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EX-31.2 - EXHIBIT 31.2 - Gaming Partners International CORPv325789_ex31-2.htm

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)    
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the Quarterly Period Ended: September 30, 2012
 
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number: 0-23588

 


 

GAMING PARTNERS INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

NEVADA   88-0310433
(State or other jurisdiction   (I.R.S. Employer Identification No.)
of incorporation or organization)    
     
1700 Industrial Road,   89102
Las Vegas, Nevada   (Zip Code)
(Address of principal executive offices)    

 

(702) 384-2425

(Registrant’s telephone number, including area code)

 

None

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on the Corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the proceeding 12 months (or for such shorter period that registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o   Accelerated filer o
     
Non-accelerated filer o   Smaller reporting company x
(Do not check if a smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

The number of shares outstanding of each of the registrant’s classes of common stock as of November 1, 2012 was 8,100,504 shares of Common Stock.

 

 

 

 
 

 

GAMING PARTNERS INTERNATIONAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED September 30, 2012

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 1
   
ITEM 1.  FINANCIAL STATEMENTS 1
   
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) 2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) 3
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited) 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 5
CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (unaudited) 6
   
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
   
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
   
ITEM 4. CONTROLS AND PROCEDURES 22
   
PART II. OTHER INFORMATION 23
   
ITEM 1. LEGAL PROCEEDINGS 23
   
ITEM 1A. RISK FACTORS 23
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 23
   
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
   
ITEM 4. MINE SAFETY DISCLOSURES 23
   
ITEM 5. OTHER INFORMATION 23
   
ITEM 6. EXHIBITS 24
   
SIGNATURES 25

 

 
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share amounts)

 

   September 30,   December 31, 
   2012   2011 
ASSETS          
Current Assets:          
Cash and cash equivalents  $12,530   $9,282 
Marketable securities   11,635    14,867 
Accounts receivable, net   7,134    5,976 
Inventories   6,939    7,749 
Prepaid expenses   1,052    1,015 
Deferred income tax asset   762    893 
Other current assets   2,007    1,564 
 Total current assets   42,059    41,346 
Property and equipment, net   11,117    11,836 
Intangibles, net   566    646 
Deferred income tax asset   1,733    1,740 
Inventories, non-current   157    160 
Other assets, net   1,664    314 
     Total assets  $57,296   $56,042 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities:          
Short-term debt  $-   $17 
Accounts payable   2,224    2,376 
Accrued liabilities   5,115    5,876 
Customer deposits and deferred revenue   2,796    4,585 
Income taxes payable   338    - 
Total current liabilities   10,473    12,854 
Long-term debt   -    15 
Deferred income tax liability   677    689 
Total liabilities   11,150    13,558 
Commitments and contingencies - see Note 8          
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, 8,207,077 and 8,100,504 issued and outstanding, respectively, as of September 30, 2012, and 8,207,077 and 8,187,764 issued and outstanding, respectively, as of December 31, 2011   82    82 
Additional paid-in capital   19,550    19,401 
Treasury stock, at cost: 106,573 and 19,313 shares   (857)   (267)
Retained earnings   26,781    22,442 
Accumulated other comprehensive income   590    826 
Total stockholders' equity   46,146    42,484 
Total liabilities and stockholders' equity  $57,296   $56,042 

 

See notes to unaudited condensed consolidated financial statements.

 

1
 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per-share amounts)

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2012     2011     2012     2011  
Revenues   $ 16,939     $ 13,834     $ 45,394     $ 46,446  
Cost of revenues     11,550       9,661       30,045       31,147  
Gross profit     5,389       4,173       15,349       15,299  
                                 
Marketing and sales     1,320       1,273       3,944       3,842  
General and administrative     2,542       2,443       6,570       7,394  
Operating income     1,527       457       4,835       4,063  
Other income and (expense)     185       125       313       357  
Income before income taxes     1,712       582       5,148       4,420  
Income tax provision     455       105       809       1,306  
Net income   $ 1,257     $ 477     $ 4,339     $ 3,114  
                                 
Earnings per share:                                
Basic   $ 0.16     $ 0.06     $ 0.53     $ 0.38  
Diluted   $ 0.15     $ 0.06     $ 0.53     $ 0.38  
Weighted-average shares of common stock outstanding:                                
Basic     8,105       8,199       8,132       8,199  
Diluted     8,113       8,234       8,152       8,226  

 

See notes to unaudited condensed consolidated financial statements.

 

2
 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
Net income  $1,257   $477   $4,339   $3,114 
Other comprehensive income:                    
Unrealized gain on securities, net of tax   -    13    2    22 
Amortization of pension transition asset, net of tax   (3)   (3)   (9)   (9)
Foreign currency translation adjustment   342   (1,297)   (229)   11 
Other comprehensive income (loss), net of tax   339    (1,287)   (236)   24 
Total other comprehensive income (loss)  $1,596   $(810)  $4,103   $3,138 

 

See notes to unaudited condensed consolidated financial statements.

 

3
 

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands, except per share amounts)

 

                       Accumulated     
           Additional           Other     
   Common Stock   Paid-In   Treasury   Retained   Comprehensive     
   Shares   Amount   Capital   Stock   Earnings   Income (Loss)   Total 
                             
Balance, January 1, 2011   8,199,016   $82   $19,196   $(196)  $20,269   $1,584   $40,935 
Net income   -    -    -    -    3,114    -    3,114 
Unrealized gain on securities, net of tax   -    -    -    -    -    22    22 
Stock compensation expense   -    -    164    -    -    -    164 
Amortization of pension transition asset, net of tax                                   
Foreign currency translation adjustment   -    -    -    -    -    11    11 
Balance, September 30, 2011   8,199,016   $82   $19,360   $(196)  $23,383   $1,608   $44,237 
                                    
Balance, January 1, 2012   8,187,764   $82   $19,401   $(267)  $22,442   $826   $42,484 
Net income   -    -    -    -    4,339    -    4,339 
Repurchases of common stock   (87,260)   -    -    (590)   -    -    (590)
Unrealized gain on securities, net of tax   -    -    -    -    -    2    2 
Stock compensation expense   -    -    149    -    -    -    149 
Amortization of pension transition asset, net of tax                                   
Foreign currency translation adjustment   -    -    -    -    -    (229)   (229)
Balance, September 30, 2012   8,100,504   $82   $19,550   $(857)  $26,781   $590   $46,146 

 

See notes to unaudited condensed consolidated financial statements.

