Unassociated Document
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, 2010

OR

 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 0-23588

 
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 o  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 5, 2010 was 8,199,016 shares of Common Stock.
 
 
GAMING PARTNERS INTERNATIONAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010

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 Stockholders’ Equity And Other Comprehensive Income (unaudited)
3
Condensed Consolidated Statements Of Cash Flows (unaudited)
4
Condensed Consolidated Notes To Financial Statements (unaudited)
5
     
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
11
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
19
     
ITEM 4T.
CONTROLS AND PROCEDURES
19
     
PART II. OTHER INFORMATION
20
     
ITEM 1.
LEGAL PROCEEDINGS
20
     
ITEM 1A.
RISK FACTORS
20
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
20
     
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
20
     
ITEM 4.
RESERVED
20
     
ITEM 5.
OTHER INFORMATION
20
     
ITEM 6.
EXHIBITS
20
     
SIGNATURES
21
 
 
 
 

PART I.  FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
GAMING PARTNERS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share amounts)

   
September 30,
    
December 31,
  
   
2010
    
2009
  
ASSETS
            
Current Assets:
            
Cash and cash equivalents
   $ 6,051     $ 3,238  
Marketable securities
     16,454       15,600  
Accounts receivable, less allowance for doubtful accounts of $252 and $220, respectively
     5,232       7,035  
Inventories
     6,602       7,173  
Prepaid expenses
     774       506  
Deferred income tax asset
     614       707  
Other current assets
     776       1,241  
Total current assets
     36,503       35,500  
Property and equipment, net
     12,224       13,454  
Intangibles, net
     848       676  
Deferred income tax asset
     1,147       1,657  
Inventories, non-current
     941       1,686  
Other assets, net
     391       305  
Total assets
   $ 52,054     $ 53,278  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Current Liabilities:
                
Current maturities of long-term debt
   $ 14     $ 546  
Accounts payable
     2,458       2,828  
Accrued liabilities
     3,705       3,320  
Customer deposits
     2,134       4,698  
Income taxes payable
     164       569  
Other current liabilities
     855       845  
Total current liabilities
     9,330       12,806  
Long-term debt, less current maturities
     36       314  
Deferred income tax liability
     516       623  
Other liabilities
     42       45  
Total liabilities
     9,924       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 issued and outstanding
     82       82  
Additional paid-in capital
     19,147       18,985  
Treasury stock, at cost; 8,061 shares
     (196 )     (196 )
Retained earnings
     20,810       17,346  
Accumulated other comprehensive income
     2,287       3,273  
Total stockholders' equity
     42,130       39,490  
Total liabilities and stockholders' equity
   $ 52,054     $ 53,278  

See notes to unaudited condensed consolidated financial statements.

 
1
 

GAMING PARTNERS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)

   
Three Months Ended
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2010
    
2009
    
2010
    
2009
  
Revenues
   $ 12,383     $ 13,425     $ 43,235     $ 33,681  
Cost of revenues
     8,319       8,743       26,914       23,465  
Gross profit
     4,064       4,682       16,321       10,216  
                                 
Marketing and sales
     1,088       1,042       3,363       3,105  
General and administrative
     1,899       2,112       7,336       6,404  
Impairment of goodwill
     -       1,572       -       1,572  
Operating income (loss)
     1,077       (44 )     5,622       (865 )
Other income and (expense)
     75       89       229       200  
Income (loss) before income taxes
     1,152       45       5,851       (665 )
Income tax expense (benefit)
     391       373       2,387       (9 )
Net income (loss)
   $ 761     $ (328 )   $ 3,464     $ (656 )
                                 
Earnings (loss) per share:
                                
Basic
   $ 0.09     $ (0.04 )   $ 0.42     $ (0.08 )
Diluted
   $ 0.09     $ (0.04 )   $ 0.42     $ (0.08 )
Weighted-average shares of common stock outstanding:
                                
Basic
     8,199       8,103       8,199       8,103  
Diluted
     8,207       8,103       8,205       8,103  

See notes to unaudited condensed consolidated financial statements.

 
2
 

GAMING PARTNERS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
OTHER COMPREHENSIVE INCOME
(unaudited)
(in thousands, except share amounts)

                                         
Accumulated
        
         
   
   
Additional
                
Other
        
   
Comprehensive
    
Common Stock
    
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
   $ (656 )     -       -       -       -       (656 )     -       (656 )
Unrealized gain on securities, net of tax
     13       -       -       -       -       -       13       13  
Stock compensation expense
     -       -       -       151       -       -       -       151  
Amortization of pension transition asset, net of tax
     (10 )     -       -       -       -       -       (10 )     (10 )
Foreign currency translation adjustment
     996       -       -       -       -       -       996       996  
Total comprehensive loss
   $ 343                                                          
Balance, September 30, 2009
             8,103,401     $ 81     $ 19,184     $ (196 )   $ 16,656     $ 3,585     $ 39,310  
                                                                 
Balance, January 1, 2010
             8,199,016     $ 82     $ 18,985     $ (196 )   $ 17,346     $ 3,273     $ 39,490  
Net income
   $ 3,464       -       -       -       -       3,464       -       3,464  
Unrealized gain on securities, net of tax
     2       -       -       -       -       -       2       2  
Stock compensation expense
     -       -       -       162       -       -       -       162  
Amortization of pension transition asset, net of tax
     (9 )     -       -       -       -       -       (9 )     (9 )
Foreign currency translation adjustment
     (979 )     -       -       -       -       -       (979 )     (979 )
Total comprehensive loss
   $ 2,478                                                          
Balance, September 30, 2010
             8,199,016     $ 82     $ 19,147     $ (196 )   $ 20,810     $ 2,287     $ 42,130  

See notes to unaudited condensed consolidated financial statements.

