<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: August 31, 1999
--------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
---------- ----------
Commission file number: 0-23588
---------------------------------------
PAUL-SON GAMING CORPORATION
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 88-0310433
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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.
3,453,757 shares of Common Stock, $0.01 par value, as of
October 12, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AUGUST 31, 1999 AND MAY 31, 1999
ASSETS
AUGUST 31, MAY 31,
1999 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,205,187 $656,299
Trade receivables, less allowance for
doubtful accounts of $350,000 and $400,000 3,309,314 3,909,732
Inventories, net 4,304,300 4,788,382
Prepaid expenses 172,720 174,664
Other current assets 113,088 232,431
------------ ------------
Total current assets 9,104,609 9,761,508
------------ ------------
PROPERTY AND EQUIPMENT, NET 9,126,513 9,416,656
------------ ------------
DEFERRED TAX ASSET 557,000 568,000
------------ ------------
OTHER ASSETS 380,769 382,153
------------ ------------
$19,168,891 $20,128,317
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $332,621 $329,201
Accounts payable 909,270 1,641,419
Accrued expenses 620,694 508,426
Customer deposits 211,920 479,936
Income taxes payable 38,376 49,298
------------ ------------
Total current liabilities 2,112,881 3,008,280
------------ ------------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 2,480,633 2,564,244
------------ ------------
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 shares as
of August 31, 1999 and May 31, 1999 34,771 34,771
Additional paid-in capital 13,652,936 13,652,936
Retained earnings 1,061,175 1,041,591
Less: Treasury stock, at cost, 21,293 shares (173,505) (173,505)
------------ ------------
Total stockholders' equity 14,575,377 14,555,793
------------ ------------
$19,168,891 $20,128,317
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
1999 1998
----------- -----------
<S> <C> <C>
Revenues $6,356,576 $5,698,409
Cost of revenues 4,746,564 4,393,359
----------- -----------
Gross profit 1,610,012 1,305,050
Selling, general and administrative expenses 1,619,694 1,722,793
----------- -----------
Operating loss (9,682) (417,743)
Other income 104,471 9,593
Interest expense (64,205) (50,599)
----------- -----------
Income (loss) before income taxes 30,584 (458,749)
Income tax (expense) benefit (11,000) 160,562
----------- -----------
Net income (loss) $19,584 ($298,187)
=========== ===========
Income (loss) per share:
Basic $0.01 ($0.09)
Diluted $0.01 ($0.09)
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
THREE MONTHS ENDED
AUGUST 31,
1999 1998
--------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $19,584 $(298,187)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 256,545 267,516
Provision for doubtful accounts 40,589 60,000
Provision for inventory obsolescence 50,000 -
Gain on sale/disposal of assets (95,046) -
Change in operating assets and liabilities:
Accounts receivable 559,829 2,024,995
Income taxes receivable - (169,053)
Inventories 434,082 249,934
Other current assets 116,370 (104,688)
Deferred tax asset 11,000 -
Accounts payable and accrued expenses (619,881) (1,212,038)
Bank overdraft - (431,380)
Customer deposits (268,016) (9,598)
Income taxes payable (10,922) -
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 494,134 377,501
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on sale of property and equipment 161,542 -
Purchase of property and equipment (26,597) (352,936)
--------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 134,945 (352,936)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on short-term borrowings - (300,000)
Principal payments on long-term borrowings (80,191) (15,280)
Proceeds from the exercise of stock options - 69,750
--------------------------
NET CASH USED IN FINANCING ACTIVITIES (80,191) (245,530)
--------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 548,888 (220,965)
Cash and cash equivalents, beginning of period 656,299 347,876
--------------------------
Cash and cash equivalents, end of period $1,205,187 $126,911
==========================
Supplemental cash flows information:
Operating activities include cash payments for interest
and income taxes as follows:
Interest paid $64,205 $50,599
Income taxes paid $12,400 $130,260
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
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, 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, 1999.
The condensed consolidated balance sheet as of August 31,
1999 and the condensed consolidated statements of operations
and cash flows for the three month periods ended August 31,
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
at the date of purchase to be cash and cash equivalents.
5
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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
<PAGE>
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. The realization of the Company's deferred tax
asset is dependent on future taxable earnings of the Company.
The realization of the Company's deferred tax asset is
reviewed by management on a periodic basis to determine
whether estimated allowances are required based on future
operating projections.
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 ACCOUNTING STANDARDS
The Company has adopted Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities" issued by the
American Institute of Certified Public Accountants' Accounting
Standards Executive Committee. 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. The
adoption of this statement did not have a significant impact
on its consolidated financial statements.
The Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133 "Accounting for
Derivative Instruments and Hedging Activities" in June 1998.
