Gaming Partners International (GPIC)

GAMING PARTNERS INTERNATIONAL CORPORATION

(unaudited)

(in thousands, except share amounts)

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

See notes to unaudited condensed consolidated financial statements.

 

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GAMING PARTNERS INTERNATIONAL CORPORATION

OTHER COMPREHENSIVE INCOME

(unaudited)

(in thousands, except share amounts)

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

See notes to unaudited condensed consolidated financial statements.

 

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GAMING PARTNERS INTERNATIONAL CORPORATION

(unaudited)

(in thousands)

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

See notes to unaudited condensed consolidated financial statements.

 

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GAMING PARTNERS INTERNATIONAL CORPORATION

(unaudited)

Note 1.  Nature of Business and Significant Accounting Policies

 

Organization and Nature of Business

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 June 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 January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements (Topic 820) — Fair Value Measurements and Disclosures.  ASU No. 2010-06 provides for more robust disclosures 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.

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.

 

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Note 2.  Marketable Securities

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

		June 30, 2010												December 31, 2009
		Cost				Unrealized Gain/(Loss)				Fair Value				Cost				Unrealized Gain/(Loss)				Fair Value
Certificates of deposit		$	10,847			$	-			$	10,847			$	11,614			$	-			$	11,614
Bond mutual fund			1,842				1				1,843				1,597				-				1,597
Term bonds			857				-				857				1,020				-				1,020
Term notes			491				-				491				1,369				-				1,369
Total marketable securites		$	14,037			$	1			$	14,038			$	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):

		June 30, 2010				December 31, 2009
Raw materials		$	3,619			$	4,748
Work in progress			1,563				2,761
Finished goods			1,683				1,350
Total inventories		$	6,865			$	8,859

As of June 30, 2010 and December 31, 2009, a portion of our inventories are classified 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):

		June 30, 2010				December 31, 2009
Inventories, current		$	5,769			$	7,173
Inventories, non-current			1,096				1,686
Total inventories		$	6,865			$	8,859

 

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Note 4.  Property and Equipment

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

		June 30, 2010				December 31, 2009
Land		$	1,758			$	1,806
Buildings and improvements			8,288				8,894
Furniture and equipment			17,526				18,891
Vehicles			517				563
			28,089				30,154
Less accumulated depreciation			(16,242	)			(16,700	)
Property and equipment, net		$	11,847			$	13,454

Depreciation expense for the three months ended June 30, 2010 and 2009 was $478,000 and $565,000, respectively.  Depreciation expense for the six months ended June 30, 2010 and 2009 was $963,000 and $1,053,000, respectively.

Note 5.  Intangible Assets

Intangible assets consist of the following (in thousands):

		June 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			$	(603	)		$	87			$	1,242			$	(1,141	)		$	101			13-16
Trademark			620				(69	)			551				620				(45	)			575			12
Total intangibles		$	1,310			$	(672	)		$	638			$	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.

 

Amortization expense for intangible assets for the three months ended June 30, 2010 and 2009 was $16,000 and $5,000, respectively.  Amortization expense for intangible assets for the six months ended June 30, 2010 and 2009 was $31,000 and $10,000, 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.

 

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On January 22, 2009, a complaint was filed in a matter entitled Sibel Products, Inc. vs. Gaming Partners International Corporation in the Circuit Court of the Second Judicial District of Jefferson County, Illinois, Case No. 09-L-4.  The complaint sought a preliminary injunction in connection with an exclusive purchase agreement, for particular raw materials used to manufacture finished goods, between plaintiff and GPI USA. On January 30, 2009, the Company filed a notice of removal of the action to the United States District Court for the Southern District of Illinois and Case Number 3:09-cv-87 was assigned.  As previously reported in our first quarter Form 10-Q, after commencement of  trial on the matter on March 22, 2010, the matter was concluded as follows: plaintiff’s claims against the current manufacturing supplier were dismissed with prejudice; plaintiff’s claims against Gaming Partners International Corporation were dismissed with prejudice; and judgment was entered in favor of Gaming Partners International USA, Inc. and against plaintiff on the counterclaim. Subsequently, plaintiff and GPI USA entered into a settlement agreement to fully resolve the remaining claims in this matter for less than the judgement amount. The Court’s Order and Final Judgment were entered by the Court on June 14, 2010. All conditions of the settlement agreement have been met and the matter is concluded.