 
3
 

GAMING PARTNERS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

   
Nine Months Ended
  
   
September 30,
  
   
2010
    
2009
  
             
Cash Flows from Operating Activities
            
Net income (loss)
   $ 3,464     $ (656 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                
Depreciation
     1,442       1,557  
Amortization
     46       14  
Provision for bad debt
     106       47  
Deferred income taxes
     523       (25 )
Stock compensation expense
     162       151  
(Gain) loss on sale of property and equipment
     (5 )     4  
(Gain) on sale of marketable securities
     (34 )     (23 )
Impairment of goodwill and intangibles
     8       1,572  
Change in operating assets and liabilities:
                
Accounts receivable
     1,457       1,507  
Inventories
     982       45  
Prepaid expenses and other current assets
     150       (987 )
Non-current other assets
     (92 )     40  
Accounts payable
     (305 )     (698 )
Customer deposits
     (2,252 )     4,428  
Accrued liabilities
     503       (289 )
Income taxes payable
     (359 )     (157 )
Other current liabilities
     33       238  
Net cash provided by operating activities
     5,829       6,768  
                 
Cash Flows from Investing Activities
                
Purchases of marketable securities
     (13,885 )     (21,194 )
Proceeds from sale of marketable securities
     12,398       16,322  
Capital expenditures
     (828 )     (320 )
Proceeds from sale of property and equipment
     49       53  
Net cash used in investing activities
     (2,266 )     (5,139 )
                 
Cash Flows from Financing Activities
                
Repayment of long-term debt obligations
     (740 )     (1,297 )
Net cash used in financing activities
     (740 )     (1,297 )
Effect of exchange rate changes on cash
     (10 )     30  
Net increase in cash and cash equivalents
     2,813       362  
Cash and cash equivalents, beginning of period
     3,238       5,547  
Cash and cash equivalents, end of period
   $ 6,051     $ 5,909  
                 
Supplemental disclosures of cash flow information:
                
Cash paid for interest
   $ 14     $ 91  
Cash paid for income taxes, net of refunds
   $ 1,786     $ 582  
Supplemental disclosures of non-cash investing and financing activities
                
Property and equipment acquired through accounts payable
   $ 10     $ -  

See notes to unaudited condensed consolidated financial statements.

 
4
 

GAMING PARTNERS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(unaudited)

Note 1.  Nature of Business and Significant Accounting Policies
 
Organization and Nature of Business

 Gaming Partners International Corporation (GPIC) has two operating subsidiaries, Gaming Partners International USA, Inc. (GPI USA) and Gaming Partners International SAS (GPI SAS). 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 by Paul S. Endy, Jr., and initially manufactured and sold dice to casinos in Las Vegas, Nevada. GPI SAS was founded in 1923 as Bourgogne et Grasset 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 shareholder. The Company has established brand names such as Paulson®, Bourgogne et Grasset® (B&G), 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 Las Vegas, Nevada; San Luis Rio Colorado, Mexico; and Beaune, France. GPI USA has sales offices in Las Vegas, Nevada; Atlantic City, New Jersey; and Gulfport, Mississippi and sells our casino products to licensed casinos primarily in the Americas. GPI SAS has a sales office in Beaune, France and sells our casino products internationally to licensed casinos. Most of our products are sold directly to end-users, however, in some regions of the world we sell through distributors.

Our business activities include the manufacture and supply of gaming chips, table layouts, 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 Polices

Basis of Consolidation and Presentation.   The condensed consolidated financial statements include the accounts of GPIC and its wholly-owned subsidiaries GPI SAS, GPI USA, and GPI Mexicana. 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, 2009.

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.

Reclassification.  Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the September 30, 2010 presentation. These reclassifications had no effect on our net income. These reclassifications relate to including product development expenses in general and administrative expenses, instead of presenting these expenses separately.
 
Recently Issued Accounting Standards.  In July 2010, the Accounting Standards Board (FASB) issued ASU 2010-20, Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 amends ASU 310 to require additional disclosures regarding the credit quality of financing receivables and the related allowance for credit losses. The amended guidance requires entities to disaggregate by segment or class certain existing disclosures and provide certain new disclosures about its financial receivables and related allowance for credit losses. The amended guidance is effective for interim and annual financial periods beginning after December 15, 2010. The Company is currently evaluating the impact of this ASU on its consolidated financial statements. The adoption of the ASU is not expected to have a material effect on the Company’s results of operations, financial position or cash flows.

In January 2010, the Financial 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 about 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.

 
5
 

In October 2009, the FASB issued 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 consolidated financial statements.

Note 2.  Marketable Securities

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

   
September 30, 2010
    
December 31, 2009
  
   
Cost
    
Unrealized
Gain/(Loss)
    
Fair Value
    
Cost
    
Unrealized
Gain/(Loss)
    
Fair
Value
  
                                     
Certificates of deposits
   $ 13,863     $ -     $ 13,863     $ 11,614     $ -     $ 11,614  
Bond mutual funds
     1,093       3       1,096       1,597       -       1,597  
Term bonds
     546       -       546       1,020       -       1,020  
Term notes
     967       (18 )     949       1,369       -       1,369  
Total marketable securites
   $ 16,469     $ (15 )   $ 16,454     $ 15,600     $ -     $ 15,600  

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 fall into the Level 1 category, with asset values recorded at quoted prices in active markets for identical assets.