This statement establishes accounting and reporting standards
for derivative instruments and hedging activities. This
statement is effective for all fiscal quarters of fiscal years
which begin after June 2000. This statement requires entities
to recognize all derivatives as either assets or liabilities
in the statement of financial position and to measure
instruments at fair value. Management believes that this
standard will not have a material impact on its consolidated
financial statements.
7
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
August 31, May 31,
1999 1999
------------ -----------
<S> <C> <C>
Raw materials $1,942,393 $1,777,212
Work in process 186,747 346,761
Finished goods 2,550,160 2,989,409
------------ -----------
4,679,300 5,113,382
Less inventory reserves 375,000 325,000
------------ -----------
$4,304,300 $4,788,382
============ ===========
</TABLE>
NOTE 3 - SHORT-TERM BORROWINGS
The Company has a $1.0 million line of credit agreement with
a bank which matures on October 31, 1999. Interest on
outstanding borrowings currently accrues at the bank's prime rate
of interest (8.00% at August 31, 1999) plus one per cent. This
line of credit facility is cross- collateralized with a $1.8
million note and a $500,000 note (collectively the "Facilities)
(see Note 4). The facilities are 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 Company is also
the guarantor of the Facilities. There were no borrowings
outstanding under the line of credit at August 31, 1999 and May
31, 1999. The Facilities contain restrictive covenants,
generally requiring the Company to maintain certain financial
ratios, as defined in the agreement. At August 31, 1999, the
Company was in compliance with its covenants as calculated on a
quarterly basis. However, at May 31, 1999, the Company was in
violation of certain of the covenants as calculated on an annual
basis. As a result of the violations, the Company agreed to
relinquish its rights to borrow under the line of credit, without
the express written consent of the bank, through the maturity
date of the line of credit. The bank has granted the Company a
formal waiver of default regarding the covenants associated with
the Facilities through the Company's fiscal year ending May 31,
2000.
8
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
August 31, May 31,
1999 1999
------------- -------------
<S> <C> <C>
Note payable to a bank in monthly installments of
$18,118 including interest of 8.87% through
October 2002 with a balloon payment of
approximately $1,450,000 due November 2002,
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). $1,692,874 $1,709,443
Note payable to a bank in monthly principal
installments of $13,889 plus interest at 9.75%
through July 2001 with a balloon payment of
approximately $42,000 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). 361,112 402,779
Capital lease obligation payable for equipment,
variable interest (approximately 8.5% at August
31, 1999), payable in monthly installments of
approximately $12,250 through March 2006,
collateralized by a second security interest on
principally all Company assets. 749,000 769,660
Note payable to mortgage company, collateralized by
real estate, interest at 9.5%, with principal and
interest payments of $450 due monthly through 2001. 10,268 11,563
------------- -------------
2,813,254 2,893,445
Less current portion 332,621 329,201
------------- -------------
$2,480,633 $2,564,244
============= =============
</TABLE>
9
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PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5 - EARNINGS PER SHARE
The following table provides a reconciliation of basic and
diluted earnings/loss per share as required by SFAS No. 128,
"Earnings per Share":
<TABLE>
<CAPTION>
Dilutive
Stock
Basic Options Diluted
----------- ----------- ----------
<S> <C> <C> <C>
For the 3 month period ended August 31, 1999
- ----------------------------------------------
Net income $19,584 $19,584
Weighted average shares 3,455,757 38,372 3,494,129
Per share amount $0.01 $0.01
For the 3 month period ended August 31, 1998
- ----------------------------------------------
Net loss ($298,187) ($298,187)
Weighted average shares 3,472,649 - 3,472,649
Per share amount ($0.09) ($0.09)
</TABLE>
Dilutive stock options for the three months ended August 31,
1998 (400,950) 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
three months ended August 31, 1999. These outstanding
antidilutive options for the three months ended August 31, 1999
and 1998 were 533,000 and 453,750, respectively.
NOTE 6 - BUSINESS SEGMENTS
The FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" effective for financial
statements for fiscal years beginning after December 1997. This
statement, which supersedes SFAS No. 14, establishes standards
for reporting information about operating segments in annual
financial statements. The statement requires public business
enterprises to report selected reporting information about
operating segments in annual financial statements and requires
public business enterprises to report selected information about
operating segments in interim financial reports. The Company's
reportable segments have been identified as follows:
10
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PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6 - BUSINESS SEGMENTS (CONTINUED)
Sale of Gaming Supply Products to New Casino Openings B
Significant sales of products to casinos which opened during the
fiscal year, the majority of which sales are not replaced on a
regular, recurring basis.
Sale of Gaming Supply Products to Established Casinos B
Sales of products to casino customers which had opened prior to
the fiscal year and are principally considered on-going,
recurring sales.
