UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

GAMING PARTNERS INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Exchange Act). Yes oNo ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 7,594,900 shares of Common Stock, $0.01 par value, outstanding as of November 10, 2004.

 

PART I. FINANCIAL INFORMATION

ITEM 1.          FINANCIAL STATEMENTS

GAMING PARTNERS INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands)

		SEPTEMBER 30, 2004			DECEMBER 31, 2003
ASSETS
Current Assets:
Cash and cash equivalents		$	5,551		$	4,186
Marketable securities		2,771			2,580
Accounts receivables, less allowance for doubtful accounts of $362 and $382, respectively		2,823			3,417
Inventories		5,506			5,382
Prepaid expenses		515			490
Deferred tax asset		5			24
Other current assets		1,144			467
Total current assets		18,315			16,546
Property and equipment, net		9,000			8,658
Goodwill, net		1,374			1,374
Other intangibles, net		1,659			1,897
Other assets, net		500			121
Total Assets		$	30,848		$	28,596
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long term debt		$	1,025		$	2,609
Accounts payable		2,099			2,135
Accrued expenses		2,291			2,103
Customer deposits		1,367			1,601
Income taxes payable		901			297
Other current liabilities		830			474
Total current liabilities		8,513			9,219
Long term debt, less current maturities		2,974			1,563
Deferred tax liability		70			—
Total liabilities		11,557			10,782
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, 7,594,900 shares issued and outstanding		76			76
Additional paid-in capital		14,253			14,253
Treasury stock, at cost; 27,293 shares		(196		)	(196		)
Retained earnings		3,970			2,611
Accumulated other comprehensive income		1,188			1,070
Total stockholders’ equity		19,291			17,814
Total Liabilities and Stockholders’ Equity		$	30,848		$	28,596

See notes to unaudited condensed consolidated financial statements.

 

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GAMING PARTNERS INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(dollars in thousands, except per share amounts)

 

		THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
		2004			2003			2004			2003
Revenues		$	9,250		$	7,128		$	31,420		$	25,259
Cost of revenues		6,128			4,949			18,972			16,235
Gross profit		3,122			2,179			12,448			9,024
Product development		25			24			97			93
Marketing and sales		978			904			2,893			2,306
Depreciation and amortization		496			660			1,476			1,690
General and administrative		1,974			1,717			5,712			5,369
Total operating expenses		3,473			3,305			10,178			9,458
Income (loss) from operations		(351		)	(1,126		)	2,270			(434		)
Other income, net		3			88			30			90
Interest expense		(60		)	(71		)	(192		)	(207		)
Income (loss) before income taxes		(408		)	(1,109		)	2,108			(551		)
Income tax benefit (expense)		297			408			(749		)	447
Net income (loss)		$	(111	)	$	(701	)	$	1,359		$	(104	)
Net income (loss) per share:
Basic		$	(0.01	)	$	(0.09	)	$	0.18		$	(0.01	)
Diluted		$	(0.01	)	$	(0.09	)	$	0.18		$	(0.01	)

 

See notes to unaudited condensed consolidated financial statements.

 

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GAMING PARTNERS INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
AND OTHER COMPREHENSIVE INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2004

(unaudited)

(dollars in thousands, except share amounts)

		Comprehensive Income (Loss)			Shares		Common Stock Amount			Additional Paid-In Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance at January 1, 2004					7,594,900		$	76		$	14,253		$	(196	)	$	2,611		$	1,070		$	17,814
Net income		$	1,359													1,359						1,359
Unrealized gain on securities, net of tax		9																	9			9
Foreign currency translation adjustment		109																	109			109
Total comprehensive income		$	1,477
Balance at September 30, 2004					7,594,900		$	76		$	14,253		$	(196	)	$	3,970		$	1,188		$	19,291

 

See notes to unaudited condensed consolidated financial statements.

 

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GAMING PARTNERS INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

		NINE MONTHS ENDED SEPTEMBER 30,
			2004			2003
Cash Flows from Operating Activities
Net income (loss)			$	1,359		$	(104	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation			1,216			1,444
Amortization			260			246
Provision for bad debt			(20		)	6
Provision for inventory obsolescence			51			62
Deferred taxes			19			(475		)
Gain on sale of property and equipment and marketable securities			(34		)	(79		)
Change in operating assets and liabilities:
Accounts receivable			614			1,300
Income tax refund			—			846
Inventories			(175		)	(498		)
Other current assets, including prepaids			(704		)	(128		)
Accounts payable			(36		)	(1,721		)
Customer deposits			(234		)	(279		)
Accrued expenses			188			640
Income taxes payable and deferred tax liability			647			24
Other current liabilities			382			510
Net cash provided by operating activities			3,533			1,794
Cash Flows from Investing Activities
Purchase of marketable securities			(8,901		)	(7,885		)
Proceeds from sale of marketable securities			8,701			7,118
Acquisition of property and equipment			(1,536		)	(1,307		)
Proceeds from sale of building and equipment			—			450
Decrease (increase) in other assets			(379		)	4
Net cash used by investing activities			(2,115		)	(1,620		)
Cash Flows from Financing Activities
Repayment of long term debt			(173		)	(76		)
Net cash used in financing activities			(173		)	(76		)
Effect of exchange rate changes on cash			120			745
Net increase in cash and cash equivalents			1,365			843
Cash and cash equivalents, beginning of the period			4,186			2,333
Cash and cash equivalents, end of the period			$	5,551		$	3,176
Supplemental disclosure of cash flow information:
Cash paid for interest			$	182		$	203
Cash paid for income taxes			$	396		$	43
Non-cash transactions:
Non-cash currency translation adjustment			$	109		$	735
Acquisition of property and equipment through a capital lease			—			224

See notes to unaudited condensed consolidated financial statements.

