<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: November 30, 2000
--------------------------------------
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 Identification No.)
incorporation 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.
3,449,757 shares of Common Stock, $0.01 par value as of January 11, 2001
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
NOVEMBER 30, 2000 AND MAY 31, 2000
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
2000 2000
-------------------- -------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,749,509 $2,071,952
Trade receivables, less allowance for doubtful accounts
of $410,000 and $380,000 2,240,378 2,298,336
Inventories, net 3,047,387 4,146,065
Prepaid expenses 221,334 128,128
Other current assets 184,213 137,162
-------------------- -------------------
Total current assets 7,442,821 8,781,643
-------------------- -------------------
PROPERTY AND EQUIPMENT, NET 8,169,076 8,396,365
-------------------- -------------------
OTHER ASSETS 650,816 577,868
-------------------- -------------------
$16,262,713 $17,755,876
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $1,206,279 $1,899,443
Accounts payable 881,715 779,309
Accrued expenses 788,504 818,092
Customer deposits 138,580 199,078
Income taxes payable 53,400 22,927
-------------------- -------------------
Total current liabilities 3,068,478 3,718,849
-------------------- -------------------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 565,072 667,401
-------------------- -------------------
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 November 30, 2000 and May 31, 2000 34,771 34,771
Additional paid-in capital 13,652,936 13,652,936
Accumulated deficit (862,764) (129,351)
Less: Treasury stock, at cost, 27,293 and 24,293 shares (195,780) (188,730)
-------------------- -------------------
12,629,163 13,369,626
-------------------- -------------------
$16,262,713 $17,755,876
==================== ===================
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
----------------------------------------- -----------------------------------------
2000 1999 2000 1999
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues $5,111,999 $4,906,238 $10,421,446 $11,262,814
Cost of revenues 4,056,457 3,827,457 8,105,868 8,574,021
----------------- ------------------ ------------------ ------------------
Gross profit 1,055,542 1,078,781 2,315,578 2,688,793
Selling, general and
administrative expenses 1,503,602 1,634,786 2,991,553 3,254,480
----------------- ------------------ ------------------ ------------------
Operating loss (448,060) (556,005) (675,975) (565,687)
Other income 19,407 46,405 42,708 150,876
Interest expense (37,768) (62,806) (100,146) (127,011)
----------------- ------------------ ------------------ ------------------
Loss before income taxes (466,421) (572,406) (733,413) (541,822)
Income tax provision -- (557,000) -- (568,000)
----------------- ------------------ ------------------ ------------------
Net loss $(466,421) $(1,129,406) $(733,413) $(1,109,822)
================= ================== ================== ==================
Loss per share:
Basic $(0.14) $(0.33) $(0.21) $(0.32)
================= ================== ================== ==================
Diluted $(0.14) $(0.33) $(0.21) $(0.32)
================= ================== ================== ==================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
2000 1999
-------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(733,413) $(1,109,822)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 514,672 502,779
Provision for doubtful accounts 70,782 100,589
Provision for inventory obsolescence 80,000 150,000
Gain on sale/disposal of assets -- (122,783)
Change in operating assets and liabilities:
Accounts receivable (12,824) 1,626,856
Inventories 1,018,678 345,083
Other current assets (140,257) 121,899
Other assets (122,550) (247,679)
Deferred tax asset -- 568,000
Accounts payable and accrued expenses 72,818 (262,489)
Income taxes payable 30,473 31,315
Customer deposits (60,498) 451,835
-------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 717,881 2,155,583
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on sale of property and equipment -- 249,069
Purchase of property and equipment (237,781) (192,771)
-------------- ----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (237,781) 56,298
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 39,452 --
Principal payments on short-term/long-term borrowings (834,945) (153,854)
Purchases of treasury stock (7,050) (11,259)
-------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES (802,543) (165,113)
-------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (322,443) 2,046,768
Cash and cash equivalents, beginning of period 2,071,952 656,299
-------------- ----------------
Cash and cash equivalents, end of period $1,749,509 $2,703,067
============== ================
Supplemental cash flows information:
Operating activities include cash payments for interest and income taxes as
follows:
Interest paid $100,146 $127,011
Income taxes paid -- 12,400
</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, 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
accounting principles generally accepted in the United States of America
for interim financial information and do not include all of the information
and notes required by accounting principles generally accepted in the
United States of America 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, 2000.