The accounting policies of the segments are the same as
those described in the "Summary of Significant Accounting
Policies." The Company evaluates the performance of each segment
by allocating certain overhead expenses to the segments based on
management's estimates. The following information represents the
disclosure requirements and information management utilizes in
measuring the profit or loss of each significant segment:
The table below presents information about the reported
operating income of the Company for the three-month periods ended
August 31, 1999 and 1998. Asset information by reportable
segment is not reported since no segregation of assets exists
between segments.
<TABLE>
<CAPTION>
1999 Product Sales B Product Sales B Consolidated
New Casino Openings Established Casinos Totals
-------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 1,517,541 $ 4,839,035 $ 6,356,576
Operating income (loss) $ 222,398 $ (232,080) $ (9,682)
-------------------------------------------------------------
1998
Revenues $ - $ 5,698,409 $ 5,698,409
Operating income (loss) $ (172,279) $ (245,464) $ (417,743)
-------------------------------------------------------------
</TABLE>
Corporate expenses and certain overhead expenses have been
allocated to each segment based on management's estimate of the
segment's utilization of the resources or expenses. During the
three-month periods ended August 31, 1999 and 1998, management
estimated gross margins of the reportable segments to be equal.
However, management's estimation used in the operating income
(loss) for the segments' overhead and corporate expenses was 90%
from product sales to established casinos and 10% from product
sales to new casino openings.
11
<PAGE>
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 AUGUST 31,
1999 AND AUGUST 31, 1998
REVENUES. For the three months ended August 31, 1999,
revenues were approximately $6.4 million, an increase of
approximately $658,000, or 12%, versus revenues of approximately
$5.7 million for the three months ended August 31, 1998. The
increase in revenues for the 1999 period was caused principally
by an increase in new casino openings during the three months
ended August 31, 1999, as compared to the three months ended
August 31, 1998. These new casino openings were primarily
responsible for an increase in casino chip and furniture sales of
approximately $775,000 versus the prior year. Additionally,
recurring sales of casino dice and layouts both increased by
approximately $75,000 versus the prior year quarter. These
increases were offset, in part, by decreases in the sales of
playing cards and table game accessories for the quarter ended
August 31, 1999 of approximately $115,000 and $160,000,
respectively, versus the same 1998 quarterly period. Sales of
products manufactured by the Company totaled approximately $4.9
million in the 1999 period versus approximately $4.2 million in
the same period of the prior year.
COST OF REVENUES. Cost of revenues, as a percentage of
sales, improved to 74.7% for the three months ended August 31,
1999 as compared to 77.1% for the three months ended August 31,
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 to
approximately 78% of total sales in the 1999 quarter versus 74%
in the prior year three-month period. Additionally, the Company
reduced certain payroll related fixed manufacturing overhead
costs in the latter part of the fiscal year ended May 31, 1999.
GROSS PROFIT. Gross profit for the three months ended
August 31, 1999 increased in absolute dollars by approximately
$305,000 from the comparable period in the prior year as a result
of the aforementioned increase in revenues and the aforementioned
improvement in the gross margin percentage from 22.9% in the 1998
quarter to 25.3% in the 1999 quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three
months ended August 31, 1999, selling, general
and administrative ("SG&A") expenses decreased
approximately $103,000 or 6%, compared to the comparable
period of the prior year. This decrease was primarily
12
<PAGE>
attributable to a decrease in certain personnel related costs
which occurred in the latter part of fiscal 1999.
INTEREST EXPENSE. For the three months ended August 31,
1999, interest expense increased to approximately $64,000 from
approximately $51,000 in the 1998 period. This increase was due
to the acquisition of a $500,000 note in November 1998 and a
$790,000 capital lease acquired in February 1999. The
incremental interest from these recent financings was offset, in
part, by reductions in interest due to a reduction in average
borrowings outstanding under the Company's line of credit from
approximately $700,000 in the 1998 quarterly period to $0 in the
similar 1999 quarter.
OTHER INCOME. For the three months ended August 31, 1999,
other income increased to approximately $104,000 from
approximately $10,000 in the 1998 period. This increase was
caused principally from gains on the sale of certain non-
operating Company assets in the 1999 period.
NET INCOME (LOSS). For the three months ended August 31,
1999 the Company generated net income of approximately $20,000,
an improvement of approximately $318,000 from the net loss of
approximately $298,000 for the quarter ended August 31, 1998.
This improvement was primarily due to the aforementioned increase
in revenues and other income, the aforementioned improvement in
gross profit margin percentage and the decrease in SG&A expenses.
Net income per diluted share was $.01 for the three months ended
August 31, 1999 as compared to a net loss per diluted share of
$.09 per share for the three months ended August 31, 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 $7.0
million at August 31, 1999, an increase of approximately $238,000
in working capital from approximately $6.8 million in working
capital at May 31, 1999.
CASH FLOW. Operating activities provided approximately
$494,000 in cash during the three months ended August 31, 1999,
as compared to operating cash provided of approximately $378,000
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
13
<PAGE>
$560,000 and reductions of inventories of approximately $434,000.