 

4
 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

   Nine Months Ended 
   September 30, 
   2012   2011 
         
Cash Flows from Operating Activities          
Net income  $4,339   $3,114 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   1,613    1,563 
Amortization of intangible assets   80    176 
Amortization of bond premium   10    - 
Provision for bad debt   (117)   91 
Deferred income taxes   127    335 
Stock compensation expense   149    164 
Loss (gain) on sale of property and equipment   2    (7)
(Gain) on sale of marketable securities   (9)   (37)
Change in operating assets and liabilities:          
Accounts receivable   (1,056)   1,690 
Inventories   796    (462)
Prepaid expenses and other current assets   (475)   (947)
Non-current other assets   (1,352)   63 
Accounts payable   (176)   (302)
Customer deposits and deferred revenue   (1,765)   (899)
Accrued liabilities   113    (793)
Income taxes payable   337    (118)
Other current liabilities   (844)   - 
Net cash provided by operating activities   1,772    3,631 
           
Cash Flows from Investing Activities          
Purchases of marketable securities   (15,452)   (16,615)
Proceeds from sale of marketable securities   18,587    18,697 
Capital expenditures   (926)   (886)
Purchase of business assets   -    (718)
Proceeds from sales of property and equipment   25    28 
Net cash provided by investing activities   2,234    506 
           
Cash Flows from Financing Activities          
Repayment of debt obligations   (32)   (7,046)
Repurchases of common stock   (590)   - 
Net cash (used in) financing activities   (622)   (7,046)
Effect of exchange rate changes on cash   (136)   30 
Net increase (decrease) in cash and cash equivalents   3,248    (2,879)
Cash and cash equivalents, beginning of period   9,282    11,400 
Cash and cash equivalents, end of period  $12,530   $8,521 
           
Supplemental disclosures of cash flow information          
Cash paid for interest  $3   $47 
Cash paid for income taxes, net of refunds  $1,086   $1,862 
Supplemental disclosure of non-cash investing and financing activities          
Property and equipment acquired through accounts payable  $31   $- 

  

See notes to unaudited condensed consolidated financial statements.

 

5
 

 

CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

Note 1. Nature of Business and Significant Accounting Policies

 

Organization and Nature of Business

 

Gaming Partners International Corporation (GPIC or the Company) has three operating subsidiaries, Gaming Partners International USA, Inc. (GPI USA), Gaming Partners International SAS (GPI SAS), and Gaming Partners International Asia Limited (GPI Asia). In addition, GPI USA owns GPI Mexicana S.A. de C.V. (GPI Mexicana), a manufacturing subsidiary. GPI USA was founded in 1963 as Paul-Son Gaming Supplies, Inc. by Paul S. Endy, Jr., and initially manufactured and sold dice to casinos in Las Vegas. GPI SAS was founded in 1923 as Etablissements Bourgogne et Grasset S.A. by Etienne Bourgogne and Claudius Grasset in Beaune, France to produce and sell counterfeit-resistant chips to casinos in Monaco. GPIC was formed in 2002 through a reverse merger between Paul-Son Gaming Corporation and Bourgogne et Grasset initiated by Francois Carrette, whose firm, Holding Wilson, SA, remains GPIC’s controlling stockholder. The Company has established brand names such as Paulson®, Bourgogne et Grasset® (BG®), and Bud Jones®. GPIC and each of its subsidiaries are sometimes collectively referred to herein as the “Company,” “us,” “we,” or “our.”

 

The Company is headquartered in Las Vegas, Nevada and has manufacturing facilities in San Luis Rio Colorado, Mexico and Beaune, France, as well as a warehouse in San Luis, Arizona. GPI USA has sales offices in Las Vegas, Nevada; Atlantic City, New Jersey; and Gulfport, Mississippi, and sells casino products to licensed casinos primarily in the Americas. GPI SAS has a sales office in Beaune, France and sells casino products to licensed casinos in Europe and Africa. GPI Asia has a sales office in Macau S.A.R., China and sells casino products primarily to licensed casinos in the Asia Pacific region. Most of our products are sold directly to end-users; however, in some regions of the world, we sell through agents.

 

Our business activities include the manufacture and supply of casino chips, table layouts, radio frequency identification device (RFID) solutions for casino currency, playing cards, gaming furniture, table accessories, and dice, all of which are used in conjunction with casino table games such as blackjack, poker, baccarat, craps, and roulette.

 

Significant Accounting Policies

 

Basis of Consolidation and Presentation. The condensed consolidated financial statements include the accounts of GPIC and its wholly-owned subsidiaries GPI SAS, GPI USA, GPI Mexicana, and GPI Asia. 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 for interim financial information and do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These statements should be read in conjunction with our annual audited consolidated financial statements and related notes included in our Form 10-K for the year ended December 31, 2011.

 

These unaudited condensed consolidated financial statements, in the opinion of management, reflect only 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.

 

Reclassifications. Certain amounts for the three months ended and nine months ended 2011 have been reclassified between cost of revenues and selling, general, and administrative expenses to conform to the 2012 presentation. These reclassifications had no impact on revenues, net income, total assets or total liabilities.

 

 

Recently Issued Accounting Standards. Effective January 1, 2012, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2011-05, Presentation of Comprehensive Income and ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. These ASUs eliminate the option to present the components of other comprehensive income in the statement of changes in stockholders’ equity. Instead, entities have the option to present the components of net income, the components of other comprehensive income, and total comprehensive income in a single continuous statement or in two separate, but consecutive, statements. The amendments did not change the items reported in other comprehensive income or when an item of other comprehensive income is reclassified to net income. As a result, the adoption of this guidance did not affect our financial position, results of operations, or cash flows. We have presented the components of net income, the components of other comprehensive income, and total comprehensive income in two separate, but consecutive, statements.

 

6
 

 

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, to amend fair value measurement to achieve convergence between US GAAP and IFRS. The ASU changes some fair value measurement principles and disclosure requirements, is effective for fiscal quarters and years beginning on or after December 15, 2011, and has not had a material impact on our condensed consolidated financial statements.

 

Note 2. Acquisition

 

In April 2011, the Company purchased certain assets of OMC SARL and its subsidiary OMC Industries (OMC), a private French-based manufacturer of high-quality plastic injection molds. The acquisition is part of the Company's overall acquisition strategy to use its cash position to acquire companies, products, or technologies that enable it to diversify and grow its product and service offerings. The Company completed the acquisition of OMC on April 6, 2011 for a total cash consideration of $0.7 million. We did not present pro forma results of operations, actual results of operations from the acquisition date through December 31, 2011, or other similar disclosure, because the acquisition was not material.

