SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2002 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-22752
MIKOHN GAMING CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88-0218876
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
920 Pilot Road, P. O. Box 98686, Las Vegas, NV 89119
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (702) 896-3890
__________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, par value $.10 per share
(Title of class)
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
filing requirement for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K, or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ ] No [ X ]
The market value of the common stock held by nonaffiliates of the Registrant
as of June 28, 2002, was approximately $38,150,000. The market value was
computed by reference to the closing sales price of common stock on the NASDAQ
National Market System. The number of shares of common stock outstanding as of
March 31, 2003, was 12,890,385.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III hereof incorporates by reference portions of the Proxy Statement
for the Annual Meeting of Stockholders to be held on or about May 28, 2003
(to be filed with the Securities and Exchange Commission within 120 days
after December 31, 2002).
CAUTIONARY NOTICE
This Annual Report of Mikohn Gaming Corporation on Form 10-K contains
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements include the
words "may," "will," "estimate," "intend," "continue," "expect," or
"anticipate," and other similar words. Statements expressing expectations
regarding our future (including pending gaming and patent approvals) and
projections relating to products, sales, revenues and earnings are typical of
such statements.
All forward-looking statements, although reasonable and made in good
faith, are subject to the uncertainties inherent in predicting the future
including the successful completion of the restructuring transactions and the
receipt of all payments required thereunder, overall industry environment,
customer acceptance of the Company's new products, delay in the introduction
of new products, the further approvals of regulatory authorities, adverse
court rulings, production and/or quality control problems, the denial,
suspension or revocation of privileged operating licenses by governmental
authorities, competitive pressures and general economic conditions as well as
the Company's, and debt service obligations.
Forward-looking statements speak only as of the date they are made.
Readers are warned that we undertake no obligation to update or revise such
statements to reflect new circumstances or unanticipated events as they
occur, and are urged to review and consider disclosures we make in this and
other reports that discuss factors germane to our business. See particularly
our reports on Forms 10-K, 10-K/A, 10-Q, 10-Q/A and 8-K filed from time to
time with the Securities and Exchange Commission.
MIKOHN GAMING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PART I
Item 1. Business 2
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk 36
Item 8. Consolidated Financial Statements and Supplementary
Data 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 75
PART III
Item 10. Directors and Executive Officers of the Registrant 75
Item 11. Executive Compensation 75
Item 12. Security Ownership of Certain Beneficial
Owners and Management 75
Item 13. Certain Relationships and Related Transactions 75
PART IV
Item 14. Controls and Procedures 75
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 76
PART I
Item 1. Business
Operations
Our worldwide operations are concentrated in two principal business
segments: gaming operations and product sales. Our gaming operations segment
includes proprietary branded and non-branded slot machines and table games.
Our product sales segment includes interior signage, progressive jackpot
systems, and player tracking and accounting systems for slot machines and
table games. Set forth below is a description of each of our two principal
business segments.
Gaming Operations Segment
Established in 1993, our gaming operations segment develops, acquires,
manufactures and distributes proprietary games. We continue to believe gaming
operations provide us with high recurring revenues and increased profit
margin potential.
We own or license from third parties the rights to several categories of
proprietary games, which we place in casinos under lease arrangements. These
leases provide for either fixed rental payments or participation in the
game's operating results. Sales of proprietary games are reflected in the
reported results of our product sales business segment while revenues derived
from leases are included in the results of our gaming operations business
segment. Reported revenues relating to our branded games are net of
royalties. Set forth below are descriptions of some of our significant
proprietary slot machines and table games that are placed under lease
arrangements.
Slot Operations. Our slot operations include such products as our
Yahtzee(r), Battleship(r), Ripley's Believe It or Not!(r), Clue(r),
Trivial Pursuit(r) and MoneyTime(tm) slot machines.
Branded Slot Games. Under an exclusive license from Hasbro, Inc., we
developed a series of casino slot games based on Yahtzee(r), a well-known
dice game. Introduced to Nevada casinos in the late summer of 1999, the first
two versions of our Yahtzee(r) slot game were spinning reel slots topped with
oversized mechanical dice, to be rolled by a player to provide a bonus
opportunity. In December 1999, we introduced our Yahtzee(r) video game, a
five-reel, nine-line, 45-coin maximum bet video game. Special features include
an interactive, animated second screen and a random scatter-pay bonus, both
presenting three-dimensional dice characters.
In the second quarter of 2001, we released the Yahtzee(r) Mystery
Winner(tm) game, another version of video Yahtzee(r), which couples the
familiar name of Yahtzee(r) with a mystery theme and three bonus features.
Yahtzee(r) Mystery Winner(tm) video slot is a five-reel, nine-line, 90-coin
maximum-bet game video.
In the fourth quarter of 2000, we introduced our Battleship(r) All
Aboard(tm) video game. The slot game is interactive containing both strategy
and skill elements based on the popular Battleship(r) board game. The game was
developed in the five-reel nine-line video slot format with a maximum play of
up to 90 coins. In addition to the base game, players have the opportunity to
test their skill, as well as win more money, with three special bonus games.
One object of the bonus games is to destroy an enemy fleet of four ships of
various sizes concealed within an ocean grid in eight shots or less.
In the second quarter of 2001 we launched our Ripley's Believe It or
Not!(r) Adventures in Trivia(tm) video slot game as the first trivia-based
slot game. This five-reel, nine-line, 90-coin maximum-bet game, the first
within our Think Big(tm) series, incorporates scores of human-interest
questions. Players win based on the accuracy of their responses. Players win
more if they are right, but win something even if they are wrong.
In June 2000, we entered into an exclusive, worldwide licensing agreement
with Hasbro, Inc. to develop a slot version of Hasbro's Clue(r) board game.
The Clue(r) Winning Solution(tm) video slot game, the second game within our
Think Big(tm) series, and was released in the second quarter of 2002. The
Clue(r) slot game is based on the classic "whodunit" as players compete to
find out who contributed to the demise of the unfortunate Mr. Boddy. With six
characters, six weapons and nine rooms, there are a potential 324 different
combinations. Three main bonus games
exist. The primary "Winning Solution" bonus utilizes the home-game theme of
identifying Who, What and Where for the untimely demise of Mr. Boddy.
In September 2000, we entered into a licensing agreement with Hasbro,
Inc. to develop a slot version of the best selling trivia game, Trivial
Pursuit(r). The Trivial Pursuit(r) Easy as Pie(tm) video slot game was
introduced in the fourth quarter of 2002. The Trivial Pursuit(r) slot utilizes
a multi-coin, multi-line video platform featuring bonus rounds that features
the famous Trivial Pursuit(r) question database. Similar to the home board
game version of Trivial Pursuit(r) a player will have the ability to select his
or her favorite question category on some bonus rounds.
We are developing a video game named Wink's Survey of America with
television game show host Wink Martindale, as emcee. This game offering will
be on a video multi-game, multi-line platform. We intend to introduce this
game during the third quarter of 2003.
In February 2003, we entered into a joint development agreement with
Bally Gaming and Systems, a wholly- owned business unit of Alliance Gaming
Corp. to develop new wide-area progressive (WAP) games. Under the terms of
the agreement, Mikohn will provide branded game content to run on Bally
Gaming's S6000 platform. The games will then be incorporated into the
Thrillions(r) linked progressive system. The companies will share net profits
generated from the WAP. The agreement also allows both companies to receive
certain patent benefits. In addition, we will sell signage and electronics to
Bally as part of a long-term purchasing agreement.
Non - Branded Slot Games. To date, our primary non-branded slot game has
been MoneyTime(tm). We also have a mechanical coin-push game, Flip It(tm)
and large oversized video poker and slot machines, Mini Bertha(tm).
MoneyTime(tm), developed in 1997, is a slot game. It uses bonusing to
initiate, extend and increase play. Typically, 40 slot machines are
configured in a carousel with extensive overhead thematic signage
manufactured by us promoting the MoneyTime(tm) game. Each slot machine is
linked into a progressive jackpot system. When the progressive pool generated
reaches a randomly determined level within a specified range, the system
triggers a bonus mode in which multiple players are awarded portions of the
jackpot in rapid succession.
In December 2001, we entered into a license agreement with Acres Gaming,
Inc. allowing use of the Acres' patents related to our MoneyTime(tm) game
going forward.
Licensed Slot Games; We also sell or lease our game content to third
party providers of slot machines. These games are developed and marketed
jointly with the other parties. Game placement under this type of arrangement
commenced in the second quarter of 2002. Under this arrangement, we sell or
license the game content to a third party, but we do not provide any hardware
or ongoing maintenance.
On December 31, 2002, we had 2,380 third-party branded slot games, 394
non-branded slot games and 332 licensed games on lease to casinos compared to
2,679, 421 and 0, respectively for the year ended December 31, 2001. Total
slot lease revenues were approximately $27.3 million for the year 2002
compared to approximately $27.6 million for the year 2001.
Table Games. Through an acquisition in 1998, we acquired a variety of
specialty table games for casinos, including Caribbean Stud(r) poker.
We place table games directly with casino operators for a monthly fee at
a fixed rate per table. Most of the agreements with the casinos are for
three-year terms with a 30-day early cancellation clause. As of December 31,
2002, we had 1,067 revenue-producing table games installed compared to
approximately 1,134 installed as of December 31, 2001. Total table games
lease revenue was $16.5 million for the year 2002 compared to $17.2 million
for the year 2001. Set forth below are descriptions of some of our
proprietary table games that are placed under lease arrangements.
Caribbean Stud(r) is the most popular proprietary table game in the world.
As of December 31, 2002, approximately 900 of our Caribbean Stud(r) tables
were in service worldwide. Caribbean Stud(r) table games have been available
in casinos since 1988.
We also market table games such as Caribbean Draw Poker(tm), Tre' Card
Stud(tm), Wild Aruba Stud(tm), Progressive Blackjack(tm), and Progressive
Jackpot Pai Gow(tm) Poker.
Product Sales Segment
We have been marketing gaming products around the world since 1987. Our
gaming products are found in almost every major gaming jurisdiction and
include:
* interior signage and related electronic components;
* electronic player tracking and game monitoring systems; and
* special order, oversized and other slot machines for sale.
Interior Signage. We believe we have a reputation throughout the
industry as an innovator of high-impact signage particularly designed for the
gaming industry. We believe our product design capabilities, manufacturing
capacity and worldwide distribution network make us the industry leader in
interior casino signage. We design and manufacture interior signage and
related electronic components that are marketed and sold either as stand-
alone signs or in combination with progressive jackpot systems.
Interior casino signage differs in many respects from other forms of
signage. Casino signage typically features intricately detailed artwork, is
constructed in a wide variety of unusual shapes, is finished and detailed
with more expensive and delicate materials than other types of signage and
often is covered by an artistic finish such as polished aluminum or acrylic
laminate. Digital laser printers are used to produce sign faces that are then
laminated, mounted on plexiglass and assembled onto the finished sign. The
electrical components of the signs may include backlighting and a wide-range
of artistic lighting, metering systems, jackpot controllers and jackpot
triggering devices.
Interior signage is used extensively in connection with the "theming" of
interiors and the differentiation and identification of facilities. Custom
processes enable us to conform signs to a casino's existing theme or to
create distinctive themes for particular areas in a casino. Sales and design
personnel work closely with the customer in the development of the design
plans. Installations by the Company may be seen in mega-casinos throughout
the world, as well as in numerous other casinos in both domestic and foreign
gaming jurisdictions.
The average construction period for an interior signage project is
approximately three to eight weeks. We typically require a 50% down payment
before commencing manufacturing, with an additional 25% due at shipping and
the balance due 30 days after delivery/acceptance. While our interior
signage is commonly incorporated into large projects, remodeling and small
projects continue to stimulate demand.
Demand for interior signage has also been stimulated by the popularity
and growth of progressive jackpots throughout the gaming industry. These
often incorporate our interior signage into sophisticated merchandising
programs.
Although controllers, displays and software are all included in every
Mikohn progressive jackpot system, controllers and displays also are sold
separately to slot machine manufacturers and casino operators. The software
used to program the displays and controllers and monitor the systems and
machine usage is proprietary, thereby inhibiting the operator from
substituting components made by other manufacturers. Our progressive jackpot
systems can be connected into multi-site progressive links among a number of
casinos. The operator of the gaming machine is responsible for payouts of all
jackpots.
Controllers. Our proprietary controllers are designed to be compatible
with the gaming equipment made by the major slot machine manufacturers,
including Aristocrat Leisure Limited, Atronic Casino Technol0gy, Ltd.,
Alliance Gaming Corporation, Novomatic Industries, Sigma Game, Inc.,
Universal de Desarrollos Electronicos, S.A. (known as UNIDESA), WMS
Industries, Inc. and International Game Technology. Our controllers are
licensed in almost every major gaming jurisdiction. We have the largest
installed base of controllers in the industry. The sale of our controllers
for a progressive jackpot system is frequently accompanied by the sale of our
electronic displays promoting the system.
Electronic Displays. We manufacture displays in a wide variety of sizes
and designs to accommodate the
technical, aesthetic and price requirements of our casino customers. Our
electronic displays are installed with slot machines made by the major slot
manufacturers and are found in casinos throughout the world. We produce
alphanumeric and graphic electronic displays for use in real-time applications
with all major brands and models of slot machines. Our displays primarily use
light emitting diodes ("LEDs") which can be turned on and off approximately 100
times per second and can be programmed to display information in a wide variety
of formats, including flashing, panning from side-to-side, odometer, pulsating,
scrolling up or down, painting (each character is formed from the top down),
morphing and dancing colors (each character alternates color). LEDs also can
utilize foreground or background color, user-selectable and downloadable font
and text justification. Cells of LEDs may be combined to display characters and
graphics in a variety of sizes ranging from small to very large. We supply
displays to casinos and gaming equipment manufacturers for their wide-area
progressive systems.
Systems We also sell or lease electronic player tracking and game
monitoring systems to casino operators and governmental agencies.
Progressive Jackpot Systems. A progressive jackpot system monitors play
on one or more slot machines or table games and accumulates, in real-time, a
predetermined percentage of each coin bet to create a jackpot. This jackpot
increases continuously until won by a player. The system then can be reset
automatically to accumulate and present subsequent jackpots. Progressive
jackpot systems can serve a single machine or can be electronically linked
with a number of slot machines to generate a collective jackpot. Progressive
jackpot systems create larger jackpots to contribute added excitement to the
game and to provide an incentive for players to play the maximum number of
coins. Our table game progressive system is not offered for sale to casinos
but is available only under lease or licensing arrangements.
Software. We design application software for use in connection with our
progressive jackpot systems. The software permits the casino operator to set
jackpot frequencies and levels in response to competitive factors and
variations in customer demand and to set a maximum amount to be displayed as
a jackpot, which effectively limits the casino's liability in the event of a
programming or technical error. The software is programmable to accommodate a
variety of international currencies, and is supplied either on a diskette for
installation on the casino's stand-alone personal computer or on a memory
card we sell for installation in a palmtop computer.