 

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GAMING PARTNERS INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1.                NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

Effective September 1, 2004, Paul-Son Gaming Corporation completed its name change to Gaming Partners International Corporation.  Gaming Partners International Corporation, a Nevada corporation and each of its subsidiaries are collectively referred to herein as the “Company,” “GPIC,” or “we” or “us” or “our”.  The name change was approved by a vote of stockholders at the Company’s annual meeting held on May 26, 2004.  The Company’s established brand names such as Paul-Son, Bourgogne et Grasset, or B&G, Bud Jones, and T-K brands remain unchanged.  The Company’s subsidiary, Paul-Son Gaming Supplies, Inc. changed its name to Gaming Partners International USA, Inc., or GPI-USA.  The Company’s subsidiary, Etablissements Bourgogne et Grasset S.A. also changed its name to Gaming Partners International SAS, or GPI-SAS.  The name of the Company’s subsidiary, Paul-Son Mexicana, S.A. de C.V., remained unchanged. 

A Combination Agreement was executed on September 12, 2002, combining GPIC (formerly known as Paul-Son Gaming Corporation) with GPI-SAS (formerly known as Etablissements Bourgogne et Grasset S.A.).  At the closing, the businesses of GPIC, GPIC-SAS and GPI-SAS’s then wholly-owned subsidiary, The Bud Jones Company, Inc., or Bud Jones, were combined, with GPI-SAS and Bud Jones becoming wholly-owned subsidiaries of GPIC, or the Combination. The Combination was accounted for as a purchase transaction for financial accounting purposes.  Because the former GPI-SAS stockholders owned a majority of the outstanding GPIC common stock as a result of the Combination, the Combination was accounted for as a reverse acquisition in which GPI-SAS is the purchaser of GPIC.  On December 31, 2002, Bud Jones merged into GPI-USA, which was a wholly-owned subsidiary of GPIC and GPI-USA was the surviving entity. Bud Jones was a gaming supply manufacturing company, which was also headquartered in Las Vegas. Both former operations (GPI-USA and Bud Jones) have been consolidated into one facility at the Company’s headquarters in Las Vegas, Nevada with the new name of GPI-USA.

Our business activities include the manufacture and supply of casino table game equipment and supplies, including casino chips, table layouts, playing cards, dice, gaming furniture, 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. 

Basis of Consolidation and Presentation

The condensed consolidated financial statements for the three and nine months ended September 30, 2004 and 2003 include the accounts of GPIC and its wholly-owned subsidiaries, including GPI-SAS, GPI-USA, and Paul-Son Mexicana, S.A. de C.V., or Paul-Son Mexicana. (See Note 2 “Business Combination”.) The assets and liabilities of our inactive former wholly-owned subsidiary, Authentic Products, Inc., were transferred into GPIC during the second quarter of 2004.  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

 

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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 our annual audited consolidated financial statements and related notes included in our Form 10-K for the year ended December 31, 2003 and the Forms 10-Q for the first and second quarters of 2004. 

These condensed consolidated financial statements are unaudited, but in the opinion of management, reflect all normal and 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.

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; the recoverability of deferred tax assets; the allowance for doubtful accounts receivable and for slow-moving, excess and obsolete inventories; estimates for the recoverability of long-lived assets; litigations, claims and assessments; and/or the recoverability of goodwill.  Actual results could differ from those estimates and assumptions.

Equity Compensation Plan Information

We account for our stock option plans under Accounting Principles Board “APB” Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation cost is currently required to be recognized.  Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards “SFAS” No. 123, “Accounting for Stock Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment to SFAS No. 123,” our net income (loss) and income (loss) per share would have been decreased to the following pro forma amounts: 

				THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
				2004			2003			2004			2003
				(in thousands, except per share amounts)
Net income (loss):		As reported		$	(111	)	$	(701	)	$	1,359		$	(104	)
		Stock based compensation expense under fair value method		(21		)	(58		)	(62		)	(116		)
		Pro forma		$	(132	)	$	(759	)	$	1,297		$	(220	)
Net income (loss) per share:		As reported
		Basic		$	(0.01	)	$	(0.09	)	$	0.18		$	(0.01	)
		Diluted		$	(0.01	)	$	(0.09	)	$	0.18		$	(0.01
		Pro forma
		Basic		$	(0.02	)	$	(0.10	)	$	0.17		$	(0.03	)
		Diluted		$	(0.02	)	$	(0.10	)	$	0.17		$	(0.03	)

 

 

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The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for grants; risk-free interest rate at the date of grant which ranged from 3.3% to 6.7%; expected dividend yield of 0.0%; expected lives of 3 to 4 years; and expected volatility which ranged from 39.75% to 75.00%.

Comprehensive Income (Loss) Information

Comprehensive income (loss) consists of the following:

		THREE MONTHS ENDED SEPTEMBER 30, ,						NINE MONTHS ENDED SEPTEMBER 30
		2004			2003			2004			2003
Net income (loss)		$	(111	)	$	(701	)	$	1,359		$	(104	)
Unrealized gain on securities, net of tax		—			—			9			9
Foreign currency translation adjustment		210			(10		)	109			735
Total Comprehensive Income (Loss)		$	99		$	(711	)	$	1,477		$	640

 

Reclassifications

Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the September 30, 2004 presentation.  These reclassifications had no effect on our net income. 