The condensed consolidated balance sheet as of November 30, 2000
and statements of operations and cash flows for the three and six-month
periods ended November 30, 2000 and 1999 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 a 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
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
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 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 on the straight-line method for financial
reporting purposes over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
<S> <C>
Buildings and improvements 18-27
Furniture and equipment 5-10
Vehicles 5-7
</TABLE>
OTHER ASSETS
Included in other assets are goodwill, which is being amortized on
a straight-line basis over 20 years, and patent rights costs, which are
being amortized over 5 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
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
A deferred tax liability or asset is recognized for the estimated
future tax effects, based on provisions of the enacted law, attributable to
temporary differences and carryforwards.
FOREIGN TRANSACTIONS
Sales outside of the United States are not significant and
substantially all sales transactions occur in United States dollars.
ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 ("FASB") issued
Statement of Financial Accounting Standards ("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. As the Company does not have
significant derivative instruments, management believes that SFAS No.
133 will not have a material impact on its consolidated financial
statements.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 clarifies existing accounting principles
related to revenue recognition in financial statements. The Company is
required to comply with the provisions of SAB 101 by the fourth quarter of
its fiscal year ending May 31, 2001. Due to the nature of the Company's
operations, management does not believe that SAB 101 will have a
significant impact on the Company's consolidated financial statements.
7
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
November 30, May 31,
2000 2000
------------------- ------------------
<S> <C> <C>
Raw materials $1,672,631 $2,321,531
Work in process 153,627 225,507
Finished goods 2,001,129 2,299,027
------------------- ------------------
3,827,387 4,846,065
Less inventory reserves 780,000 700,000
------------------- ------------------
$3,047,387 $4,146,065
=================== ==================
</TABLE>
NOTE 3 - LONG-TERM DEBT AND PLEDGED ASSETS
Paul-Son Supplies has a $1.8 million note and a $500,000 note to a bank
(collectively the "Facilities"). 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. The
Facilities contain restrictive covenants, generally requiring the Company to
maintain certain financial ratios, as defined, and to maintain net income
annually of at least $250,000. As of May 31, 2000, the Company was in violation
of certain covenants. As a result of the violations, the Company and the bank,
in June 2000, entered into a forbearance agreement. This agreement requires the
Company to pay additional monthly principal payments of $100,000 which began
June 15, 2000. The additional monthly principal payments increased to $125,000
beginning October 15, 2000 and will increase to $150,000 beginning February 15,
2001. The bank has agreed to waive its rights to declare a default on the
Facilities as long as principal payments are made in accordance with the
forbearance agreement. The Company made the required payments under the
forbearance agreement during the three and six months ended November 30, 2000.
8
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTE 3 - LONG-TERM DEBT AND PLEDGED ASSETS
(CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
November 30, May 31,
2000 2000
------------------ -----------------
<S> <C> <C>
Note payable to bank in monthly installments of $18,118, including
interest of 8.87%, plus additional monthly graduating principal
payments of $100,000 to $150,000 from June 2000 through May 2001,
secured by a first deed of trust on the Company's main facility in
Las Vegas, Nevada and a first security interest on all Company
assets.............................................................. $ 945,650 $ 1,643,518
Note payable to bank in monthly principal installments of $13,889 plus
interest of 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 main facility in Las Vegas, Nevada and a
first security interest on all Company assets....................... 152,777 236,111
Notes payable to mortgage company, collateralized by real estate,
interest at 7.5%, with principal and interest payments of
approximately $500 due monthly through July 2001.................... 3,418 6,235
Various notes payable to finance company with principal and interest
payments of approximately $1,125 due monthly through July 2003...... 35,589 --
Capital lease obligation payable for equipment, variable interest
(approximately 9% at November 30, 2000), payable in monthly
installments of approximately $12,250 through March 2006,
collateralized by a second security interest on principally all
Company assets...................................................... 633,917 680,980
------------------ -----------------
1,771,351 2,566,844
Less current portion.......................................... 1,206,279 1,899,443
------------------ -----------------
$ 565,072 $ 667,401
================== =================
</TABLE>
9
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTE 4 - 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":
<TABLE>
<CAPTION>
Dilutive
Stock
Basic Options Diluted
----------------- ------------- ----------------
<S> <C> <C> <C>
FOR THE 6 MONTH PERIOD ENDED NOVEMBER 30, 2000
Net loss $(733,413) $ (733,413)
Weighted Average Shares 3,451,210 -- 3,451,210
Per Share Amount $(0.21) $(0.21)
FOR THE 6 MONTH PERIOD ENDED 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)
FOR THE 3 MONTH PERIOD ENDED NOVEMBER 30, 2000
Net loss $ (466,421) $(466,421)
Weighted Average Shares 3,449,757 -- 3,449,757
Per Share Amount $(0.14) $(0.14)
FOR THE 3 MONTH PERIOD ENDED NOVEMBER 30, 1999
Net loss $(1,129,406) $(1,129,406)
Weighted Average Shares 3,454,537 -- 3,454,537
Per Share Amount $(0.33) $(0.33)
</TABLE>
Dilutive stock options for the three and six months ended November 30,
2000 (6,000) and November 30, 1999 (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 three and six-month periods. These outstanding,
antidilutive options for the three and six months ended November 30, 2000 and
1999 were approximately 520,000 and 535,000, respectively.