 

Note 3. Cash, Cash Equivalents, and Marketable Securities

 

The Company holds its cash, cash equivalents, and marketable securities in financial institutions in various countries throughout the world. Substantially all accounts have balances in excess of government-insured limits. The following summarizes the geographic location of our holdings (in thousands):

 

   September 30, 2012   December 31, 2011 
   Cash and  Cash Equivalents   Marketable Securities   Total   Cash and  Cash Equivalents   Marketable Securities   Total 
                         
France  $1,994   $11,635   $13,629   $281   $13,500   $13,781 
United States   9,321    -    9,321    7,537    1,367    8,904 
Macau S.A.R., China   1,215    -    1,215    1,464    -    1,464 
   $12,530   $11,635   $24,165   $9,282   $14,867   $24,149 

 

Available-for-sale marketable securities consist of investments in securities, such as certificates of deposit offered by French and US banks, bond mutual funds, and term bonds (in thousands):

 

   September 30, 2012   December 31, 2011 
   Cost   Unrealized Gain/(Loss)   Fair Value   Cost   Unrealized Gain/(Loss)   Fair Value 
                         
Certificates of deposit  $8,616   $-   $8,616   $12,537   $(1)  $12,536 
Bond mutual funds   3,019    -    3,019    1,942    -    1,942 
Term bonds   -    -    -    390    (1)   389 
Total marketable securites  $11,635   $-   $11,635   $14,869   $(2)  $14,867 

 

We present our marketable securities at their estimated fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has determined that all of its marketable securities are Level 1 financial instruments, with asset values recorded at quoted prices in active markets for identical assets.

  

Note 4. Accounts Receivable and Allowance for Doubtful Accounts

 

At September 30, 2012, we had four customers that individually accounted for 22%, 12%, 11% and 11% of our accounts receivable balance, respectively. At December 31, 2011, we had one customer that individually accounted for 28% of our accounts receivable balance.

  

7
 

 

The allowance for doubtful accounts consists of the following (in thousands):

 

   Balance Beginning of Year   Provision   Write-offs,
Net of
Recoveries
   Exchange
Rate Effect
   Ending
Balance
 
September 30, 2012  $366   $(117)  $-   $(1)  $248 
                          
December 31, 2011  $208   $174   $(9)  $(7)  $366 

 

Note 5. Inventories

 

Inventories consist of the following (in thousands):

 

   September 30, 2012   December 31, 2011 
Raw materials  $4,031   $3,762 
Work in progress   1,308    2,031 
Finished goods   1,757    2,116 
Total inventories  $7,096   $7,909 

 

 

We classified a portion of our inventories as non-current because we do not expect this portion to be used within one year. The classification of our inventories on our condensed consolidated balance sheets is as follows (in thousands):

 

   September 30, 2012   December 31, 2011 
Current  $6,939   $7,749 
Non-current   157    160 
Total inventories  $7,096   $7,909 

 

Note 6. Property and Equipment

 

Property and equipment consists of the following (in thousands):

 

   September 30, 2012   December 31, 2011 
Land  $1,771   $1,773 
Buildings and improvements   8,497    8,480 
Furniture and equipment   19,786    19,003 
Vehicles   431    493 
    30,485    29,749 
Less accumulated depreciation   (19,368)   (17,913)
Property and equipment, net  $11,117   $11,836 

 

 

Depreciation expense for the three months ended September 30, 2012 and 2011 was $539,000 and $543,000, respectively. Depreciation expense for the nine months ended September 30, 2012 and 2011 was $1,613,000 and $1,563,000, respectively.

 

8
 

 

Note 7. Intangible Assets

 

Intangible assets consist of the following (in thousands):

 

   September 30, 2012   December 31, 2011 
   Gross Carrying Amount   Accum Amort   Net Carrying Amount   Gross Carrying Amount   Accum Amort   Net Carrying Amount 
Patents  $690   $(630)  $60   $690   $(621)  $69 
Trademark   620    (179)   441    620    (143)   477 
Licenses   225    (190)   35    225    (163)   62 
Other intangibles   64    (34)   30    65    (27)   38 
Total intangible assets  $1,599   $(1,033)  $566   $1,600   $(954)  $646 

 

 

In April 2011, the Company acquired in its OMC acquisition certain intangibles, including a customer list.

 

Amortization expense for intangible assets for the three months ended September 30, 2012 and 2011 was $26,000 and $53,000, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2012 and 2011 was $80,000 and $176,000, respectively.

 

Note 8. Commitments and Contingencies

 

Legal Proceedings and Contingencies

 

Liabilities for material claims against the Company are accrued when a loss is considered probable and can be reasonably estimated. Legal costs associated with claims are expensed as incurred.

 

On January 18, 2011, a former employee of GPI SAS filed a complaint with the Employment Tribunal of Dijon, France, entitled Christophe Leparoux vs. Gaming Partners International SAS, related to his termination of employment in November 2010. The complaint sought damages for unfair dismissal, legal fees, and back pay. The parties entered into a settlement agreement on June 28, 2012, by which they agreed to a full, final and unconditional settlement and waiver of all rights to pursue legal action. The net settlement was lower than the plaintiff’s claim of approximately 1.0 million euros (approximately $1.3 million) and was credited against previously accrued legal expenses at June 30, 2012. On September 3, 2012, the claims were formally dismissed by the Tribunal and the matter was concluded.

 

We are also engaged in disputes and claims in the normal course of business. We believe the ultimate outcome of these proceedings will not have a material adverse impact on our consolidated financial position or results of operations.

 

Commitments

 

The Company has exclusive intellectual property license agreements from an unrelated third party which grant the Company the exclusive rights to manufacture and distribute RFID gaming chips, RFID equipment, and software worldwide under patents for a gaming chip tracking system and method that utilizes gaming chips with embedded electronic circuits scanned by antennas in gaming chip placement areas (gaming tables and casino cages) and other RFID-related intellectual property. The duration of these agreements ranges from annual renewal to the life of the patents, the last of which expires in 2015. Cumulative minimum net annual royalty payments are $375,000.

 

We purchased certain security technology from an unrelated third party for use in our gaming chips under an exclusive contract which requires that we purchase a minimum of $50,000 in product each year through 2016, or $250,000 during the remaining life of the contract.

