GAMING PARTNERS INTERNATIONAL CORPORATION

(unaudited)

(in thousands, except share amounts)

		June 30,				December 31,
		2010				2009
ASSETS
Current Assets:
Cash and cash equivalents		$	4,510			$	3,238
Marketable securities			14,038				15,600
Accounts receivable, less allowance for doubtful accounts of $169 and $220, respectively			9,588				7,035
Inventories			5,769				7,173
Prepaid expenses			479				506
Deferred income tax asset			558				707
Other current assets			704				1,241
Total current assets			35,646				35,500
Property and equipment, net			11,847				13,454
Intangibles, net			638				676
Deferred income tax asset			1,147				1,657
Inventories, non-current			1,096				1,686
Other assets, net			346				305
Total assets		$	50,720			$	53,278
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt		$	14			$	546
Accounts payable			2,932				2,828
Accrued liabilities			3,914				3,516
Customer deposits			2,995				4,698
Income taxes payable			372				569
Other current liabilities			788				649
Total current liabilities			11,015				12,806
Long-term debt, less current maturities			40				314
Deferred income tax liability			447				623
Other liabilities			38				45
Total liabilities			11,540				13,788
Commitments and contingencies - see Note 6
Stockholders' Equity:
Preferred stock, authorized 10,000,000 shares, $.01 par value, none issued or outstanding			-				-
Common stock, authorized 30,000,000 shares, $.01 par value, 8,199,016 and 8,199,016 respectively, issued and outstanding			82				82
Additional paid-in capital			19,093				18,985
Treasury stock, at cost; 8,061 shares			(196	)			(196	)
Retained earnings			20,049				17,346
Accumulated other comprehensive income			152				3,273
Total stockholders' equity			39,180				39,490
Total liabilities and stockholders' equity		$	50,720			$	53,278

See notes to unaudited condensed consolidated financial statements.

 

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GAMING PARTNERS INTERNATIONAL CORPORATION

OTHER COMPREHENSIVE INCOME

(unaudited)

(in thousands, except share amounts)

																										Accumulated
						Common Stock								Additional												Other
		Comprehensive												Paid-In				Treasury				Retained				Comprehensive
		Income (Loss)				Shares				Amount				Capital				Stock				Earnings				Income				Total
Balance, January 1, 2009							8,103,401			$	81			$	19,033			$	(196	)		$	17,312			$	2,586			$	38,816
Net loss		$	(328	)			-				-				-				-				(328	)			-				(328	)
Unrealized gain on securities, net of tax			7				-				-				-				-				-				7				7
Stock compensation expense			-				-				-				84				-				-				-				84
Amortization of pension transition asset, net of tax			(6	)			-				-				-				-				-				(6	)			(6	)
Foreign currency translation adjustment			295				-				-				-				-				-				295				295
Total comprehensive loss		$	(32	)
Balance, June 30, 2009							8,103,401			$	81			$	19,117			$	(196	)		$	16,984			$	2,882			$	38,868
Balance, January 1, 2010							8,199,016			$	82			$	18,985			$	(196	)		$	17,346			$	3,273			$	39,490
Net income		$	2,703				-				-				-				-				2,703				-				2,703
Unrealized gain on securities, net of tax			1				-				-				-				-				-				1				1
Stock compensation expense			-				-				-				108				-				-				-				108
Amortization of pension transition asset, net of tax			(5	)			-				-				-				-				-				(5	)			(5	)
Foreign currency translation adjustment			(3,117	)			-				-				-				-				-				(3,117	)			(3,117	)
Total comprehensive loss		$	(418	)
Balance, June 30, 2010							8,199,016			$	82			$	19,093			$	(196	)		$	20,049			$	152			$	39,180

See notes to unaudited condensed consolidated financial statements.