Our SuperLink(r) software package supplies a comprehensive, multi-faceted
system for managing a progressive jackpot network from a central location.
The SuperLink(r) system consists of Mikohn bonus and/or standard progressive
controllers, a Mikohn smart interface board for each machine and a PC-hosted
monitoring system. The system PC provides reports and statistics for bonus
game play and features screens for configuration and set-up. It also links
the interface packages of electronic displays, controllers and software into
one total integrated package, permitting centralized control and facilitating
the operation, programming and monitoring of progressive jackpots and
bonuses. As a result, we believe that the SuperLink(r) system enables casino
operators to manage their slot machines with greater efficiency, which can
increase productivity, enhance security and reduce costs. Moreover, the
SuperLink(r) system, with its built-in flexibility, is a system that will
enhance both existing and new slot machines with new progressive, bonusing
and merchandising features, including our MoneyTime(tm), Mystery Jackpot(tm)
and Bonus Jackpot(tm) systems.
Bonusing Systems. A bonusing system provides a cash bonus which can be
random or preset separate from the normal payout for a winning combination.
While bonus amounts are typically lower than the top payout for the game, the
frequency is higher, providing a valuable merchandising tool for stimulating,
extending and increasing the rate of play.
Bonus Jackpot(tm) provides a random cash bonus along with the normal
payout for a winning combination. Any or all of eight progressive pay levels
may be selected as the bonus level, and up to eight random bonuses can be set
for each selected level.
Mystery Jackpot(tm) is a progressive system that randomly rewards patrons
according to a fixed pay schedule. The bonus is triggered when the mystery
(hidden) jackpot reaches a random level within a specified range. Once a
winner is identified, a payout is randomly selected from one of eight awards.
Mystery Jackpot(tm) awards a player a progressive jackpot just for playing;
no winning reel combination or minimum coin-in is required. The range for
the jackpot can be configured by the operator, and the system randomly selects
a jackpot amount within that range and
awards the jackpot via the credit meter to the player.
Accessories. We also supply a number of accessory products that allow
the casino customer to operate a wider variety of progressive games, provide
promotional messages, animated and graphic displays, and generate additional
statistical and operating information from the slot machines linked to
progressive jackpot systems. Available accessories also include devices to
boost electrical outputs to a large number of displays, cable and fiber-optic
connectors, devices to trigger visual or aural signals when a progressive
jackpot is hit, and circuitry for the display of progressive jackpot amounts
on the screens of video slot machines.
Keno. Under a licensing agreement with XpertX, Inc., we hold the
exclusive worldwide distribution rights (except Nevada) to the XpertX(tm)
keno system. Key features of this keno system include: player tracking,
including player account information, player trip history, play and win
amounts and buy-in limits; reporting, including customized audit/management
reports and inter-property progressive capabilities; display functions,
including in-room television keno display and advertising options; and
built-in diagnostic software and disc mirroring features.
CasinoLink(r). Our CasinoLink(r) system is an integrated management system
for the gaming enterprise. Operating on a Microsoft Windows NT(r) /2000 / SQL
Server(r) platform, CasinoLink(r) provides its users with robust, highly
scalable applications for accounting and auditing, administration and security,
jackpot management and player marketing. CasinoLink(r) is exceptionally well
suited to fulfill the requirements of large, geographically dispersed casino
operators who require multi-site capability.
The CasinoLink(r) system is installed throughout the gaming operations of
more than 20 casino operators worldwide. CasinoLink(r) is utilized domestically
by single-site operators in California and Oregon and a multi-site operator
in Nevada. We believe we hold the dominant share of the gaming system market
in Canada, with installations in the multi-site, provincial lottery
corporations of Alberta, British Columbia, Ontario and Saskatchewan. In the
European market we have single-site installations in Finland, Greece and
Italy, as well as multi-site installations in the Netherlands, Estonia,
Lithuania, Russia, the Slovak Republic, Slovenia and Sweden.
In September 2002, through an agreement with Rank Group Gaming ("Rank"),
we debuted the world's first operational wide area progressive system for
table games. Operating on our CasinoLink Progressive Jackpot system, the
Caribbean Stud(r) Poker wide area progressive was initially linked in three
casinos in the United Kingdom, with a rollout to Rank's remaining 30 casinos
during the early part of 2003.
TableLink(r). We also develop and market automated data collection systems
for player tracking and accounting for table games. These products include
our patented TableLink(r) technology.
In 1995, we acquired the worldwide rights to develop, manufacture, market
and distribute the technology incorporated in our TableLink(r) system, a
player tracking and data collection system for table games. This system enables
the casino to recognize and reward players, and enhances game security. Our
TableLink(r) system employs:
* special casino chips that are embedded with computer microchips which
* transmit encrypted radio frequency signals;
* sensors at each player position at the table;
* player identification card readers;
* optical readers that read playing cards as they are dealt for card game
applications; and
* touch-screen computer displays at the gaming table or pit stand.
Information is compiled by patented instruments and computer and sensor
technology, which electronically track all bets in real-time as the chips are
placed, producing a record of each game. In addition to providing player
tracking, chip tracking and game tracking, the technology can be used to
integrate a progressive jackpot system with other table games to stimulate
player excitement and improve revenue production. The TableLink(r) system
provides casino operators with real-time accounting of the play of each table
game player. Improved accuracy and player-initiated ratings not only are very
useful to the casino in identifying and directing complimentary benefits to
the customer, but also improve customer loyalty. It also redirects supervisor
time from administrative to customer-relationship tasks.
The TableLink(r) system brings to table games the benefits of accurate and
automated data collection and player tracking, previously seen only in the
slot machine sector. Players initiate their ratings using their player cards
when they begin play. The TableLink(r) system tracks the time played, wagers
made and game results. The information can be interfaced with the casino's
main database and used for rewarding patrons as well as building marketing
information. TableLink(r) is available in three tiers: PT (Player Tracking),
CT (Chip Tracking) and GT (Game Tracking). TableLink(r) PT is the base product
upon which the CT and GT product offerings are built.
In June 1999, we licensed TableLink(r) to the Mandalay Resort Group for
use in their MotorCity Casino in Detroit, MI, on all of its tables.
TableLink(r)has been in continuous operation since December 1999, where it is
used to provide accurate marketing information about table game players.
TableLink(r) also serves to differentiate MotorCity from its nearby
competitors by allowing customers to initiate their own rating sessions
directly at the table by inserting their patron cards into the card readers in
the rail.
Customized Slot Machines. We hold an exclusive license from International
Game Technology to manufacture and distribute oversized and giant slot
machines known as Mini-Bertha(tm) and Colossus(tm), respectively. These
oversized and giant slot machines come in electronic video and slot-reel
formats, feature many of International Game Technology's popular games and
can be linked within a casino on a progressive network. Because of their size,
they provide greater visual appeal and variety. Management also believes that
they generate greater win per machine for the casino than conventional slot
machines. The machines are available for sale, lease or license.
International Game Technology receives a license fee based upon the income
derived from the machines that are placed. Lease income from these machines
is reported in our gaming operations segment, while income from sales is
reported in our product sales segment. The revenues relating to these
machines as reported in our financial statements are net of license fees paid
to International Game Technology.
Competition
The markets for our products are highly competitive. We compete with a
number of developers, manufacturers and distributors of products similar to
those that we produce and distribute. Some of these competitors are larger
and have greater access to capital resources than we do. Our future
performance may be affected by numerous factors, including:
* the continued popularity of our existing products and our ability to
develop and introduce new products that gain market acceptance and
satisfy consumer preferences;
* our ability to maintain existing regulatory approvals and obtain
future approvals in order to conduct our business; and
* our ability to enforce our existing intellectual property rights and
to adequately secure and enforce such rights for new products.
Many of our products require regulatory approval. We believe that the
amount of time and money consumed in the course of obtaining licenses in new
jurisdictions and new product approvals in multiple jurisdictions constitute
significant obstacles to entry or expansion by new competitors. In addition
to regulatory constraints, our intellectual property rights to patents and
trademarks help protect our products. We actively seek patent and trademark
protection and vigorously enforce our intellectual property rights.
Gaming Operations Competition
Slot Operations. The success of many of the recent video-based games and
the popularity of many of the themed game introductions are dictating the
types of games being developed. The current competitive environment is
placing increasing demands on equipment makers, requiring a strong pipeline
of new games and the ability to secure rights to popular brand names and
other entertainment-oriented content suitable for adaptation for casino
games. Future growth opportunities in the gaming equipment industry will
result not only from a strong pipeline of well-defined branded games, but
also from new product developments and technological advancements.
Our proprietary slot games business segment faces both direct and
indirect competition. Manufacturers that sell standard slot machines to
casino operators indirectly compete with us for casino floor space and market
share. Manufacturers that offer proprietary games to casino operators on a
lease or participation basis compete directly with
us. Direct competitors typically offer specialty, niche or novelty games.
In some cases they offer casino customers the right to purchase specialty
games at premium prices or at a lower price with ongoing license fees. Our
major competitors include AC Coin & Slot Company, Alliance Gaming, Aristocrat,
Atronic, International Game Technology, Konami Gaming Corporation, Sigma Game,
Shuffle Master, Inc. and WMS Industries.
Table Games. In the proprietary table game market, we are a leading
designer, manufacturer and distributor of progressive jackpot table games,
and we believe our patents significantly limit the ability of competitors to
offer table games with progressive or electronically enhanced side-bet
features. The only significant competitors in proprietary table games are
Shuffle Master, which markets the Let It Ride(tm) and Three Card Poker(tm)
games and BET Technology, Inc., which markets Fortune Pai Gow Poker and Royal
Match Blackjack. Our patented side-bet progressive jackpot feature, which was
developed for Caribbean Stud(r), has been successfully adapted for Progressive
Jackpot Pai Gow Poker, Caribbean Draw Poker(r) and Progressive Blackjack(tm),
and is adaptable for other games. Through its deployment, we can convert
industry-standard table games which are in the public domain to proprietary
games capable of producing for us a recurring revenue stream. We believe that
this proprietary feature provides us with a competitive advantage by
facilitating our ability to introduce new table games.
Product Sales Competition
Interior Signage. We believe that we are the leading worldwide
manufacturer of interior casino signs and the dominant competitor in this
specialized market. We are recognized as the industry leader in technology
integration, artistic concepts, library of designs, design staff,
distribution network and structural design, all of which are essential to the
production of the complex thematic signage found in new mega-casinos. These
factors, in the aggregate, create significant obstacles to entry by new
competitors. Competitors in the interior sign business include AC Coin & Slot
Company, Aristocrat, B&D Signs, DID Signs, Egads and Young Electric Sign
Company.
Systems. In the electronics, bonusing and control systems market, we
believe that our components for progressive jackpot systems have the highest
market share and name recognition in the industry. The primary competitors
for our progressive jackpot system components are Aristocrat, Paltronics and
Acres Gaming.
We may in the future face additional competition from other component
manufacturers. For example, International Game Technology currently uses the
controllers and software it manufactures solely in connection with its own
proprietary slot machines. However, International Game Technology may in the
future commence sales of these components to other slot machine manufacturers
and casino operators. In the placement of progressive jackpot bonusing
systems, we compete with Acres Gaming and the major slot machine
manufacturers who have developed their own proprietary gaming products that
incorporate progressive jackpot bonusing systems into their games.
Our CasinoLink(r) system competes against systems from Acres Gaming,
Alliance Gaming, Monaco Information Systems Group, Aristocrat, and
International Game Technology. This market is highly competitive. Pricing,
product features and functions, accuracy and reliability are key factors in
determining a provider's success in selling its system. Because of the high
initial costs of installing a computerized monitoring system, customers for
such systems generally do not change suppliers once they have installed such
a system. Mikohn has been successful primarily with customers in foreign
jurisdictions that desire to monitor geographically dispersed casinos from a
centralized control facility.
TableLink(r) systems automatically capture and record exact wagering
information in real-time. This information includes the exact amount wagered,
a critical element that gaming operators traditionally have had great
difficulty in ascertaining and confirming. Prior to the introduction of the
TableLink(r) technology, casinos could only estimate amounts wagered. We hold
worldwide rights to this system. Patents protecting the system and several of
its unique features have been issued to us in the United States, as well as
in several foreign jurisdictions. We believe that such patents serve as a
significant barrier to entry for potential competitors. Our entry level
TableLink(r) PT version competes with products marketed by International Game
Technology, EndX Limited and Table Trac, Inc.
Manufacturing
We currently have manufacturing/assembly facilities in Las Vegas, NV, and
Hurricane, UT, as well as Utrecht, The Netherlands. Most manufacturing
relates to the interior sign business, but we also assemble electronic
displays, controllers, table games and proprietary games. We routinely
contract with outside vendors for assembly services to keep idle production
capacity to a minimum and maintain a constant level of employment.
Nearly all of the components and raw materials we use in our products are
available from many sources. Many suppliers can assemble our progressive
jackpot products. Accordingly, we are not dependent in any significant way
upon any single supplier or vendor for components, raw materials or assembly.
However, we are dependent on Sigma Game for the manufacture of the game
platform we use to build our branded slot machines.
To reduce our dependence from Sigma, in March 2002, we signed an
agreement with Sigma Game which will allow the Company to develop games on
the Sigma platform. Additionally, in April 2002, we entered into an agreement
with Sierra Design Group, which has a license to develop software used in
International Game Technology's slot machines, to distribute our game content
on its slot machine platform.
In October 2002, the Company entered into a development and licensing
agreement with Aristocrat whereby Aristocrat will be an exclusive supplier of
hardware for our branded slot machine products in certain North America
jurisdictions. Under the agreement, we will be responsible for game
development and theme licensing and Aristocrat will integrate the games onto
its latest game platforms. The companies will share responsibility for
marketing and servicing the games. In addition, the agreement also grants us
the right of first refusal to provide signage, electronics and slot glass for
Aristocrat games throughout North America. In January 2003, this agreement
was expanded to allow us to outsource our servicing, maintenance and
refurbishing needs to Aristocrat, so we may focus our efforts on game
development, including game conceptualization, art and software program
design. Aristocrat will receive royalties for service and hardware rendered
on a per game per day. On a jurisdiction-by-jurisdiction basis, we plan to
replace our existing slot machines placed in casinos with Aristocrat versions
of these machines.
Marketing and Distribution
We maintain facilities to sell and service our products to markets
throughout the world. In addition to our headquarters and other facilities
in Las Vegas, NV, we have regional sales offices in Sparks, NV; Ft.
Lauderdale, FL; Egg Harbor, NJ; Golden, CO; Gulfport, MS, Alexandria,
Australia, and Utrecht, The Netherlands. Mikohn Latin America S.A. sells and
services our products throughout Latin America and the Caribbean and has
manufacturing facilities in Lima, Peru. In September 2002, we sold our
remaining interest in Mikohn Latin America S.A. and it is now an exclusive
distributor of our products.
