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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
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For the quarterly period ended: |
November 30, 1999 |
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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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) |
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NEVADA |
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88-0310433 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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1700 S. Industrial Road, Las Vegas, Nevada |
89102 |
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(Address of principal executive offices) |
(Zip Code) |
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(702) 384-2425 |
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(Registrant's telephone number, including area code) |
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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.
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YES |
X |
NO |
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
3,452,757 shares of Common Stock, $0.01 par value as of January 13, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1999 and MAY 31, 1999 (unaudited)
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ASSETS |
||
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NOVEMBER 30, |
MAY 31, |
|
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CURRENT ASSETS |
||
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Cash and cash equivalents |
$ 2,703,067 |
$ 656,299 |
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Trade receivables, less allowance for doubtful accounts |
||
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of $404,000 and $400,000 |
2,182,287 |
3,909,732 |
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Inventories, net |
4,293,299 |
4,788,382 |
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Prepaid expenses |
199,692 |
174,664 |
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Other current assets |
85,504 |
232,431 |
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Total current assets |
9,463,849 |
9,761,508 |
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PROPERTY AND EQUIPMENT, net |
8,992,965 |
9,416,656 |
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DEFERRED TAX ASSET |
- |
568,000 |
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OTHER ASSETS |
617,229 |
382,153 |
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$19,074,043 |
$20,128,317 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
||
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CURRENT LIABILITIES |
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Current maturities of long-term debt |
$ 335,500 |
$ 329,201 |
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Accounts payable |
1,143,637 |
1,641,419 |
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Accrued expenses |
743,719 |
508,426 |
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Customer deposits |
931,771 |
479,936 |
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Income taxes payable |
80,613 |
49,298 |
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Total current liabilities |
3,235,240 |
3,008,280 |
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LONG-TERM DEBT, net of current maturities |
2,404,091 |
2,564,244 |
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COMMITMENTS AND CONTINGENCIES |
- |
- |
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STOCKHOLDERS' EQUITY |
||
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Preferred stock, authorized 10,000,000 shares, |
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|
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Common stock, authorized 30,000,000 shares, |
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|
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Additional paid-in capital |
13,652,936 |
13,652,936 |
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(Accumulated deficit) retained earnings |
(68,231) |
1,041,591 |
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Less: Treasury stock, at cost, 23,293 and 21,293 shares |
(184,764) |
(173,505) |
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13,434,712 |
14,555,793 |
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|
$19,074,043 |
$20,128,317 |
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See notes to condensed consolidated financial statements.
2
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
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THREE MONTHS ENDED |
SIX MONTHS ENDED |
||||||
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1999 |
1998 |
1999 |
1998 |
||||
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Revenues |
$4,906,238 |
$5,466,639 |
$11,262,814 |
$11,165,048 |
|||
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Cost of revenues |
3,827,457 |
4,203,890 |
8,574,021 |
8,597,249 |
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Gross profit |
1,078,781 |
1,262,749 |
2,688,793 |
2,567,799 |
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Selling, general and |
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|
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|
|||
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Operating loss |
(556,005) |
(397,729) |
(565,687) |
(815,472) |
|||
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Other income |
46,405 |
6,635 |
150,876 |
16,228 |
|||
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Interest expense |
(62,806) |
(57,917) |
(127,011) |
(108,516) |
|||
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Loss before income taxes |
(572,406) |
(449,011) |
(541,822) |
(907,760) |
|||
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Income tax (provision) benefit |
(557,000) |
156,438 |
(568,000) |
317,000 |
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Net loss |
($1,129,406) |
($292,573) |
($1,109,822) |
($590,760) |
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Loss per share: |
|||||||
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Basic |
($0.33) |
($0.08) |
($0.32) |
($0.17) |
|||
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Diluted |
($0.33) |
($0.08) |
($0.32) |
($0.17) |
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See notes to condensed consolidated financial statements.