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 an exclusive patent license agreement with International Game Technology which grants the Company the exclusive rights to manufacture and distribute gaming chips and readers in the United States 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), or Radio Frequency Identification Devices (RFID) technology. The duration of the exclusive agreement is for the life of the patents, the last of which expires in 2015. Minimum annual royalty payments of $125,000 are 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):

		June 30, 2010				December 31, 2009
Foreign currency translation		$	124			$	3,241
Unrealized gain on securities, net of tax			1				-
Unrecognized pension transition asset, net of tax			27				32
Total accumulated other comprehensive income		$	152			$	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
		June 30,
		2010								2009
Revenues
United States		$	11,356				57.0	%		$	5,233				46.2	%
Asia (1)			6,743				33.9	%			4,266				37.7	%
Europe (includes Russia)			952				4.8	%			1,036				9.2	%
Other (2)			855				4.3	%			777				6.9	%
Total		$	19,906				100.0	%		$	11,312				100.0	%

(1)     Primarily Macau and Singapore.

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

 

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		Six Months Ended
		June 30,
		2010								2009
Revenues
United States		$	16,680				54.1	%		$	10,812				53.4	%
Asia (1)			10,777				34.9	%			5,752				28.4	%
Europe (includes Russia)			1,921				6.2	%			1,725				8.5	%
Other (2)			1,473				4.8	%			1,967				9.7	%
Total		$	30,851				100.0	%		$	20,256				100.0	%

(1)     Primarily Macau and Singapore.

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

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

		Three Months Ended
		June 30,
		2010								2009
Casino chips:
American-style casino chips		$	10,523				52.8	%		$	3,070				27.1	%
European-style casino chips			1,767				8.9	%			3,979				35.2	%
Total casino chips			12,290				61.7	%			7,049				62.3	%
Gaming furniture			2,229				11.2	%			489				4.3	%
Table accessories and other products			1,612				8.1	%			628				5.6	%
Playing cards			1,266				6.4	%			1,147				10.1	%
Table layouts			1,213				6.1	%			1,084				9.6	%
Dice			550				2.8	%			510				4.5	%
Shipping			746				3.7	%			405				3.6	%
Total		$	19,906				100.0	%		$	11,312				100.0	%
		Six Months Ended
		June 30,
		2010								2009
Casino chips:
American-style casino chips		$	15,857				51.2	%		$	7,599				37.5	%
European-style casino chips			3,661				11.9	%			4,368				21.6	%
Total casino chips			19,518				63.1	%			11,967				59.1	%
Gaming furniture			2,500				8.1	%			880				4.3	%
Playing cards			2,432				7.9	%			2,203				10.9	%
Table layouts			2,209				7.2	%			2,242				11.1	%
Table accessories and other products			2,091				6.8	%			1,310				6.4	%
Dice			1,034				3.4	%			891				4.4	%
Shipping			1,067				3.5	%			763				3.8	%
Total		$	30,851				100.0	%		$	20,256				100.0	%

 

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

		June 30, 2010				December 31, 2009
Property and equipment, net:
France		$	5,138			$	6,458
United States			3,524				3,670
Mexico			3,185				3,326
Total		$	11,847			$	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								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Interest income		$	73			$	72			$	128			$	121
Interest expense			(2	)			(34	)			(11	)			(62	)
Gain (loss) on foreign currency transactions			17				(68	)			3				25
Other income, net			4				9				35				26
Total other income and (expense)		$	92			$	(21	)		$	155			$	110

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								Six Months Ended
		June 30,								June 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				82				6				-
Weighted average number of common shares outstanding - Diluted			8,207				8,185				8,205				8,103

For the six months ended June 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 561,000 options then outstanding.

 

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

·

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

·

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

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

 

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

Overview of our Industry

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

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

 

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

Financial and Operational Highlights

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

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

Other Matters

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

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

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

CRITICAL ACCOUNTING ESTIMATES

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

RESULTS OF OPERATIONS

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

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

 

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

   

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

  

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