Research and Development
During the years ended December 31, 2002, 2001, and 2000, we expended
approximately $4.2 million, $4.2 million, and $5.2 million respectively, on
research and development activities.
As previously noted, the casino gaming industry is intensely competitive,
causing casinos to constantly seek out, evaluate and introduce new and
upgraded gaming products in an effort to attract and retain gaming customers.
An important part of our strategy is to provide our casino customers with new
and upgraded products, games and services that enhance their revenue stream
and facilitate operating efficiencies. Our current emphasis in research and
development is on the development of new slot games and table games
(including refresher versions of our existing slot games).
Employees
As of March 14, 2003, we had approximately 425 employees worldwide, of
whom approximately 135 were in manufacturing, 50 in sales and distribution,
30 in art/CAD design, 75 in installation and service, 65 in research and
development and 70 in administration. None of our employees are covered by a
collective bargaining agreement. We believe that we enjoy good relations
with our employees.
Government Regulation
Overview
We are subject to regulation by governmental authorities in most
jurisdictions in which our products are sold or used by persons or entities
licensed to conduct gaming activities. Gaming regulatory requirements vary
from jurisdiction to jurisdiction, and obtaining licenses, findings of
suitability, registrations and/or other required approvals with respect to
us, our personnel and our products is time-consuming and expensive.
References in this "Government Regulation" section to "Mikohn," "we," "us"
and "our" are to Mikohn Gaming Corporation only, and not to its subsidiaries.
Generally, gaming regulatory authorities have broad discretionary powers
and may deny applications for or revoke approvals on any basis they deem
reasonable. Although our experience is excellent, we may be unable to obtain
or maintain necessary gaming regulatory approvals for us, our products or our
personnel.
We, either directly or through our subsidiaries, have approvals that
enable us to conduct our business in numerous jurisdictions, subject in each
case to the conditions of the particular approvals. These conditions may
include limitations as to the type of game or product we may sell or lease,
as well as limitations on the type of facility (such as riverboats) and the
territory within which we may operate (such as tribal nations). Jurisdictions
in which we (together with our subsidiaries, and specific personnel where
required) have authorizations with respect to some or all of our products and
activities include Nevada, South Dakota, Mississippi, Iowa, Missouri, Oregon,
Louisiana, Colorado, Illinois, Washington, Arizona, Connecticut, Montana, New
Jersey, North Carolina, North Dakota, New Mexico, Kansas, Minnesota, Indiana,
Michigan, New York, Wisconsin, California; the Canadian provinces of Alberta,
Manitoba, Nova Scotia, Quebec, Saskatchewan, British Columbia and Ontario;
the Australian provinces of New South Wales, Victoria, Queensland, Northern
Territory, Western Australia, Australia Capital Territories and Tasmania; New
Zealand; Mpumalanga and Gauteng in South Africa; and Greece.
We have a provisional license in Puerto Rico, which permits us to
transact our business pending completion of the license application process.
Certain Indian tribes throughout the United States that have compacts
with the states in which their tribal dominions are located, operate or
propose to operate casinos, and these tribes may require suppliers of gaming
and gaming- related equipment to obtain authorizations. We have worked and
will continue to work with these tribes to obtain the necessary
authorizations.
At this time the Company is in the process of cooperating with certain
state gaming authorities with respect to the required licensing of the
Company's Chief Executive Officer, Chief Financial Officer and related
financial controls, policies and procedures. The Company expects to conclude
this process shortly and believes that the results of the required reviews
will not have a material adverse effect on the Company.
Gaming Devices and Equipment
We sell or lease products which are considered to be "gaming devices"
and/or "gaming equipment" in jurisdictions in which gaming has been
legalized. Although regulations vary among jurisdictions, each jurisdiction
requires various licenses, findings of suitability, registrations, approvals
or permits to be held by companies and their key personnel in connection with
the manufacture and distribution of gaming devices and equipment.
Associated Equipment
Some of our products fall within the general classification of
"associated equipment." "Associated equipment" is equipment that is not
classified as a "gaming device," but which has an integral relationship to
the conduct of licensed gaming. Regulatory authorities in some jurisdictions
have discretion to require manufacturers and distributors to meet licensing
or suitability requirements prior to or concurrently with the use of
associated equipment. In other jurisdictions, associated equipment must be
approved by the regulatory authorities in advance of its use at licensed
locations. We have obtained approval of our associated equipment in each
jurisdiction that requires such approval and in which our products that are
classified as associated equipment are sold or used.
Regulation of Stockholders
In most jurisdictions, any beneficial owner of our voting securities or
other securities may, at the discretion of the gaming regulatory authorities,
be required to file an application for a license, finding of suitability or
other approval, and in the process subject himself or herself to an
investigation by those authorities. The gaming laws and regulations of
substantially all jurisdictions require beneficial owners of more than 5% of
our outstanding voting securities to file certain reports, and may require
our directors and executive officers to undergo investigation for licensing
and/or findings of suitability.
Regulation and Licensing-Nevada
Gaming The manufacture, sale and distribution of gaming devices for
use or play in Nevada or for distribution outside of Nevada, the
manufacturing and distribution of associated equipment for use in Nevada, and
the operation of slot machine routes and inter-casino linked systems in
Nevada are subject to (i) the Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, "Nevada Act") and (ii) various local
ordinances and regulations. These activities are subject to the licensing and
regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the
Nevada State Gaming Control Board ("Nevada Board"), and various local, city
and county regulatory agencies (collectively referred to as the "Nevada
Gaming Authorities").
The laws, regulations and supervisory practices of the Nevada Gaming
Authorities are based upon declarations of public policy with the following
objectives:
* preventing any involvement, direct or indirect, of any unsavory or
unsuitable persons in gaming or the manufacture or distribution of
gaming devices at any time or in any capacity;
* strictly regulating all persons, locations, practices and activities
related to the operation of licensed gaming establishments and the
manufacturing or distribution of gaming devices and equipment;
* establishing and maintaining responsible accounting practices and
procedures;
* maintaining effective controls over the financial practices of
licensees (including requirements covering minimum procedures for
internal fiscal controls and safeguarding assets and revenues,
reliable recordkeeping and periodic reports to be filed with the
Nevada Gaming Authorities);
* preventing cheating and fraudulent practices; and
* providing and monitoring sources of state and local revenue based on
taxation and licensing fees.
Changes in such laws, regulations and procedures, depending upon their
nature, could have an adverse effect on our operations.
We are registered by the Nevada Commission as a publicly traded
corporation (a "Registered Corporation") and have been found to be suitable
to own the stock of Mikohn Nevada which is licensed as a manufacturer and
distributor of gaming devices, and as an operator of a slot machine route.
The Company and Mikohn Nevada have obtained from the Nevada Gaming
Authorities the various authorizations they require to engage in Nevada in
manufacturing, distribution, slot route operations and inter-casino linked
system activities consisting of slot machines. The regulatory requirements
set forth below apply to us as a Registered Corporation and to Mikohn Nevada
as a manufacturer, distributor and operator of a slot machine route.
All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured
by licensed manufacturers and distributed and sold by licensed distributors.
All gaming devices manufactured for use or play in Nevada must be approved by
the Nevada Commission before distribution or exposure for play. The approval
process for gaming devices includes rigorous testing by the Nevada Board, a
field trial and a determination that the gaming device meets strict technical
standards set forth in the regulations of the Nevada Commission. Associated
equipment must be administratively approved by the Chairman of the Nevada
Board before it is distributed for use in Nevada.
As a Registered Corporation, we are periodically required to submit
detailed financial and operating reports to the Nevada Commission and furnish
any other information the Nevada Commission may require. No person may become
a stockholder of or receive any percentage of profits from Mikohn Nevada
without first obtaining authorizations from the Nevada Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, us or Mikohn Nevada
in order to determine whether such individual is suitable or should be
licensed as a business associate of a gaming licensee. Officers, directors
and certain key employees of Mikohn Nevada are required to file applications
with the Nevada Gaming Authorities and may be required to be licensed or
found suitable by the Nevada Gaming Authorities. Our officers, directors and
key employees who are actively and directly involved in gaming activities of
Mikohn Nevada may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause that they deem reasonable. A finding of suitability
is comparable to licensing. Both require submission of detailed personal and
financial information, which is followed by a thorough investigation. The
applicant for licensing or a finding of suitability must pay all the costs of
the investigation. Changes in licensed positions must be reported to the
Nevada Gaming Authorities. In addition to their authority to deny an
application for a finding of suitability or licensure, the Nevada Gaming
Authorities have the power to disapprove a change in corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with us or Mikohn Nevada, we would have to sever all
relationships with that person. In addition, the Nevada Commission may
require us or Mikohn Nevada to terminate the employment of any person who
refuses to file appropriate applications. Determinations of suitability or of
questions pertaining to licensing are not subject to judicial review in
Nevada.
Mikohn and Mikohn Nevada are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by Mikohn
Nevada also are required to be reported to or approved by the Nevada
Commission.
Should Mikohn Nevada be found to have violated the Nevada Act, the
licenses it holds could be limited, conditioned, suspended or revoked. In
addition, Mikohn Nevada, Mikohn and the persons involved could be required to
pay substantial fines, at the discretion of the Nevada Commission, for each
separate violation of the Nevada Act. Limitation, conditioning or suspension
of any license held by Mikohn Nevada could (and revocation of any license
would) materially adversely affect our manufacturing, distribution and slot
operations.
Regulation of Security Holders
Any beneficial holder of our voting securities, regardless of the number
of shares owned, may be required to file an application, be investigated, and
have his or her suitability as a beneficial holder of our voting securities
determined if the Nevada Commission finds reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred
by the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. It also requires beneficial owners of
more than 10% of a Registered Corporation's voting securities to apply to the
Nevada Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails a written notice requiring such filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10%, but not more than 15%, of the
Registered Corporation's voting securities may apply to the Nevada Commission
for a waiver of such finding of suitability if such institutional investor
holds the voting securities for investment purposes only.
An institutional investor is deemed to hold voting securities for
investment purposes if the voting securities were acquired and are held in
the ordinary course of its business as an institutional investor and were not
acquired and are not held for the purpose of causing, directly or indirectly:
(i) the election of a majority of the members of the board of directors of
the Registered Corporation; (ii) any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations or those of any
of its gaming affiliates or (iii) any other action that the Nevada Commission
finds to be inconsistent with holding the Registered Corporation's voting
securities for investment purposes only. Activities which are not deemed to
be inconsistent with holding voting securities for investment purposes only
include: (i) voting on all matters voted on by stockholders; (ii) making
financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in
management, policies or operations and (iii) other activities the Nevada
Commission may determine to
be consistent with investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust,
it must submit detailed business and financial information including a list
of beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability or
a license within 30 days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any stockholder of a Registered
Corporation found unsuitable and who holds, directly or indirectly, any
beneficial ownership in the voting securities beyond such period of time as
the Nevada Commission may specify for filing any required application may be
guilty of a criminal offense. Moreover, the Registered Corporation will be
subject to disciplinary action if, after it receives notice that a person is
unsuitable to be a stockholder or to have any other relationship with the
Registered Corporation, it: (i) pays that person any dividend on its voting
securities; (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities ownership; (iii) pays remuneration
in any form to that person for services rendered or otherwise or (iv) fails
to pursue all lawful efforts (including, if necessary, the immediate purchase
of said voting securities for cash at fair market value) to require such
unsuitable person to completely divest all voting securities held.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be
investigated and be found suitable to own the debt security of a Registered
Corporation if the Nevada Commission finds reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. If the Nevada Commission determines that a person is
unsuitable to own such security, it may sanction the Registered Corporation,
which sanctions may include the loss of its approvals if, without the prior
approval of the Nevada Commission: it (i) pays to the unsuitable person any
dividend, interest, or other distribution; (ii) recognizes any voting right
of such unsuitable person in connection with such securities; (iii) pays the
unsuitable person remuneration in any form or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation or similar transaction.
The pledge of the stock of Mikohn Nevada (the "Stock Pledge") and of the
stock of any future subsidiary that obtains a gaming license (a "Future
Subsidiary"), and the restriction on the transfer of and agreement not to
encumber the equity securities of Mikohn Nevada or any Future Subsidiary
(collectively, the "Stock Restrictions") in respect of the notes was approved
by the Nevada Commission on March 21, 2002. No assurances can be given that
such approvals in the future will be granted or granted on a timely basis. An
approval of the Stock Pledge by the Nevada Commission does not constitute
approval to foreclose on the Stock Pledge. Separate approval would be
required to foreclose on the Stock Pledge and transfer ownership of the stock
and such approval would require the licensing of the indenture trustee or
other secured party (the "Secured Party"), unless such licensing is waived
upon application of the Secured Party. No assurances can be given that
approval to foreclose on the Stock Pledge would be granted, or that the
Secured Party would be licensed or would receive a waiver of licensing
requirements. Foreclosure of the lien on collateral consisting of gaming
devices in respect of the notes and the taking possession of such gaming
devices may require the prior licensing of the Secured Party as a distributor
by the Nevada Commission. However, the Nevada Act provides that in the case
of foreclosure of a lien by a person holding any security interest for which
gaming devices are security in whole or part, the Nevada Board may authorize
the disposition of such gaming devices without requiring a distributor's
license. No assurances can be given that the Nevada Board would grant such
approval or that if such approval were not granted, that the Secured Party
would be granted a license as a distributor.
The Company and Mikohn Nevada are required to maintain a current stock
ledger in Nevada that may be examined by the Nevada Gaming Authorities at any
time. If any securities are held in trust by an agent or by a nominee, the
record owner may be required to disclose the identity of the beneficial owner
to the Nevada Gaming Authorities. A failure to make such disclosure may be
grounds for finding the record owner unsuitable.
We also are required to render maximum assistance in determining the
identity of the beneficial owners of our securities. The Nevada Commission
has the power to require us to imprint our stock certificates with a legend
stating that the securities are subject to the Nevada Act. To date, the
Nevada Commission has not imposed such requirement on us.