 

9
 

 

Note 9. Accumulated Other Comprehensive Income

 

Accumulated other comprehensive income consists of the following (in thousands):

 

   September 30, 2012   December 31, 2011 
Foreign currency translation  $590   $819 
Unrealized gain / (loss) on securities, net of tax   1    (1)
Unrecognized pension transition asset, net of tax   (1)   8 
Total accumulated other comprehensive income  $590   $826 

 

Note 10. Geographic and Product Line Information

 

We manufacture and sell casino table game equipment in one operating segment - casino table game equipment products and chip authentication software. Although the Company derives its revenues from a number of different product lines, the Company neither allocates resources based on the operating results from the individual product lines, nor manages each individual product line as a separate business unit.

 

The following tables present our net sales by geographic area (in thousands):

 

   Three Months Ended 
   September 30, 
   2012   2011 
Revenues                    
Asia Pacific  $8,282    48.9%  $7,024    50.8%
The Americas   7,952    46.9%   6,314    45.6%
Europe and Africa (1)   705    4.2%   496    3.6%
Total  $16,939    100.0%  $13,834    100.0%

 

   Nine Months Ended 
   September 30, 
   2012   2011 
Revenues                    
Asia Pacific  $17,613    38.8%  $25,618    55.1%
The Americas   24,068    53.0%   18,611    40.1%
Europe and Africa (1)   3,713    8.2%   2,217    4.8%
Total  $45,394    100.0%  $46,446    100.0%

  

10
 

 

The following tables present our net sales by product line (in thousands):

 

    Three Months Ended  
    September 30,  
    2012     2011  
Casino chips                                
American-style casino chips   $ 6,365       37.6 %   $ 5,757       41.7 %
European-style casino chips     4,818       28.4 %     3,316       24.0 %
Total casino chips     11,183       66.0 %     9,073       65.7 %
                                 
Playing cards     1,335       7.9 %     1,248       9.0 %
Table accessories and other products     1,086       6.4 %     823       5.9 %
Table layouts     1,037       6.1 %     1,074       7.8 %
Gaming furniture     1,028       6.1 %     463       3.3 %
Dice     596       3.5 %     531       3.8 %
RFID solutions     106       0.6 %     256       1.9 %
Shipping     568       3.4 %     366       2.6 %
Total   $ 16,939       100.0 %   $ 13,834       100.0 %

 

    Nine Months Ended  
    September 30,  
    2012     2011  
Casino chips                    
American-style casino chips  $20,177    44.4%  $17,333    37.2%
European-style casino chips   8,482    18.7%   14,287    30.8%
Total casino chips   28,659    63.1%   31,620    68.0%
                     
Playing cards   4,113    9.1%   3,845    8.3%
Table accessories and other products   2,854    6.3%   2,164    4.7%
Table layouts   3,358    7.4%   3,115    6.7%
Gaming furniture   2,531    5.6%   1,461    3.1%
Dice   1,733    3.8%   1,631    3.5%
RFID solutions   671    1.5%   1,330    2.9%
Shipping   1,475    3.2%   1,280    2.8%
Total  $45,394    100.0%  $46,446    100.0%

 

The following table presents our property and equipment by geographic area (in thousands):

 

   September 30, 2012   December 31, 2011 
Property and equipment, net:          
France  $4,873   $5,229 
United States   3,180    3,471 
Mexico   3,011    3,066 
Macau S.A.R., China   53    70 
Total  $11,117   $11,836 

 

11
 

 

The following table presents our intangible assets by geographic area (in thousands):

 

   September 30, 2012   December 31, 2011 
Intangibles, net:          
United States  $535   $609 
Macau S.A.R., China   -    - 
France   31    37 
Total  $566   $646 

 

Note 11. Stockholders’ Equity

 

On December 1, 2011, our Board of Directors approved a stock repurchase program which authorized us to repurchase up to five percent (5%), or 409,951 shares, of our outstanding shares of common stock. Repurchases are subject to market conditions, share price, and other factors, as well as periodic review by the Board of Directors. Repurchases have been and will be made in accordance with applicable securities laws in the open market, in privately negotiated transactions, and/or pursuant to Rule 10b5-1 trading plans. The repurchase program does not specify an expiration date, and it may be suspended or discontinued at any time. 

 

During the quarter ended September 30, 2012, we repurchased 7,800 shares of our common stock at a cost of $49,499, or a weighted-average price of $6.35 per share. During the nine months ended September 30, 2012, we repurchased 87,260 shares of our common stock at a cost of $589,651, or a weighted-average price of $6.76 per share. As of September 30, 2012, 311,439 shares remained outstanding for repurchase under this program.

 

Note 12. Income Taxes

 

We recorded a deferred charge during the three months ended September 30, 2012 related to the deferral of income tax expense on intercompany profits that resulted from the sale of intellectual property rights between two of our foreign subsidiaries. This deferred charge is included in the other current assets and other assets lines of the condensed consolidated balance sheets at September 30, 2012 in the amounts of $0.1 million and $1.2 million, respectively, and will be amortized as a component of income tax expense over the ten year economic life of the intellectual property.

 

Note 13. Earnings per Share (EPS)

 

Basic EPS is calculated by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the effect of issuances of shares of common stock, should currently outstanding stock options be exercised. Potentially dilutive securities are not taken into account when their effect would be anti-dilutive.

 

The weighted-average number of common shares outstanding used in the computation of basic and diluted earnings per share is as follows (in thousands):

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
Weighted-average number of common shares outstanding - basic   8,105    8,199    8,132    8,199 
Potential dilution from stock options   8    35    20    27 
Weighted-average number of common shares outstanding - diluted   8,113    8,234    8,152    8,226 

 

12
 

 

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

 

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, 2011.

 

For a company overview and information on our products, as well as general information, see Item 1. “Business,” of the Company’s Form 10-K for the period ended December 31, 2011.