10
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTE 5 - BUSINESS SEGMENTS
The Company's reportable segments have been identified as follows:
- Sale of Gaming Supply Products to New Casino Openings - 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 - 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 and six-month periods ended November 30,
2000 and 1999. Asset information by reportable segment is not reported since no
segregation of assets exists between segments.
<TABLE>
<CAPTION>
Six Months Ended November 30,
2000 Product Sales - New Product Sales - Consolidated
Casino Openings Established Casinos Totals
----------------------- --------------------- -------------------
<S> <C> <C> <C>
Revenues $1,088,950 $9,332,496 $10,421,446
Operating loss $(57,232) $(618,743) $(675,975)
----------------------- --------------------- -------------------
----------------------- --------------------- -------------------
1999 Product Sales - New Product Sales - Consolidated
Casino Openings Established Casinos Totals
----------------------- --------------------- -------------------
Revenues $1,517,541 $9,745,273 $11,262,814
Operating income (loss) $58,919 $(624,606) $(565,687)
----------------------- --------------------- -------------------
</TABLE>
11
<PAGE>
PAUL-SON GAMING CORPORATION AND SUBSIDIARIES
NOTE 5 - BUSINESS SEGMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended November 30,
2000 Product Sales - New Product Sales - Consolidated
Casino Openings Established Casinos Totals
----------------------- --------------------- -------------------
<S> <C> <C> <C>
Revenues $535,263 $4,576,736 $5,111,999
Operating loss $(39,837) $(408,223) $(448,060)
----------------------- --------------------- -------------------
----------------------- --------------------- -------------------
1999 Product Sales - New Product Sales - Consolidated
Casino Openings Established Casinos Totals
----------------------- --------------------- -------------------
Revenues -- $4,906,238 $4,906,238
Operating loss $(163,479) $(392,526) $(556,005)
----------------------- --------------------- -------------------
</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 and six-month periods ended November 30,
2000 and 1999, 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 6 - INCOME TAXES
The Company recorded an allowance of $557,000 in the form of a tax
provision during its fiscal quarter ended November 30, 1999 based on a review of
operating results. The allowance was recorded against certain future tax
benefits, the realization of which were deemed 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. Since November 30, 1999, the
Company has not recorded tax benefits against pretax losses incurred.
12
<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; 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, 2000 AND
NOVEMBER 30, 1999
REVENUES. For the three months ended November 30, 2000, revenues were
approximately $5.1 million, an increase of approximately $206,000, or 4%, versus
revenues of approximately $4.9 million for the three months ended November 30,
1999. The increase in revenues for the 2000 period was caused principally by an
increase in sales of casino table layouts and casino chips of approximately
$550,000. The Company acquired patent rights for the production of certain
synthetic layouts in the latter half of the fiscal year ended May 31, 2000 which
has helped increase its market share of casino table layouts. These increases
were offset, in part, by decreases in sales of casino playing cards, dice and
table accessories, such as seating and table furniture, of approximately
$300,000. Sales of products manufactured by the Company totaled approximately
$4.3 million and $4.0 million in the respective 2000 and 1999 three-month
periods.