We may not make a public offering of our securities without the prior
approval of the Nevada Commission if
the securities or proceeds therefrom are to be used to construct, acquire or
finance gaming facilities in Nevada, or to retire or extend obligations
incurred for such purposes. Such approved, if given, does not constitute a
finding, recommendation or approval by the Nevada Commission or the Nevada
Board as to the accuracy or adequacy of the prospectus or the investment
merit of the offered securities, and any representation to the contrary is
unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting
agreements, or any act or conduct, by which anyone obtains control, may not
lawfully occur without the prior approval of the Nevada Commission. Entities
seeking to acquire control of a Registered Corporation must meet the strict
standards established by the Nevada Board and the Nevada Commission prior to
assuming control of a Registered Corporation. The Nevada Commission also may
require persons who intend to become controlling stockholders, officers or
directors, and other persons who expect to have a material relationship or
involvement with the acquired company, to be investigated and licensed as
part of the approval process.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming licensees, and Registered
Corporations that are affiliated with those operations, may be injurious to
stable and productive corporate gaming. The Nevada Commission has established
a regulatory scheme to minimize the potentially adverse effects of these
business practices upon Nevada's gaming industry and to further Nevada's
policy to: (i) assure the financial stability of corporate gaming licensees
and their affiliates; (ii) preserve the beneficial aspects of conducting
business in the corporate form and (iii) promote a neutral environment for
the orderly governance of corporate affairs. Approvals are, in certain
circumstances, required from the Nevada Commission before the Registered
Corporation can make exceptional repurchases of voting securities above
market price and before a corporate acquisition opposed by management can be
consummated. The Nevada Act also requires prior approval of a plan of
recapitalization proposed by the Registered Corporation's board of directors
in response to a tender offer made directly to the Registered Corporation's
stockholders for the purpose of acquiring control of the Registered
Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, must be paid to the State of Nevada and to the
counties and cities in which gaming operations are conducted. These fees and
taxes, depending upon their nature, are payable monthly, quarterly or
annually and are based upon either a percentage of the gross revenues
received or the number of gaming devices operated. Annual fees are also
payable to the State of Nevada for renewal of licenses as an operator of a
slot machine route, manufacturer and/or distributor.
Any person who is licensed, required to be licensed, registered, required
to be registered, or who is under common control with any such persons
(collectively, "Licensees") and who proposes to become involved in a gaming
venture outside of Nevada, is required to deposit with the Nevada Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada Board of his or her participation
outside of Nevada. The revolving fund is subject to increase or decrease at
the discretion of the Nevada Commission. Thereafter, Licensees are required
to comply with certain reporting requirements imposed by the Nevada Act.
Licensees also are subject to disciplinary action by the Nevada Commission if
they knowingly violate any laws of the foreign jurisdiction pertaining to the
non- Nevada gaming operations, fail to conduct the foreign gaming operations
in accordance with the standards of honesty and integrity required of Nevada
gaming operations, engage in activities or enter into associations that are
harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employ, contract with or associate with a person in the non-Nevada
operations who has been denied a license or finding of suitability in Nevada
on the ground of unsuitability.
Other Jurisdictions
All other jurisdictions that have legalized gaming require various
licenses, registrations, findings of suitability, permits and approvals for
manufacturers and distributors of gaming devices and equipment. In general,
such requirements involve restrictions similar to those of Nevada.
Federal Regulation
The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful, in general, for a person to manufacture, transport, or receive
gaming machines, gaming machine type devices, and components across state
lines or to operate gaming machines unless that person has first registered
with the Attorney General of the United
States. We have registered and must renew our registration annually. In
addition, various recordkeeping and equipment identification requirements are
imposed by the Federal Act. Violation of the Federal Act may result in seizure
and forfeiture of the equipment, as well as other penalties.
Application of Future or Additional Regulatory Requirements
In the future, we intend to seek the necessary registrations, licenses,
approvals and findings of suitability for us, our products and our personnel
in other jurisdictions throughout the world where significant sales of our
products are expected to be made. However, we may be unable to obtain these
registrations, licenses, approvals or findings of suitability, which if
obtained may be revoked, suspended or unsuitably conditioned. In addition, we
may be unable to timely obtain, or to obtain at all, the necessary approvals
for our future products as they are developed, even in those jurisdictions in
which we or certain of our existing products have been licensed or approved.
If a registration, license, approval or finding of suitability is required by
a regulatory authority and we fail to seek or do not receive the necessary
registration, license, approval or finding of suitability, we may be
prohibited from selling our products for use in that jurisdiction or may be
required to sell our products through other licensed entities at a reduced
profit.
Item 2. Properties
The table below lists our leased manufacturing, administrative,
engineering, sales and service facilities as of December 31, 2002.
Area
Location/Activity (Sq Ft.)
---------------------------------------- -------
Las Vegas, NV - Corporate Administration 86,515
Las Vegas, NV - Subleased 45,976 *
Las Vegas, NV - Games and Electronics-Manufacturing 85,638 *
Las Vegas, NV - Slot Glass 17,225
Sparks, NV - Administration, Service and Sales 8,587
Mokena, IL- Service 4,200
Gulfport, MS - Service and Sales 28,000 *
Robinsonville, MS - Service 1,800
Kansas City, MO - Service 3,600
Hurricane, UT - Manufacturing 79,230
Shreveport, LA - Service 1,500
Ft. Lauderdale, FL - Service and Sales 2,000
Golden, CO - Service 1,500
Egg Harbor, NJ - Service and Sales 2,800
Calgary, Canada - Sales and Service 1,800
Alexandria, Australia - Sales and Service 25,349
Utrecht, The Netherlands - Manufacturing,
Service and Sales 21,422
-------
417,142
=======
* As part of the restructuring plan, announced in August 2002, a charge
of approximately $3.3 million was taken to record the present value of these
three building lease commitments which, in accordance with the actions
taken by the Company, will not be utilized as of specified dates as certain
business operations have been streamlined, consolidated or divested.
These locations have remaining terms of occupancy ranging up to fourteen
years that expire on various dates through 2017.
See Note 12 of Notes to Consolidated Financial Statements for information
as to the Company's lease commitments with respect to the foregoing rental
properties. We believe these facilities are suitable for our needs and we
have no future expansion plans that would make these properties inadequate.
Item 3. Legal Proceedings
We are involved in routine litigation, including bankruptcies of debtors,
collection efforts, disputes with former employees and other matters in the
ordinary course of our business operations. We know of no matter, pending or
threatened that will or might have a material adverse impact on our business
or operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters
Our common stock trades on the NASDAQ National Market System under the
symbol "MIKN". The following table sets forth the range of high and low sales
prices per share by quarter for our common stock.
High Low
2002 ------ -----
First Quarter $10.06 $ 5.00
Second Quarter 7.20 4.10
Third Quarter 4.75 1.28
Fourth Quarter 3.40 1.93
2001
First Quarter $ 4.94 $ 2.75
Second Quarter 8.25 3.50
Third Quarter 8.50 3.15
Fourth Quarter 8.85 3.90
We believe there were approximately 2,500 beneficial owners of our common
stock as of March 31, 2003. The approximate number of beneficial owners as
of that date was reached by estimating the number of holders whose stock is
held for them in street name by brokerage houses, by trusts and other
nominees and by participants in a clearing agency. On March 31, 2003, we had
approximately 300 holders of record of our common stock.
We have never paid dividends nor do we have any plans to pay dividends in
the future. At present, we intend to retain all future earnings for use in
the development of our business. The indenture governing the Company's $105.0
million of Senior Secured Notes due 2008 expressly prohibits the payment of
cash dividends except under specified circumstances. See Note 12 of Notes to
Consolidated Financial Statements for information as to the Company's Senior
Secured Note commitments.
The following table summarizes equity securities authorized for issuance
as of December 31, 2002.
Number of Number of securities
securities to be remaining available for
issued upon Weighted- average future issuance under
exercise of exercise price of equity compensation
outstanding outstanding plans (excluding
options, warrants options, warrants securities reflected in
and rights and rights column (a)
---------- ---------- ----------
(a) (b) (c)
Equity compensation plans
approved by shareholders 2,320,203 $ 4.92 284,570
Equity compensation plans not
approved by shareholders 955,000 (1) $ 6.62 508,334
---------- ------- --------
Total 3,275,203 $ 5.42 792,904
========== ======= ========
(1) Amount includes: (a) warrants to purchase an aggregate of 420,000
shares of common stock at a price of $7.70 per share related to the
Company's private placement of $105.0 million of its 11.875% Senior
Secured Notes; and (b) warrants to purchase 535,000 shares of the
Company's common stock issued to various licensors which granted
the Company rights to intellectual property.
Item 6. Selected Financial Data
The table below sets forth a summary of our selected financial data for
each of the years ended December 31, (amounts in thousands except per share
amounts):
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Statement of Operations Data:
Net sales $ 102,588 $ 98,161 $ 85,404 $ 93,835 $ 82,545
Cost of sales 51,808 41,353 41,300 44,874 47,457
------- ------- ------- ------- -------
Gross profit 50,780 56,808 44,104 48,961 35,088
Selling, general and administrative
expenses 53,247 49,125 44,108 39,096 36,664
Restructuring expense 5,618 - - - -
Severance expense 4,774 - - - -
Impairment loss 6,261 1,656 9,852 1,352 4,493
------- ------- ------- ------- -------
Operating income (loss) (19,120) 6,027 (9,856) 8,513 (6,069)
Interest expense (15,689) (11,720) (10,498) (8,839) (5,115)
Loss on early retirement of debt - (3,135) - - (1,752)
Other income and (expense) 375 1,620 (62) 651 152
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes (34,434) (7,208) (20,416) 325 (12,784)
Income tax (provision) benefit (1,480) (847) (574) 432 3,819
------- ------- ------- ------- -------
Income (loss) from continuing
operations (35,914) (8,055) (20,990) 757 (8,965)
Income (loss) from discontinued
operations (net of taxes) (1,989) (1,645) (1,115) 175 939
------- ------- ------- ------- -------
Net income (loss) $ (37,903) $ (9,700) $ (22,105) $ 932 $ (8,026)
========= ========= ========= ========= =========
Weighted average common shares
outstanding:
Basic 12,843 11,750 10,968 10,720 10,527
Diluted 12,843 11,750 10,968 10,784 10,527
======== ======== ======== ======== ========
Basic and diluted income (loss)
per share:
Income (loss) from continuing
operations $ (2.80) $ (0.69) $ (1.92) $ 0.07 $ (0.85)
Income (loss) from discontinued
operations (0.15) (0.14) (0.10) 0.02 0.09
------- ------- ------- ------- -------
Net income (loss) $ (2.95) $ (0.83) $ (2.02) $ 0.09 $ (0.76)
======== ======== ======== ======== ========
Balance Sheet Data:
Total assets $ 141,993 $ 175,587 $ 166,746 $ 178,295 $ 167,841
Total debt / obligations $ 123,967 $ 124,982 $ 113,488 $ 108,221 $ 101,612
Stockholders' equity (deficit) $ (6,912) $ 28,654 $ 29,205 $ 48,116 $ 46,727
========= ========= ========= ========= =========
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
Amounts disclosed in the accompanying tables are shown in thousands while
amounts included in text are disclosed in actual amounts.
RESTRUCTURING PLAN - 2002
During the third quarter of 2002, the Company initiated a restructuring
plan for certain of its operations. The restructuring plan was designed to
achieve various objectives, principally related to reducing costs,
streamlining operations and improving financial performance on an ongoing
basis. The Company's Board of Directors approved the plan in August 2002,
which was subsequently acted upon by management during the third quarter of
2002. The principal restructuring initiatives included:
* Replacing the Chief Executive Officer, Chief Financial Officer and
certain other executives;
* Eliminating approximately 20% of the Company's permanent work force;
* Divesting non-core business units and product lines;
* Disposing under-utilized assets;
* Consolidating interior sign production capacity into one facility;
* Streamlining certain of the Company's warehousing and slot route
assembly operations; and
* Outsourcing and streamlining certain of the Company's international
sign operations.
The actions taken on these initiatives are expected to yield the following
results (amounts are approximate):
* Annualized cost savings of $7.0 million from reducing the Company's
permanent work force head count by approximately 130 employees. The
headcount reductions did not effect the Company's Research and
Development or Sales departments;
* Annualized rental and occupancy expense reductions from the
consolidating or divesting of assembly facilities of $1.0 million;
* Annualized savings of $0.8 million from the divesting of its
exterior sign business;
* Annualized expense reduction of $1.2 million from the departure of
former officers of the Company, which will be offset by the hiring
of other key officers and employees.
As a result of implementing the above initiatives, the Company recorded
certain restructuring expenses, severance expenses, a loss from discontinued
operations and certain other significant operating costs in the third quarter
of 2002. The Company also recorded an impairment loss relating to certain of
its indefinite and definite-lived intangible assets, property and equipment
and inventories. These impairment charges were recorded based on valuation
analyses whereby it was determined that cash flow, earnings and other key
operational criteria no longer supported the carrying values of these assets.
In addition, the Company recorded a charge to write-down the assets of its
exterior sign operations, net of expected proceeds. The charges totaled $27.8
million for the third quarter and $28.0 million for the year ended December
31, 2002, and are described below.
RESTRUCTURING EXPENSE
Included in the restructuring expense caption of Consolidated Statements
of Operations is approximately $0.9 million of principally non-officer
employee severance costs for approximately 130 terminated employees related
to the restructuring plan. Excluding the Company's research and development
and sales personnel, all employee groups within the Company were affected by
the terminations. At December 31, 2002, approximately $0.1 million of this
restructuring expense remains to be paid.
Additionally, a restructuring charge of approximately $3.3 million was
taken to record the present value of long-term building lease commitments
which, in accordance with the actions taken by the Company, will not be
utilized as of specified dates as certain business operations have been
streamlined, consolidated or divested. The
leases are for one building located in Gulfport, Mississippi and for two
buildings located in Las Vegas, Nevada. The building lease in Mississippi
has a term which expires in approximately 13 years, while the two leases in
Nevada have terms expiring in July 2004 and in 2017. On a quarterly basis
through July 2004, the Company plans to remit cash of approximately $0.3
million under the lease agreements, net of sublease rental amounts.
Subsequent to July 2004, the Company plans to remit cash of approximately
$0.1 million quarterly. The Company is currently subleasing one of the Las
Vegas buildings and is currently seeking tenants for subleasing the other
buildings.
Also included in restructuring expenses were write-downs of certain
property and equipment to their net realizable value in relation to the
curtailment of planned business operations with certain assembly facilities
and the sale of certain real estate. Specifically, a charge for approximately
$1.5 million was recorded for various leasehold improvements, machinery and
equipment and real estate. Of the $1.5 million, a building owned by the
Company in Las Vegas, Nevada, was sold for approximately $0.5 million less
than its book value of $2.2 million. The Company realized net cash proceeds
of $1.7 million from this sale in November 2002. The Company is attempting
to sell the machinery and equipment no longer used in the ongoing operations
of the Company.
The restructuring expense is not included in the calculation of operating
income in the tables shown below.
SEVERANCE EXPENSE
Included in the severance expense caption in the Company's consolidated
statement of operations are charges for the separation and post-employment
agreements of the Company's former CEO, CFO and another officer. Including
severance and other provisions of the agreements, the total charge was
approximately $4.8 million of which $1.8 million in cash payments were made
during the year ended December 31, 2002. Approximately $0.6 million of the
severance expense was applied by the former CEO and CFO to repay outstanding
loans and advances owed to the Company. At December 31, 2002, approximately
$2.2 million remained unpaid to these individuals. However, in March 2003,
the Company paid its former CEO all remaining amounts owed him under the
chief executive officer severance agreement totaling $1.4 million in
conjunction with his retirement as chairman of the board of directors. On a
quarterly basis through July 2003, the remaining required quarterly payments
to the remaining individuals approximate $0.2 million. Subsequent to July
2003 through August 2006, the Company is required to pay approximately $0.2
million annually.