NOTE  2.               BUSINESS COMBINATION

Pursuant to the Combination Agreement, the Company acquired 100% of the stock of GPI-SAS (formerly known as B&G) in exchange for (a) shares of GPIC (formerly known as Paul-Son) common stock which immediately after the closing equaled 53.45% of the outstanding shares of GPIC’s common stock and (b) warrants to provide anti-dilution protection to the extent that the stock options and other rights to acquire GPIC’s common stock outstanding at the closing are subsequently exercised. 

The Combination was accounted for as a reverse acquisition under United States of America generally accepted accounting principles, with GPI-SAS considered the acquiring entity, for accounting purposes, even though GPIC survives and is the legal parent of GPI-SAS.  The condensed consolidated financial statements for the three and nine months ended September 30, 2004 and 2003 include the results of GPIC and its post-Combination subsidiaries. 

 

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NOTE  3.       MARKETABLE SECURITIES

Marketable securities consist of investments in securities offered by French banks, primarily bond portfolios, that are designated by these banks as “risk free or minimum risk instruments” (dollars in thousands):

		September 30, 2004									December 31, 2003
		Cost			Gross Unrealized Gains			Fair Value			Cost			Gross Unrealized Gains			Fair Value
Available for sale		$	2,762		$	9		$	2,771		$	2,579		$	1		$	2,580

		Nine Months Ended September 30,
		2004			2003
Proceeds from sales		$	8,701		$	7,118
Gross realized gains		$	34		$	79

 

NOTE 4.        INVENTORIES

Inventories consist of the following (dollars in thousands):

		September 30, 2004			December 31, 2003
Raw materials		$	2,991		$		3,025
Work in process		1,437			1,144
Finished goods		1,078			1,213
Total		$	5,506		$	5,382

 

NOTE  5.       PROPERTY AND EQUIPMENT

Property and equipment consist of the following (dollars in thousands):

		September 30, 2004			December 31, 2003
Land		$	837		$	839
Buildings and improvements		5,291			4,499
Furniture and equipment		11,315			10,661
Vehicles		366			339
		17,809			16,338
Less accumulated depreciation		(8,809		)	(7,680		)
Property and equipment, net		$	9,000		$	8,658

Depreciation expense for the three months ended September 30, 2004 and 2003 was $394,000 and $564,000, respectively.  Depreciation expense for the nine months ended September 30, 2004 and 2003 was $1.2 million and $1.4 million, respectively.

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NOTE  6.       GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consist of the following (dollars in thousands, except for the “Years in Estimated Useful Life”):

		September 30, 2004									December 31, 2003
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Estimated Useful Life (Years)
Goodwill(1)		$	1,435		$	(61	)	$	1,374		$	1,435		$	(61	)	$	1,374		Indefinite
Trademarks		620			(37		)	583			620			(37		)	583			Indefinite
Patents		1,007			(497		)	510			1,007			(400		)	607			8 to 14
Customer relationships		432			(218		)	214			432			(166		)	266			7
Non-compete agreements		730			(378		)	352			730			(289		)	441			5 to 6
Total		$	4,224		$	(1,191	)	$	3,033		$	4,224		$	(953	)	$	3,271

(1)          The amounts of goodwill related to GPI-SAS at September 30, 2004 and December 31, 2003 included above were:  $1,197 for the gross carrying amount; $(23) for accumulated amortization; and $1,174 for the net carrying amount, excluding the effects of foreign currency adjustments. 

Amortization expense for the three months ended September 30, 2004 and 2003 was $79,000 and $58,000, respectively.  Amortization expense for the nine months ended September 30, 2004 and 2003 was $260,000, and $246,000, respectively. 

Estimated Amortization Expense for Years Ending December 31,

(dollars in thousands)
2004 (remaining three months)		$	78
2005		288
2006		264
2007		261
2008		45
Thereafter		—
Total		$	936

NOTE 7.        COMMITMENTS AND CONTINGENCIES

We are engaged in disputes and claims arising in the normal course of business.  Management believes the ultimate outcome of these proceedings will not have a material adverse impact on the condensed consolidated financial position, results of operations or cash flows.

Legal Proceedings

Tesh Sewnarain and Ghanshamani Sewnarain, Plaintiffs v. Trump Plaza Hotel & Casino, Trump Plaza Associates, Trump Hotels & Casino Resorts, Inc., Gasser Chair Co., Inc., Infanti International, Inc., Infanti Chair Manufacturing Corp. and Paul-Son Dice & Card Company, Inc., Defendants, Supreme Court of the State of New York, County of New York, Index No. 107705-03. On or about January 15, 2004, Tesh Sewnarain and Ghanshamani Sewnarain filed a Complaint in the above-mentioned Court against Trump Plaza Hotel and Casino, its holding and parent companies, two chair manufacturers and Paul-Son Dice & Card Company, Inc., claiming that on February 23, 2002, plaintiff Tesh Sewnarain, fell from a slot stool upon which he was seated and suffered personal injury as a result.  Plaintiffs claim damages of $2.5 million based on alleged negligence, product liability, product defect and loss of consortium.  The

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Second Amended Complaint was filed by plaintiffs on or about September 1, 2004, and the Second Amended Complaint, Summons and Order to Show Cause returnable October 22, 2004 was served on GPIC on or about September 20, 2004.  The amount has been submitted to GPIC’s insurance carrier for defense.