COST OF REVENUES. Cost of revenues, as a percentage of sales, increased
to 79.4% for the three months ended November 30, 2000 as compared to 78.0% for
the three months ended November 30, 1999. This slight decline in the gross
margin percentage occurred as inflationary costs to operate the Company's Mexico
manufacturing plant were not offset by a devaluation in the Mexican peso.
Additionally, the Company incurred certain severance costs related to the
reduction of some of its manufacturing personnel during the quarter ended
November 30, 2000.
GROSS PROFIT. Gross profit for the three months ended November 30, 2000
decreased in absolute dollars by approximately $23,000 from the comparable
period in the prior year as a result of the aforementioned higher cost of
revenues as a percentage of sales from 78.0% in the 1999 period to 79.4% offset,
in part, by the increase in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months
ended November 30, 2000, selling, general and administrative ("SG&A")
expenses decreased approximately $131,000, or 8%, compared to the comparable
period of the prior year. Reductions in sales related personnel, as well as
certain sales office activities, occurred throughout the fiscal year ended
May 31, 2000 and were principally the cause of the aforementioned decrease.
13
<PAGE>
OTHER INCOME. For the three months ended November 30, 2000, other
income decreased to approximately $19,000 from approximately $46,000 in the 1999
period. This decrease was caused principally from certain nonrecurring gains on
the sale of non-operating assets which occurred during the quarter ended
November 30, 1999.
INTEREST EXPENSE. For the three months ended November 30, 2000,
interest expense decreased to approximately $38,000 from approximately $63,000
in the 1999 period. This decrease was due principally to lower average
outstanding debt during the 2000 period as compared to the 1999 period.
INCOME TAXES. For the three months ended November 30, 2000, the Company
did not record a tax benefit related to its pretax loss. For the three months
ended November 30, 1999 the Company recorded a tax provision of $557,000. The
Company recorded the 1999 quarterly period tax provision as an allowance to an
existing deferred tax asset due to uncertainties related to its realizability.
The Company did not record a tax benefit in the 2000 period due to current
uncertainties about the timing of the recognition of an asset recorded for
future tax benefits.
NET LOSS. For the three months ended November 30, 2000, the Company's
net loss was approximately $466,000, a reduction in net loss of approximately
$663,000 from the net loss of approximately $1,129,000 for the quarter ended
November 30, 1999. This improvement in net loss versus the net loss of the prior
year period was primarily due to (i) the absence of a tax provision in the 2000
quarterly period as compared to a tax provision in the prior year quarter of
$557,000, (ii) the increase in revenues offset, in part, by a slight decline in
the gross profit margins and (iii) the reduction in selling, general and
administrative expenses offset, in part, by a decline in other income. Net loss
per diluted share was $.14 for the three months ended November 30, 2000, as
compared to a net loss per diluted share of $.33 for the three months ended
November 30, 1999.
COMPARISON OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 2000 AND NOVEMBER
30, 1999
REVENUES. For the six months ended November 30, 2000, revenues totaled
approximately $10.4 million, an 8% decrease versus the approximate $11.3 million
of revenues in the 1999 period. The decrease in revenues for the 2000 period was
due principally to a decrease in sales of casino chips, casino playing cards and
furniture/accessory product sales of approximately $1.0 million during the 2000
period offset, in part, by an increase in sales of casino layouts of
approximately $160,000. The decline in sales of casino chips, accessories and
furniture products was caused principally by a decline in the number of new
casino openings and expansions during the six months ended November 30, 2000 as
compared to the same period of the previous year. Sales of casino layouts
increased over the prior year six-month period due to the acquisition, in the
latter half of the fiscal year ended May 31, 2000, of patent rights relating to
the production of certain casino layouts. Sales of products manufactured by the
Company totaled approximately $9.3 million in the 2000 period, compared to
approximately $8.8 million in the same period of the prior year.
14
<PAGE>
COST OF REVENUES. Cost of revenues, as a percentage of sales, increased
to 77.8% for the six-month period ended November 30, 2000 as compared to 76.1%
for the six months ended November 30, 1999. This slight decline in the gross
margin percentage occurred as the Company experienced higher costs in its
Mexican manufacturing facilities due to inflation. These inflationary increases
were not offset by a corresponding devaluation of the Mexican peso during the
six months ended November 30, 2000. Additionally, the Company experienced an
increase in unabsorbed fixed manufacturing costs in the current year period due
to lower sales and production volume in its Mexican manufacturing plant.