These sources of cash were offset, in part, by cash used to
reduce balances in accounts payable, accrued expenses and
customer deposits of approximately $888,000. Overall the Company
experienced an increase in cash of approximately $549,000.
LINE OF CREDIT. The Company maintains a line of credit (the
"Line of Credit") with Norwest Bank of Nevada ("Norwest") which,
under the terms of the agreement, allows the Company to borrow up
to $1.0 million. The Line of Credit matures on October 31, 1999.
As of August 31, 1999, no advances were outstanding under the
Line of Credit. The Line of Credit is collateralized by a first
priority security interest on certain Company-owned real estate
and substantially all of Paul-Son Supplies' assets including
accounts receivable, inventory, furniture, fixtures and
equipment. The Line of Credit bears interest at Norwest's prime
rate (8.0% at August 31, 1999) plus 1%.
The Line of Credit, as well as certain other cross-
collateralized term loans outstanding with Norwest, contains
restrictive covenants. 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 net
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. At August 31, 1999, the Company was in
compliance with its covenants as calculated on a quarterly basis.
However, at May 31, 1999, the Company was in violation of certain
covenants as calculated on an annual basis. As a result of the
violations at May 31, 1999, the Company agreed to relinquish its
rights to borrow under the Line of Credit, without the express
written consent of Norwest, through the maturity date of the Line
of Credit.
Management believes the Line of Credit will not be renewed
when it matures on October 31, 1999 and the Company is seeking
another line of credit from a different lender. However, no
assurance can be given that the Company will be able to secure a
new line of credit at rates or terms acceptable to the Company.
While management of the Company believes the absence of a line of
credit would not significantly impair the operations of the
Company in the near term, it may impair the Company's operations
in future years and may limit the Company's ability to expand
operations.
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 October 12,
1999, the Company had repurchased 4,000 shares on the open market
at a total cost of approximately $21,000 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 OR 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.
14
<PAGE>
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 nearing completion of updating many
of its existing 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 may, although it is not anticipated
to, differ materially from that anticipated by the Company.
Management believes that the Company's critical systems will be
remediated by December 31, 1999. The Company's overall estimated
status for the Company for the year 2000 issues at August 31,
1999 shows identification of potential problems at 100% complete,
assessment at 100% complete and testing at 95% complete.
The Company believes that there will be no material adverse
impact on its production capabilities, processes or other
operational departments reliant on computer systems resulting
from the year 2000 issues. The Company also believes that there
will be no material impact from the year 2000 issues on its
consolidated financial position, results of operations or cash
flows. However, certain risks exist relative to the non-
compliance of third parties with operational significance to the
Company, such as key suppliers to its manufacturing operations in
Mexico. Although management believes the conversion process will
be completed by December 31, 1999, there can be no assurance that
the conversion project will be completed on schedule, and 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. The Company is continuing its development of a
contingency plan should planned corrections or third party
compliance to year 2000 issues prove unsuccessful. The Company's
contingency plan is expected to be developed by December 31,
1999.
The estimated costs directly or indirectly associated with
the conversion project is currently expected to total less than
$125,000. As of October 12, 1999, the Company has incurred
approximately $100,000 of costs or capital expenditures as a
result of the Year 2000 issue implementation.
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.
15
<PAGE>
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, 1999, 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
<PAGE>
PART II. OTHER INFORMATION
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
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
PAUL-SON GAMING CORPORATION
Date: October 14, 1999 By: /s/ Eric P. Endy
--------------------------------
Eric P. Endy, Chairman of the
Board and Chief Executive
Officer (Duly Authorized
Officer)
Date: October 14, 1999 By: /s/ John M. Garner
--------------------------------
John M. Garner, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION PAGE
-------- ----------- ----
27.01 Financial Data Schedule 20
19
<PAGE>
EXHIBIT 27.01
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet and statements of income of Paul-Son Gaming
Corporation, as of and for the quarter ended August 31, 1999, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-END> AUG-31-1999
<CASH> 1,205
<SECURITIES> 0
<RECEIVABLES> 3,659
<ALLOWANCES> 350
<INVENTORY> 4,304
<CURRENT-ASSETS> 9,105
<PP&E> 13,968
<DEPRECIATION> 4,841
<TOTAL-ASSETS> 19,169
<CURRENT-LIABILITIES> 2,113
<BONDS> 0
0
0
<COMMON> 35
<OTHER-SE> 14,540
<TOTAL-LIABILITY-AND-EQUITY> 19,169
<SALES> 6,357
<TOTAL-REVENUES> 6,357
<CGS> 4,747
<TOTAL-COSTS> 4,747
<OTHER-EXPENSES> 1,620
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> 31
<INCOME-TAX> 11
<INCOME-CONTINUING> 20
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