Valora Smith, Plaintiff vs. Park Place Entertainment Corp, ABC Corporation, (1-100); Bally’s Park Place, Inc. Def Corporation, Bally’s Skyscraper Inc. d/b/a/ Claridge Casino Hotel, et al, j/s/a, Defendants and Bally’s Skyscraper, Inc. d/b/a/ Claridge Casino Hotel, Defendant/Third Party Plaintiff vs. Paul-Son Casino Supplies and Gasser Chair Company, and John Does 1-10 (fictitious names of chair designers, installers, inspectors, manufacturers), Third Party Defendants, Superior Court of New Jersey, Law Division, Camden County, Docket No. CAM-L-173-04. On January 8, 2004, Valora Smith filed a Civil Action Complaint in the above-mentioned Court against Claridge Casino Hotel, or Claridge, and its parent company for negligence seeking damages, interest, costs of suit and such other relief as is just and equitable.  Plaintiff Smith alleges having sustained personal injury on or about January 9, 2002, when she fell from a chair at a slot machine which did not have a back while it was in Claridge Casino Hotel. As a result, Plaintiff Smith claims that she is incurring and shall incur severe consequential and significant and/or permanent personal injuries, medical bills, various costs and expenses, emotional distress, other damages and/or pain and suffering.  On June 14, 2004, Claridge filed its Answer, Crossclaims, Jury Demand and Third-Party Complaint against Paul-Son Casino Supplies, Gasser Chair Company, and fictitious named defendant chair designers, installers, inspectors and manufacturers seeking contribution and indemnification.  The summons and Third-Party Complaint were served upon us on July 20, 2004.  The matter has been submitted to our insurance carrier for defense.   

Paul-Son Gaming Corporation, Plaintiff, vs. Skipco, Inc., Toshiba Business Solutions, US Bancorp, and ROE corporations 1 through 10, inclusive, Defendants.  Skipco, Inc., Toshiba Business Solutions, Third-Party Plaintiffs, v. Gerry Tieri, Third-Party Defendant, Case No. A453852 filed in the District Court for Clark County, Nevada.  Between 1998 and 2000, we entered into a series of lease agreements with Skipco, Inc., or Skipco, pursuant to which we leased certain office equipment, including copiers and facsimile machines.  Skipco subsequently assigned the lease agreements to US Bancorp.  We believe that Skipco, by and through a former employee, fraudulently engaged in a business practice whereby, without authorization, it increased the base usage charges per copy and monthly guaranteed minimum copies.  On July 26, 2002, we filed a Complaint against Skipco, Toshiba Business Solutions, or Toshiba, the successor to Skipco, and US Bancorp, asserting claims for Fraud, Misrepresentation, Reformation of Agreement, Rescission of Agreement, Declaratory Relief and Breach of the Implied Covenant of Good Faith and Fair Dealing.  We seek to recover, among other things, compensatory damages, punitive damages, attorney’s fees, cost of suit, and a declaratory judgment rescinding or reforming the lease agreements.  Skipco and Toshiba answered the Complaint and filed a Third-Party Complaint against its former employee.  Lyon Financial Services, Inc., or Lyon, has filed a Complaint in Intervention, claiming that US Bancorp is only a fictitious name of Lyon and that Lyon financed the lease agreements that gave rise to this action.  Lyon has asserted claims against us for breach of the lease agreements and unjust enrichment.  We have agreed in principle to settle the claims involving all parties and a formal agreement has been prepared pending execution by the parties.  The resolution with Lyon is to include a restructuring of the lease agreements at reduced rental payments in the aggregate amount of approximately $5,550 per month for 36 months.  Skipco and Toshiba have agreed to pay us a sum in the aggregate amount of $10,000. Upon execution of the settlement agreement, the action in its entirety will be dismissed.

John Fucile, Plaintiff vs. The Bud Jones Company, Paul-Son Gaming Supplies, Inc., Bourgogne et Grasset and Laurent Gaubout.  This case was brought in the Puerto Rico courts by John Fucile and his company.  Fucile claims, in essence, that in 1994 he was appointed as exclusive sales representative of

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Bud Jones for Puerto Rico and the Caribbean for the sale of products used in the casino industry; that he and, subsequently his company, acted as such until December 31, 2002, when co-defendant Paul-Son Gaming Supplies terminated the commercial relationship, in alleged violation of a Puerto Rico statute which protects exclusive sales representatives from termination without just cause, and provides a cause of action for damages to the terminated sales representative.  The complaint is seeking monetary damages totaling $775,000, for alleged economic damages, damages to the business and commercial reputation of the plaintiffs, alleged mental anguish and unpaid commissions.  The San Juan law firm of O’Neill & Borges has assumed the representation of the defendants and is in the process of evaluating the claims and the relevant documents and information, some of which is still in the process of being gathered.  An answer to the complaint has been filed and the parties have engaged in the discovery process with initial exchanges of interrogatories.  A settlement conference was conducted on February 26, 2004. 

Commitments

On March 3, 2004, we entered into an agreement with CIAS, Inc. by which we may manufacture and distribute gaming chips carrying information, with the exception of binary bar coded chips, and appropriate readers for gaming chip tracking, and with the exception of player’s tracking, without the potential for any claims by CIAS for infringement of any of its related patents against us or third party users of the subject products.  The duration of the agreement is for the life of the patents, the last of which expire in 2011. 

On October 25, 2001, GPI-SAS entered into an exclusive patent license agreement with Enpat, Inc. which grants GPI-SAS the exclusive rights to manufacture and distribute a gaming chip tracking system and method, in the USA, which utilizes gaming chips with embedded electronic circuits scanned by antennas in gaming chip placement areas (gaming tables and casino cage).  The duration of the exclusive agreement is for the life of the patents, the last of which expire in 2015. 