Note 3.  Inventories

Inventories consist of the following (in thousands):

   
September 30, 2010
    
December 31, 2009
  
Raw materials
   $ 3,969     $ 4,748  
Work in progress
     1,675       2,761  
Finished goods
     1,899       1,350  
Total inventories
   $ 7,543     $ 8,859  

At September 30, 2010 and December 31, 2009, we classified a portion of our inventories as non-current because we do not expect this portion to be used in our normal inventory cycle.  The classification of our inventories on our balance sheets is as follows (in thousands):

   
September 30, 2010
    
December 31, 2009
  
Inventories, current
   $ 6,602     $ 7,173  
Inventories, non-current
     941       1,686  
Total inventories
   $ 7,543     $ 8,859  
 
 Note 4.  Property and Equipment

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

 
6
 


   
September 30, 2010
    
December 31, 2009
  
Land
   $ 1,789     $ 1,806  
Buildings and improvements
     8,704       8,894  
Furniture and equipment
     18,175       18,891  
Vehicles
     507       563  
      29,175       30,154  
Less accumulated depreciation
     (16,951 )     (16,700 )
Property and equipment, net
   $ 12,224     $ 13,454  

Depreciation expense for the three months ended September 30, 2010 and 2009 was $479,000 and $505,000, respectively.  Depreciation expense for the nine months ended September 30, 2010 and 2009 was $1,442,000 and $1,557,000, respectively.

Note 5.  Intangible Assets

Intangible assets consist of the following (in thousands):

   
September 30, 2010
    
December 31, 2009
        
   
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Net
Carrying
Amount
    
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Net
Carrying
Amount
    
Estimated
Useful Life
(Years)
  
Patents
   $ 690     $ (605 )   $ 85     $ 1,242     $ (1,141 )   $ 101    
13-14
  
Trademark
     620       (82 )     538       620       (45 )     575    
12
  
Licenses
     225       -       225       -       -       -    
1-3
  
Total intangibles
   $ 1,535     $ (687 )   $ 848     $ 1,862     $ (1,186 )   $ 676        

In January 2010, a fully amortized patent expired, resulting in a reduction to the gross carrying value and accumulated amortization of $540,000.  In June 2010, a partially amortized patent was impaired and removed, resulting in a reduction to the gross carrying value of $12,500, accumulated amortization of $4,800, and impairment loss of $7,700.

In August 2010 the Company licensed certain Radio Frequency Identification Device (RFID) intellectual property  and  purchased certain software to converge high- and low-frequency RFID applications to improve functionality, security, and communications for a variety of casino management systems.
 
Amortization expense for intangible assets for the three months ended September 30, 2010 and 2009 was $15,000 and $4,000, respectively.  Amortization expense for intangible assets for the nine months ended September 30, 2010 and 2009 was $46,000 and $14,000, respectively.

Note 6.  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 June 27, 2007, a putative class action complaint alleging violations of federal securities laws based on alleged misstatements and omissions by the Company, entitled Robert J. Kaplan v. Gerard P. Charlier, Paul S. Dennis, Eric P. Endy, Alain Thieffry, Elisabeth Carrette, Robert J. Kelly, Charles R. Henry, Laura McAllister Cox and Gaming Partners International Corporation was filed in the United States District Court for the District of Nevada, under Case No. 2:07-cv-00849-LDG-GWF. Plaintiff Kaplan has been designated by the court as “Lead Plaintiff.” On February 12, 2008, Plaintiff filed an amended complaint, deleting several of the above named defendants, and adding three others. The action is now captioned Robert J. Kaplan v. Gerard P. Charlier, Melody J. Sullivan a/k/a Melody Sullivan Yowell, David Grimes, Charles T. McCullough, Eric P. Endy, Elisabeth Carrette and Gaming Partners International Corporation.  The Company engaged counsel and intends to vigorously defend against the claims presented. Defendants filed a Motion to Dismiss the Complaint on April 16, 2008. Defendants’ Motion to Dismiss was thereafter granted and an Order was entered dismissing the Amended Complaint without prejudice on November 18, 2008. Plaintiff filed a Second Amended Complaint on January 9, 2009. Defendants’ Motion to Dismiss the Second Amended Complaint was filed on February 27, 2009. On September 28, 2009, Defendants’ motion was granted and judgment dismissing the Second Amended Complaint with prejudice was entered on September 29, 2009. On October 29, 2009, Plaintiff filed his Notice of Appeal of the Court’s judgment to the 9th Circuit Court of Appeals. All briefings have been concluded and the matter awaits further action by the Court.

 
7
 

We are 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 the consolidated financial position or results of operations.

Commitments

The Company has acquired exclusive intellectual property license agreements from an unrelated third party which grant the Company the exclusive rights to manufacture and distribute gaming chips, RFID equipment and software worldwide under patents for a gaming chip tracking system and method that utilize gaming chips with embedded electronic circuits scanned by antennas in gaming chip placement areas (gaming tables and casino cage) and other RFID-related intellectual property. The duration of these exclusive agreements range from annual renewal to the life of the patents, the last of which expires in 2015.  Minimum annual royalty payments are $375,000, of which $125,000 is required to be made by GPIC over the remaining life of the exclusive patent license agreement.