 

Overview of our Business

 

We manufacture and supply casino currency under the brand names of Paulson®, Bourgogne et Grasset®, and Bud Jones® (including low- and high-frequency RFID casino chips), RFID solutions for casino currency (consisting of low- and high-frequency RFID chip readers, antennas, chip authentication software, chip inventory software applications and software maintenance services), 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; Macau S.A.R., China; San Luis Rio Colorado, Mexico; Atlantic City, New Jersey; and Gulfport, Mississippi. We sell our products to licensed casinos worldwide. We operate in one segment and have three operating subsidiaries: GPI USA (including maquiladora manufacturing operations in Mexico), GPI SAS, and GPI Asia.  Our subsidiaries have the following distribution and product focus:

 

GPI USA sells in the Americas, primarily in the United States and Canada, out of regional offices in the United States. GPI USA sells our full product line, with most of the products manufactured at our facility in Mexico and with the remainder either manufactured in France or purchased from United States vendors. We also warehouse inventory in San Luis, Arizona and at our Las Vegas, Nevada headquarters.
GPI SAS sells primarily in Europe and Africa out of its office in Beaune, France. GPI SAS predominantly 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.
GPI Asia sells in Asia Pacific out of its office in Macau S.A.R., China. GPI Asia distributes chips, plaques, and jetons, as well as RFID solutions for casino currency, with these products manufactured at our plants in France and 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 timing of these events is difficult to forecast and largely beyond our ability to influence, which creates variability in revenues 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, which reflects signed orders that we expect to ship during the remainder of the respective year. Our backlog at September 30, 2012 and September 30, 2011, was as follows (in millions):

 

   GPI USA   GPI SAS   GPI Asia   Total 
September 30, 2012  $4.6   $0.4   $3.1   $8.1 
September 30, 2011  $3.9   $5.7   $0.3   $9.9 

 

Outlook

 

During 2012, we have had success in the American market with Paulson chips, furniture and accessories sales driven by casino openings, as well as sales to casinos that were expanding and rebranding. Additionally, in the third quarter of 2012 we showed increases in Asia Pacific sales, due to new and expansion orders. Our existing backlog and pending orders for the fourth quarter of 2012 and early 2013 include the introduction of new chip products and chips with more customized designs and security features to meet customer needs.

 

13
 

  

We will continue to evaluate potential strategic acquisitions and partnerships to grow our business. However, no assurance can be given that these efforts will result in completed transactions or that any completed transactions will be successful.

 

Financial and Operational Highlights

 

For the third quarter of 2012, our revenues were $16.9 million, an increase of $3.1 million, or 22.4%, compared to revenues of $13.8 million for the same period of 2011.  For the third quarter of 2012, our net income was $1.3 million, an increase of $0.8 million, or 163.5%, compared to net income of $0.5 million for the same period of 2011.

 

For the first nine months of 2012, our revenues were $45.4 million, a decrease of $1.0 million, or 2.3%, compared to revenues of $46.4 million for the same period of 2011.  For the first nine months of 2012, our net income was $4.3 million, an increase of $1.2 million, or 39.3%, compared to net income of $3.1 million for the same period of 2011. The underlying components of these results are discussed in more detail below.

 

GPI SAS uses the euro as its functional currency. At September 30, 2012 and December 31, 2011, the US dollar to euro exchange rates were $1.2860 and $1.2950, respectively, which represents a 0.7% stronger dollar compared to the euro. The average exchange rates for the nine months ended September 30, 2012 and 2011 were $1.2824 and $1.4071, respectively, which represents a 7.9% stronger dollar compared to the euro.

 

Our Mexican manufacturing plant uses the US dollar as its functional currency. At September 30, 2012 and December 31, 2011, the Mexican peso to US dollar exchange rates were 12.8521 and 13.9787, respectively, which represents an 8.1% weaker dollar compared to the peso. The average exchange rates for the nine months ended September 30, 2012 and 2011 were 13.2433 pesos and 12.0281 pesos to the US dollar, respectively, which represents a 10.1% stronger dollar compared to the Mexican peso.

 

Other Matters

 

On December 1, 2011, our Board of Directors approved a stock repurchase program which authorizes us to repurchase up to five percent (5%), or 409,951 shares, of our outstanding shares of common stock. For more information regarding this program, see Part II, Item 2 of this Quarterly Report on Form 10-Q and Note 11 contained in the “Condensed Consolidated Notes to Financial Statements” of this Quarterly Report on Form 10-Q.

 

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, 2011.

 

RESULTS OF OPERATIONS

 

The following tables summarize selected items from the Company’s condensed consolidated statements of operations (in thousands) and as a percentage of revenues:

 

14
 

 

   Three Months Ended         
   September 30,         
   2012   2011   Period-to-Period Change 
Revenues  $16,939    100.0%  $13,834    100.0%  $3,105    22.4%
Cost of revenues (1)   11,550    68.2%   9,661    69.8%   1,889    19.6%
Gross profit   5,389    31.8%   4,173    30.2%   1,216    29.1%
Selling, general, and administrative (1)   3,862    22.8%   3,716    26.9%   146    3.9%
Operating income   1,527    9.0%   457    3.3%   1,070    234.1%
Other income and (expense)   185    1.1%   125    0.9%   60    48.0%
Income before income taxes   1,712    10.1%   582    4.2%   1,130    194.2%
Income tax (benefit) / provision   455    2.7%   105    0.8%   350    333.3%
Net income  $1,257    7.4%  $477    3.4%  $780    163.5%

  

(1)Certain amounts for the three months ended September 30, 2011, have been reclassified between cost of revenues and selling, general and administrative expenses to conform to the 2012 presentation. The net amounts reclassified from selling, general and administrative expenses to cost of revenues were $65,000, or 0.5% of revenues, for the three months ended September 30, 2011.

 

   Nine Months Ended         
   September 30,         
   2012   2011   Period-to-Period Change 
Revenues  $45,394    100.0%  $46,446    100.0%  $(1,052)   (2.3)%
Cost of revenues (1)   30,045    66.2%   31,147    67.1%   (1,102)   (3.5)%
Gross profit   15,349    33.8%   15,299    32.9%   50    0.3%
Selling, general, and administrative (1)   10,514    23.2%   11,236    24.2%   (722)   (6.4)%
Operating income   4,835    10.6%   4,063    8.7%   772    19.0%
Other income and (expense)   313    0.7%   357    0.8%   (44)   (12.3)%
Income before income taxes   5,148    11.3%   4,420    9.5%   728    16.5%
Income tax provision   809    1.8%   1,306    2.8%   (497)   (38.1)%
Net income  $4,339    9.5%  $3,114    6.7%  $1,225    39.3%

  

(1)Certain amounts for the nine months ended September 30, 2011, have been reclassified between cost of revenues and selling, general and administrative expenses to conform to the 2012 presentation. The net amounts reclassified from cost of revenues to selling, general and administrative expenses were $200,000, or 0.4% of revenues, for the nine months ended September 30, 2011.