In January 2004, GPI-SAS entered into a 350,000 Euro (approximately $431,000US at the September 30, 2004 exchange rate) loan transaction, with Banque Nationale de Paris (B.N.P), a French bank, for the purposes of building expansion in France.  The general terms of this loan are as follows: 

•      Interest Rate.  3.6% fixed per annum. 

•      Maturity Date.  The maturity date is January 2010.

•      Security.  The loan is secured by a mortgage on the building premises.

•      Monthly Payment.  4,720 Euros; no balloon payment.

NOTE  8.       EARNINGS PER SHARE

Per share data is based on the number of our common shares as if the GPIC-SAS shares had been converted to the GPIC shares as of the earliest period presented. 

We have outstanding certain stock options to purchase shares of our common stock, which have an exercise price greater than the average market price. Antidilutive options of 203,500 and 217,500 shares as of September 30, 2004 and 2003, respectively, have been excluded from the computation of diluted net loss per share for the respective quarterly periods. 

The following table provides a reconciliation of basic and diluted income (loss) per share as required by SFAS No. 128, “Earnings Per Share” (dollars in thousands, except per share amounts):  

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		Basic				Dilutive Stock Options		Diluted
For the three month period ended September 30, 2004
Net loss		$		(111	)			$	(111	)
Weighted average shares (in thousands)		7,595						7,595
Per share amount		$		(0.01	)			$	(0.01	)
For the three month period ended September 30, 2003
Net loss		$		(701	)			$	(701	)
Weighted average shares (in thousands)		7,595						7,595
Per share amount		$		(0.09	)			$	(0.09	)
For the nine month period ended September 30, 2004
Net income		$	1,359					$	1,359
Weighted average shares (in thousands)		7,595				55		7,650
Per share amount		$	0.18					$	0.18
For the nine month period ended September 30, 2003
Net loss		$	(104		)			$	(104	)
Weighted average shares (in thousands)		7,595						7,595
Per share amount		$	(0.01		)			$	(0.01	)

 

NOTE 9.        RELATED PARTY TRANSACTIONS

We lease our main 34,000 square foot manufacturing facility located in San Luis, Rio Colorado, Mexico from an entity controlled by the family of Frank Moreno, General Manager of Paul-Son Mexicana.  The current lease was extended in April 2004 for an additional five years at the same monthly rent amount of approximately $0.35 per square foot, or $12,000.  If we elect, at our discretion, to use less square footage, our rent will be decreased proportionately. 

Ron-Lyn Enterprises, a company co-owned by Ron Coiro, East Coast Sales Manager of GPI-USA, provides miscellaneous table game plastic accessories to GPI-USA, including dealing shoes, money paddles and discard holders.  For the three months ended September 30, 2004 and 2003, GPI-USA paid Mr. Coiro, through his subsidiary Ron-Lyn Enterprises, approximately $34,000 and $22,100, respectively.  For the nine months ended September 30, 2004 and 2003, the Company paid Mr. Coiro, through his subsidiary Ron-Lyn Enterprises, approximately $64,000 and $89,300, respectively.  As of December 1, 2004, the Company will no longer purchase its products from Ron-Lyn Enterprises. 

Neither Mr. Coiro nor Mr. Moreno is a director or an executive officer.  We require that the Audit Committee of our board of directors review the related party transactions involving our directors and executive officers. 

NOTE 10.      BUSINESS SEGMENTS

SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” requires public business enterprises to report selected reporting information about operating segments in interim and annual financial statements. We manufacture and sell casino table game equipment and have determined that we operate in one operating segment—casino game equipment products. The segment is

 

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comprised of the following product lines:  casino chips, table layouts, playing cards, gaming furniture, dice, table accessories and other products.  Although we derive our revenues from a number of different product lines, we do not allocate resources based on the operating results from the individual product lines nor do we manage each individual product line as a separate business unit.

The following tables present certain data by geographic area as of and for the periods ended (dollars in thousands, except for percentages): 

		Three Months Ended September 30,
		2004					2003
Net sales to external customers:
USA		$	5,482		59.2	%	$	5,491		77.0	%
Europe and Russia		1,509			16.3	%	964			13.5	%
Asia		1,874			20.3	%	61			0.9	%
Other(1)		385			4.2	%	612			8.6	%
Total consolidated net sales to external customers		$	9,250		100.0	%	$	7,128		100.0	%

 

 

		Nine Months Ended September 30,
		2004						2003
Net sales to external customers:
USA		$		17,610		56.0	%	$	17,887			70.8	%
Europe and Russia		3,549				11.3	%	3,380				13.4	%
Asia		8,185				26.1	%	2,810				11.1	%
Other(1)		2,076				6.6	%	1,182				4.7	%
Total consolidated net sales to external customers		$	31,420			100.0	%	$		25,259		100.0	%

________________________

(1)          Includes Canada, Africa, Australia, South America and other countries. 

		September 30,					December 31,
		2004					2003
Property and equipment, net:
United States		$	5,010		55.7	%	$	5,284		61.0	%
Europe		2,617			29.1	%	1,991			23.0	%
Mexico		1,373			15.2	%	1,383			16.0	%
Total		$	9,000		100.0	%	$	8,658		100.0	%

 

 

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ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RECENT DEVELOPMENTS

At our annual stockholders’ meeting on May 26, 2004, the stockholders voted to change our company name.  As a consequence, Paul-Son Gaming Corporation became Gaming Partners International Corporation as of September 1, 2004. The NASDAQ stock ticker symbol became GPIC. This change reflects the fundamental positioning of the Company within the industry, partnering with legal casinos worldwide, and continuing to provide gaming supplies for gaming table operations.  Paul-Son Gaming Supplies, Inc. became Gaming Partners International USA, Inc. and Establissements Bourgogne et Grasset SAS became Gaming Partners International SAS.  Our current product brand names will remain the same.