Note 7.  Accumulated Other Comprehensive Income

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

   
September 30, 2010
    
December 31, 2009
  
Foreign currency translation
   $ 2,262     $ 3,241  
Unrealized gain on securities, net of tax
     2       -  
Unrecognized pension transition asset, net of tax
     23       32  
Total accumulated other comprehensive income
   $ 2,287     $ 3,273  
 
Note 8.  Geographic and Product Line Information

We manufacture and sell casino table game equipment and have determined that we operate in one operating segment - casino game equipment products.  Although the Company derives its revenues from a number of different product lines, the Company does not allocate resources based on the operating results from the individual product lines nor does it manage each individual product line as a separate business unit.

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

   
Three Months Ended
  
   
September 30,
  
   
2010
    
2009
  
Revenues
                        
United States
   $ 6,111       49.3 %   $ 4,608       34.3 %
Asia (1)
     4,328       35.0 %     7,644       56.9 %
Other (2)
     1,592       12.9  %     518        3.9  % 
Europe (includes Russia)
     352       2.8 %     655       4.9 %
Total
   $ 12,383       100.0 %   $ 13,425       100.0 %

(1)
Primarily Macau and Singapore.
(2)
Includes Canada, Australia and countries in South America and Africa.
 
 
8
 

   
Nine Months Ended
  
   
September 30,
  
   
2010
    
2009
  
Revenues
                        
United States
   $ 22,793       52.7 %   $ 15,419       45.8 %
Asia (1)
     15,105       34.9 %     13,396       39.8 %
Other (2)
     3,064       7.1  %     2,485       7.3 %
Europe (includes Russia)
     2,273       5.3 %     2,381       7.1 %
Total
   $ 43,235       100.0 %   $ 33,681       100.0 %

(1)  Primarily Macau and Singapore.
(2)  Includes Canada, Australia and countries in South America and Africa.
 
The following tables present our net sales by product (in thousands):

   
Three Months Ended
  
   
September 30,
  
   
2010
    
2009
  
Casino chips:
                        
American-style casino chips
   $ 5,730       46.3 %   $ 6,175       46.0 %
European-style casino chips
     2,371       19.1 %     3,780       28.2 %
Total casino chips
     8,101       65.4 %     9,955       74.2 %
                                 
Playing cards
     1,188       9.6 %     987       7.3 %
Table layouts
     1,004       8.1 %     1,017       7.6 %
Table accessories and other products
     824       6.7 %     471       3.5 %
Dice
     547       4.4 %     462       3.4 %
Gaming furniture
     318       2.6 %     264       2.0 %
Shipping
     401       3.2 %     269       2.0 %
Total
   $ 12,383       100.0 %   $ 13,425       100.0 %

   
Nine Months Ended
  
   
September 30,
  
   
2010
    
2009
  
Casino chips:
                        
American-style casino chips
   $ 21,587       49.9 %   $ 13,773       40.9 %
European-style casino chips
     6,032       14.0 %     8,148       24.2 %
Total casino chips
     27,619       63.9 %     21,921       65.1 %
                                 
Playing cards
     3,620       8.4 %     3,191       9.5 %
Table layouts
     3,213       7.4 %     3,259       9.7 %
Table accessories and other products
     2,915       6.7 %     1,749       5.1 %
Dice
     1,581       3.7 %     1,385       4.1 %
Gaming furniture
     2,818       6.5 %     1,144       3.4 %
Shipping
     1,469       3.4 %     1,032       3.1 %
Total
   $ 43,235       100.0 %   $ 33,681       100.0 %
 
 
9
 

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

   
September 30, 2010
    
December 31, 2009
  
Property and equipment, net:
            
France
   $ 5,630     $ 6,458  
United States
     3,501       3,670  
Mexico
     3,093       3,326  
Total
   $ 12,224     $ 13,454  
 
All intangible assets with a cost basis are owned by GPI USA.

Note 9.  Other Income and Expense

Other income and expense consists of the following:

   
Three Months Ended
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2010
    
2009
    
2010
    
2009
  
Interest income
   $ 67     $ 69     $ 195     $ 190  
Interest expense
     (2 )     (29 )     (13 )     (91 )
Gain (loss) on foreign currency transactions
     11       45       15       72  
Other income (expense), net
     (1 )     4       32       29  
Total other income and (expense)
   $ 75     $ 89     $ 229     $ 200  
 
Note 10.  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 potential common stock, which consists of assumed stock options. Potentially dilutive securities are not taken into account when their effect would be antidilutive.

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,
  
   
2010
    
2009
    
2010
    
2009
  
Weighted-average number of common shares outstanding
                        
- Basic
     8,199       8,103       8,199       8,103  
Potential dilution from stock options
     8       -       6       -  
Weighted-average number of common shares outstanding
                                
- Diluted
     8,207       8,103       8,205       8,103  

For the three months and nine months ended September 30, 2009, the Company was in a loss position and, accordingly, the basic and diluted weighted average shares outstanding were equal because any increase to the basic shares would have been antidilutive. Therefore, we did not calculate the dilutive effect of the 567,500 options then outstanding.