3
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PAUL-SON GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
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SIX MONTHS ENDED |
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1999 |
1998 |
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Cash Flows from Operating Activities |
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Net loss |
$ (1,109,822) |
$ (590,760) |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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|||||
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Depreciation and amortization |
502,779 |
533,338 |
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Provision for doubtful accounts |
100,589 |
120,000 |
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Provision for inventory obsolescence |
150,000 |
- |
|||||
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(Gain) loss on sale/disposal of assets |
(122,783) |
4,798 |
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Change in operating assets and liabilities: |
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|
|||||
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Accounts receivable |
1,626,856 |
2,602,863 |
|||||
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Inventories |
345,083 |
352,552 |
|||||
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Other current assets |
121,899 |
138,995 |
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Other assets |
(247,679) |
16,576 |
|||||
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Deferred tax asset |
568,000 |
(384,832) |
|||||
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Accounts payable and accrued expenses |
(262,489) |
(1,197,126) |
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Bank overdraft |
- |
(431,380) |
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Income taxes payable |
31,315 |
- |
|||||
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Customer deposits |
451,835 |
(205,588) |
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Net cash provided by operating activities |
2,155,583 |
959,436 |
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Cash Flows from Investing Activities |
|
|
|||||
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Proceeds received on sale of property and equipment |
249,069 |
3,000 |
|||||
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Purchase of property and equipment |
(192,771) |
(653,372) |
|||||
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Net cash provided by (used in) investing activities |
56,298 |
(650,372) |
|||||
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Cash Flows from Financing Activities |
|
|
|||||
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Principal payments on short-term borrowings |
- |
(550,000) |
|||||
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Proceeds from long-term borrowings |
- |
500,000 |
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Principal payments on long-term borrowings |
(153,854) |
(45,281) |
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Purchases of treasury stock |
(11,259) |
(9,515) |
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Proceeds from the exercise of stock options |
- |
77,250 |
|||||
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Net cash used in financing activities |
(165,113) |
(27,546) |
|||||
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Net increase in cash and cash equivalents |
2,046,768 |
281,518 |
|||||
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Cash and cash equivalents, beginning of period |
656,299 |
347,876 |
|||||
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Cash and cash equivalents, end of period |
$ 2,703,067 |
$ 629,394 |
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Supplemental cash flows information: |
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|
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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, 1999.
The condensed consolidated balance sheet as of November 30, 1999 and statements of operations and cash flows for the three and six-month periods ended November 30, 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 original 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:
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Years |
Buildings and improvements |
18-27 |
Other Assets
Included in other assets are goodwill, which is being amortized on a straight-line basis over 20 years, and patent rights, which are being amortized over the life of the patent.
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. Future tax benefits attributable to temporary differences are recognized to the extent that realization of such benefits are more likely than not.
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 Financial Accounting Standards Board issued SFAS 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. The 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.
NOTE 2 - INVENTORIES
Inventories consist of the following:
|
|
November 30, |
May 31, |
|
Raw materials |
$1,589,031 |
$1,777,212 |
|
Work in process |
157,735 |
346,761 |
|
Finished goods |
3,021,533 |
2,989,409 |
|
|
4,768,299 |
5.113.382 |
|
Less inventory reserves |
475,000 |
325,000 |
|
|
$4,293,299 |
$4,788,382 |
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 3 - SHORT-TERM BORROWINGS
Until its maturity date of October 31, 1999, the Company had a $1.0 million line of credit agreement with a bank. Interest accrued on outstanding borrowings at the bank's prime rate of interest plus one percent. The bank did not renew this line of credit facility at October 31, 1999. The line of credit facility was cross-collateralized with other notes payable to the bank (see Note 4). The former line of credit, as well as the other notes payable to the bank, 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 notes payable to the bank. No borrowings existed under the line of credit at November 30, 1999 and at May 31, 1999. The notes payable to the bank contain restrictive covenants, generally requiring the Company to maintain certain financial ratios, as defined in the agreement. As of May 31, 1999, the Company was in violation of certain of its covenants, for which the bank has granted the Company a formal waiver of default regarding the violated covenants through the fiscal year ending May 31, 2000. If the Company continues to be in violation of its covenants at May 31, 2000, the Bank may pursue the default remedies provided under the terms of the notes payable. As of November 30, 1999, the Company believed it was in compliance with its quarterly ratios.
NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt consists of the following:
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November 30, |
|
May 31, |
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Note payable to a bank in monthly installments of $18,118 |
|
|
|
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Note payable to a bank in monthly principal installments of $13,889 |
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|
|
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Capital lease obligation payable for equipment, variable interest |
|
|
|
8
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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NOTE 4 - LONG-TERM DEBT AND PLEDGED ASSETS (continued) |
|||
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Notes payable to mortgage company, collateralized by real estate, |
|
|
|
|
|
2,739,591 |
|
2,893,445 |
Less current portion |
335,500 |
|
329,201 |
|
|
$2,404,091 |
|
$2,564,244 |
NOTE 5 - EARNINGS PER SHARE
The following table provides a reconciliation of basic and diluted loss per share as required by SFAS No. 128, "Earnings per Share":
|
|
|
|
|
Dilutive Stock |
|
|
|
For the 3 month period ending November 30, 1999 |
||||||
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Net loss |
|
($1,129,406) |
|
|
|
($1,129,406) |
|
Weighted Average Shares |
|
3,454,537 |
|
- |
|
3,454,537 |
|
Per Share Amount |
|
($0.33) |
|
|
|
($0.33) |
|
|
||||||
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For the 3 month period ending November 30, 1998 |
||||||
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Net loss |
|
($292,573) |
|
|
|
($292,573) |
|
Weighted Average Shares |
|
3,474,830 |
|
- |
|
3,474,830 |
|
Per Share Amount |
|
($0.08) |
|
|
|
($0.08) |
|
|
|
Basic |
|
Dilutive Stock |
|
Diluted |
|
For the 6 month period ending November 30, 1999 |
||||||
|
Net loss |
|
($1,109,822) |
|
|
|
($1,109,822) |
|
Weighted Average Shares |
|
3,455,150 |
|
- |
|
3,455,150 |
|
Per Share Amount |
|
($0.32) |
|
|
|
($0.32) |
|
|
||||||
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For the 6 month period ending November 30, 1998 |
||||||
|
Net loss |
|
($590,760) |
|
|
|
($590,760) |
|
Weighted Average Shares |
|
3,473,732 |
|
- |
|
3,473,732 |
|
Per Share Amount |
|
($0.17) |
|
|
|
($0.17) |
9
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 5 - EARNINGS PER SHARE (continued)
Dilutive stock options for the six months ended November 30, 1999 (111,000) and November 30, 1998 (111,000) have not been included in the computation of diluted net loss per share as their effect would be antidilutive.
The Company has granted certain stock options to purchase common stock which had an exercise price greater than the average market price. These antidilutive options have been excluded from the computation of diluted net loss per share for the respective six-month periods. These outstanding, antidilutive options for the six months ended November 30, 1999 and 1998 were 534,750 and 623,250, 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:
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 and six-month periods ended November 30, 1999 and 1998. Asset information by reportable segment is not reported since no segregation of assets exists between segments.
