivable (note 5) - (150,000)
Purchase of property and equipment (1,811,028) (448,181)
---------------- ------------
NET CASH (USED IN) INVESTING ACTIVITIES (1,803,678) (594,581)
---------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on due to related party (15,000)
Proceeds from long-term borrowings 1,800,000 -
Proceeds from exercise of options 135,160 -
Principal payments on long-term borrowings (23,986) (45,536)
---------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,911,174 (60,536)
---------------- ------------
Net (decrease) increase in cash and cash equivalents (2,008,881) 683,656
CASH AND CASH EQUIVALENTS, beginning of period 2,753,152 997,509
---------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $744,271 $1,681,165
================ ============
RECONCILIATION OF NET (LOSS) INCOME TO NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
Net (loss) income ($695,858) $804,999
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 483,152 401,022
Provision for bad debts 45,434 48,000
Loss on sale of assets 3,663 2,594
Change in assets and liabilities:
(Increase) in accounts receivable (591,466) (655,028)
(Increase) in income tax benefit receivable (337,290) -
(Increase) decrease in inventories (612,245) 136,513
(Increase) decrease in prepaid expenses (121,041) 47,063
(Increase) in other current assets (260,822) (307,542)
(Increase) decrease in other assets (150,247) 2,281
Decrease in account payable and accrued expenses (276,562) (209,838)
Increase in customer deposits 715,835 906,975
Increase (decrease) in income taxes payable (318,930) 161,734
---------------- ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ($2,116,377) $1,338,773
================ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
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 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 November 30,
1997 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 six month periods ended November 30, 1997 and 1996
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 November 30,
1997 and the statements of operations and cash flows for the
three and six month periods ended November 30, 1997 and 1996 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
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
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
Earnings per share are computed based on the weighted
average number of shares outstanding during the periods.
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. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued
the following statements of financial accounting standards
("FAS"): FAS No. 128 "Earnings per Share," FAS No. 129,
"Disclosure of Information about Capital Structure," FAS No. 130,
"Reporting Comprehensive Income," and FAS No. 131 "Disclosure
About Segments of an Enterprise and related Information." FAS
No. 128 and 129 are effective for periods ending after December
15, 1997, and establish standards for computing and presenting
earnings per share ("EPS"), and for disclosing information about
an entity's capital structure, respectively. Management believes
these standards will not have a significant impact
on its EPS or financial statement disclosure. FAS
No. 130 and 131 are effective for periods beginning after
6
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 15, 1997. FAS No. 130 requires classifying items of
other comprehensive income by their nature in a financial
statement. FAS 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.
[CAPTION]
<TABLE>
NOTE 2 - INVENTORIES
Inventories consist of the following:
<S> <C> <C>
November 30, May 31,
1997 1997
------------ -------------
Raw materials $ 1,869,721 $ 1,977,089
Work in process 403,820 465,514
Finished goods 3,689,150 2,907,843
------------ -------------
$ 5,962,691 $ 5,350,446
============ =============
</TABLE>
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 and a note payable of $1.8 million (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. The line of
credit expires October 31, 1998. There was no balance
outstanding under the line of credit at November 30, 1997.
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 maintain a debt to tangible worth ratio (total
liabilities divided by tangible net worth) of less than 0.5 to 1
on a quarterly basis.
[CAPTION]
<TABLE>
NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt consists of the following:
<S> <C> <C>
November 30, May 31,
1997 1997
---------------- ---------------
Note payable to a bank, payable 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 and the Company has agreed to maintain the same
financial covenants as provided under the line of credit $ 1,800,000 $ -
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,
7
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
interest at 7.5% to 9.5%, principal and interest payments of $898
are due monthly through 2016 67,490 64,004
---------------- ----------------
1,867,490 91,476
Less current portion 65,698 24,052
---------------- ----------------
$ 1,801,792 $ 67,424
================ ================
</TABLE>
NOTE 5 - RELATED PARTIES
The following amounts were paid for legal and consulting
fees to an individual who is currently a member of the Company's
Board of Directors:
1997 1996
--------- ----------
Laurence Speiser $ 75,544 $ 53,042
========= ==========
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.