 
10
 

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, 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, (including low and high frequency RFID casino chips), under the brand names of Paulson®, Bourgogne et Grasset®, and Bud Jones®, low and high frequency RFID hardware and software, 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 are planned to be shipped in the fourth quarter.

Backlog
  
                   
   
GPI USA
    
GPI SAS
    
Total
  
                   
September 30, 2010
  
$ 3.4 million
    
$ 7.1 million
    
$ 10.5 million
  
September 30, 2009
  
$ 4.6 million
    
$ 7.0 million
    
$ 11.6 million
  
 
In addition, we have signed orders totaling $7.2 million that we plan to ship in the first half of 2011.

Overview of our Industry

In the United States, the general slowdown 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, Delaware and West Virginia recently legalized table games and licensed GPI USA as an equipment vendor.  Though our most significant sales in Pennsylvania were in the second quarter, we continued to ship products from each of our product lines to several Pennsylvania casinos that commenced operations in the third quarter.

 
11
 
 
Internationally, Macau continues to be the largest gaming market and continues to post record gaming revenues. Other parts of Asia have also become significant gaming destinations, such as Singapore, where the Sentosa casino and the Marina Bay Sands casino opened in February and April 2010, respectively.  In 2011, the Company will supply both plaques and chips for the opening of the Galaxy Macau casino.  In November 2010, the Company determined to create a local sales and service office in Macau to better serve its Asian customers.

Financial and Operational Highlights

For the third quarter of 2010, our revenues were $12.4 million, a decrease of $1.0 million, or 7.8%, compared to revenues of $13.4 million for the same period of 2009.  Our net income for the third quarter of 2010 was $0.8 million, compared to a net loss of $0.3 million for the same period in 2009.  The primary reason for this difference was a $1.6 million impairment of goodwill that we recorded in September 2009.

Other Matters

GPI SAS uses the euro as its functional currency.  At September 30, 2010 and December 31, 2009 the US dollar to euro exchange rates were $1.3648 to one euro and $1.4406 to one euro, respectively, which represents a 5.3% stronger dollar compared to the euro. The average exchange rates for the nine months ended September 30, 2010 and September 30, 2009 were $1.3165 and $1.3650, which represents a 3.5% stronger dollar compared to the euro.

This strengthening of the dollar compared to the euro for the first nine months of 2010 resulted in a reduction in foreign currency translation in other comprehensive income in the balance sheet to $2,287,000 at September 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 September 30, 2010 and 2009 were 12.81 pesos to the US dollar and 13.26 pesos to the US dollar, respectively, which represents a 3.4% weaker dollar compared to the Mexican peso. The weaker dollar compared with the Mexican peso had a negative impact of $58,000 on the Statement of Operations for the third quarter 2010.

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
              
   
September 30,
              
   
2010
    
2009
    
Period-to-Period Change
  
Revenues
   $ 12,383       100.0 %   $ 13,425       100.0 %   $ (1,042 )     (7.8 )%
Cost of revenues
     8,319       67.2 %     8,743       65.1 %     (424 )     (4.8 )%
Gross profit
     4,064       32.8 %     4,682       34.9 %     (618 )     (13.2 )%
Selling, general and administrative
     2,987       24.1 %     3,154       23.5 %     (167 )     (5.3 )%
Impairment of goodwill
     -       0.0 %     1,572       11.7 %     (1,572 )     *  
Operating income
     1,077       8.7 %     (44 )     (0.3 )%     1,121       *  
Other income and (expense)
     75       0.6 %     89       0.7 %     (14 )     (15.7 )%
Income before income taxes
     1,152       9.3 %     45       0.4 %     1,107       2,460.0 %
Income tax expense (benefit)
     391       3.2 %     373       2.8 %     18       4.8 %
Net income
   $ 761       6.1 %   $ (328 )     (2.4 )%   $ 1,089       *  

*   not meaningful

 
12
 

   
Nine Months Ended
              
   
September 30,
              
   
2010
    
2009
    
Period-to-Period Change
  
Revenues
   $ 43,235       100.0 %   $ 33,681       100.0 %   $ 9,554       28.4 %
Cost of revenues
     26,914       62.3 %     23,465       69.7 %     3,449       14.7 %
Gross profit
     16,321       37.7 %     10,216       30.3 %     6,105       59.8 %
Selling, general and administrative
     10,699       24.8 %     9,509       28.2 %     1,190       12.5 %
Impairment of goodwill
     -       0.0 %     1,572       4.7 %     (1,572 )     *  
Operating income (loss)
     5,622       12.9 %     (865 )     (2.6 )%     6,487       *  
Other income and (expense)
     229       0.5 %     200       0.6 %     29       14.5 %
Income (loss) before income taxes
     5,851       13.4 %     (665 )     (2.0 )%     6,516       *  
Income tax expense (benefit)
     2,387       5.5 %     (9 )     0.0 %     2,396       *  
Net income (loss)
   $ 3,464       7.9 %   $ (656 )     (2.0 )%   $ 4,120       *  

*   not meaningful

The following tables detail the Company’s revenues by geographic area (in thousands):

   
Three Months Ended
              
   
September 30,
              
   
2010
    
2009
    
Year-to-Year Change
  
Revenues
                                    
United States
   $ 6,111       49.3 %   $ 4,608       34.3 %   $ 1,503       32.6 %
Asia (1)
     4,328       35.0 %     7,644       56.9 %     (3,316 )     (43.4 )%
Europe (includes Russia)
     352       2.8 %     655       4.9 %     (303 )     (46.3 )%
Other (2)
     1,592       12.9 %     518       3.9 %     1,074       207.3 %
Total
   $ 12,383       100.0 %   $ 13,425       100.0 %   $ (1,042 )     (7.8 )%

(1)   Primarily Macau and Singapore.
(2)   Includes Canada, Australia and countries in South America and Africa.
  