The severance expense is not included in the calculation of operating
income in the tables shown below.
IMPAIRMENT LOSS
An impairment loss was recorded during the third quarter of 2002 for
certain definite-lived intangible assets. Management ascertained that
certain of its definite-lived intangible assets no longer generated
sufficient actual or anticipated future revenues, earnings or cash flows.
Based thereon, the Company recorded approximately $3.9 million in write-downs
of these impaired intangible assets. The write-downs consisted primarily of a
license agreement related to certain table game hardware of approximately
$1.0 million, software costs related to Monopoly(r) table games of
approximately $0.6 million, proprietary rights and software development costs
related to certain components of our table game tracking system of
approximately $1.5 million and capitalized costs associated with patents that
are no longer deemed useful of approximately $0.7 million.
The Company maintains certain indefinite-lived intangible assets as part
of its consolidated financial statements, principally in a perpetual license
related to its casino table game operations and, to a limited extent,
goodwill related to its slot route operations and international operations.
An independent valuation test as of January 1, 2002 and September 30, 2002
did not result in any impairment. However, as a result of the Company's
divestiture of its Latin American subsidiary, goodwill related to the Latin
American subsidiary was deemed to have been impaired during the third quarter
of 2002. Therefore, the Company recorded a goodwill impairment loss of
approximately $0.4 million.
In connection with the restructuring initiatives and a third quarter
valuation review of its long-lived assets, the Company determined that the
assets described below no longer generated sufficient cash flow to support
their carrying value. These assets are comprised of approximately 200 reel-
spinning slot machines and certain non-branded assets including MoneyTime(tm),
a proprietary jackpot system consisting of slot machines, signs, meters and
related electronics. The impairment charge recorded in the third quarter of
2002 related to these assets totaled approximately $1.7 million.
Additionally, the Company decided to no longer use certain trade show
equipment, after returning from its annual trade show in September 2002, and
recorded a charge for approximately $0.2 million in the third quarter of
2002.
The impairment loss is not included in the calculation of operating
income in the tables shown below.
The company performs an impairment analysis on all of its long-lived and
intangible assets on a quarterly basis. For indefinite lived assets,
including perpetual licenses and goodwill, an independent valuation is
performed at least annually to determine if any impairment has occurred.
OPERATING COSTS AND EXPENSES
The Company recorded various charges totaling approximately $4.0 million
for inventory write-downs and approximately $4.3 million principally for
provisions for doubtful receivables during the third quarter of 2002. These
charges are included under the caption "Operating Costs" in the consolidated
statements of operations.
Certain inventories were deemed obsolete in the quarter as the Company,
in accordance with its restructuring plan, entered into arrangements to
outsource certain international sign assembly operations and to discontinue
the pursuit of certain European system sales related to the tracking of
arcade devices. These charges amounted to approximately $1.0 million.
Additionally, the Company wrote down slow moving inventories for specialized
electronic meters, slot machines and finished signs in the amount of
approximately $3.0 million as targeted sales levels were not achieved.
On September 20, 2002, the Company completed the sale of its 50% interest
in its Latin American subsidiary as part of the restructuring initiatives. A
charge of approximately $1.8 million was recorded to reflect the difference
between the sale price and an intercompany debt from the subsidiary to the
Company. The Company recorded provisions for doubtful accounts totaling $2.5
million that includes $1.5 million to reserve a loan made to a company that
in turn granted the Company an exclusive license to manufacture and
distribute its video poker games. Based on the debtor's financial condition
and uncertainties surrounding the Company's future business plan related to
the proprietary games, a provision for doubtful accounts was recorded.
Various other uncertainties with other debtors caused the Company to record
an additional $1.0 million of doubtful account provisions in the third
quarter of 2002.
YEAR-END ASSET VALUATION AND CHARGES - 2001
A review and analysis performed during the fourth quarter of 2001
resulted in the Company taking various charges in its fourth quarter for
(i) impaired assets (principally goodwill and nonoperating fixed assets of
approximately $1.7 million included in the "Impairment Loss" caption),
(ii) receivables, including significant amounts owed from debtors who
purchased certain patent and internet rights, for which collectibility is
now considered doubtful (approximately $2.5 million which is included in the
operating income segments below), (iii) inventory reserves, including those
related to the energy crisis and the economic decline (approximately $1.4
million included in the operating income segments below), (iv) losses
incurred in foreign operations due to the collapse of the Argentina economy
and softness in the Australasian market (approximately $0.6 million included
in revenues below) and (v) miscellaneous charges related to medical insurance
claims and certain international slot leasing revenues of $1.0 million
(included in operating income segments below).
Two of the Company's operating units operated at losses during 2001.
Although the Company initially believed future business plans during 2001 did
not necessitate impairment losses relating to these operating units, the
downturn in the economy in the latter part of 2001 and an assessment of the
backlog of these operating units in the fourth quarter of 2001 and the first
quarter of 2002 caused the Company to record an impairment loss of
approximately $0.5 million, principally for goodwill of two of these
operating units. These charges relate to our corporate and product sales
operations.
Additionally, the Company decided in the fourth quarter that it would no
longer use certain long-lived operating assets. Since these assets,
principally related to trade shows, non-compete agreements and slot route
revenue
production, were deemed to no longer benefit the Company, the Company
recorded write-offs of approximately $1.2 million. These charges relate to
our corporate operations and our gaming operations business segment.
In the latter part of 2001, a debtor of the Company, whose obligation is
secured by certain Internet and patent rights, defaulted. The Company
amended the debtor's payment terms but concluded after assessing the economic
environment in late 2001 that it would be prudent to reserve the net
receivable of $1.5 million. These charges relate to our gaming operations
business segment.
Additional events in late 2001, including certain bankruptcy filings,
customer disputes and slower paying debtors caused the Company to record an
additional $1.3 million reserve in the fourth quarter. These charges relate
to our gaming operations and product sales business segments.
Additionally, reductions in the Company's backlog for certain interior
sign and systems products in the fourth quarter, both domestically and
internationally, indicated substantially slower inventory turnover and caused
the Company to record additional inventory reserves of approximately $1.4
million. These charges relate to our product sales business segment.
During the fourth quarter of 2001 and into the first quarter of 2002, the
Company determined that the effect from the collapse of the Argentine economy
was likely to have a material impact on the future operations of Mikohn Latin
America. Specifically, certain assets were deemed to be uncollectible or
significantly impaired. As a result, the Company recorded a charge of
approximately $0.3 million for impairment of the Argentine assets in the
fourth quarter of 2001. Additionally, the Company deemed certain assets from
its Australian subsidiary to be impaired based on the business unit's
inability to generate expected positive cash flow in 2001 and for the
foreseeable future. An additional $0.3 million charge was recorded for those
assets in the fourth quarter of 2001. These charges, totaling approximately
$0.6 million, relate to our product sales business segment.
During the latter part of 2001, the Company incurred significant medical
claims and related costs under its employee medical benefits plan. These
costs were approximately $0.3 million higher than in previous quarters and
were caused principally by a few abnormally large claims. In addition,
charges of approximately $0.3 million and less than $0.1 million were
recorded in the fourth quarter of 2001 due to a dispute with a previous
medical claims administrator now in litigation and for other miscellaneous
charges, respectively. These charges, totaling approximately $0.6 million,
relate to our corporate operations.
The Company incurred approximately $0.3 million in costs to convert a
number of slot machines to comply with Canadian technical requirements in the
latter part of 2001. Based on a determination that these expenditures did
not increase the value of the machines, the Company recorded a charge for
these expenses. These charges relate to our gaming operations business
segment.
ACQUISITION / DIVESTITURE OF SUBSIDIARIES
On May 14, 2002, the Company acquired 1,744,403 shares of MGA from TAB
Limited ("TAB"). These shares represented 8% of the issued and outstanding
shares of MGA, increasing the Company's ownership in this subsidiary from 92%
to 100%. The purchase price for the shares was approximately $1.1 million,
payable $0.8 million on closing and a promissory note for approximately $0.3
million. The promissory note is due June 30, 2005 and bears interest at 5%
per annum with principal and interest due at maturity. Simultaneously with
the purchase of these shares, the Company and TAB amended their existing
licensing agreement granting TAB additional rights to operate a Mystery(r)
Linked Jackpot system in New South Wales. In consideration for these
additional rights, TAB agreed to pay a fee of approximately $0.8 million
within seven days after execution of the agreement and to pay an additional
fee, aggregating a minimum of approximately $0.6 million over three years, in
the amount of $8 per month per game connected to the system. The Company and
TAB agreed that monies owed by the Company to TAB for the purchase of the
shares in MGA could be offset by the monies owed by TAB to the Company under
the terms of the amended license agreement.
On September 20, 2002 the Company completed the sale of our remaining 50%
interest in our Latin American subsidiary as part of the restructuring
initiatives. The interest was sold for approximately $0.4 million consisting
of a cash payment of $0.1 million and a note for approximately $0.3 million
which was paid in full on November 15,
2002, in accordance with the terms of the agreement. A charge of approximately
$1.8 million was recorded to reflect the forgiveness of an intercompany debt
from the subsidiary to the Company. As a result of the Company's divestiture
of its Latin American Subsidiary, goodwill related to the Latin American
subsidiary was deemed to have been impaired during the quarter ended September
30, 2002. Therefore, the Company recorded a goodwill impairment loss of
approximately $0.4 million.
During the third quarter of 2002, in connection with its restructuring
plan, the Company decided to divest its exterior sign operations in the
Product Sales segment. On October 1, 2002 the Company reached a definitive
agreement to sell the exterior sign operations. The transaction closed on
October 31, 2002 for $1.7 million, consisting of cash payments totaling $1.2
million and a note for $0.5 million paid on December 31, 2002 in accordance
with the terms of the agreement. As a result of the sale, a charge of
approximately $1.1 million related to the impairment of the exterior sign
operations assets, net of the expected proceeds, was recorded. In addition, a
charge of approximately $1.0 million for a long-term advertising lease deemed
no longer useful to the entity was included in the loss from normal
operations. The loss from discontinued operations is shown net of an income
tax benefit of 34% applied to the pretax loss. The operating results of this
business were previously included in the "Product Sales" segment and are
presently reflected as "Discontinued Operations" in the accompanying
consolidated statements of operations.
RELATED PARTY TRANSACTIONS
During the year ended December 31, 2002, the Company entered into various
material transactions with related parties. Specifically, the Company charged
interest and other expense of approximately $0.2 million and sold
approximately $0.2 million of products to its 50% owned, unconsolidated
subsidiary in Latin America. During the third quarter of 2002, the Company
sold its remaining 50% interest in its Latin American subsidiary as part of
the restructuring initiatives. All sales and expense charges to or from
affiliates were deemed to be arms-length transactions.
Included in "Notes receivable-related parties" at December 31, 2002 are
amounts owed from a former officer and a former director of the Company that
were due and payable October 30, 2002. The loans arose out of a stock
purchase plan approved by the Board of Directors in October 1997. Under the
plan, each person who elected to participate purchased shares of the
Company's restricted common stock at the closing price on October 30, 1997.
Each participant borrowed from the Company the entire purchase price for the
shares of common stock he elected to buy. The loans are evidenced by
promissory notes and are secured by a pledge of the purchased shares. The
Company has given notice that the loans are in default, has demanded payment
and, on December 31, 2002, the Company foreclosed on the stock securing the
promissory notes. The two defaulted loans, including interest, total
approximately $0.3 million at December 31, 2002. In March 2003, the Company
filed a claim against the former officer and agreed to payment terms with the
former director in accordance with a promissory note.
David J. Thompson announced his resignation as chief executive officer
effective August 16, 2002 and, on March 21, 2002, Mr. Thompson announced his
retirement as chairman of the board of directors. According to the provisions
of Mr. Thompson's chief executive officer severance agreement, the Company
recorded a charge of approximately $3.3 million of which $1.5 million in cash
payments were made during the year ended December 31, 2002. Approximately
$0.3 million of the chief executive officer severance agreement was applied
by Mr. Thompson to repay outstanding loans and advances owed to the Company.
At December 31, 2002, approximately $1.5 million remained unpaid of the chief
executive officer severance agreement. As part of his retirement package,
the Company paid the remaining amounts owed Mr. Thompson under the chief
executive officer severance agreement totaling $1.4 million on March 20,
2003. There are no future payments due Mr. Thompson.
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues
Change
2002 2001 Amount % Comment
------ ------ ------ ------ ------
Business segment:
Gaming operations $ 43,859 $ 44,805 $ (946) (2.1)% 1
Product sales 58,729 53,356 5,373 10.1 % 2
------- ------- -------
Total revenues $102,588 $ 98,161 $ 4,427 4.5 %
======== ======== =======
Percentage of total revenues:
Gaming operations 42.8% 45.6%
Product sales 57.2% 54.4%
----- -----
Total 100.0% 100.0%
===== =====
1. Gaming operations' revenues during the year ended December 31, 2002
were $43.9 million, a decrease of approximately $0.9 million, or 2%,
from revenues of $44.8 million in the 2001 comparable period. This
net decrease resulted from:
(i) a decrease in recurring revenues from leased slot machines
of approximately $0.3 million in 2002, from approximately $27.6
million in the prior year, to approximately $27.3 million in the
current year as increases in revenues from branded slot machines
and licensed games were offset by a decrease in revenues from
non-branded games. The improvement in branded slot machine
revenue was attributable to an 8% increase in the average number
of branded slot machines leased to customers to approximately
2,530 for the year ended December 31, 2002 from approximately
2,340 in the prior year, partially offset by an approximate 6%
reduction in the average net win per day per branded slot
machine, from approximately $28 during 2001 to approximately $26
during 2002. Management believes that a slight change in the
demographics of slot machine placements, whereby more slot
machines were located in jurisdictions with historically lower
win per day amounts, contributed to the decline in the average
win per day. Non-branded slot machines accounted for $2.7 million
of revenues in 2002 as compared to approximately $3.8 million in
2001. Average non-branded machines outstanding during the year
were approximately 410 and 450 for 2002 and 2001, respectively.
Additionally, the Company received approximately $0.3 million in
2002 from the participation in an average of 200 licensed games
for which the Company does not provide hardware for the games.