10
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 6 - BUSINESS SEGMENTS (continued)
|
Three months ended November 30, 1999 |
|
Product Sales - New Casino Openings |
|
Product Sales - Established Casinos |
|
Consolidated Totals |
|
Revenues |
$ |
- |
$ |
4,906,238 |
$ |
4,906,238 |
|
Operating income (loss) |
$ |
(163,479) |
$ |
(392,526) |
$ |
(556,005) |
|
|
||||||
|
Three months ended November 30, 1998 |
|
|
|
|
|
|
|
Revenues |
$ |
758,792 |
$ |
4,707,847 |
$ |
5,466,639 |
|
Operating loss |
$ |
9,232 |
$ |
(406,961) |
$ |
(397,729) |
|
Six months ended November 30, 1999 |
|
|
|
|
|
|
|
Revenues |
$ |
1,517,541 |
$ |
9,745,273 |
$ |
11,262,814 |
|
Operating income (loss) |
$ |
58,919 |
$ |
(624,606) |
$ |
(565,687) |
|
|
||||||
|
Six months ended November 30, 1998 |
|
|
|
|
|
|
|
Revenues |
$ |
758,792 |
$ |
10,406,256 |
$ |
11,165,048 |
|
Operating loss |
$ |
(163,046) |
$ |
(652,426) |
$ |
(815,472) |
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 six-month periods ended November 30, 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.
NOTE 7 - INCOME TAXES
Based on a review of operating results for the three months ended November 30, 1999, the Company decided to record an allowance of $557,000 in the form of an income tax provision against certain future tax benefits, the realization of which are currently uncertain. The deferred tax benefits are primarily composed of net operating losses and timing differences related to certain accounts receivable and inventory allowances not currently deductible as expenses under IRS provisions.
11
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; Gulfport, Mississippi; Portland, Oregon; and Ontario, Canada. The Company sells its products in every state in which casinos operate in the United States.
Comparison of Operations for the Three Months Ended November 30, 1999 and November 30, 1998
Revenues. For the three months ended November 30, 1999, revenues were approximately $4.9 million, a decrease of approximately $560,000, or 10.2%, versus revenues of approximately $5.5 million for the three months ended November 30, 1998. The decrease in revenues for the 1999 period was caused principally by a decrease in sales of table furniture (i.e. casino gaming tables and seating equipment) of approximately $600,000. This occurred due to an absence of any significant, new casino openings during the three months ended November 30, 1999. In the prior fiscal year three-month period, the Company sold a large volume of casino gaming tables to a newly opened casino. Certain other products sold by the Company (i.e. dice, chips and layouts) experienced modest increases in sales versus the prior year period. These increases were offset by a decline in casino playing card sales as compared to the prior year three month period ended November 30, 1998. Sales of products manufactured by the Company totaled approximately $4.0 million in both 1999 and 1998 periods.
Cost of Revenues. Cost of revenues, as a percentage of sales, increased to 78.0% for the three months ended November 30, 1999 as compared to 76.9% for the three months ended November 30, 1998. This slight decline in the gross margin occurred due to the lower volume of sales and production during the 1999 period, which caused an underabsorption of fixed manufacturing overhead expenses.
Gross Profit. Gross profit for the three months ended November 30, 1999 decreased in absolute dollars by approximately $184,000 from the comparable period in the prior year as a result of the aforementioned lower revenues and the aforementioned higher cost of revenues as a percentage of sales from 76.9% in the 1998 period to 78.0% in the 1999 period.
Selling, General and Administrative Expenses. For the three months ended November 30, 1999, selling, general and administrative ("SG&A") expenses decreased approximately $25,000 or 1.5%, 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 costs related to the development of the Company's non-gaming division.
12
Other Income. For the three months ended November 30, 1999, other income increased to approximately $46,000 from approximately $7,000 in the 1998 period. This increase was caused principally by gains on the sale of certain non-operating assets during the quarter ended November 30, 1999.
Interest Expense. For the three months ended November 30, 1999, interest expense increased to approximately $63,000 from approximately $58,000 in the 1998 period. This slight increase was due principally to the acquisition of $500,000 of debt in October 1998 and the acquisition of a $790,000 capital lease obligation in March 1999 offset, in part, by a reduction in the 1999 period of average outstanding borrowings of approximately $700,000 under the Company's former line of credit facility.
Income Taxes. For the three months ended November 30, 1999, the Company recorded a tax provision of $557,000 compared to recording a tax benefit of approximately $156,000 in the three months ended November 30, 1998. The Company recorded the 1999 quarterly period tax provision due to current uncertainties related to the realizability of previously recorded future tax benefits.