   
Nine Months Ended
              
   
September 30,
              
   
2010
    
2009
    
Year-to-Year Change
  
Revenues
                                    
United States
   $ 22,793       52.7 %   $ 15,419       45.8 %   $ 7,374       47.8 %
Asia (1)
     15,105       34.9 %     13,396       39.8 %     1,709       12.8 %
Europe (includes Russia)
     2,273       5.3 %     2,381       7.1 %     (108 )     (4.5 )%
Other (2)
     3,064       7.1 %     2,485       7.3 %     579       23.3 %
Total
   $ 43,235       100.0 %   $ 33,681       100.0 %   $ 9,554       28.4 %

 
(1)   Primarily Macau and Singapore.
(2)   Includes Canada, Australia and countries in South America and Africa.

 
13
 
 
The following tables detail the Company’s revenues by product line (in thousands):

   
Three Months Ended
              
   
September 30,
              
   
2010
    
2009
    
Year-to-Year Change
  
Casino chips:
                                    
American-style casino chips
   $ 5,730       46.3 %   $ 6,175       46.0 %   $ (445 )     (7.2 )%
European-style casino chips
     2,371       19.1 %     3,780       28.2 %     (1,409 )     (37.3 )%
Total casino chips
     8,101       65.4 %     9,955       74.2 %     (1,854 )     (18.6 )%
                                                 
Playing cards
     1,188       9.6 %     987       7.3 %     201       20.4 %
Table layouts
     1,004       8.1 %     1,017       7.6 %     (13 )     (1.3 )%
Table accessories and other products
     824       6.7 %     471       3.5 %     353       74.9 %
Dice
     547       4.4 %     462       3.4 %     85       18.4 %
Gaming furniture
     318       2.6 %     264       2.0 %     54       20.5 %
Shipping
     401       3.2 %     269       2.0 %     132       49.1 %
Total
   $ 12,383       100.0 %   $ 13,425       100.0 %   $ (1,042 )     (7.8 )%
 
   
Nine Months Ended
              
   
September 30,
              
   
2010
    
2009
    
Year-to-Year Change
  
Casino chips:
                                    
American-style casino chips
   $ 21,587       49.9 %   $ 13,773       40.9 %   $ 7,814       56.7 %
European-style casino chips
     6,032       14.0 %     8,148       24.2 %     (2,116 )     (26.0 )%
Total casino chips
     27,619       63.9 %     21,921       65.1 %     5,698       26.0 %
                                                 
Playing cards
     3,620       8.4 %     3,191       9.5 %     429       13.4 %
Table layouts
     3,213       7.4 %     3,259       9.7 %     (46 )     (1.4 )%
Table accessories and other products
     2,915       6.7 %     1,749       5.1 %     1,166       66.7 %
Dice
     1,581       3.7 %     1,385       4.1 %     196       14.2 %
Gaming furniture
     2,818       6.5 %     1,144       3.4 %     1,674       146.3 %
Shipping
     1,469       3.4 %     1,032       3.1 %     437       42.3 %
Total
   $ 43,235       100.0 %   $ 33,681       100.0 %   $ 9,554       28.4 %
 
Revenues.   For the three months ended September 30, 2010, revenues were $12.4 million, a decrease of $1.0 million, or 7.8%, compared to revenues of $13.4 million during the same period in 2009.  This decrease in revenues was primarily attributable to lower sales in 2010 of American-style and European-style casino chips to casinos in the Philippines and Macau.  The decrease in international revenues was offset by increased domestic sales in substantially all product lines, primarily due to sales to Pennsylvania casinos that were not delivered in the second quarter.
 
For the nine months ended September 30, 2010, revenues were $43.2 million, an increase of $9.5 million, or 28.4%, compared to revenues of $33.7 million during the same period in 2009.  This increase was due primarily to significant year-to-date sales in all product lines to casinos located in Pennsylvania, Delaware and West Virginia, as well as increased year-to-date sales of casino chips to casinos in Singapore and Macau.
 
Cost of Revenues.   For the three months ended September 30, 2010, cost of revenues was $8.3 million, a decrease of $0.4 million, or 4.8%, compared to cost of revenues of $8.7 million for the three months ended September 30, 2009.  As a percentage of revenues, the cost of revenues increased to 67.2% for the quarter in 2010 from 65.1% for the quarter in 2009.

 
For the nine months ended September 30, 2010, cost of revenues was $27.0 million, an increase of $3.5 million, or 14.7%, compared to cost of revenues of $23.5 million for the nine months ended September 30, 2009.  As a percentage of revenues, the cost of revenues decreased to 62.3% for the nine months ended September 30, 2010 from 69.7% for the same period in 2009.

 
14
 

Gross Profit.  For the three months ended September 30, 2010, gross profit was $4.1 million, a decrease of $0.6 million, or 13.2%, compared to gross profit of $4.7 million for the three months ended September 30, 2009. As a percentage of revenues, our gross margin decreased to 32.8% from 34.9% in the comparable prior year quarter.  This gross margin percentage decrease was primarily driven by a shift in sales mix away from chip sales.