  

15
 

 

The following tables present certain data by geographic area (in thousands) and as a percentage of revenues:

 

  Three Months Ended         
  September 30,         
   2012   2011    Period-to-Period Change 
Revenues                              
Asia Pacific  $8,282    48.9%  $7,024    50.8%  $1,258    17.9%
The Americas   7,952    46.9%   6,314    45.6%   1,638    25.9%
Europe and Africa (1)   705    4.2%   496    3.6%   209    42.1%
         Total  $16,939    100.0%  $13,834    100.0%  $3,105    22.4%

 

  (1) includes Russia                      

 

  Nine Months Ended         
  September 30,         
   2012   2011    Period-to-Period Change 
Revenues                              
Asia Pacific  $17,613    38.8%  $25,618    55.1%  $(8,005)   (31.2)%
The Americas   24,068    53.0%   18,611    40.1%   5,457    29.3%
Europe and Africa (1)   3,713    8.2%   2,217    4.8%   1,496    67.5%
         Total  $45,394    100.0%  $46,446    100.0%  $(1,052)   (2.3)%

 

  (1) includes Russia                      

                         

The following tables present the Company’s revenues by product line (in thousands) and as a percentage of revenues:

 

  Three Months Ended         
  September 30,         
   2012   2011    Period-to-Period Change 
Casino chips                              
American-style casino chips  $6,365    37.6%  $5,757    41.7%  $608    10.6%
European-style casino chips   4,818    28.4%   3,316    24.0%   1,502    45.3%
Total casino chips   11,183    66.0%   9,073    65.7%   2,110    23.3%
                               
Playing cards   1,335    7.9%   1,248    9.0%   87    7.0%
Table accessories and other products   1,086    6.4%   823    5.9%   263    32.0%
Table layouts   1,037    6.1%   1,074    7.8%   (37)   (3.4)%
Gaming furniture   1,028    6.1%   463    3.3%   565    122.0%
Dice   596    3.5%   531    3.8%   65    12.2%
RFID solutions   106    0.6%   256    1.9%   (150)   (58.6)%
Shipping   568    3.4%   366    2.6%   202    55.2%
Total  $16,939    100.0%  $13,834    100.0%  $3,105    22.4%

 

16
 

  

  Nine Months Ended         
  September 30,         
   2012   2011    Period-to-Period Change 
Casino chips                              
American-style casino chips  $20,177    44.4%  $17,333    37.2%  $2,844    16.4%
European-style casino chips   8,482    18.7%   14,287    30.8%   (5,805)   (40.6)%
Total casino chips   28,659    63.1%   31,620    68.0%   (2,961)   (9.4)%
                               
Playing cards   4,113    9.1%   3,845    8.3%   268    7.0%
Table accessories and other products   2,854    6.3%   2,164    4.7%   690    31.9%
Table layouts   3,358    7.4%   3,115    6.7%   243    7.8%
Gaming furniture   2,531    5.6%   1,461    3.1%   1,070    73.2%
Dice   1,733    3.8%   1,631    3.5%   102    6.3%
RFID solutions   671    1.5%   1,330    2.9%   (659)   (49.5)%
Shipping   1,475    3.2%   1,280    2.8%   195    15.2%
Total  $45,394    100.0%  $46,446    100.0%  $(1,052)   (2.3)%

  

Comparison of Operations for the Three Months and Nine Months Ended September 30, 2012 and 2011

 

Revenues. For the three months ended September 30, 2012, revenues were $16.9 million, an increase of $3.1 million, or 22.4%, compared to revenues of $13.8 million for the same period of 2011. The net increase in revenues in the third quarter of 2012, compared to the third quarter of 2011, was primarily due to the following:

 

·a $1.5 million increase in sales of European-style casino chips for Asia Pacific casinos, primarily driven by sales to the Sociedade de Jogos (SJM) and Venetian casinos in Macau; and
·a $1.4 million increase in sales of American-style casino chips, furniture, and accessories to new and expanding casinos, as well as casinos that are rebranding.

 

For the nine months ended September 30, 2012, revenues were $45.4 million, a decrease of $1.0 million, or 2.3%, compared to revenues of $46.4 million for the same period of 2011. The net decrease in revenues for the first nine months of 2012, compared to the first nine months of 2011, was primarily due to the following:

 

·a $5.8 million decrease in sales of European-style casino chips for Asia Pacific casinos, driven by significant sales to the Galaxy ™ and SJM casinos in Macau in the 2011 reporting period; and
·a $0.7 million decrease in sales of RFID solutions to casinos in Asia Pacific, primarily related to the May 2011 Galaxy Macau opening; offset by
·a $2.8 million increase in sales of American-style chips in the United States, primarily driven by sales of Paulson chips to casinos opening in Ohio and New Jersey; and
·a $2.3 million increase in sales of furniture, accessories, table layouts, and cards to new and expanding casinos in the United States.

 

Cost of Revenues. For the three months ended September 30, 2012, cost of revenues was $11.6 million, an increase of $1.9 million, or 19.6%, compared to cost of revenues of $9.7 million for the same period of 2011. As a percentage of revenues, our cost of revenues decreased to 68.2% in 2012, compared to 69.8% for the same period of 2011.

 

For the nine months ended September 30, 2012, cost of revenues was $30.0 million, a decrease of $1.1 million, or 3.5%, compared to cost of revenues of $31.1 million for the same period of 2011. As a percentage of revenues, our cost of revenues decreased to 66.2% in 2012, compared to 67.1% for the same period of 2011. The reduced cost of revenues were driven by the same factors described under Gross Profit below.

 

Gross Profit. For the three months ended September 30, 2012, gross profit was $5.4 million, an increase of $1.2 million, or 29.1%, compared to gross profit of $4.2 million for the same period of 2011. As a percentage of revenues, our gross profit increased from 30.2% to 31.8%. This gross profit percentage increase was primarily due to a shift in sales mix toward higher-margin Paulson chips to casinos in the United States in the third quarter of 2012. Additionally, we increased our sales of European-style casino chips to Asia Pacific casinos in the third quarter of 2012 compared to the same period in 2011, which resulted in fixed manufacturing costs being allocated over higher production volumes in these products.

 

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For the nine months ended September 30, 2012 and 2011, gross profit was $15.3 million. As a percentage of revenues, our gross profit increased from 32.9% to 33.8%. This gross profit percentage increase was primarily due to a shift in sales mix toward higher-margin Paulson chips to casinos in the United States in the first nine months of 2012. This increase was partially offset by a decrease in sales of European-style casino chips to Asia Pacific casinos in the first nine months of 2012 compared to the same period in 2011.The reduced sales of European-style chips resulted in fixed manufacturing costs being allocated over lower production volumes in these products.