GROSS PROFIT. Gross profit for the six months ended November 30, 2000
decreased in absolute dollars by approximately $373,000 over the comparable
period in the prior year. This decrease was primarily a result of the decrease
in revenues and increase in the cost of revenues as a percentage of sales in the
2000 period versus the 1999 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the six months ended
November 30, 2000, SG&A expenses decreased approximately $263,000, or 8%, to
approximately $3.0 million as compared to approximately $3.3 million in the
comparable period of the prior year. Reductions in sales related personnel, as
well as certain sales related activities, occurred throughout the fiscal year
ended May 31, 2000 and were principally the cause of the aforementioned
decrease.
OTHER INCOME. For the six months ended November 30, 2000, other income
decreased to approximately $43,000 from approximately $151,000 in the 1999
period. This decrease was caused principally by certain nonrecurring gains
recognized from the sale of non-operating assets during the six months ended
November 30, 1999.
INTEREST EXPENSE. For the six months ended November 30, 2000, interest
expense decreased to approximately $100,000, from approximately $127,000 in the
1999 period. This decrease was due principally to a decrease in average
outstanding borrowings versus the prior year.
INCOME TAXES. For the six months ended November 30, 2000, the Company
did not record a tax provision for pretax losses. During the six months ended
November 30, 1999, the Company recorded a tax provision of $568,000. The Company
recorded the 1999 quarterly period tax provision as an allowance to an existing
deferred tax asset due to uncertainties related to its realizability. The
Company did not record a tax benefit in the 2000 period due to current
uncertainties about the timing of the recognition of tax assets recorded for
future tax benefits.
NET LOSS. For the six months ended November 30, 2000, the Company
sustained a net loss of approximately $733,000 versus a net loss of
approximately $1,110,000 in the comparable prior year period. This improvement
in net loss of approximately $377,000 was primarily due to the aforementioned
absence of the tax provision recorded in the 1999 period, the reduction in
selling, general and administrative expenses offset, in part, by the decline in
gross margin and other income. The net loss per diluted share was $.21 for the
six months ended November 30, 2000 as compared to a net loss per diluted share
of $.32 for the six months ended November 30, 1999.
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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 $4.4 million at
November 30, 2000, a decrease of approximately $690,000 from approximately $5.1
million in working capital at May 31, 2000.
CASH FLOW. Operating activities provided approximately $718,000 in cash
during the six months ended November 30, 2000, as compared to cash provided of
approximately $2.2 million during the same period in the prior year. The primary
operational source of cash during the period was related to reductions of
inventories of approximately $1.0 million. Overall, the Company experienced a
decrease in cash during the six months ended November 30, 2000 of approximately
$322,000 as the Company used approximately $835,000 to pay principal amounts on
its debt and used approximately $238,000 for the acquisition of property and
equipment.
FORBEARANCE AGREEMENT. In June 2000, the Company entered into a
forbearance agreement with Wells Fargo Bank of Nevada. The agreement requires
that the Company make monthly additional principal payments beginning June 2000
in the amount of $100,000. The monthly additional principal payments increased
to $125,000 beginning October 2000 and will increase to $150,000 beginning
February 2001 until all debt obligations to Wells Fargo Bank of Nevada have been
satisfied. The Company has complied with the requirements of the agreement as of
January 11, 2001.
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 11, 2001, the Company had repurchased
8,000 shares on the open market at a total cost of approximately $32,000 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 STANDARDS. See Note 1 to the
Condensed Consolidated Financial Statements for a discussion of recently issued
accounting standards and their expected impact on the Company's condensed
consolidated financial statements.
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
16
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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, 2000, 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 14,
2000, to elect the following directors:
<TABLE>
<CAPTION>
Name of Director For Against Abstain
------------------------- --------------- -------------- --------------
<S> <C> <C> <C>
Paul S. Dennis 3,272,862 97,310 0
Richard W. Scott 3,272,962 97,210 0
</TABLE>
17
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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.
PAUL-SON GAMING CORPORATION
Date: January 12, 2001 By: /s/ Eric P. Endy
------------------------------------
Eric P. Endy, Chief Executive Officer
(Duly Authorized Officer)
Date: January 12, 2001 By: /s/ John M. Garner
------------------------------------
John M. Garner, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
18