NOTE 6 - RESTATEMENT
Subsequent to the issuance of the Company's condensed
consolidated financial statements for the three-month and six-
month periods ended November 30, 1997, the Company determined
that an error had been made in accounting for a sales transaction
during the quarter ended November 30, 1997. The accompanying
condensed consolidated financial statements for the affected
periods have been restated as follows:
[CAPTION]
<TABLE>
STATEMENT OF OPERATIONS DATA:
<C> <C> <C>
3 MONTHS ENDED 6 MONTHS ENDED
NOVEMBER 30, 1997 NOVEMBER 30, 1997
---------------------------- ----------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------ ------------- ------------ -----------
Cost of revenues $ 4,246,388 $ 4,784,912 $ 8,987,987 $ 9,526,491
Gross profit 1,846,833 1,308,309 2,651,837 2,113,313
Operating income (loss) 126,667 (411,857) (635,869) (1,174,393)
Income (loss) before income taxes 152,814 (385,710) (553,075) (1,091,599)
Income tax benefit (expense) (55,777) 138,092 201,872 395,741
Net income (loss) 97,087 (247,618) (351,203) (695,858)
Net income (loss) per share 0.03 (0.07) (0.10) (0.20)
</TABLE>
8
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
[CAPTION]
<TABLE>
BALANCE SHEET DATA:
AS OF
NOVEMBER 30, 1997
----------------------------
<S> <C> <C>
AS
PREVIOUSLY AS
REPORTED RESTATED
------------ ----------
Trade receivables $4,753,695 $4,215,171
Income tax receivable 143,421 337,290
Retained earnings 3,590,336 3,245,681
</TABLE>
9
<PAGE>
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.
The Company has restated its condensed consolidated
financial statements for the three-month and six-month periods
ended November 30, 1997 due to an error in accounting for a sales
transaction recorded in the quarter ended November 30, 1997. The
amounts presented in the accompanying Management's Discussion and
Analysis of Financial Condition and Results of Operations for the
three-month and six-month periods ended November 30, 1997 have
been restated to reflect correction of the error.
COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30,
1997 AND NOVEMBER 30, 1996
REVENUES. For the three months ended November 30, 1997,
revenues were approximately $6.1 million, a $214,000 or a 3.4%
decrease from the approximately $6.3 million in revenues in the
comparable period of the prior year. This decrease was due
principally to a decrease in revenues from new casino openings
and major expansions. During the three months ended November 30,
1997, the Company supplied products totaling approximately $1.8
million to 6 new casinos and casino expansions, a decrease of
approximately $1.1 million from the approximately $2.9 million
sold to 12 new casinos in the comparable period of the prior
year. Core sales revenue, however, which are sales of consumable
gaming supplies and equipment to the Company's existing customer
base, increased by 25.5% or approximately $864,000, to
approximately $4.3 million for the three months ended November
30, 1997, versus approximately $3.4 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. Playing card
sales were approximately $1.0 million for the quarter ended
November 30, 1997, an increase of 30.7% over the approximately
$700,000 in playing card sales for the comparable period of the
prior year.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, increased to 78.5% for the three months ended November 30,
1997, as compared to 65.2% for the three months ended November
30, 1996. This percentage increase 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). In
addition, the product mix sold in the prior year's quarter ended
November 30, 1996 was unusually favorable in comparison
10
<PAGE>
to the historical results of the Company (i.e. casino chip sales,
for which the Company normally generates the highest gross
margin, were unusually high for the quarter ended November 30,
1996). The cost of revenues at 78.5% for the quarter ended
November 30, 1997 is higher than the Company's historic cost of
sales percentages which have ranged from 69.1% to 69.7% during
the last three fiscal years. This increase in the cost of
revenues as a percentage of sales was caused by stronger than
anticipated demand in items not manufactured by the Company
versus sales of core products manufactured by the Company.
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 stabilized. 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.
GROSS PROFIT. Gross profit for the three months ended
November 30, 1997 decreased in absolute dollars by approximately
$898,000 from the comparable period in the prior year as a result
of lower revenues and the higher cost of revenues as a percentage
of sales from 65.2% to 78.5%, due to the factors discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three
months ended November 30, 1997, selling, general and
administrative ("SG&A") expenses increased approximately $254,000
or 17.4%, to approximately $1.7 million, as compared to the
approximately $1.5 million in the comparable period of the prior
year. Major increases in SG&A expenses included increases in
salaries and wages ($108,000), travel and promotion ($28,000) as
a result of the Company's efforts to expand market share for its
products and expand sales coverage in certain areas, and
depreciation ($35,000) as a result of the Company's installation
of additional production facilities in the past several reporting
periods.