 

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GAMING PARTNERS INTERNATIONAL CORPORATION

(unaudited)

(in thousands)

		Six Months Ended
		June 30,
		2010				2009
Cash Flows from Operating Activities
Net income (loss)		$	2,703			$	(328	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation			963				1,053
Amortization			31				10
Provision for bad debt			36				61
Deferred income taxes			554				(47	)
Stock compensation expense			108				84
(Gain) loss on sale of property and equipment			30				(13	)
Gain on sale of marketable securities			(32	)			(20	)
Impairment of intangibles			8				-
Change in operating assets and liabilities:
Accounts receivable			(3,068	)			1,004
Inventories			1,375				(929	)
Prepaid expenses and other current assets			468				(810	)
Non-current other assets			(70	)			(47	)
Accounts payable			245				(688	)
Customer deposits			(1,190	)			5,912
Accrued liabilities			720				(171	)
Income taxes payable			(143	)			(159	)
Other current liabilities			228				102
Net cash provided by operating activities			2,966				5,014
Cash Flows from Investing Activities
Purchases of marketable securities			(8,153	)			(16,635	)
Proceeds from sale of marketable securities			7,571				13,552
Capital expenditures			(249	)			(170	)
Proceeds from sale of property and equipment			3				27
Net cash used in investing activities			(828	)			(3,226	)
Cash Flows from Financing Activities
Repayment of long-term debt obligations			(744	)			(248	)
Net cash used in financing activities			(744	)			(248	)
Effect of exchange rate changes on cash			(122	)			13
Net increase in cash and cash equivalents			1,272				1,553
Cash and cash equivalents, beginning of period			3,238				5,547
Cash and cash equivalents, end of period		$	4,510			$	7,100
Supplemental disclosures of cash flow information:
Cash paid for interest		$	11			$	61
Cash paid for income taxes, net of refunds		$	1,149			$	426
Supplemental disclosures of non-cash investing and financing activities
Property and equipment acquired through accounts payable		$	68			$	-

See notes to unaudited condensed consolidated financial statements.

 

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GAMING PARTNERS INTERNATIONAL CORPORATION

(unaudited)

Note 1.  Nature of Business and Significant Accounting Policies

 

Organization and Nature of Business

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 Item 1A, Risk Factors of the Company’s Form 10-K for the period ended December 31, 2009.

For a Company Overview and information on our products as well as general information, see Part I—Item 1. Business of the Company’s Form 10-K for the period ended December 31, 2009.

Overview of our Business

GPIC manufactures and supplies casino chips, under the brand names of Paulson®, Bourgogne et Grasset®, and Bud Jones®, (including low and high frequency RFID casino chips), low and high frequency RFID readers, table layouts, playing cards, dice, gaming furniture, roulette wheels, table accessories, and other products that are used with casino table games such as blackjack, poker, baccarat, craps and roulette. GPIC is headquartered in Las Vegas, Nevada, with offices in Beaune, France; San Luis Rio Colorado, Mexico; Atlantic City, New Jersey; and Gulfport, Mississippi. GPIC sells its products to licensed casinos worldwide.  We operate in one segment and have two operating subsidiaries: GPI USA and GPI SAS, a French subsidiary.  Our subsidiaries have the following distribution and product focus:

·

GPI USA sells in the Americas out of regional offices in the United States. GPI USA sells our full product line with most of the products manufactured in Mexico with the remainder either manufactured in the United States or France.

·

GPI SAS sells internationally out of Beaune, France, with most sales occurring in Europe and Asia. GPI SAS predominately sells casino chips, including both American-style casino chips and European-style casino chips, which are also known as plaques and jetons. Most of the products sold by GPI SAS are manufactured in France, with the remainder manufactured in Mexico.

Historically, we have experienced significant fluctuations in our quarterly operating results and expect such fluctuations to continue. Our operating results fluctuate due to a number of factors, but primarily reflect the opening of new casinos, the expansion of existing casinos, and large replacement orders for casino chips - our primary product line, which typically represents over 60% of the Company’s revenues. The nature of these events is difficult to forecast and largely beyond our ability to influence, which creates variability in revenue and earnings.  While most large projects are pursued years in advance, both large and small sales opportunities arise with little prior notice.  An indicator of future sales is found in our backlog report, which reflects signed orders that we expect to ship in the remainder of 2010.

 

Backlog
	GPI USA			GPI SAS			Total
June 30, 2010	$  4.7  million			$  5.6  million			$ 10.3  million
June 30, 2009	$  3.2  million			$  7.0  million			$ 10.2  million

Overview of our Industry

In the United States, the general slow down in the gaming industry has negatively affected our casino customers and therefore our sales. Casinos have been working to reduce their operating costs and capital expenditures. We have seen a slowing down of the typical replacement cycle for consumable products, such as our cards, layouts and dice, as well as a reduction in casino openings, expansions, and replacement orders, on which our casino chip and furniture sales are largely dependent.  To the extent these economic conditions continue, we anticipate that our revenues in future quarters could be adversely affected.