 

Selling, General, and Administrative Expenses. The following tables present the selling, general, and administrative expenses (in thousands) and as a percentage of revenues:

 

  Three Months Ended         
  September 30,         
   2012   2011    Period-to-Period Change 
Marketing and sales (1)  $1,320    7.8%  $1,273    9.2%  $47    3.7%
General and administrative (1)   2,542    15.0%   2,443    17.7%   99    4.1%
Total selling, general, and                              
administrative expenses  $3,862    22.8%  $3,716    26.9%  $146    3.9%

  

(1) Certain amounts for the three months ended September 30, 2011, have been reclassified between cost of revenues and selling, general and administrative expenses to conform to the 2012 presentation. The net amounts reclassified from selling, general and administrative expenses to cost of revenues were $65,000, or 0.5% of revenues, for the three months ended September 30, 2011.

 

For the three months ended September 30, 2012, selling, general, and administrative expenses were $3.9 million, an increase of $0.2 million, or 3.9%, compared to selling, general, and administrative expenses of $3.7 million during the same period of 2011. Selling, general, and administrative expenses decreased as a percent of revenue to 22.8% in the three months ended September 30, 2012, from 26.9% during the same period of 2011.

 

Marketing and sales expenses increased by $47,000 during the third quarter of 2012, compared to the same period in 2011. This increase is primarily due to expenses from our first participation in the Australian Gaming Exposition.

 

General and administrative expenses increased by $0.1 million during the third quarter of 2012, compared to the same period in 2011. This is primarily due to an increase in product development of $0.3 million, offset by a decrease in bad debt expense of $0.1 million and a decrease in ad valorem taxes of $0.1 million.

 

  Nine Months Ended         
  September 30,         
   2012   2011    Period-to-Period Change 
Marketing and sales (1)  $3,944    8.7%  $3,842    8.3%  $102    2.7%
General and administrative (1)   6,570    14.5%   7,394    15.9%   (824)   (11.1)%
Total selling, general, and                              
administrative expenses  $10,514    23.2%  $11,236    24.2%  $(722)   (6.4)%

 

(1) Certain amounts for the nine months ended September 30, 2011, have been reclassified between cost of revenues and selling, general and administrative expenses to conform to the 2012 presentation. The net amounts reclassified from cost of revenues to selling, general and administrative expenses were $200,000, or 0.4% of revenues, for the nine months ended September 30, 2011.

  

For the nine months ended September 30, 2012, selling, general, and administrative expenses were $10.5 million, a decrease of $0.7 million, or 6.4%, compared to selling, general, and administrative expenses of $11.2 million during the same period of 2011. Selling, general, and administrative expenses decreased as a percent of revenue to 23.2% in the nine months ended September 30, 2012, from 24.2% during the same period in 2011.

 

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Marketing and sales expenses increased by $0.1 million during the nine months ended September 30, 2012, compared to the same period in 2011. This increase is primarily due to an increase of $0.1 million related to trade-shows and other marketing activities in the Asia Pacific region.

 

General and administrative expenses decreased by $0.8 million during the nine months ended September 30, 2012, compared to the same period in 2011. This is primarily due to a decrease of $0.8 million in legal expenses, including a credit related to the settlement of employment litigation in France, and reduced gaming license expenses.

 

Other Income and (Expense). The following tables present other income and (expense) items (in thousands) and as a percentage of revenues:

 

  Three Months Ended         
  September 30,         
   2012   2011    Period-to-Period Change 
Interest income  $100    0.6%  $92    0.6%  $8    8.7%
Gain on foreign currency transactions   83    0.5%   7    0.1%   76    1,085.7%
Other income, net   5    0.0%   28    0.2%   (23)   (82.1)%
Interest expense   (3)   0.0%   (2)   0.0%   (1)   - 
Total other income and (expense)  $185    1.1%  $125    0.9%  $60    48.0%

 

  Nine Months Ended         
  September 30,         
   2012   2011    Period-to-Period Change 
Interest income  $314    0.7%  $332    0.7%  $(18)   (5.4)%
Gain on foreign currency transactions   -    0.0%   36    0.1%   (36)   (100.0)%
Other income, net   3    0.0%   44    0.1%   (41)   (93.2)%
Interest expense   (4)   0.0%   (55)   (0.1)%   51    - 
Total other income and (expense)  $313    0.7%  $357    0.8%  $(44)   (12.3)%

 

Income Taxes. Our effective income tax rates for the three months ended September 30, 2012 and 2011 were 26.6% and 18.0%, respectively. Our effective income tax rates for the nine months ended September 30, 2012 and 2011 were 15.7% and 29.5%, respectively. Our effective tax rates for the three and nine months ended September 30, 2012 differed from the statutory rate as a result of the utilization of our foreign tax credit carryforwards, combined with the foreign rate differential on the income from our Macau subsidiary, GPI Asia, and the benefit from a research credit from our French subsidiary, GPI SAS. Without the release of valuation allowance related to our foreign tax credits, our effective income tax rates for the three and nine months ended September 30, 2012 would have been approximately 28.5% and 24.4%, respectively. Our effective income tax rates for the three and nine months ended September 30, 2011 differed from the statutory rate as a result of the foreign rate differential on the income from our Macau subsidiary, GPI Asia, combined with the benefit from the research credit from our French subsidiary, GPI SAS.

 

As of December 31, 2011, we had $3.2 million in available foreign tax credits and a valuation allowance of $3.0 million related to these foreign tax credits, due to the on-going uncertainty of future foreign source and US taxable income. These available foreign tax credits of $0.7 million, $1.3 million, and $1.2 million will expire in 2015, 2016, and 2017, respectively. During the nine months ended September 30, 2012, we released $0.7 million of the valuation allowance related to our foreign tax credits.

 

The Company accounts for uncertain tax positions in accordance with applicable accounting guidance. As of September 30, 2012, there was no material change to the balance of unrecognized tax benefits reported at December 31, 2011.

 

We recorded a deferred charge during the three months ended September 30, 2012 related to the deferral of income tax expense on intercompany profits that resulted from the sale of intellectual property rights between two of our foreign subsidiaries. This deferred charge is included in the other current assets and other assets lines of the condensed consolidated balance sheets at September 30, 2012 in the amounts of $0.1 million and $1.2 million, respectively, and will be amortized as a component of income tax expense over the economic life of the intellectual property.

 

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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 sources of liquidity and capital resources include, but are not limited to short-term investments in marketable securities. Although none are currently outstanding, we believe that we have the ability to obtain financial institution credit facilities both in the United States and abroad, should the need arise. We believe that the combination of these resources will satisfy our needs for working capital, capital expenditures, purchases of common stock under our stock repurchase program, and other potential cash requirements, such as any dividends or acquisitions, for our operations for a minimum of the next 12 months.