NET INCOME. For the three months ended November 30, 1997
the Company's net loss was approximately $248,000, a $731,000
decrease from the approximately $483,000 in net income for the
quarter ended November 30, 1996, primarily as a result of
decreases in sales and gross profit, and increases in SG&A
expenses over the comparable period in the prior year. Net
earnings (loss) per share decreased $0.22 to a net loss per share
of $0.07 for the three months ended November 30, 1997, as
compared to net income per share of $0.15 per share for the three
months ended November 30, 1996, based on the weighted average
number of shares outstanding.
COMPARISON OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30,
1997 AND NOVEMBER 30, 1996
REVENUES. For the six months ended November 30, 1997,
revenues totaled approximately $11.6 million, a $710,000 or a
5.7% decrease from the approximately $12.3 million in revenues in
the comparable period of the prior year. This decrease was due
primarily to a decrease in new casino openings. The Company
supplied products totaling approximately $3.5 million to 7 new
casinos and 3 major expansions in the six months ended November
30, 1997, versus approximately $4.6 million to 14 new casinos and
3 major expansions in the comparable period of the prior year.
Core sales revenue, however, increased by 4.9% or approximately
$400,000 to approximately $8.1 million for the six
months ended November 30, 1997, versus approximately
11
<PAGE>
$7.7 million in core sales for the same period in the prior year.
Core sales, which are sales of consumable gaming supplies and
equipment to the Company's existing customer base, increased
during the six months ended November 30, 1997, principally due to
an increase in playing card sales during the period. Playing
card sales were approximately $2.0 million for the six months
ended November 30, 1997, an increase of approximately 25.0% over
the approximately $1.6 million in playing card sales in the
comparable period of the prior year.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, increased to 81.8% for the six months ended November 30,
1997, as compared to 66.6% for the six months ended November 30,
1996. This significantly higher percentage increase in cost of
sales 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 unusual product mix in the
quarter ended August 31, 1997 in comparison to the Company's
historical operations. After the first quarter of the current
fiscal year in which the cost of revenues as a percentage of
sales was 85.5% primarily due to a lack of casino chip sales, the
cost of revenues in the second quarter of the current fiscal year
improved slightly to a percentage of 78.5%.
During several of the Company's prior reporting periods, the
Company has experienced a positive impact from the decrease in
the value of the Mexican peso. Over the last several months the
value of the Mexican peso has stabilized. The Company cannot
predict what impact fluctuations in the Mexican peso will have on
the cost of the Company's products manufactured in Mexico.
GROSS PROFIT. Gross profit for the six months ended
November 30, 1997 decreased in absolute dollars by approximately
$2.0 million from the comparable period in the prior year as a
result of lower revenues and the higher cost of revenues as a
percentage of sales from 66.6% to 81.8%, due to factors discussed
above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the six
months ended November 30, 1997, SG&A expenses increased
approximately $406,000 or 14.3%, to approximately $3.3 million as
compared to the approximately $2.9 million in the comparable
period of the prior year. Major increases in SG&A expenses
included increases in salaries and wages ($173,000), advertising
and promotion ($35,000) as a result of the Company's efforts to
expand market share for its products and expand sales coverage in
certain areas, and depreciation ($79,000) as a result of the
Company's installation of additional production facilities in
the past several reporting periods.
NET INCOME. For the six months ended November 30, 1997, the
Company sustained a net loss of approximately $696,000, a
decrease in net income of approximately $1.5 million, versus the
record net income of approximately $805,000 for the six month
period ended November 30, 1996. The decrease was primarily a
result of decreases in sales and gross profit, and increases in
SG&A expenses over the comparable period in the prior year. The
net loss per share was $0.20 for the six months ended November
30, 1997, as compared to net income of $0.24 per share for the
six months ended November 30, 1996, based on the weighted average
number of shares outstanding.
12
<PAGE>
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 $9.2
million at November 30, 1997, virtually unchanged from the
approximately $9.3 million in working capital at May 31, 1997.