Apart from the above general industry trends, the states of  Pennsylvania and Delaware recently legalized table games and licensed GPI USA as an equipment vendor. In the second quarter, we shipped products from each of our product lines to all of the Pennsylvania casinos that were opened in early July 2010.  We expect some modest sales to these casinos during the second half of 2010, but most of our sales were shipped in the second quarter.  Additionally, we supplied products to three Delaware casinos and two West Virginia casinos that also commenced table game operations during the second quarter.

 

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Internationally, Macau continues to be the largest gaming market and has recently posted record gaming revenues. Other parts of Asia are also becoming significant gaming destinations. In Singapore, the Sentosa casino and the Marina Bay Sands casino opened in February and April 2010, respectively.

Financial and Operational Highlights

For the second quarter of 2010, our revenues were $19.9 million, an increase of $8.6 million, or 76%, compared to revenues of $11.3 million for the same period of 2009.  Our net income for the second quarter of 2010 was $2.7 million, compared to a net income of $0.2 million for the same period in 2009.  The improvement in our operating results was primarily due to sales totaling $6.6 million in the second quarter to casinos in Pennsylvania, Delaware, and West Virginia, as well as sales totaling $5.0 million to the Marina Bay Sands Casino in Singapore.

The Company completed most of its expected shipments to Pennsylvania casinos in the second quarter of 2010, with sales for openings completed in Delaware and West Virginia as well.

Other Matters

GPI SAS uses the euro as its functional currency.  As of June 30, 2010 and December 31, 2009 the US dollar to euro exchange rates were $1.2271 to one euro and $1.4406 to one euro, respectively, which represents a 14.8% stronger dollar compared to the euro. The average exchange rates for the six months ended June 30, 2010 and June 30, 2009 were 1.3301 and 1.3322, which represents a 0.2% stronger dollar compared to the euro.

This significant strengthening of the dollar compared to the euro during the first half of 2010 resulted in a large reduction in foreign currency translation in other comprehensive income in the balance sheet to $152,000 at June 30, 2010 from $3,273,000 at December 31, 2009.

GPI Mexicana uses the US Dollar as its functional currency. The average exchange rates for the quarters ended June 30, 2010 and 2009 were 12.55 pesos to the US dollar and 13.36 pesos to the US dollar, respectively, which represents a 6.1% weaker dollar compared to the Mexican peso. The weaker dollar compared with the Mexican peso had an unfavorable impact of $0.1 million for the first quarter as our manufacturing costs were increased.

CRITICAL ACCOUNTING ESTIMATES

Financial statement preparation requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and disclosure of contingent assets and liabilities. The accompanying condensed consolidated financial statements are prepared using the same critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

RESULTS OF OPERATIONS

The following tables summarize selected items from the Company’s Consolidated Statements of Operations as a percentage of revenues:

		Three Months Ended
		June 30,
		2010								2009								Period to Period Change
Revenues		$	19,906				100.0	%		$	11,312				100.0	%		$	8,594				76.0	%
Cost of revenues			11,321				56.9	%			8,191				72.4	%			3,130				38.2	%
Gross profit			8,585				43.1	%			3,121				27.6	%			5,464				175.1	%
Selling, general and administrative			4,032				20.3	%			3,049				26.9	%			983				32.2	%
Operating income			4,553				22.8	%			72				0.7	%			4,481				6,223.6	%
Other income and (expense)			92				0.5	%			(21	)			(0.2	)%			113				—
Income before income taxes			4,645				23.3	%			51				0.5	%			4,594				9,007.8	%
Income tax expense (benefit)			1,979				9.9	%			(119	)			(1.1	)%			2,098				—
Net income		$	2,666				13.4	%		$	170				1.6	%		$	2,496				1,468.2	%

 