 

At September 30, 2012, we had $12.5 million in cash and cash equivalents and $11.6 million in marketable securities, totaling $24.1 million. Of this amount, $13.6 million is held by GPI SAS, $9.3 million is held by GPI USA, and $1.2 million is held by GPI Asia.

 

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

 

   September 30,   December 31,         
   2012   2011   Period-to-Period Change 
Cash and cash equivalents  $12,530   $9,282   $3,248    35.0%
Marketable securities   11,635    14,867    (3,232)   (21.7)%
Working capital   31,586    28,492    3,094    10.9%
Current ratio   4.0    3.2           

 

At September 30, 2012, working capital totaled $31.6 million, an increase of $3.1 million, or 10.9%, compared to working capital of $28.5 million at December 31, 2011. This increase is due to an increase in current assets of $0.7 million and a decrease in current liabilities of $2.4 million. The increase in current assets was due primarily to an increase in accounts receivable of $1.2 million and an increase in other current assets of $0.4 million, offset by a decrease in inventory of $0.8 million. The decrease in current liabilities was due primarily to a decrease in customer deposits and deferred revenue of $1.8 million and a decrease in accrued liabilities of $0.8 million.

 

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

 

   Nine Months Ended         
   September 30,   Period-to-Period 
   2012   2011   Change 
                 
Operating activities  $1,772   $3,631   $(1,859)   (51.2)%
Investing activities   2,234    506    1,728    341.5%
Financing activities   (622)   (7,046)   6,424    (91.2)%
Effect of exchange rates   (136)   30    (166)   (553.3)%
Net change  $3,248   $(2,879)  $6,127    (212.8)%

 

Net cash flows provided by operating activities were $1.8 million during the nine months ended September 30, 2012, a decrease of $1.8 million, compared to net cash flows provided by operating activities of $3.6 million during the same period in 2011. For the nine months ended September 30, 2012, $6.2 million of cash was provided by net income-related activities; $2.1 million was used to acquire operating assets (excluding cash); and $2.3 million was used to reduce current liabilities. For the nine months ended September 30, 2011, $5.4 million of cash was provided by net income-related reconciling adjustments; $0.3 million was used to acquire operating assets (excluding cash) and $2.1 million was used to reduce current liabilities.

 

Net cash flows provided by investing activities were $2.2 million during the nine months ended September 30, 2012, an increase of $1.7 million, compared to net cash flows provided by investing activities of $0.5 million during the same period in 2011. This increase in cash flows provided by investing activities is primarily due to an increase in net sales of marketable securities of $1.1 million in 2012 during the nine months ended September 30, 2012, compared to the same period in 2011, and by the $0.7 million acquisition of assets from OMC in April 2011.

 

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Net cash flows used in financing activities were $0.6 million during the nine months ended September 30, 2012, a change of $6.4 million, compared to net cash flows used in financing activities of $7.0 million during the same period in 2011. This reduction in cash flows used in financing activities was primarily due to the repayment of debt obligations for $7.0 million during the nine months ended September, 2011, compared to the repurchase of common stock of $0.6 million during the nine months ended September 30, 2012.

 

Debt. In December 2010, GPI SAS borrowed 5.0 million euros (approximately $6.7 million in December 2010) from a French bank at a variable interest rate based on the Euro Interbank Offered Rate plus 0.5% per annum and secured by 3.75 million euros (approximately $4.9 million in December 2010) in GPI SAS certificates of deposit. This loan was paid in full in June 2011.

 

Capital Expenditures. We currently plan to purchase approximately $0.2 million in property, plant, and equipment during the remainder of 2012.

 

Cash Dividend. Our Board of Directors has no current plans to pay a regular dividend on our common stock, but intends to evaluate the merit of paying a dividend from time to time. We paid a $1.5 million dividend, or $0.1825 per share, in December 2011.

 

Backlog. At September 30, 2012, our backlog of signed orders for 2012 was $8.1 million, consisting of $0.4 million for GPI SAS, $4.6 million for GPI USA, and $3.1 million for GPI Asia. At September 30, 2011, our backlog of signed orders was $9.9 million, consisting of $5.7 million for GPI SAS, $3.9 million for GPI USA, and $0.3 million for GPI Asia.

 

Contractual Obligations and Commercial Commitments

 

There were no material changes in the contractual obligations and commercial commitments during the nine months ended September 30, 2012.

 

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, potential acquisitions, 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.

 

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, 2011. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for a smaller reporting company.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

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 September 30, 2012. Based upon this evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer have concluded that, as of September 30, 2012, 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 September 30, 2012, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

 

ITEM 1. LEGAL PROCEEDINGS

 

For a description of our material legal proceedings, see Note 8 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.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following is a summary of common shares repurchased by us by month during the third quarter of 2012 under our stock repurchase program:

 

Period  Total Number of Shares Purchased  Average Price Paid per Share  Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)  Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1 to 31  1,000  $6.52  1,000  318,239
August 1 to 31  600  $6.19  600  317,639
September 1 to 30  6,200  $6.33  6,200  311,439
Total  7,800  $6.35  7,800   

 

 

(1) On December 1, 2011, our Board of Directors approved a stock repurchase program which authorizes us to repurchase up to five percent (5%), or 409,951 shares, of our outstanding shares of common stock. Repurchases are subject to market conditions, share price, and other factors, as well as periodic review by the Board of Directors. Repurchases have been and will be made in accordance with applicable securities laws in the open market, in privately negotiated transactions, and/or pursuant to Rule 10b5-1 trading plans. The repurchase program does not specify an expiration date and it may be suspended or discontinued at any time. The shares repurchased during the quarter ended September 30, 2012, were not the result of an accelerated share repurchase agreement and did not result in any derivative transactions.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

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.
   
101.INS** XBRL Instance
   
101.SCH** XBRL Taxonomy Extension Schema
   
101.CAL** XBRL Taxonomy Extension Calculation
   
101.DEF** XBRL Taxonomy Extension Definition
   
101.LAB** XBRL Taxonomy Extension Labels
   
101.PRE** XBRL Taxonomy Extension Presentation
   
   
**XBRL information furnished and not filed or a part of a registration statement or prospectus for purposes
of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under these sections.

 

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SIGNATURES

 

 

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

 

  GAMING PARTNERS INTERNATIONAL CORPORATION
   
   
Date: November 8, 2012 By: /s/ Gregory S. Gronau
    Gregory S. Gronau
    President and Chief Executive Officer
     
Date: November 8, 2012 By: /s/ Gerald W. Koslow
    Gerald W. Koslow
    Chief Financial Officer

 

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