Management determined that it would be more efficient to combine our Kansas City, Kansas chip manufacturing operations with our Las Vegas, Nevada chip manufacturing operations. During the second quarter of 2004, we successfully relocated substantially all of our Kansas manufacturing equipment and a few employees to Las Vegas, Nevada.  The relocation was completed during the third quarter of 2004.  The Kansas operation formerly consisted of approximately seven employees with equipment used in the manufacturing process of certain gaming chips.

On March 3, 2004, we entered into an agreement with CIAS, Inc. by which we may manufacture and distribute gaming chips carrying information, with the exception of binary bar coded chips, and with the exception of player’s tracking, and appropriate readers for gaming chip tracking without the potential for any claims by CIAS for infringement of any of its related patents against us or third party users of the subject products. The duration of the agreement is for the life of the patents, the last of which expire in 2011.

In January 2004, B&G entered into a 350,000 Euro (approximately $431,000US at the September 30, 2004 exchange rate) loan transaction, with Banque Nationale de Paris (B.N.P), a French bank, for the purposes of building expansion in France.  The general terms of this loan are as follows:

•      Interest Rate.  3.6% fixed per annum.

•      Maturity Date.  The maturity date is January 2010.

•      Security.  The loan is secured by a mortgage on the building premises.

•      Monthly Payment.  4,720 Euros; no balloon payment.

We are currently exploring opportunities to sell non-casino chips through wholesale distributors.

OVERVIEW

Gaming Partners International Corporation, a Nevada corporation and each of its subsidiaries are collectively referred to herein as the “Company,” “GPIC,” or “we” or “us” or “our.”  The following discussion is intended to assist in the understanding of our results of operations and our present financial condition.  The condensed consolidated financial statements and the accompanying notes contain additional detailed information that should be referred to when reviewing this material.  Statements in this discussion may be forward-looking.  Such forward-looking statements involve risks and uncertainties that could cause actual results to differ significantly from those expressed.  See “Statement on Forward-Looking Information.”

A Combination Agreement was executed on September 12, 2002, combining GPIC (formerly known as Paul-Son Gaming Corporation) with GPI-SAS (formerly known as Etablissements Bourgogne

 

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et Grasset S.A.).  At the closing, the businesses of GPIC, GPIC-SAS and GPI-SAS’s then wholly-owned subsidiary, The Bud Jones Company, Inc., or Bud Jones, were combined, with GPI-SAS and Bud Jones becoming wholly-owned subsidiaries of GPIC, or the Combination. The Combination was accounted for as a purchase transaction for financial accounting purposes.  Because the former GPI-SAS stockholders owned a majority of the outstanding GPIC common stock as a result of the Combination, the Combination was accounted for as a reverse acquisition in which GPI-SAS is the purchaser of GPIC.  On December 31, 2002, Bud Jones merged into GPI-USA, which was a wholly-owned subsidiary of GPIC, and GPI-USA was the surviving entity. Bud Jones was a gaming supply manufacturing company, which was also headquartered in Las Vegas. Both former operations (GPI-USA and Bud Jones) have been consolidated into one facility at the Company’s headquarters in Las Vegas, Nevada with the new name of GPI-USA. (See Notes to Condensed Consolidated Financial Statements-Notes 1 and 2).

Our business activities include the manufacture and/or supply of gaming equipment and supplies such as casino chips, table layouts, playing cards, dice, gaming furniture, table accessories and other products that are used with casino table games such as blackjack, poker, baccarat, craps and roulette.  We generally sell our casino products to licensed casinos for new openings and to existing casino operations, worldwide. We are headquartered in Las Vegas, Nevada, with offices in Beaune, France; San Luis, Mexico; Atlantic City, New Jersey and other locations.

The GPIC products on display at the 2004 Global Gaming Expo included its gaming chips with embedded RFID technology and readers. The company has been working for several years to apply the RFID technologies to the gaming chips. The company can offer RFID microchips with all of its brands and types of gaming chips. GPIC holds several patents concerning the embedding process of the RFID and an exclusive license for the use of these RFID chips in the USA. The company also sells several types of readers that can be used by the casinos at the cages, vaults, tables, or by the pit bosses. RFID chips and readers help to protect the casinos from buying at face value, counterfeited or stolen chips and to improve the efficiency of table game management.

The following are the most important factors and trends that contribute to our operating performance:

 

 

•                  The receipt of higher volume orders enhances our profit margins through production efficiencies. The timing and occurrence of these orders remain uncertain. Therefore, we may experience quarters that are more profitable than others due to the timing and volume of product demand.

 

•                  A number of states in the United States and foreign countries are currently considering legislation to legalize or expand gaming. Such legislation presents potential opportunities to sell our gaming supplies to new properties and thus increase revenue. The timing and occurrence of these events remain uncertain. Therefore, we may experience quarters that are more profitable than others due to the timing and nature of new casino openings and expansions throughout the world.