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		Six Months Ended
		June 30,
		2010								2009								Period to Period Change
Revenues		$	30,851				100.0	%		$	20,256				100.0	%		$	10,595				52.3	%
Cost of revenues			18,595				60.3	%			14,722				72.7	%			3,873				26.3	%
Gross profit			12,256				39.7	%			5,534				27.3	%			6,722				121.5	%
Selling, general and administrative			7,712				25.0	%			6,355				31.4	%			1,357				21.4	%
Operating income (loss)			4,544				14.7	%			(821	)			(4.1	)%			5,365				—
Other income and (expense)			155				0.5	%			110				0.5	%			45				40.9	%
Income (loss) before income taxes			4,699				15.2	%			(711	)			(3.6	)%			5,410				—
Income tax expense (benefit)			1,996				6.5	%			(383	)			(1.9	)%			2,379				—
Net income (loss)		$	2,703				8.7	%		$	(328	)			(1.7	)%		$	3,031				—

   

The following tables present certain data by geographic area (in thousands):

  

		Three Months Ended
		June 30,
		2010								2009								Year to Year Change
Revenues
United States		$	11,356				57.0	%		$	5,233				46.2	%		$	6,123				117.0	%
Asia (1)			6,743				33.9	%			4,266				37.7	%			2,477				58.1	%
Europe (includes Russia)			952				4.8	%			1,036				9.2	%			(84	)			(8.1	)%
Other (2)			855				4.3	%			777				6.9	%			78				10.0	%
Total		$	19,906				100.0	%		$	11,312				100.0	%		$	8,594				76.0	%

(1)   Primarily Macau and Singapore.

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

		Six Months Ended
		June 30,
		2010								2009								Year to Year Change
Revenues
United States		$	16,680				54.1	%		$	10,812				53.4	%		$	5,868				54.3	%
Asia (1)			10,777				34.9	%			5,752				28.4	%			5,025				87.4	%
Europe (includes Russia)			1,921				6.2	%			1,725				8.5	%			196				11.4	%
Other (2)			1,473				4.8	%			1,967				9.7	%			(494	)			(25.1	)%
Total		$	30,851				100.0	%		$	20,256				100.0	%		$	10,595				52.3	%

(1)   Primarily Macau and Singapore.

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

 

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The following tables detail the Company’s revenues by product line (in thousands):

		Three Months Ended
		June 30,
		2010								2009								Year to Year Change
Casino chips:
American-style casino chips		$	10,523				52.8	%		$	3,070				27.1	%		$	7,453				242.8	%
European-style casino chips			1,767				8.9	%			3,979				35.2	%			(2,212	)			(55.6	)%
Total casino chips			12,290				61.7	%			7,049				62.3	%			5,241				74.4	%
Gaming furniture			2,229				11.2	%			489				4.3	%			1,740				355.8	%
Table accessories and other products			1,612				8.1	%			628				5.6	%			984				156.7	%
Playing cards			1,266				6.4	%			1,147				10.1	%			119				10.4	%
Table layouts			1,213				6.1	%			1,084				9.6	%			129				11.9	%
Dice			550				2.8	%			510				4.5	%			40				7.8	%
Shipping			746				3.7	%			405				3.6	%			341				84.2	%
Total		$	19,906				100.0	%		$	11,312				100.0	%		$	8,594				76.0	%
		Six Months Ended
		June 30,
		2010								2009								Year to Year Change
Casino chips:
American-style casino chips		$	15,857				51.2	%		$	7,599				37.5	%		$	8,258				108.7	%
European-style casino chips			3,661				11.9	%			4,368				21.6	%			(707	)			(16.2	)%
Total casino chips			19,518				63.1	%			11,967				59.1	%			7,551				63.1	%
Gaming furniture			2,500				8.1	%			880				4.3	%			1,620				184.1	%
Playing cards			2,432				7.9	%			2,203				10.9	%			229				10.4	%
Table layouts			2,209				7.2	%			2,242				11.1	%			(33	)			(1.5	)%
Table accessories and other products			2,091				6.8	%			1,310				6.4	%			781				59.6	%
Dice			1,034				3.4	%			891				4.4	%			143				16.0	%
Shipping			1,067				3.5	%			763				3.8	%			304				39.8	%
Total		$	30,851				100.0	%		$	20,256				100.0	%		$	10,595				52.3	%

Revenues. For the three months ended June 30, 2010, revenues were $19.9 million, an increase of $8.6 million, or 76.0%, compared to revenues of $11.3 million during the same period in 2009. This increase was due primarily to significant sales in all product lines to casinos located in Pennsylvania, Delaware and West Virginia, which recently commenced table game operations, as well as increased sales of European-style and American-style chips to casinos in Singapore and Macau.