Net Loss. For the three months ended November 30, 1999 the Company's net loss was approximately $1,129,000, a decline in net operating results of approximately $836,000 from the net loss of approximately $293,000 for the quarter ended November 30, 1998. This decline in net operating results was primarily due to the aforementioned decrease in revenues, gross profit margin percentages and the recording of the income tax provision offset, in part, by the slight improvement in SG&A expenses and the increase in other income. Net loss per diluted share was $.33 for the three months ended November 30, 1999 as compared to a net loss per diluted share of $.08 for the three months ended November 30, 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 fluctuations in the valuation of the Mexican peso will have on the cost of the Company's products manufactured in Mexico.
Comparison of Operations for the Six Months Ended November 30, 1999 and November 30, 1998
Revenues. For the six months ended November 30, 1999 revenues totaled approximately $11.3 million, an approximately 1% increase over the approximately $11.2 million of revenues in the 1998 period. The increase in revenues for the 1999 period was due principally to an increase in sales of casino chips during the 1999 period of approximately $500,000 offset, in part, by a decrease in sales of non-manufactured, distributed products, such as furniture and seating accessories, of approximately $400,000. The improvement in chip sales was due primarily to an increase in significant new casino openings in the 1999 period versus the 1998 period. Other products manufactured by the Company, including dice and layouts, experienced modest growth in the 1999 period, which was offset by a decline in sales of casino playing cards manufactured by the Company. Sales of products manufactured by the Company totaled approximately $8.8 million in the 1999 period, compared to approximately $8.2 million in the same period of the prior year.
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Cost of Revenues. Cost of revenues, as a percentage of sales, decreased to 76.1% for the six-month period ended November 30, 1999 as compared to 77.0% for the six months ended November 30, 1998. This slight improvement in the gross margin occurred as sales of the Company's manufactured, higher-margin products (principally playing cards, casino chips, dice and table layouts) increased by approximately $600,000 over the prior year period.
Gross Profit. Gross profit for the six months ended November 30, 1999 increased in absolute dollars by approximately $121,000 over the comparable period in the prior year. This improvement was primarily a result of the aforementioned marginal improvements in revenues and the cost of revenues as a percentage of sales in the 1999 period versus the 1998 period.
Selling, General and Administrative Expenses. For the six months ended November 30, 1999, SG&A expenses decreased approximately $129,000, or 4%, to approximately $3.3 million as compared to approximately $3.4 million in the comparable period of the prior year. This decrease was primarily attributable to a decrease in certain personnel costs from the Company's gaming division offset, in part, by an increase in personnel related costs from the development of the Company's non-gaming division.
Other Income. For the six months ended November 30, 1999, other income increased to approximately $151,000 from approximately $16,000 in the 1998 period. This increase was caused principally by the gain on the sale of certain non-operating assets during the six months ended November 30, 1999, as compared to the comparable 1998 period.
Interest Expense. For the six months ended November 30, 1999, interest expense increased to approximately $127,000, from approximately $109,000 in the 1998 period. This increase was due principally to the acquisition of $500,000 of debt in October 1998, and the acquisition of a $790,000 capital lease obligation in March 1999 offset, in part, by a decrease in average outstanding borrowings of approximately $700,000 under the Company's former line of credit facility.
Income Taxes. For the six months ended November 30, 1999, the Company recorded a tax provision of $568,000 compared to recording a tax benefit of approximately $317,000 in the six-month period ended November 30, 1998. The Company recorded the tax provision due to the current uncertainty related to the realizability of previously recorded future tax benefits.
Net Loss. For the six months ended November 30, 1999 the Company sustained a net loss of approximately $1,110,000, versus a net loss of approximately $591,000 in the comparable prior year period. This decline in net operating results was primarily due to the aforementioned decrease in revenues and the recording of the income tax provision offset, in part, by the aforementioned slight improvement in SG&A expenses, gross margin percentages and the increase in other income. The net loss per diluted share was $.32 for the six months ended November 30, 1999 as compared to a net loss per diluted share of $.17 for the six months ended November 30, 1998.