The Company intends to continue the acquisition of leasing
arrangements whereby the Company would supply the software
component to a third party which would use hardware not otherwise
owned or leased by the Company. These games earned the Company
approximately $8 per day and did not exist in the prior year. At
December 31, 2002, the Company maintained 2,380, 394 and 332
branded, non-branded and licensed games without hardware,
respectively. At December 31, 2001, the Company maintained
2,679, 415 and 0 branded, non-branded and licensed games without
hardware, respectively, and
(ii) a decrease of approximately $0.7 million in table games
revenues. This decrease was caused primarily by a decline in the
number of outstanding tables and in the average monthly lease
revenue in domestic markets offset, in part, by the exclusion for
approximately ten months of table game revenues from the
Company's Australian subsidiary which, until November 2001, was a
50% owned subsidiary whose table games revenues were excluded
from the consolidated results. For the year ended December 31,
2002, revenues from European and domestically leased casino table
games were approximately $15.3 million compared with
approximately $17.1 million in 2001. Management believes that
the industry trend to reduce the number of table games in casinos
in the last several years in favor of slot machines, as well as
increased competition from competitors selling "felt" only table
games, have contributed to this decline in table game placements
and revenues. During the years ended December 31, 2002 and 2001,
the Company averaged approximately 1,090, which includes the
table games in Australia, and 1,040 leased casino table games,
respectively. The average monthly lease revenue was approximately
$1,200 during 2002 compared to approximately $1,280 during 2001.
The monthly lease revenue includes royalties and commencement
fees paid during the respective years. Management believes that
the decline in the average monthly lease charge in 2002 was
attributable to the absence of table commencement fee revenues in
2002, lower royalty payments received, and a lower percentage of
the higher revenue generating progressive table games in 2002.
The decrease in revenues was partially offset by gross revenues
from table games operations in Australia in 2002 that were not
consolidated in the Company's 2001 financial statements as the
Australian subsidiary was a 50% owned, unconsolidated subsidiary
until November 15, 2001. During the year ended December 31,
2002, the Australian subsidiary was a wholly-owned subsidiary,
and it generated table game revenues of approximately $1.2
million compared to revenues of $0.1 million from November 15 to
December 31, 2001. The Company maintained 1,067 and 1,134 table
games at December 31, 2002 and 2001, respectively.
2. Product sales' revenues during the year ended December 31, 2002 were
$58.7 million, an increase of approximately $5.4 million, or 10%,
from revenues of $53.3 million in the 2001 comparable period. This
increase during 2002 was due principally to:
(i) the inclusion of revenues from the Company's Australian
subsidiary in 2002 that were not included with the Company's 2001
consolidated financial results of approximately $7.5 million.
The majority of this subsidiary's revenues were excluded from the
2001 consolidated revenues, as the subsidiary was a 50% owned
non-consolidated subsidiary until November 15, 2001. During the
year ended December 31, 2002, the Australian subsidiary was a
wholly-owned subsidiary. Offsetting this increase in the current
year was a decline in interior signage and visual display
products of approximately $1.8 million from the exclusion of the
Company's Latin American subsidiary revenues in 2002 due to this
subsidiary becoming a non-consolidated reporting business
beginning October 1, 2001. Additionally, the Company experienced
a decline in European and domestic sales of its interior sign
products and visual display products of approximately $2.9
increase in service and installation revenues of approximately
$1.0 million, and
(ii) an increase of approximately $2.4 million in revenues from
the Company's systems business operations. Increased sales to
certain Canadian customers which expanded casino slot operations
during the year, as well as new customer installations in Europe
related to the growth and expansion of casinos, were the primary
contributor to this increase.
Operating Income
Change
2002 2001 Amount % Comment
------ ------ ------ ------ ------
Business segment:
Gaming operations $ 7,894 $ 15,661 $ (7,767) (49.6)% 1
Product sales 2,553 4,882 (2,329) (47.7)% 2
------- ------- -------
Total segment operating
income 10,447 20,543 (10,096) (49.1)%
Corporate (12,914) (12,860) (54) (0.4)% 3
------- ------- -------
Total operating income
(loss) $ (2,467) $ 7,683 $(10,150) (132.1)%
======== ======== ========
Depreciation and amortization:
Gaming operations $ 8,188 $ 7,743 $ 445 5.7 %
Product sales 993 1,100 (107) (9.7)%
Corporate 3,320 3,257 63 1.9 %
------- ------- -------
Total depreciation and
amortization $ 12,501 $ 12,100 $ 401 3.3 % 4
======== ======== ========
1. Gaming operations' operating income during the year ended December
31, 2002 was $7.9 million compared to operating income of $15.7
million in 2001. This net decrease of approximately $7.8 million
was primarily due to:
(i) the previously discussed decrease in recurring revenues
from leased slot machines of approximately $0.3 million and an
increase in the costs to service, refurbish and maintain the slot
machine route. The cost to service, refurbish and maintain the
slot route increased to approximately $8.8 million in the current
year as compared to approximately $5.7 million in the prior year.
Factors which caused this increase included significant
refurbishment costs to a non-branded product involving signs,
electronics and slot machine tracking, refurbishment costs to
existing slot machines for a new product theme involving
customized features, conversion costs in changing out previously
themed games to new game themes, and the normal costs associated
with maintaining older slot machines which are no longer under a
warranty period and typically require increased repair and
maintenance. Slot rental expense increased to $5.5 million in
2002 as compared to $4.1 million in 2001. Depreciation and
amortization for the years ended December 31, 2002 and 2001 was
$6.8 million and $5.1 million, respectively. The increase was due
primarily to the increase in total slot route equipment during
2002 combined with an acceleration of depreciation in respect to
certain signage and slot machines in 2002. The Company also
incurred segment expenses, excluding slot rent expense and
depreciation and amortization expense, of approximately $7.8
million in 2002 compared to approximately $5.1 million in 2001.
This $2.7 million increase was caused by a charge for bad debts
of $1.5 million. The remaining $1.2 million increase was caused
principally by increased sales and engineering expenses related
to the development and introduction of new game themes and
certain charges for stock options issued to consultants, and
(ii) an improvement in operating income of approximately $1.3
million from leased casino table games due primarily to a decline
in segment expenses and a decrease in depreciation and
amortization, partially offset by the previously discussed
decrease in recurring revenues of $0.7 million and an increase in
costs of revenues. Costs of revenues as a percentage of revenues
increased to 21% in 2002 from 13% in 2001. This occurred as the
Company refurbished many of its older table games during 2002,
incurring both increased repair costs and personnel expenses to
complete the refurbishments. Total costs of revenues, exclusive
of segment expenses, for the year ended December 31, 2002 totaled
approximately $3.4 million compared to approximately $2.2 million
in 2001. Depreciation and amortization for the years ended
December 31, 2002 and 2001 was $1.4 million and $2.6 million,
respectively. The decrease was due primarily to the curtailment
in the amortization of certain goodwill and intangible assets due
to the implementation of SFAS No. 142 beginning in January 2002.
Segment expenses, excluding depreciation and amortization, were
approximately $2.0 million in 2002 as compared with $4.0 million
in 2001. The decrease was due primarily to a decrease in the
provision for bad debts of $1.5 million as well as decreases in
personnel and related expenses and in sales and engineering
costs.
2. Product sales' operating income during the year ended December 31,
2002 was $2.6 million, compared to operating income of $4.9 million
in 2001. This decline of approximately $2.3 million in operating
income resulted principally from:
(i) lower gross profit margins from the Company's interior
signs, electronics and other product sales of approximately 36%
in 2001 to 30% in 2002. This decline was caused principally by
an increased provision for obsolete inventories in the year ended
December 31, 2002 to approximately $3.7 million as compared to
provisions for obsolescence in 2001 of approximately $1.1 million
and lower gross profit margins on certain installation contracts,
certain of which were outsourced and generated negative gross
profit in 2002. Additionally, segment expenses, before
depreciation and impairment or restructuring charges, increased
approximately $1.9 million primarily due to an increase in the
provision for bad debts of approximately $1.9 million in 2002
relating principally to a receivable from the Company's former
50% owned subsidiary in Latin America. Depreciation and
amortization for the years ended December 31, 2002 and 2001 was
$0.9 million and $1.0 million, respectively. This slight decrease
was due primarily to the curtailment in the amortization of
certain goodwill and intangible assets due to the implementation
of SFAS No. 142 beginning January 2002. These factors were
offset, in part, by the aforementioned increase in revenues
during 2002, and
(ii) an improvement in operating results of the Company's systems
business of approximately $1.5 million, due primarily to the
aforementioned increase in revenues of $2.4 million. Gross profit
margins for the years ended December 31, 2002 and 2001 remained
relatively constant at 51% for both periods. Segment expenses,
excluding costs of sales, impairment or restructuring expense and
depreciation and amortization expenses, decreased from $4.0
million in 2001 to approximately $3.8 million in 2002. Decreases
in research and development costs related to certain new systems
product development in 2002 contributed to the decrease in
segment expenses. Depreciation and amortization for the years
ended December 31, 2002 and 2001 was $0.1 million for both
periods.
3. Corporate expenses during the year ended December 31, 2002 were
$12.9 million, a slight increase compared to $12.8 million in 2001.
This increase occurred principally from increases in marketing
expenses and legal and compliance expenses, partially offset by the
reduction in the Company's permanent work force as part of the
restructuring plan in August 2002.
4. Depreciation and amortization during the year ended December 31,
2002 was approximately $12.5 million, an increase of $0.4 million,
or 3%, from approximately $12.1 million in 2001. This increase was
primarily due to the aforementioned increase in depreciation related
to slot machines, partially offset by the aforementioned decreases
in amortization related to both table games and interior signs and
electronics.
Interest Expense
Interest expense during the year ended December 31, 2002 was $15.7
million, an increase of $4.0 million, or 34%, from $11.7 million in 2001.
This increase was due to higher average outstanding borrowings during 2002
and a higher average effective interest rate during 2002 of approximately 14%
compared to approximately 10% in 2001. In August 2001, the Company refinanced
its debt structure and incurred an additional $18 million of long-term debt
at a higher interest rate.
Loss from Discontinued Operations
During the year ended December 31, 2002, the Company recorded losses from
discontinued operations, net of income tax benefits calculated at a 34% tax
rate, of approximately $2.0 million compared to a loss of $1.6 million during
the year ended December 31, 2001. The losses relate to the Company's exterior
sign operation, which was sold effective October 31, 2002. The decision to
sell this operation was made in August 2002.
Other Income and Expense
Other income and expense, excluding interest income, for the year ended
December 31, 2002 was a net expense of $0.3 million compared to net income
the year ended December 31, 2001 of $1.0 million. The decrease from the
prior year's income to the current year's net expense was caused principally
from the recognition of a net gain from the sale of 50% of the Company's
Australian subsidiary of approximately $1.3 million which was completed by
the delivery of a wide area progressive system during the third quarter of
2001.
Interest income for the year ended December 31, 2002 was $0.7 million
compared to $0.6 million for the year ended December 31, 2001.
Income Tax Provision
During the year ended December 31, 2002, the Company recorded a tax
provision of $1.5 million compared to a provision of $0.8 million for the
year ended December 31, 2001. The primary component of the income tax
provisions was an offset to a tax benefit recorded relative to discontinued
operations losses. The tax provision offsets the tax benefit of the losses
from discontinued operations for both periods. No tax benefit was recorded by
the Company related to its loss from continuing operations, as the benefit
would have been fully reserved.
Loss Per Share
Both basic and diluted loss per share for the year ended December 31,
2002 were $2.95 on basic and diluted weighted average common shares
outstanding of approximately 12,843,000. Both basic and diluted loss per
share for the year ended December 31, 2001 were $0.83 on basic and diluted
weighted average common shares outstanding of approximately 11,750,000. Stock
options have not been included in the computations of diluted net loss per
share as their effect would be antidilutive.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues
Change
2002 2001 Amount % Comment
------ ------ ------ ------ ------
Business segment:
Gaming operations $ 44,805 $ 35,176 $ 9,629 27.4% 1
Product sales 53,356 50,228 3,128 6.2% 2
------- ------- -------
Total revenues $ 98,161 $ 85,404 $ 12,757 14.9%
======== ======== ========
Percentage of total revenues:
Gaming operations 45.6% 41.2%
Product sales 54.4% 58.8%
----- -----
Total 100.0% 100.0%
===== =====
1. Gaming operations' revenues in 2001 were $44.8 million, a $9.6 million
increase from revenues of $35.2 million in 2000. This 27.4% increase
resulted from:
(i) an increase in recurring revenues from leased slot machines of
approximately $12.8 million in the 2001 period attributable to the
addition of approximately 1,200 average branded units in operation
and an increase in the average win per day per branded slot machine
from approximately $25 during the prior year to approximately $28
during the current year. This increase was partially offset by a
decrease in revenue from non-branded slot machines to $3.8 million
during 2001 from $4.8 million during 2000. At December 31, 2001,
the Company had 2,679 branded slot machines and 421 non-branded slot
machines on lease as compared to 2,009 and 477 at December 31, 2000,
and
(ii) a decrease of approximately $3.1 million in table games revenues
reflecting the absence of a nonrecurring sale of certain video and
internet license rights of $2.6 million which occurred in 2000 and a
slight decrease in the average monthly lease payment on leased table
games during 2001. At December 31, 2001, the Company maintained
1,134 table games compared to 1,025 at December 31, 2000.
2. Product sales' revenues in 2001 were $53.3 million as compared to
revenues of $50.2 million in 2000, an increase of approximately $3.1
million, or 6.2%. This increase during 2001 was due principally to:
(i) an increase in product revenues of $1.8 million due primarily to
an increase of $5.0 million in electronic display products,
partially offset by a decline in interior visual display products of
approximately $3.4 million, and
(ii) an increase in systems revenues of approximately $1.3 million due
primarily to an increase in international revenues.
Operating Income
Change
2002 2001 Amount % Comment
------ ------ ------ ------ ------
Business segment:
Gaming operations $ 15,661 $ 14,543 $ 1,118 7.7 % 1
Product sales 4,882 (621) 5,503 886.2 % 2
------- ------- -------
Total segment operating
income 20,543 13,922 6,621 47.6 %
Corporate (12,860) (13,926) 1,066 7.6 % 3
------- ------- -------
Total operating income
(loss) $ 7,683 $ (4) $ 7,687 ---
======== ======== ========
Depreciation and amortization:
Gaming operations $ 7,743 $ 6,356 $ 1,387 21.8 %
Product sales 1,100 1,295 (195) (15.1)%
Corporate 3,257 3,179 78 2.5 %
------- ------- -------
Total depreciation and
amortization $ 12,100 $ 10,830 $ 1,270 11.7 % 4
======== ======== ========
1. Gaming operations' operating income in 2001 increased to $15.7 million
from $14.6 million in 2000. This increase of approximately $1.1
million, or 7.7%, was primarily due to:
(i) the aforementioned increase in revenues of leased slot machines
of $12.8 million offset, in part, by an increase in depreciation and
rent expense of approximately $4.8 million in 2001. These increases
during the 2001 period were the result of the significant growth in
placements of branded slot machines in the Company's route
operation, from an average of approximately 1,100 machines in 2000
to approximately 2,300 in 2001 and, beginning in the latter part of
2000, the use of operating leases to finance the purchase and
placement of the machines. Segment expenses, excluding slot rent
expense and depreciation expense, increased from $3.4 million in
2000 to $5.1 million in 2001. The increase was due primarily to an
increase in the cost to service the route due to the aforementioned
increase in placements of branded slot machines, and,
(ii) the aforementioned decrease in revenues from leased table games
of $3.1 million and an increase in the costs of revenues offset, in
part, by a decline in segment expenses, exclusive of depreciation
and amortization. Costs of revenues as a percentage of revenues
increased to 13% in the current period from 9% in the prior period.