 

For the six months ended June 30, 2010, revenues were $30.9 million, an increase of $10.6 million, or 52.3%, compared to revenues of $20.3 million during the same period in 2009.  This increase was due primarily to significant sales in all product lines to casinos located in Pennsylvania, Delaware and West Virginia, which recently commenced table game operations, as well as increased sales of European-style and American-style chips to casinos in Singapore and Macau.

 

Cost of Revenues. For the three months ended June 30, 2010, cost of revenues was $11.3 million, an increase of $3.1 million, or 38.2%, compared to cost of revenues of $8.2 million for the three months ended June 30, 2009.  As a percentage of revenues, the cost of revenues decreased to 56.9% for the quarter in 2010 from 72.4% for the quarter in 2009.

For the six months ended June 30, 2010, cost of revenues was $18.6 million, an increase of $3.9 million, or 26.3%, compared to cost of revenues of $14.7 million for the six months ended June 30, 2009.  As a percentage of revenues, the cost of revenues decreased to 60.3% for the quarter in 2010 from 72.7% for the quarter in 2009.

 

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Gross Profit.  For the three months ended June 30, 2010, gross profit was $8.6 million, an increase of $5.5 million, or 175.1%, compared to gross profit of $3.1 million for the three months ended June 30, 2009. As a percentage of revenues, our gross margin increased to 43.1% from 27.6% in the comparable prior year quarter.  This gross margin percentage increase was primarily driven by a shift in sales mix towards higher margin product lines, such as casino chips.  Higher sales also resulted in fixed manufacturing costs being allocated over higher production volumes.  Additionally, we experienced production problems that increased our manufacturing costs, as a percent of sales, in the second quarter of 2009.

For the six months ended June 30, 2010, gross profit was $12.3 million, an increase of $6.8 million, or 121.5%, compared to gross profit of $5.5 million for the six months ended June 30, 2009. As a percentage of revenues, our gross margin increased from 27.3% to 39.7%.  This gross margin percentage increase was driven by the same factors as those for the second quarter, namely, a shift in sales mix towards higher margin product lines, fixed manufacturing costs being allocated over higher production volumes, and production problems that increased our manufacturing costs, as a percent of sales, in the second quarter of 2009.

Selling, General, and Administrative Expenses.   The following tables detail the selling, general, and administrative expenses (in thousands):

		Three Months Ended
		June 30,
		2010								2009								Period to Period Change
Marketing and sales		$	1,190				6.0	%		$	1,080				9.5	%		$	110				10.2	%
General and administrative			2,842				14.3	%			1,969				17.4	%			873				44.3	%
Total selling, general and administrative expenses		$	4,032				20.3	%		$	3,049				26.9	%		$	983				32.2	%

For the three months ended June 30, 2010, selling, general and administrative expenses were $4.0 million, an increase of $1.0 million, or 32.2%, compared to selling, general and administrative expenses of $3.0 million for the three months ended June 30, 2009. The increase in selling, general and administrative expenses was primarily due to an increase in compensation and bonuses of $0.6 million, including severance pay of $0.1 million, legal expenses of $0.2 million and an increase in bad debt expense of $0.1 million.  Selling, general and administrative expenses decreased as a percent of revenue to 20.3% in 2010 from 27.0% in 2009.

		Six Months Ended
		June 30,
		2010								2009								Period to Period Change
Marketing and sales		$	2,275				7.4	%		$	2,063				10.2	%		$	212				10.3	%
General and administrative			5,437				17.6	%			4,292				21.2	%			1,145				26.7	%
Total selling, general and administrative expenses		$	7,712				25.0	%		$	6,355				31.4	%		$	1,357				21.4	%

For the six months ended June 30, 2010, selling, general and administrative expenses were $7.7 million, an increase of $1.4 million, or 21.4%, compared to selling, general and administrative expenses of $6.3 million for the six months ended June 30, 2009.  The increase in selling, general and administrative expenses was primarily due to an increase in compensation and bonuses of $0.7 million, including severance pay of $0.1 million, legal expenses of $0.5 million and $0.1 million related to gaming licenses.  Selling, general and administrative expenses decreased as a percent of revenue to 25.0% in 2010 from 31.4% in 2009.