For the nine months ended September 30, 2010, gross profit was $16.3 million, an increase of $6.1 million, or 59.8%, compared to gross profit of $10.2 million for the nine months ended September 30, 2009. As a percentage of revenues, our gross margin increased from 30.3% to 37.7%.  This gross margin percentage increase was caused by a shift in year-to-date sales mix towards higher margin product lines and fixed manufacturing costs being allocated over higher production volumes.

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

 
   
Three Months Ended
              
   
September 30,
              
   
2010
    
2009
    
Period-to-Period Change
  
                                     
Marketing and sales
   $ 1,088       8.8 %   $ 1,042       7.8 %   $ 46       4.4 %
General and administrative
     1,899       15.3 %     2,112       15.7 %     (213 )     (10.1 )%
Total selling, general and administrative expenses
   $ 2,987       24.1 %   $ 3,154       23.5 %   $ (167 )     (5.3 )%

For the three months ended September 30, 2010, selling, general and administrative expenses were $3.0 million, a decrease of $0.2 million, or 5.3%, compared to selling, general and administrative expenses of $3.2 million for the three months ended September 30, 2009. Selling, general and administrative expenses increased as a percent of revenue to 24.1% in 2010 from 23.5% in 2009.

   
Nine Months Ended
              
   
September 30,
              
   
2010
    
2009
    
Period-to-Period Change
  
                                     
Marketing and sales
   $ 3,363       7.8 %   $ 3,105       9.2 %   $ 258       8.3 %
General and administrative
     7,336       17.0 %     6,404       19.0 %     932       14.6 %
Total selling, general and administrative expenses
   $ 10,699       24.8 %   $ 9,509       28.2 %   $ 1,190       12.5 %
 
For the nine months ended September 30, 2010, selling, general and administrative expenses were $10.7 million, an increase of $1.2 million, or 12.5%, compared to selling, general and administrative expenses of $9.5 million for the nine months ended September 30, 2009.  Selling, general and administrative expenses decreased as a percent of revenue to 24.8% in 2010 from 28.2% in 2009.The increase in selling, general and administrative expenses was primarily due to an increase in compensation and bonuses of $1.3 million, including severance pay of $0.2 million, and bad debt expense of $0.2 million, offset by a decrease in Sarbanes Oxley-related costs of $0.2 million and legal expenses of $0.2 million compared to the nine months ended September 30, 2009.

 
Impairment of Goodwill.  In the third quarter of 2009, we recorded a one-time, non-cash impairment of goodwill charge of $1.6 million.
 
 
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Other Income and (Expense).   The following table details the Other Income and (Expense) items (in thousands):

   
Three Months Ended
              
   
September 30,
              
   
2010
    
2009
    
Period-to-Period Change
  
Interest income
   $ 67       0.5 %   $ 69       0.5 %   $ (2 )     (2.9 )%
Interest expense
     (2 )     0.0 %     (29 )     (0.2 )%     27       93.1 %
Gain (loss) on foreign currency transactions
     11       0.1 %     45       0.4 %     (34 )     75.6 %
Other income (expense), net
     (1 )     0.0 %     4       0.0 %     (5 )     *  
Total other income and (expense)
   $ 75       0.6 %   $ 89       0.7 %   $ (14 )     15.7 %

* not meaningful

   
Nine Months Ended
              
   
September 30,
              
   
2010
    
2009
    
Period-to-Period Change
  
Interest income
   $ 195       0.4 %   $ 190       0.6 %   $ 5       2.6 %
Interest expense
     (13 )     0.0 %     (91 )     (0.3 )%     78       85.7 %
Gain on foreign currency transactions
     15       0.0 %     72       0.2 %     (57 )     (79.2 )%
Other income, net
     32       0.1 %     29       0.1 %     3       10.3 %
Total other income and (expense)
   $ 229       0.5 %   $ 200       0.6 %   $ 29       14.5 %

Income Taxes.   Our effective income tax rate for the three months ended September 30, 2010 was 33.9% compared to the effective income tax rate of 818.5% for the three months ended September 30, 2009.  Our effective tax rate for the quarter ended September 30, 2010 differed from the statutory rate as a result of the benefit from a research credit from our French subsidiary, GPI SAS, and a decrease in our valuation allowance related to foreign tax credits.  The Company’s effective tax rate for the quarter ended September 30, 2009 differed from the statutory rate as a result of the benefit from the French research credit, combined with having small book income before income taxes for the third quarter and the impairment of goodwill charge which was not tax-deductible.  Without the one-time charge for impairment of goodwill, our effective tax rate would have been approximately 23.7% for the quarter ended September 30, 2009.

 
Our effective income tax rate for the nine months ended September 30, 2010 was 40.8% compared to1.4% for the same period of 2009.  Our effective tax rate for the nine months ended September 30, 2010 differed from the statutory rate as a result of the decrease in the tax basis of certain intangible assets, offset by the French research credit, and a decrease in our valuation allowance related to foreign tax credits.  The Company monitors its deferred tax assets to assess whether they will be realizable.  Using a more likely than not threshold, at 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.  The Company’s effective tax rate for the nine months ended September 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 nine month period and the impairment of goodwill charge.   

 
Our corporate tax rate is calculated on a consolidated basis.  Certain 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.