Total costs of revenues, exclusive of segment expenses, for the year
ended December 31, 2001 totaled approximately $2.2 million compared
to approximately $1.7 million in 2000. Depreciation and
amortization for the years ended December 30, 2001 and 2000 was $2.6
million and $2.5 million, respectively. Segment expenses, excluding
depreciation and amortization, were approximately $4.0 million in
2001 period as compared with $3.4 million in 2000. The increase was
primarily due to an increase in the bad debt provision, partially
offset by a decrease in personnel and related costs.
2. Product sales' operating income for 2001 was $4.9 million compared to
an operating loss of $0.6 in 2000. This improvement in operating income
of approximately $5.5 million resulted from:
(i) the aforementioned increase in interior signage and visual
display products revenues of $1.3 million and an improvement in the
gross profit percentage from 30% in 2000 to 36% in 2001. This gross
margin improvement was primarily the result of (a) an approximate
$1.2 million margin reduction in 2000 caused by start up costs
related to a new LED product, (b) reduced provisions for inventory
obsolescence of approximately $2.1 million in 2001 and (c) a shift
in the product sales mix. In 2001, the Company had a greater
percentage of higher margin electronic displays sold versus 2000 and
a lower percentage of lower margin interior sign displays sold.
Additionally, segment expenses, before depreciation and
amortization, decreased approximately $1.6 million to $10.2 million
in the current period from $11.8 in the prior period. The decrease
was due primarily to the decrease in the provision for bad debts in
2001 from 2000. Depreciation and amortization for the years ended
December 31, 2001 and 2000 was approximately $1.0 million and $1.2
million, respectively, and
(ii) the aforementioned increase in systems sales revenues of $1.3
million. Gross profit margins increased to 51% for the year ended
December 31, 2002 from 42% for the year ended December 31, 2001. The
gross profit margin improvement was due primarily to an increase in
sales of higher margin system components. Segment expenses,
excluding depreciation and amortization expenses, increased from
approximately $3.4 million in 2000 to approximately $4.0 million in
2001. Increases in development costs related to certain new systems
product development and international costs during 2001 contributed
to the increase in segment expenses. Depreciation and amortization
for the years ended December 31, 2001 and 2000 remained constant at
approximately $0.1 million.
3. Corporate expenses in 2001 decreased by approximately $1.1 million from
$13.9 million in 2000 to $12.8 million in 2001. This decrease was due to
a decline in marketing expenses due to reduced trade show expenses and
promotional costs as well as a decline in administrative incentive
compensation.
4. Depreciation and amortization in 2001 increased by $1.3 million, or 12%,
from $10.8 million in 2000 to $12.1 million in 2001. This increase was
primarily due to a significant increase in the average number of leased
slot machines in service from 2000 to 2001 of approximately 1,200
machines.
Interest Expense
Interest expense in 2001 was $11.7 million compared to $10.5 million in
2000. This increase of approximately $1.2 million, or 10%, was due to
higher average outstanding borrowings in 2001 of approximately $7.0 million,
due principally to the Company's refinancing in August 2001, as well as a
slightly higher average effective interest rate in 2001.
Loss On Early Retirement of Debt
In connection with the Company's August 2001 refinancing and early
retirement of certain of its outstanding debt obligations (see Liquidity and
Capital Resources, below), the Company incurred a loss for the early
retirement of debt, totaling approximately $3.1 million, during the year
ended December 31, 2001.
Other Income and Expense
Other income and expense, excluding interest income, in 2001 was net
income of $1.0 million compared to a net expense in 2000 of $0.6 million, an
increase of approximately $1.6 million. This increase was principally due to
the recognition of a net gain of $1.3 million on the sale of a 50% interest
in the Company's Australian subsidiary and systems sale.
Interest income remained constant at approximately $0.6 million for the
years ended December 31, 2001 and 2000 as an increase in average cash and
cash equivalent balances during the latter part of 2001 resulting from the
net cash proceeds of the Company's refinancing in August 2001 was offset by
lower interest rates earned on cash deposits in 2001 and a decrease in
interest income recorded from interest-bearing notes as certain charges have
been deferred in 2001 pending cash receipt.
Income Tax Provision
During the year ended December 31, 2001, the Company recorded a tax
provision of approximately $0.8 million compared to a provision of $0.6
million for the year ended December 31, 2000. The primary component of the
income tax provisions was an offset to a tax benefit recorded relative to
discontinued operations losses. The tax provision offsets the tax benefit of
losses from the discontinued operations for both periods. No tax benefit was
recorded by the Company related to its loss from continuing operations, as
the benefit would have been fully reserved.
Loss from Discontinued Operations
During the year ended December 31, 2001, the Company recorded losses from
discontinued operations, net of
income tax benefits calculated at a 34% tax rate, of approximately $1.6
million, compared to a loss of approximately $1.1 million during the year
ended December 31, 2000. The losses relate to the Company's exterior sign
operations, which was sold effective October 31, 2002. The decision to sell
this operation was made in August 2002.
Loss Per Share
Both basic and diluted loss per share for 2001 were $0.83 on basic and
diluted weighted average common shares outstanding of 11,750,000. Both basic
and diluted loss per share for 2000 were $2.02 on basic and diluted weighted
average common shares outstanding of 10,968,000. Stock options have not been
included in the computations of diluted net loss per share as their effect
would be antidilutive.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 30, 2002, the Company incurred a net loss of
$37.9 million. Net cash and cash equivalents at December 31, 2002 were $16.3
million, an increase of approximately $1.1 million from $15.2 million at
December 31, 2001. Working capital decreased to $22.0 million at December 31,
2002 from $39.2 million at December 31, 2001. This working capital decrease
was due primarily to decreases in accounts receivable and installment sales
receivable of approximately $4.5 million and inventory of approximately $5.4
million, principally related to write-downs and charges from the
restructuring plan, an increase in accrued liabilities of approximately $1.9
million, principally from accrued severance costs for separated officers,
a decrease in deferred tax assets of $1.9 million that were reclassified to
non-current deferred tax liabilities and a net decrease in assets and
liabilities under disposal group of $3.6 million as a result of the Company's
sale of its exterior sign operation.
Cash provided by operating activities was $0.7 million for the year ended
December 31, 2002. The significant items affecting this amount were a net
loss of $37.9 million offset by non-cash charges of: (i) $17.1 million for
asset impairments, loss from discontinued operations and valuation
provisions, (ii) $12.5 million for depreciation and amortization and (iii)
$2.2 million for amortization of debt discount. Significant changes in
operating assets and liabilities also affecting cash provided by operating
activities were increases in accrued liabilities of $8.9 million, principally
from accrued severance costs for separated officers and an accrual for long-
term lease commitments, and a net decrease in accounts receivable and
installment sales receivable of approximately $2.0 million, partially offset
by a net increase in inventories of approximately $3.7 million and a decrease
in accounts payable of approximately $1.2 million.
Cash provided by investing activities was $2.4 million during the year
ended December 31, 2002, due primarily to cash provided by the divesture of
the exterior sign operations of $2.6 million and sales of property and
equipment of $1.8 million, partially offset by an increase in intangible
assets of approximately $1.0 million and purchases of property and equipment
of approximately $1.0 million.
Cash used in financing activities was $2.1 million during the year ended
December 31, 2002, primarily the result of principal payments on debt,
deferred license fees and capital leases of approximately $2.9 million
offset, in part, by proceeds of approximately $0.7 million from the issuance
of common stock.
On August 22, 2001, the Company completed the private placement of $105.0
million of its 11.875% Senior Secured Notes due 2008 and warrants to purchase
an aggregate of 420,000 shares of its common stock at a price of $7.70 per
share. Interest payments of approximately $6.2 million are due on May 1 and
November 1 until 2008. The Senior Secured Notes due 2008 are secured by a
security interest in certain of the Company's assets and certain assets of
its subsidiaries. On or after August 15, 2005, the Company will have the
right to redeem all or some of the notes at a price that will decrease over
time from 105.938% of the principal amount in 2005 to 100.0% of the principal
amount in 2007, plus accrued and unpaid interest. The Senior Secured Notes
due 2008 include a covenant whereby the Company may only purchase additional
slot machines if it maintains $5.0 million of available liquidity, as
defined. The Company is in compliance with this covenant as of December 31,
2002.
Following each fiscal year, if the Company has excess cash flow for such
fiscal year, the Company will offer to purchase up to an aggregate principal
amount of notes equal to 50.0% of such excess cash flow at a price equal to
100.0% of the principal amount plus accrued and unpaid interest.
In February 2002, the Company completed the acquisition of a $17.5
million working capital revolving line of credit facility (the "Facility")
with Foothill Capital Corporation ("Foothill"). Borrowings under the
Facility are based on (i) eligible accounts receivable, as defined, up to
$7.5 million with interest at LIBOR plus 2.75% or prime plus 0.75% and (ii)
Table Game EBITDA, as defined, up to $10.0 million with interest at prime
plus a range of 2.0% to 3.5% depending on Debt Coverage Ratios, as defined in
the Facility. Any borrowings under the Facility are secured by a first
secured interest in substantially all of the Company's assets. The Company
pays a 0.5% per annum unused line fee. The Facility has early payoff
penalties during the term of the line at 3.0% during the first year, 2.0%
during the second year, and 1.0% during the third year. The Facility has an
initial term of three years and includes certain restrictive financial
covenants, including maintenance of $20.0 million of annual EBITDA, minimum
table games revenue of $0.75 million monthly and a table game installed base
of not less than 600 games. At June 30 and September 30, 2002, the Company
was not in compliance with its covenant to maintain minimum amounts of annual
EBITDA. The Company and Foothill subsequently amended the EBITDA covenant to
require the Company to maintain a trailing twelve months EBITDA of $15.0
million for each of the quarters ended September 30, 2002, December 31, 2002,
and March 31, 2003. The calculation of EBITDA was also amended to allow for
certain non-cash charges to be excluded. The EBITDA covenant increases to
$17.0 million for the quarter ended June 30, 2003, and increases to the
original amount of $20.0 million for the quarter ended September 30, 2003,
and each quarter thereafter for the remaining term of the Facility. The
capacity of the Facility will be $12.5 million until the Company has achieved
EBITDA of $20.0 million for three consecutive quarters, at which point the
capacity of the Facility will revert to the original $17.5 million. At
December 31, 2002, the Company was in compliance with the financial covenants
associated with the Facility.
Based on the amount of cash and cash equivalents held of approximately
$16.3 million, cash generated from operations and credit available under its
Facility with Foothill, management believes the Company has sufficient
working capital on both a short- and long-term basis.
A lease agreement for a building in Las Vegas, NV contains a minimum net
worth requirement stating that if the net worth of the Company falls below a
specified threshold, the Company must provide the landlord with a letter of
credit to secure future rent payments. During the years ended December 31,
2001 and 2002, the Company's minimum net worth did not meet the requirements
under the lease agreement. Because of the violations, the Company paid $0.8
million for a letter of credit to secure future rent payments and potentially
could be obligated to purchase an additional $2.2 million letter of credit.
The following table summarizes the Company's contractual obligations for
long-term debt, capital leases, operating leases, license fees, slot machine
purchases and employment agreements for the periods shown:
Less than 1-3 4-5 After 5
(Amounts in thousands) Total 1 year years years years
----- ------ ----- ----- -----
Contractual Obligations
Long-term debt $105,579 $ 144 $ 151 $ 284 $105,000
Capital lease obligations 2,137 1,509 625 3 -
Operating leases 29,371 9,031 6,577 4,360 9,403
License fees 902 451 451 - -
Purchase of slot machines 600 600 - - -
Employment agreements 6,391 2,247 3,054 1,090 -
------- ------- ------- ------- -------
Total $144,980 $ 13,982 $ 10,858 $ 5,737 $114,403
======== ======== ======== ======== ========
The table above includes accretion of debt discount of $4.7 million for
the periods shown.
Capital Expenditures and Other
During the year ended December 31, 2002, the Company spent approximately
$1.0 million for purchases of property and equipment. The Company presently
plans to spend approximately $3.0 million for property and equipment for the
year ending December 31, 2003. The Company plans to purchase inventory for
lease to others only to the extent that specific machines not currently on
lease or participation at casinos are used or based on contractual
commitments with the supplier of its gaming machines. Purchases of property
and equipment are limited to $6.0 million under the terms of the Company's
Facility.
In March 2002, the Company entered into a contractual commitment to
purchase a minimum of 125 slot machines each calendar quarter beginning July
1, 2002 through June 30, 2003 for a new slot machine introduction. These
purchases will total approximately $3.5 million. As of December 31, 2002, the
Company has not purchased any slot machines under this agreement and may be
obligated to pay a cancellation fee of up to $0.6 million. In March 2003, the
Company paid $0.3 million to the supplier to be used as an advance against
future slot machine purchases or as part of the cancellation fee.
In October 2002, the Company entered into a development and licensing
agreement with Aristocrat whereby Aristocrat will be an exclusive supplier of
hardware for our branded slot machine products in certain North America
jurisdictions. Under the agreement, we will be responsible for game
development and theme licensing and Aristocrat will integrate the games onto
its latest game platforms. In January 2003, this agreement was expanded to
allow us to outsource our servicing, maintenance and refurbishing
requirements to Aristocrat, so we may focus our efforts on game development,
including game conceptualization, art and software program design. Aristocrat
will receive royalties for service and hardware rendered per game per day. On
a jurisdiction-by-jurisdiction basis, we plan to replace our existing slot
machines placed in casinos with Aristocrat versions of these machines.
The Company is a party to post-employment agreements entered into in
August 2002 with its former CEO and CFO. The agreements require payments
subsequent to December 31, 2002 of approximately $2.0 million plus medical
costs through August 2006. In March 2003, the Company reached an agreement
with its former CEO whereby he resigned from the Company's board of directors
and specifically as chairman of the board. In March 2003, the Company paid
its former CEO all outstanding future payments, according to the chief
executive officer severance agreement, totaling approximately $1.4 million
and agreed to pay certain legal costs incurred by the former CEO in the
approximate amount of $0.4 million.
Presently, the Company owns or leases approximately 800 machines which are
not currently in use at casinos. Due to the number of slot machines owned or
leased by the Company which are not currently in use at casinos as well as
the new agreement with Aristocrat, planned purchases for slot machines
(inventory leased to others) for 2003 should be significantly less than in
previous years.
A former supplier to the Company has alleged that the Company has an
outstanding commitment to purchase certain electronic components in the amount
of approximately $0.5 million. The Company does not believe that the amount
or the alleged contractual relationship are valid and does not plan to acquire
the components.
In April 2002, the Company acquired certain rights to develop software
from its primary supplier of slot machines in exchange for an advance payment
on royalties. The advance royalty payment made by the Company in April 2002
was approximately $1.6 million. At December 31, 2002, the amount of the
advance royalty payable was approximately $1.1 million.