 Other Income and (Expense). The following table details the Other Income and (Expense) items (in thousands):

		Three Months Ended
		June 30,
		2010								2009								Period to Period Change
Interest income		$	73				0.4	%		$	72				0.6	%		$	1				1.4	%
Interest expense			(2	)			0.0	%			(34	)			(0.3	)%			32				94.1	%
Gain (loss) on foreign currency transactions			17				0.1	%			(68	)			(0.6	)%			85				—
Other income, net			4				0.0	%			9				0.1	%			(5	)			(55.6	)%
Total other income and (expense)		$	92				0.5	%		$	(21	)			(0.2	)%		$	113				—

 

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		Six Months Ended
		June 30,
		2010								2009								Period to Period Change
Interest income		$	128				0.4	%		$	121				0.6	%		$	7				5.8	%
Interest expense			(11	)			0.0	%			(62	)			(0.3	)%			51				82.3	%
Gain on foreign currency transactions			3				0.0	%			25				0.1	%			(22	)			(88.0	)%
Other income, net			35				0.1	%			26				0.1	%			9				34.6	%
Total other income and (expense)		$	155				0.5	%		$	110				0.5	%		$	45				40.9	%

Income Taxes. Our effective income tax rate for the three months ended June 30, 2010 was 42.6% compared to the effective income tax rate of (233.9)% for the three months ended June 30, 2009.  Our effective tax rate for the quarter ended June 30, 2010 was negatively affected by the decrease in the tax basis of certain intangible assets.  The Company monitors its deferred tax assets to assess whether they will be realizable.  Using a more likely than not threshold, during the three months ended June 30, 2010, the Company considered additional information and concluded that certain intangible asset tax basis would not be realizable and, accordingly, reduced the related deferred tax asset by approximately $500,000.  Our effective tax rate for the quarter ended June 30, 2009 also differed from the statutory rate as a result of the benefit from a research credit from our French subsidiary, GPI SAS, combined with having small book income before income taxes for the second quarter.

Our effective income tax rate for the six months ended June 30, 2010 was 42.5% compared to 53.8% for the same period of 2009.  Our effective tax rate for the six months ended June 30, 2010 differed from the statutory rate as a result of the decrease in the tax basis of certain intangible assets.  The Company monitors its deferred tax assets to assess whether they will be realizable.  Using a more likely than not threshold, during the six months ended June 30, 2010, the Company considered additional information and concluded that certain intangible asset tax basis would not be realizable and, accordingly, reduced the related deferred tax asset by approximately $500,000.  Our effective tax rate for the six months ended June 30, 2009 differed from the statutory rate as a result of the benefit from a research credit from our French subsidiary, GPI SAS, combined with having a net loss before income tax for the six month period. 

Our corporate tax rate is calculated on a consolidated basis.  Our corporate costs are not allocated to our French subsidiary, GPI SAS.

Liquidity and Capital Resources

 

Sources of Liquidity and Capital Resources. Historically, our primary source of liquidity and capital resources has been cash from operations. Other potential sources of capital include, but are not limited to, marketable securities and bank credit facilities, both in the United States and abroad. We believe that the combination of these resources will satisfy our needs for working capital, capital expenditures, debt service, and other cash requirements, such as dividends or acquisitions, for a minimum of the next 12 months.

As of June 30, 2010, we had $4.5 million in cash and cash equivalents and $14.0 million in marketable securities, totaling $18.5 million. Of this amount, $14.3 million is held by GPI SAS and $4.2 million is held by GPI USA. Our ability to permanently transfer cash from GPI SAS, our French subsidiary, to the United States is restricted due to unfavorable tax consequences and profit retention requirements under French law.