 At September 30, 2010, we had $6.0 million in cash and cash equivalents and $16.5 million in marketable securities, totaling $22.5 million. Of this amount, $15.6 million is held by GPI SAS and $6.9 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.

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

 
   
September 30,
    
December 31,
              
   
2010
    
2009
    
Period-to-Period Change
  
Cash and cash equivalents
   $ 6,051     $ 3,238     $ 2,813       86.9 %
Marketable securities
   $ 16,454     $ 15,600     $ 854       5.5 %
Working capital
   $ 27,173     $ 22,694     $ 4,479       19.7 %
Current ratio
     3.9       2.8                  
 
At September 30, 2010, working capital totaled $27.2 million, an increase of $4.5 million, or 19.7%, compared to working capital of $22.7 million as of December 31, 2009. This increase is due to an increase of $1.0 million in current assets and to a decrease in current liabilities of $3.5 million.  The increase in current assets was due primarily to an increase in cash and cash equivalents of $2.8 million, offset by a decrease in accounts receivable of $1.8 million.  The decrease in current liabilities was due primarily to a decrease in customer deposits of $2.6 million.  The decrease in customer deposits is primarily attributable to application of deposits received against sales to Pennsylvania casinos recorded in the second and third quarters of 2010.

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

   
Nine Months Ended
              
   
September 30,
              
   
2010
    
2009
    
Period-to-Period Change
  
                         
Operating activities
   $ 5,829     $ 6,768     $ (939 )     (13.9 )%
Investing activities
     (2,266 )     (5,139 )     2,873       55.9 %
Financing activities
     (740 )     (1,297 )     557       42.9 %
Effect of exchange rates
     (10 )     30       (40 )     *  
Net change
   $ 2,813     $ 362     $ 2,451       677.1 %

 
*        not meaningful
 
 Net cash provided by operations was $5.8 million during the nine months ended September 30, 2010, a decrease of $1.0 million, compared to $6.8 million during the same period in 2009.  For the nine months ended September 30, 2010, $5.7 million of cash was provided by net income and related reconciling adjustments; $2.5 million was provided by a decrease in operating assets (excluding cash), primarily the decrease in accounts receivable and inventories; and $2.4 million was used by a decrease in current liabilities, primarily the decrease in customer deposits. For the nine months ended September 30, 2009, $2.7 million of cash was provided by net income-related activities, $0.6 million was provided by a decrease in operating assets (excluding cash), and $3.5 million was provided by an increase in current liabilities.
 
Our investing activities resulted in net cash used of $2.3 million during the nine months ended September 30, 2010, a decrease of $2.8 million compared to net cash used by investing activities of $5.1 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 $3.4 million during the nine months ended September 30, 2010 compared the same period in 2009.

 
Net cash used in financing activities was $0.7 million during the nine months ended September 30, 2010, a decrease of $0.6 million compared to net cash used in financing activities of $1.3 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 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.

At September 30, 2010, the remaining long-term debt balances relate to obligations under capital leases.

 
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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.

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 Expenditure.  We plan to purchase approximately $0.2 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 September 30, 2010, our backlog of signed orders, which is expected to be filled in the remainder of 2010, is $10.5 million, consisting of $3.4 million for GPI USA and $7.1 million for GPI SAS.  At September 30, 2009, our backlog of signed orders for the remainder of 2009 was $11.6 million, consisting of $4.6 million for GPI USA and $7.0 million for GPI SAS. In addition, we have signed orders totaling $7.2 million that we plan to ship in the first half of 2011.

Contractual Obligations and Commercial Commitments

The Company has acquired exclusive intellectual property license agreements from an unrelated third party which grant the Company the exclusive rights to manufacture and distribute gaming chips, RFID equipment and software worldwide under patents for a gaming chip tracking system and method that utilize gaming chips with embedded electronic circuits scanned by antennas in gaming chip placement areas (gaming tables and casino cage), and other RFID-related intellectual property. The duration of these exclusive agreements range from annual renewal to the life of the patents, the last of which expires in 2015.  Minimum annual royalty payments are $375,000, of which $125,000 is required to be made by GPIC over the remaining life of the exclusive patent license agreement.

Recently Issued Accounting Standards
 
In July 2010, the Accounting Standards Board (FASB) issued ASU 2010-20, Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 amends ASU 310 to require additional disclosures regarding the credit quality of financing receivables and the related allowance for credit losses. The amended guidance requires entities to disaggregate by segment or class certain existing disclosures and provide certain new disclosures about its financial receivables and related allowance for credit losses. The amended guidance is effective for interim and annual financial periods beginning after December 15, 2010. The Company is currently evaluating the impact of this ASU on its consolidated financial statements. The adoption of the ASU is not expected to have a material effect on the Company’s results of operations, financial position or cash flows.

In January 2010, the 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 about 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.

 
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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.

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.

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.

ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for a smaller reporting company.

ITEM 4T.     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, 2010. Based upon this evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer have concluded that, as of September 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 September 30, 2010 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 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.

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

None.

ITEM 3.        DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.        RESERVED

ITEM 5.        OTHER INFORMATION

None.

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.

 
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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 15, 2010
By:
/s/ Gregory S. Gronau
   
 Gregory S. Gronau
   
 President and Chief Executive Officer
     
Date: November 15, 2010
By:
/s/ Gerald W. Koslow
   
 Gerald W. Koslow
   
Chief Financial Officer

 
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