 

•                  The acceptance or lack of acceptance of our product innovations regarding security features and the efficiency of table management information systems by the casino industry.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America.  Certain of our accounting policies, including the depreciable lives of our assets, the recoverability of deferred tax assets, the allowance for doubtful accounts receivable, the allowance for obsolete or slow moving inventories and the estimated cash flows in assessing the recoverability of long-lived assets require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates.  By their nature, these judgments are subject to an inherent degree of uncertainty.  Our judgments are based on our historical experience, terms of existing contracts, our observance of industry trends, information provided by or gathered from our customers and information available from other outside sources, as appropriate.  There

 

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can be no assurance that actual results will not differ from our estimates.  To provide an understanding of the methodologies we apply, our significant accounting policies are discussed where appropriate in this discussion and analysis and in the notes to the condensed consolidated financial statements.  See the Company’s Form 10-K as of December 31, 2003 for more detail regarding our specific accounting policies.

 

 

RESULTS OF OPERATIONS

Comparison of Operations for the Three Months Ended September 30, 2004 and 2003

 

		THREE MONTHS ENDED SEPTEMBER 30, (unaudited)
		2004		2003
Revenues		100.0	%	100.0	%
Cost of revenues		66.2	%	69.4	%
Gross profit		33.8	%	30.6	%
Product development		0.3	%	0.3	%
Marketing and sales		10.6	%	12.7	%
Depreciation and amortization		5.4	%	9.3	%
General and administrative		21.3	%	24.1	%
Total operating expenses		37.6	%	46.4	%
Loss from operations		(3.8	)%	(15.8	)%
Other income, net		—		1.2	%
Interest expense		(0.6	)%	(1.0	)%
Loss before income taxes		(4.4	)%	(15.6	)%
Income tax benefit		3.2	%	5.7	%
Net loss		(1.2	)%	(9.9	)%

 

Revenues.  For the three months ended September 30, 2004, revenues were approximately $9.2 million; an increase of approximately $2.1 million, compared to revenues of approximately $7.1 million for the three months ended September 30, 2003.  The increase in revenues for the three months ended September 30, 2004 was principally due to the timing and volume of customer demand for our casino products and the timing of new casino openings and expansions.  GPI-SAS recorded revenue of $3.4 million for the third quarter of 2004, primarily as a result of sales to casinos in Asia with development of casinos in Macau and Myanmar, compared to $1.5 million for the same quarter of 2003.  Sales by GPI-USA amounted to $5.8 million in the third quarter of 2004 compared to revenues of $5.6 million for the same period in 2003.

Cost of Revenues.  The decrease in the cost of revenues as a percentage of sales occurred principally due to the better absorption of fixed costs due to higher volume of sales and the product mix at GPI-SAS, which had a higher percentage of the European Chip production in the three months ended September 30, 2004 compared to 2003. GPI-USA is still implementing some of its post-combination strategies to improve its revenues and efficiencies. We expect those strategies to be substantially implemented by the end of 2005. A decrease in the estimated inventory obsolescence provision

 

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from $69,000 in the third quarter of 2003 to $56,000 in the third quarter of 2004, due primarily to a decline in our estimated obsolete inventory, also contributed to the improvements.

Gross Profit.  Gross profit for the three months ended September 30, 2004 increased in absolute dollars by approximately $943,000 from the prior year three-month period.  This occurred as a result of the aforementioned decreased cost of revenues and the increase in revenues of $2.1 million.

 

 

		THREE MONTHS ENDED SEPTEMBER 30,
		(dollars in thousands)
		(unaudited)
		2004				Revenue %		2003				Revenue %
Product development		$		25		0.3	%	$	24			0.3	%
Marketing and sales		978				10.6	%	904				12.7	%
Depreciation and amortization		496				5.4	%	660				9.3	%
General and administrative		1,974				21.3	%	1,717				24.1	%
Total operating expenses		$	3,473			37.6	%	$		3,305		46.4	%

 

Operating Expenses.  Operating expenses, which include product development; marketing and sales; depreciation and amortization; and general and administrative costs, increased approximately $168,000 from approximately $3.3 million during the three-months ended September 30, 2003 to approximately $3.5 million during the three months ended September 30, 2004.  The increase in product development and marketing and sales expenses of approximately $75,000 related primarily to approximately $93,000 for costs associated with a major U.S. trade show, offset by a decrease of approximately $18,000 in other sales and marketing expenses. General and administrative expenses increased approximately $257,000 compared to the same period in 2003. As a result of the relocation of the Kansas chip manufacturing operations to Las Vegas, $126,000 of expenses were incurred in the third quarter of 2004, and an additional $48,000 in expenses related to the name change from Paul-Son Gaming Corporation to Gaming Partners International Corporation, including catalogs and related marketing publications, costs that were minimal prior to the name change expenses. The remaining increase of approximately $83,000 was related to the payment of Enpat royalties and CIAS fees.

Other Income (Expense), (excluding Interest Expense).  During the three months ended September 30, 2004, other income (expense), including gains (losses) on foreign currency transactions, interest income, gains on sales of marketable securities and other income (expense) decreased to approximately $3,000 in income from approximately $88,000 in income during the three months ended September 30, 2003.  This decrease of approximately $85,000 in income was principally the result of a decrease in the gain related to foreign currency exchange of approximately $91,000.  This variation in foreign currency exchange occurred as a result of the valuation of the Euro compared to the US Dollar.

Interest Expense.  For the three months ended September 30, 2004, interest expense decreased to approximately $60,000 from approximately $71,000 for the three months ended September 30, 2003.  The average level of the outstanding debt amounts in the 2004 three-month period as compared to the 2003 three-month period remained relatively constant.