 

Working Capital (See Condensed Consolidated Balance Sheets). The following summarizes our cash and cash equivalents, working capital (in thousands), and current ratio:

 

		June 30,				December 31,
		2010				2009				Period to Period Change
Cash and cash equivalents		$	4,510			$	3,238			$	1,272				39.3	%
Marketable securities		$	14,038			$	15,600			$	(1,562	)			(10.0	)%
Working capital		$	24,631			$	22,694			$	1,937				8.5	%
Current ratio			3.2				2.8

 

As of June 30, 2010, working capital totaled $24.6 million, an increase of $1.9 million, or 8.5%, compared to working capital of $22.7 million as of December 31, 2009. This increase is due to an increase of $0.1 million in current assets and to a decrease in current liabilities of $1.8 million.  The increase in current assets was due primarily to an increase in accounts receivable of $2.5 million, offset by a decrease in current inventory of $1.4 million.  The increase in accounts receivable as of June 30, 2010 compared to December 31, 2009 is due to sales to Pennsylvania, Delaware and West Virginia casinos at the end of the second quarter of 2010. The decrease in current liabilities was due primarily to decreases in customer deposits of $1.7 million.  The decrease in customer deposits is primarily attributable to deposits made in conjunction with Pennsylvania orders applied against sales recorded at the end of the second quarter of 2010.

 

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Cash Flows (See Condensed Consolidated Statements of Cash Flow).  The following summarizes our cash flow (in thousands):

 

		Six Months Ended
		June 30,
		2010				2009				Period to Period Change
Operating activities		$	2,966			$	5,014			$	(2,048	)			(40.8	)%
Investing activities			(828	)			(3,226	)			2,398				74.3	%
Financing activities			(744	)			(248	)			(496	)			(200.0	)%
Effect of exchange rates			(122	)			13				(135	)			—
Net change		$	1,272			$	1,553			$	(281	)			(18.1	)%

 

Net cash provided by operations was $3.0 million during the six months ended June 30, 2010, a decrease of $2.0 million, compared to $5.0 million during the same period in 2009.  For the six months ended June 30, 2010, $4.4 million of cash was provided by net income and related reconciling adjustments; $1.3 million was used by an increase in operating assets (excluding cash), primarily the increase in accounts receivable; and $0.1 million was used by a decrease in current liabilities, primarily the increase in accounts payable and accruals, offset by a decrease in customer deposits. For the six months ended June 30, 2009, $0.8 million of cash was provided by net income and related reconciling adjustments; $0.8 million of cash was used by a decrease in operating assets (excluding cash) and $5.0 million was provided by an increase in current liabilities, primarily customer deposits.

 

Our investing activities resulted in net cash used of $0.8 million during the six months ended June 30, 2010, a decrease of $2.4 million compared to net cash used by investing activities of $3.2 million during the same period in 2009. This decrease in cash used in investing activities is attributable to a decrease in net purchases of marketable securities of $2.5 million during the six months ended June 30, 2010 compared the same period in 2009.

Net cash used in financing activities was $0.7 million during the six months ended June 30, 2010, an increase of $0.5 million compared to net cash used in financing activities of $0.2 million during the same period in 2009. Cash decreased as $0.7 million of long-term debt was paid off in 2010.

Long-Term Debt.  In March 2002, GPI USA entered into a $995,000 loan transaction secured by a deed of trust on its Las Vegas building.  In September 2009 this loan was paid in full.

 

In May 2004, GPI SAS borrowed 350,000 euros (approximately $423,000 in May 2004) from a French bank.  The loan had a fixed interest rate of 3.6% per annum, was due in May 2011, and was secured by a mortgage on the manufacturing facility in France.  In April 2010 this loan was paid in full.

In June 2006, GPI SAS borrowed 1.5 million euros (approximately $1.9 million in June 2006) from a French bank. The loan had a five-year term at a fixed rate of 3.4% per annum. The loan was repayable in fixed quarterly installments of principal and interest.  In March 2010 this loan was paid in full.

As of June 30, 2010, the remaining long-term debt balances relate to obligations under capital leases.

Seasonality.   Seasonality is difficult to determine due to the significant revenue fluctuations we experience on a quarterly basis. History indicates that the first quarter is typically one of the lowest revenue quarters for the year.

Las Vegas, Nevada Facilities.  In Las Vegas we own an approximately 60,000 square-foot building, which houses the Las Vegas corporate and sales offices, as well as a centralized warehouse, several manufacturing departments, and a graphics art department.