During certain previous reporting periods, the Company has generally had a positive impact from the decrease in the value of the Mexican peso. Over the last year, the value of the Mexican peso has remained relatively stable. The Company cannot predict what impact
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fluctuations between the Mexican peso and the U.S. dollar will have on the cost of the Company's products manufactured in Mexico.
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 $6.2 million at November 30, 1999, a decrease of approximately $600,000 in working capital from approximately $6.8 million in working capital at May 31, 1999.
Cash Flow. Operating activities provided approximately $2.2 million in cash during the six months ended November 30, 1999, as compared to cash provided of approximately $1.0 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 $1.6 million, reductions of inventories of approximately $350,000 and an increase in customer deposits received of approximately $450,000. These sources of cash were offset, in part, by cash used to reduce balances in accounts payable and accrued expenses of approximately $250,000. Overall, the Company experienced an increase in cash of approximately $2.0 million during the six months ended November 30, 1999.
Line of Credit. On October 31, 1999, the Company's line of credit with Norwest Bank of Nevada, now Wells Fargo Bank (the "Bank"), which allowed the Company to borrow up to $1.0 million matured and was not renewed. At maturity, no advances were outstanding under the line of credit.
Bank Notes. The Company has two notes payable (the "Bank Notes") to the Bank in the principal amount of approximately $2 million. The Bank Notes 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.
Under the terms of the Bank Notes, 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 quarterly cash flow ratios. As of May 31, 1999, the Company was in violation of certain of its covenants, for which the Bank has granted the Company a formal waiver of default regarding the violated covenants through the fiscal year ending May 31, 2000. If the Company continues to be in violation of its covenants at May 31, 2000, the Company may be required to refinance the Bank Notes through another lender. As of November 30, 1999, the Company believes it was in compliance with the quarterly ratios.
Capital Lease Obligation. In March 1999, the Company leased certain equipment for its manufacturing operations. The lease terms require, among other things, total monthly payments
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of approximately $12,250 for a non-cancelable period of 84 months. The obligation is collateralized by a second priority security interest in substantially all the Company's assets. The obligation bears interest at a variable rate (approximately 8.5% at November 30, 1999).
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 January 13, 2000, the Company had repurchased 5,000 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 and Adopted Accounting Standard. The Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" in June 1998. The statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement is effective for all fiscal quarters of fiscal years which begin after June 2000. The 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.
Year 2000 Project. The Company conducted a review of its computer systems to identify areas that could be affected by year 2000 issues and completed updating many of its existing systems to improve overall business performance and to accommodate business for the year 2000. Management believes that the Company's critical systems were remediated as of December 31, 1999.
The Company believes that no material adverse impact has occurred 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 is no material impact from the year 2000 issues on its consolidated financial position, results of operations or cash flows. However, certain ongoing 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 has been completed, there can be no assurance that the Company will not be adversely impacted in the future by Year 2000 issues.
As of January 13, 2000, 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
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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, 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.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on November 11, 1999, to elect the following directors:
|
Name of Director |
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For |
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Against |
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Abstain |
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Eric P. Endy |
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3,270,514 |
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114,415 |
|
0 |
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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Exhibit No. |
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Description |
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27.01 |
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Financial Data Schedule |
(b) Reports on Form 8-K
None
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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.
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PAUL-SON GAMING CORPORATION |
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Date: January 13, 2000 |
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By: |
/s/ Eric P. Endy |
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Eric P. Endy, Chief Executive Officer |
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Date: January 13, 2000 |
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By: |
/s/ John M. Garner |
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John M. Garner, Treasurer and |
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18
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Exhibit Number |
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27.01 |
Financial Data Schedule |
20 |
19
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