CASH FLOW. Operating activities used approximately $2.1
million in cash during the six months ended November 30, 1997, as
compared to cash generated of approximately $1.3 million during
the same period in the prior year. The major operational uses of
cash during the period were caused principally by the Company's
net loss before depreciation and income taxes of approximately
$600,000, additional inventories ($612,000, 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), and the reduction of accounts payable and accrued
expenses of $276,000. Overall the Company experienced a decrease
in cash of approximately $2.0 million, with $2.1 million used by
operations, $1.8 million used to purchase property and equipment
during the period and $1.8 million provided by new bank financing
(see the Norwest Bank Note and Deed of Trust below).
LINE OF CREDIT. During the period, the Company replaced its
previously existing line of credit with a new line of credit (the
"Line of Credit") from Norwest Bank of Nevada ("Norwest"), which
allows the Company to borrow up to $1.0 million. The Line of
Credit matures on October 31, 1998. As of November 30, 1997, no
advances were outstanding and all of the Line of Credit was
available. The Line of Credit is collateralized by a first
priority security interest in substantially all of the Company's
depository accounts at 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 maintain 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 Bank of Nevada ("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), and for 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
13
<PAGE>
Facility (see below) and a blanket security agreement on
substantially all of the Company's assets, 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.
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.
BACKLOG. Open orders as of November 30, 1997 totaled
approximately $3.7 million, compared to approximately $3.2
million at November 30, 1996. 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 new facilities (the "New Las Vegas
Facility") in Las Vegas. The New Las Vegas Facility was
purchased in September 1995 for $2.0 million, and since September
1995, the Company has made improvements totaling approximately
$375,000. 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, plastic
dealing shoes manufacturing and some limited warehousing is
located at the Company's former headquarters (the "Original Las
Vegas Facility") which the Company has owned since 1966. The
remaining components of the Original Las Vegas Facility continue
to be listed for sale.
SAN LUIS FACILITIES. In January of 1997, the Company
installed a second playing card production line in its San Luis,
Mexico facilities (the "San Luis Facilities"). The use of
existing space at its San Luis Facilities provides additional
playing card production capacity while the Company evaluates
production costs and efficiencies achieved in the San Luis
Facilities. The additional production line will also augment the
Company's ability to solicit orders from larger and multi-site
casinos both in the United States and from the international
market, which provides additional opportunities to the Company.
The Company's ability to compete for additional market share in
playing card sales should be enhanced by the Company's
anticipated decrease in per unit production costs. Management is
analyzing whether the anticipated lower playing card production
costs justify the relocation of other portions of its
manufacturing operations to Mexico.
NEW SAN LUIS BUILDING. In July 1997, the Company's Board of
Directors approved the purchase of an existing approximately
66,000 square foot building (the "New San Luis Building") in San
Luis, Mexico located approximately 400 yards from the Company's
existing facility for $1.1 million. The purchase of this New San
Luis Building was completed on or before November 5, 1997. 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 is currently in the process of installing the
equipment and improvements necessary to use the New San Luis
Building for additional playing card manufacturing to accommodate
the additional playing card contracts already signed as well as
the anticipated future increase in demand for the Company's
playing cards.
14
<PAGE>
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.
15
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
NUMBER DESCRIPTION
---------- -----------
27.01 Restated Financial Data Schedule.
(b) Reports on Form 8-K
None.
16
<PAGE>
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: August 27, 1998 By: /s/ Eric P. Endy
------------------------------
Eric P. Endy, President
(Duly Authorized Officer)
Date: August 27, 1998 By: /s/ John M. Garner
------------------------------
John M. Garner, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
17
<PAGE>
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION Page
- ------- ----------- ----
27.01 Restated Financial Data Schedule. 19
18
<PAGE>
EXHIBIT 27.01
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated summary financial information
extracted from the restated condensed consolidated balance sheet
and statements of income of Paul-Son Gaming Corporation, as of and
for the quarter ended November 30, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 744
<SECURITIES> 0
<RECEIVABLES> 4,530
<ALLOWANCES> 315
<INVENTORY> 5,962
<CURRENT-ASSETS> 12,568
<PP&E> 12,758
<DEPRECIATION> 4,191
<TOTAL-ASSETS> 21,732
<CURRENT-LIABILITIES> 3,395
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 16,490
<TOTAL-LIABILITY-AND-EQUITY> 21,732
<SALES> 6,093
<TOTAL-REVENUES> 6,093
<CGS> 4,785
<TOTAL-COSTS> 4,785
<OTHER-EXPENSES> 1,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (386)
<INCOME-TAX> 138
<INCOME-CONTINUING> (248)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (248)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