 

San Luis Rio Colorado, Mexico Facilities.  We manufacture casino chips, playing cards, dice, plastic products, layouts and tables at three facilities in San Luis Rio Colorado, Mexico. These facilities include a 34,000 square-foot leased facility, a 46,000 square-foot leased facility, and an approximately 66,000 square-foot facility, which we own. The two leased facilities are leased through December 2013 at a monthly rental amount of $0.35 per square foot, or approximately $28,000.

 

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San Luis, Arizona Warehouse. In April 2010, we leased an approximately 7,000 square-foot warehouse facility in San Luis, Arizona.  The facility is leased through April 2011.

 

Beaune, France Facilities.  In Beaune, we own an approximately 34,000 square-foot manufacturing facility and a 15,000 square-foot administrative and sales building.

 

Capital Expenditures.   We plan to purchase approximately $0.5 million in property, plant and equipment in the remainder of 2010.

 

Cash Dividend.  Our Board of Directors has no plans to pay a regular dividend on our common stock; however the Board of Directors will continuously evaluate the merits of paying a special dividend. We paid a $1.0 million dividend, or $0.125 per share, in December 2009.

 

Backlog.  At June 30, 2010, our backlog of signed orders, which is expected to be filled in 2010, was $10.3 million, consisting of $4.7 million for GPI USA and $5.6 million for GPI SAS.  At June 30, 2009, our backlog of signed orders for 2009 was $10.2 million, consisting of $3.2 million for GPI USA and $7.0 million for GPI SAS.

Contractual Obligations and Commercial Commitments

There were no material changes in the contractual obligations and commercial commitments during the three months ended June 30, 2010.

Recently Issued Accounting Standards

In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements.  ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable companies to account for products or services (deliverables) separately rather than as a combined unit since companies often provide multiple products or services to their customers. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable.  ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. Management is currently evaluating the requirements of ASU No. 2009-13 and has not yet determined the impact, if any, on our condensed consolidated financial statements.

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements (Topic 820) — Fair Value Measurements and Disclosures.  ASU No. 2010-06 provides for more robust disclosures abut the assets and liabilities measured at fair value, the valuation techniques used and disclosure regarding transfers between levels 1, 2 and 3.  ASU No. 2010-06 is effective for fiscal years beginning after December 15, 2009 and for interim periods within that fiscal year. The adoption of ASU No. 2010-06 did not impact the Company’s financial position or results of operations.

Forward-Looking Information Statements and Risk Factors

Throughout this Form 10-Q, we make some forward-looking statements, which do not relate to historical or current facts, but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable that, while considered reasonable by us, are inherently subject to significant business, economic, and competitive risks and uncertainties, many of which are beyond our control and are subject to change.  The statements also relate to our future prospects and anticipated performance, development, and business strategies such as statements relating to anticipated future sales or the timing thereof, the long-term growth and prospects of our business or any jurisdiction, the duration or effects of unfavorable economic conditions which may reduce our product sales, and the long-term potential of the RFID gaming chips market and the ability of the Company to capitalize on any such growth opportunities.  These statements are identified by their use of terms and phrases such as anticipate, believe, could, would, estimate, expect, intend, may, plan, predict, project, pursue, will, continue, feel, or the negative or other variations thereof, and other similar terms and phrases, including references to assumptions.

 

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Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those expressed or implied.  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent known and unknown risks and uncertainties such as those identified in Part I-Item 1A, “Risk Factors” of the Company’s Form 10-K for the period ended December 31, 2009.  We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances.

Not required for a smaller reporting company.

Evaluation of Disclosure Controls and Procedures:

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of June 30, 2010. Based upon this evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer have concluded that, as of June 30, 2010, the end of the period covered by this Form 10-Q, the Company’s disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting:

Management has determined that there was no change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended June 30, 2010 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

For a description of our legal proceedings, see Note 6 contained in the “Condensed Consolidated Notes to Financial Statements” of this Quarterly Report on Form 10-Q, which is incorporated by reference in response to this item.

ITEM 1A.

RISK FACTORS

None.

None.

None.

None.

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.0	Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	GAMING PARTNERS INTERNATIONAL CORPORATION
Date:  August 11, 2010	By:	/s/ Gregory S. Gronau
		Gregory S. Gronau
		President, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive and Financial Officer)

 

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