 

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Income Taxes.  During the three months ended September 30, 2004, we recorded a tax benefit of approximately $297,000 as compared to a tax benefit of approximately $408,000 for the three months ended September 30, 2003.  The tax benefit for the 2004 three-month period is primarily a result of the net loss before taxes recorded of $408,000 for the third quarter of 2004, and a reduction to taxes payable resulting from filing the company’s tax return during the third quarter.

Net Income.  For the three months ended September 30, 2004, we recorded a net loss of approximately $111,000 compared to $701,000 for the same period in 2003. The decrease in the net loss of approximately $590,000 occurred principally as a result of the aforementioned factors, many of which were caused by the timing of sales and production of our casino products.

 

Comparison of Operations for the Nine Months Ended September 30, 2004 and 2003

 

		NINE MONTHS ENDED SEPTEMBER 30, (unaudited)
		2004		2003
Revenues		100.0	%	100.0	%
Cost of revenues		60.4	%	64.3	%
Gross profit		39.6	%	35.7	%
Product development		0.3	%	0.4	%
Marketing and sales		9.2	%	9.1	%
Depreciation and amortization		4.7	%	6.7	%
General and administrative		18.2	%	21.2	%
Total operating expenses		32.4	%	37.4	%
Income (loss) from operations		7.2	%	(1.7	)%
Other income, net		0.1	%	0.3	%
Interest expense		(0.6	)%	(0.8	)%
Income (loss) before income taxes		6.7	%	(2.2	)%
Income tax benefit (expense)		(2.4	)%	1.8	%
Net income (loss)		4.3	%	(0.4	)%

 

              Revenues.  For the nine months ended September 30, 2004, revenues were approximately $31.4 million, an increase of approximately $6.2 million, versus revenues of approximately $25.2 million for the nine months ended September 30, 2003.  The increase in revenues for the nine months ended September 30, 2004 was principally the result of GPI-SAS’s sales to casinos in Asia and to one in Canada of approximately $7.3 million and $700,000, respectively, in the second and third quarter of 2004 and the US operations’ sale to a casino in Canada for approximately $1.0 million, also in the second quarter of 2004.  These second and third quarter increases in revenue, were partially offset by decreased revenues in the first quarter of 2004 due to the timing and demand variability for casino openings and expansion.  For the nine months ended September 30, 2003, revenues included approximately $1.2 million in sales for a large U.S. casino opening in the second quarter of 2003, and a sale to an Asian casino for approximately $1.9 million during the second quarter of 2003.

 

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Cost of Revenues.  The decrease in cost of revenues as a percentage of sales occurred principally due to the better absorption of fixed costs due to the higher sales volume, and the product mix at GPI-SAS, which had a higher percentage of the European Chip production in the nine months ended 2004 compared to the same period in 2003.

Gross Profit.  Gross profit for the nine months ended September 30, 2004 increased in absolute dollars by approximately $3.4 million from the comparable prior year nine-month period.  This occurred as a result of the aforementioned increase in revenues of approximately $6.2 million and the decrease in cost of revenues as a percentage of sales.

 

 

		NINE MONTHS ENDED SEPTEMBER 30,
		(dollars in thousands)
		(unaudited)
		2004				Revenue %		2003			Revenue %
Product development		$		97		0.3	%	$	93		0.4	%
Marketing and sales		2,893				9.2	%	2,306			9.1	%
Depreciation and amortization		1,476				4.7	%	1,690			6.7	%
General and administrative		5,712				18.2	%	5,369			21.2	%
Total operating expenses		$	10,178			32.4	%	$	9,458		37.4	%

 

Operating Expenses.  Operating expenses, which include product development; marketing and sales; depreciation and amortization; and general and administrative costs, increased approximately $720,000 to approximately $10.2 million during the nine months ended September 30, 2004 from approximately $9.5 million during the nine months ended September 30, 2003.  This increase was primarily attributable to an increase in product development and marketing and sales expense of approximately $591,000 due to costs associated with two major trade shows, Enpat royalties, CIAS fees, commissions and bonuses.  As a result of the relocation of the Kansas chip manufacturing operations to Las Vegas, $257,000 in expenses were incurred in the second and third quarters of 2004.  Our general and administrative expenses include professional fees of approximately $114,000, of which $45,000 is associated with public reporting for the nine months ended September 30, 2004.

Other Income (Expense), (excluding Interest Expense).  During the nine months ended September 30, 2004, other income (expense), including gains (losses) on foreign currency transactions, interest income, gains on sales of marketable securities, and other income (expense) decreased to approximately $30,000 in income from approximately $90,000 in income during the nine months ended September 30, 2003.  This decrease of approximately $60,000 was principally the result of a decrease in other income from $171,000 in income in the 2003 period compared to $19,000 in income for the same period ended September 30, 2004, partially offset by currency exchange losses of $160,000 in the 2003 period as compared to currency exchange net losses of approximately $23,000 in the 2004 period.  Gain on sale of marketable securities were $34,000 in the first three quarters of 2004, compared to $79,000 in the first three quarters of 2003, primarily as a result of the sale of $1.0 million of marketable equity securities held by GPI-SAS in the first quarter of 2003.  The variation in foreign currency transactions occurred as a result of an increase in the Euro and the sales activity in foreign currencies between the quarterly periods.  Additionally, management changed its intent for the intercompany loans, which loans now are not expected to be repaid in the foreseeable future.  Therefore, beginning with the second quarter of 2003, the foreign currency exchange loss related to such loans does not impact the statement of operations.

 

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