Share Repurchase Plan
On August 13, 2002 the Company's Board of Directors authorized the
purchase of up to $2.0 million of the Company's common stock. The purchases
will be made from time to time in the open market. The timing and actual
number of shares to be purchased will depend on market conditions. During the
year ended December 31, 2002, the Company purchased approximately 76,000
shares at an average price of $2.94. Additionally, the Company acquired
100,000 shares as the result of foreclosures or forfeitures on obligations
owed to the Company which were secured by the shares. As of December 31,
2002, the Company had approximately 195,000 shares of common stock held in
treasury.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. Certain of our
accounting policies require that we apply significant estimates, judgments
and assumptions, that we believe are reasonable, in calculating the reported
amounts of certain assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. By their nature, these
estimates are subject to an inherent degree of uncertainty. Our judgments are
based on our historical experience, terms of existing contracts, our
observance of know industry trends, and information available from outside
sources, as appropriate. On a regular basis, we evaluate our estimates
including those related to lives assigned to our assets, the determination of
bad debts, inventory valuation reserves, asset impairment and self-insurance
reserves. There can be no assurance that actual results will not differ from
our estimates.
We have identified the following policies as critical to our business
operations and the understanding of our results of operations: revenue
recognition, receivables and allowance for doubtful accounts, inventories and
obsolescence, and long-lived asset impairment. To provide an understanding of
the methodology we apply to these and other significant accounting policies
are discussed below and where appropriate in the notes to our consolidated
financial statements.
Revenue Recognition
The Company recognizes revenue depending on the line of business as
follows:
Product sales are executed by a signed contract or customer purchase order.
Revenue is recognized when the completed product is delivered. If the
agreement calls for Mikohn to perform an installation after delivery, revenue
related to the installation is recognized when the installation has been
completed and accepted by the customer.
System sales consist of a suite of products (some of which are sold
separately) that enable gaming entities to track customer gaming activity,
account for slot machine activity and operate progressive jackpot systems.
There are proprietary hardware and software components to the systems. The
Company accounts for system sales in accordance with Statement of Position 97-
2 - Software Revenue Recognition ("SOP 97-2"). System sales are considered
multiple element arrangements because they include hardware, software,
installation, training and post-sale customer support. System sales are
evidenced by a signed contract. Follow-up spare parts and hardware-only sales
are evidenced by a purchase order. Revenue for system sales is recognized
when: (i) there is a signed contract with a fixed determinable price; (ii)
collectibility of the sale is probable; and (iii) the hardware and software
have been delivered, installed, training has been completed and acceptance has
occurred. Not all systems contracts require installation. Examples include
sales of hardware only to (i) previous customers that are expanding their
systems, (ii) customers that have multiple locations and do the installation
themselves and require an additional software license and hardware and (iii)
customers purchasing spare parts.
Maintenance and support are sold under agreements with established vendor-
specific objective evidence of price. These contracts are generally for a
period of 12 months and revenue is recognized ratably over the contract
service period. Further training is also sold under agreements with
established vendor-specific objective evidence of price, which is based on
daily rates and is recognized upon delivery.
The leasing of proprietary table games to casino customers occurs under
signed lease agreements. Table game lease contracts are typically for a 36-
month period with a 30-day cancellation clause. The lease revenue is
recognized on a monthly basis.
The leasing of proprietary slot machines occurs under signed lease
agreements. These contracts will either be on participation or a fixed-rental
basis. Slot machine lease contracts are typically for a month-to-month period
with a 30-day cancellation clause. On a participation basis, the Company earns
a share of the revenue that the casino earns from these slot machines. On a
fixed-rental basis, the Company charges a fixed amount per slot machine per
day. Revenues from both types of lease arrangements are recognized on the
accrual basis.
Receivables and Allowance for Doubtful Accounts
We regularly evaluate the collectibility of our trade receivable
balances based on a combination of factors. When a customer's account becomes
past due, we initiate dialogue with the customer to determine the cause. If
it is determined that the customer will be unable to meet its financial
obligation to us, such as in the case of a bankruptcy filing, deterioration
in the customer's operating results or financial position or other material
events impacting their business, we record a specific reserve for bad debt to
reduce the related receivable to the amount we expect to recover given all
information presently available. We also record reserves for bad debt for all
other customers based on certain other factors including the length of time
the receivables are past due and historical collection experience with
individual customers. If circumstances related to specific customers change,
our estimates of the recoverability of receivables could materially change.
Inventory and Obsolescence
We regularly evaluate the realizability of our inventory based on a
combination of factors including the following: historical usage rates,
forecasted sales or usage, estimated service period, product end of life
dates, estimated current and future market values, service inventory
requirements and new product introductions, as well as other factors.
Purchasing requirements and alternative usage avenues are explored within
these processes to mitigate inventory exposure. Raw materials and work in
progress with quantities in excess of forecasted usage are reviewed at least
quarterly by our engineering and operating personnel for obsolescence. Such
raw material and work in progress write-downs are typically caused by
engineering change orders or product end of life adjustments. Finished goods
are reviewed at least quarterly by product marketing and operating personnel
to determine if inventory carrying costs exceed market selling prices.
Service inventory is systematically reserved for based on the estimated
remaining service life of the inventory. We record reserves for inventory
based on the above factors and take into account worldwide quantities and
demand in our analysis. If circumstances related to our inventories change,
our estimates of the realizability of inventory could materially change.
Long-Lived Asset Impairment
Long-lived assets and intangible assets with determinable lives are
reviewed for impairment quarterly or whenever events or circumstances
indicate that the carrying amount of assets may not be recoverable in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long Lived Assets." We evaluate recoverability of assets to be held and used
by comparing the carrying amount of an asset to future net undiscounted cash
flows to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Such
reviews assess the fair value of the assets based upon our estimates of the
future cash flows we expected the assets to generate. In response to changes
in industry and market conditions, we may be required to strategically
realign our resources in the future, which could result in an impairment of
long lived assets.
For indefinite lived assets including perpetual licenses and goodwill, an
independent valuation is performed at least annually to determine if any
impairment has occurred.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2001, the FASB issued Statement No. 143, "Accounting for
Asset Retirement Obligations." This statement addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This statement
applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and the
normal operation of a long-lived asset, except for certain obligations of
lessees. Statement No. 143 is effective for financial statements issued for
fiscal years beginning after September 15, 2002. Management does not expect
the adoption of this statement to have a material effect on the Company.
In April 2002, the FASB issued Statement No. 145, "Rescission of Statement
Nos. 4, 44 and 64, Amendment of Statement No. 13, and Technical Corrections".
Among other things, Statement No. 145 rescinds various pronouncements
regarding early extinguishment of debt and allows extraordinary accounting
treatment for early extinguishment only when the provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
are met. Statement No. 145 provisions regarding early extinguishment of debt
are generally effective for fiscal years beginning after May 15, 2002.
Management adopted Statement No. 145, and the impact was a
reclassification of approximately $3.1 million from an extraordinary item to
an other income and expense of a loss from the early retirement of debt
during 2001.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. Statement No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force (EITF) Issue No.
94-3. The Company will adopt the
provisions of Statement No. 146 for
restructuring activities initiated after December 31, 2002. Statement No.
146 requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of a company's
commitment to an exit plan. Statement No. 146 also establishes that the
liability should initially be measured and recorded at fair value.
Accordingly, Statement No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure", which amends
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation". Statement No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, Statement No.
148 amends the disclosure requirements of Statement No. 123 to require more
prominent and more frequent disclosures in financial statements of the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of Statement No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are
effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. The adoption of Statement
No. 148 did not have a material impact on the Company's consolidated balance
sheet or results of operations. The Company will provide the interim
disclosures required by Statement No. 148 beginning in the first quarter of
2003 and has provided the required annual disclosure in the accompanying
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others," which disclosures are
effective for financial statements issued after December 15, 2002. While the
Company has various guarantees included in contracts in the normal course of
business, primarily in the form of indemnities, these guarantees would only
result in immaterial increases in future costs, but do not represent
significant or contingent liabilities of the indebtedness of others.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which requires the
consolidation of variable interests entities, as defined. FIN 46 is
applicable to financial statements issued after 2002, however, disclosures
are required currently if the Company expects to consolidate any variable
interests entities. The Company does not expect to identify any variable
interest entities that must be consolidated, but may be required to make
additional disclosures. The maximum exposure of any investment that may be
determined to be in a variable interest entity is limited to the amount
invested.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
Foreign Currency Risk
There are two types of foreign currency exchange risks that a company may
be subject to: transaction and translation gains or losses. Foreign currency
transaction gains or losses are distinguished from translation gains or
losses as follows: (i) translation adjustments do not involve the movement of
cash, they are accounting conversion
calculations of an existing functional currency to a reporting currency and
(ii) transaction gain or losses, however, are based on an actual transaction
that requires formal payment at a future point in time.
We are subject to foreign currency exchange risk relating to the
translation of our foreign subsidiaries' asset, liability, income and expense
accounts. Our foreign subsidiaries use the local currency as their functional
currency. The assets and liabilities of these subsidiaries are translated
into U.S. dollars at the rate of exchange at the end of the period. The
income and expense accounts are translated using the average rate of exchange
during the period. Due to the long-term nature of our investment in our
foreign operations, 60% of our intercompany translation adjustments are
reflected as a separate component in stockholders' equity, and the remaining
amount is recognized in the consolidated statement of operations. Although we
do not regularly incur gains or losses from specific foreign currency
transactions and do not believe that these amounts would be material, these
gains and losses would be reflected in our consolidated statement of
operations. For the year ended December 31, 2002, we did not have any
forwards, options or other derivative contracts in force. We do not consider
our existing foreign currency translation exposure to be material.
Interest Rate Risk
We have total interest-bearing debt of approximately $108.0 million
before discounts. The components of this amount have fixed rates of interest
and therefore, we do not have exposure to the fluctuation of market interest
rates. However, in February 2002, we acquired a $17.5 million revolving line
of credit which bears floating rate interest on outstanding borrowings. At
December 31, 2002, we had not made any borrowings under this line of credit.
Any future borrowings will be exposed to market rate risk. We periodically
review our interest rate exposure, if any, on our long-term debt and, as
market conditions warrant, we may enter into an interest rate cap or swap
agreements in order to manage this exposure. For the year ended December 31,
2002, we did not have any agreements in force. See Note 12 in the Notes to
Consolidated Financial Statements.
Item 8. Consolidated Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
Report of Independent Certified Public Accountants
(BDO Seidman LLP) 38
Consolidated Balance Sheets as of December 31, 2002 and 2001 39
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000 41
Consolidated Statements of Comprehensive Income (Loss) for the Years
Ended December 31, 2002, 2001 and 2000 42
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000 43
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 44
Notes to Consolidated Financial Statements 46
Quarterly Results of Operations (Unaudited) 74
All other schedules are omitted because of the absence of conditions
under which they are required or because the information is included in the
financial statements or the notes thereto.
Report of Independent Certified Public Accountants
Board of Directors
Mikohn Gaming Corporation
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of Mikohn Gaming
Corporation as of December 31, 2002 and 2001 and the related consolidated
statements of operations, comprehensive income (loss), stockholders' equity
(deficit), and cash flows for the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mikohn Gaming
Corporation as of December 31, 2002 and 2001, and the results of its operations
and its cash flows for the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 6 to the financial statements, effective January 1, 2002,
the Company adopted FASB Statement No. 142, Goodwill and Other Intangible
Assets.
\s\ BDO SEIDMAN, LLP
Los Angeles, California
April 14, 2003
MIKOHN GAMING CORPORATION
CONSOLIDATED BALANCE SHEETS
as of December 31, 2002 and 2001
(Amounts in thousands) 2002 2001
------ ------
ASSETS
Current assets:
Cash and cash equivalents $ 16,275 $ 15,206
Accounts receivable, net 14,121 18,773
Installment sales receivable, net 513 343
Notes receivable - related parties 165 -
Inventories, net 10,578 15,941
Prepaid expenses 4,063 3,841
Deferred tax asset 3,313 5,275
Assets under disposal group - 4,739
------- -------
Total current assets 49,028 64,118
Installment sales and notes receivable,
net 408 92
Notes receivable - related parties - 2,401
Property and equipment, net 21,824 31,787
Intangible assets, net 57,838 62,827
Goodwill 2,860 3,006
Other assets 10,035 11,356
------- -------
Total assets $ 141,993 $ 175,587
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable $ 8,715 $ 7,757
Customer deposits 3,928 2,305
Current portion of long-term debt and
notes payable 1,654 2,381
Accrued liabilities 11,241 9,316
Deferred revenues and license fees 1,501 1,955
Liabilities under disposal group - 1,161
------- -------
Total current liabilities 27,039 24,875
Long-term debt and notes payable, net of
unamortized discount of $4,732 and $5,567 101,330 101,767
Other long-term liabilities 4,422 2,215
Deferred tax liability 16,114 18,076
------- -------
Total liabilities 148,905 146,933
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.10 par value, 5,000,000
shares authorized, none issued and
outstanding - -
Common stock, $0.10 par value, 100,000,000
shares authorized 13,049,773 and 12,764,505
shares issued and outstanding 1,305 1,276
Additional paid-in capital 67,299 65,751
Stockholders' notes receivable - (1,023)
Foreign currency translation (858) (1,079)
Accumulated deficit (73,946) (36,043)
------- -------
Subtotal (6,200) 28,882
Less treasury stock, 194,913 and 19,113
shares, at cost (712) (228)
------- -------
Total stockholders' equity (deficit) (6,912) 28,654
------- -------
Total liabilities and stockholders' equity
(deficit) $ 141,993 $ 175,587
========= =========
See notes to consolidated financial statements
MIKOHN GAMING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2002, 2001 and 2000
(Amounts in thousands,
except per share amounts) 2002 2001 2000
------ ------ ------
Revenues:
Gaming operations $ 43,859 $ 44,805 $ 35,176
Product sales 58,729 53,356 50,228
------- ------- -------
Total revenues 102,588 98,161 85,404
Operating costs:
Gaming operations 35,965 29,144 20,633
Product sales 56,176 48,474 50,849
Corporate expense 12,914 12,860 13,926
Restructuring expense 5,618 - -
Severance expense 4,774 - -
Impairment losses 6,261 1,656 9,852
------- ------- -------
Total operating costs 121,708 92,134 95,260
Operating income (loss):
Gaming operations 7,894 15,661 14,543
Product sales 2,553 4,882 (621)
Corporate expense (12,914) (12,860) (13,926)
Restructuring expense (5,618) - -
Severance expense (4,774) - -
Impairment losses (6,261) (1,656) (9,852)
------- ------- -------
Total operating income (loss) (19,120) 6,027 (9,856)
Interest expense (15,689) (11,720) (10,498)
Loss on early retirement of debt - (3,135) -
Other income and (expense) 375 1,620 (62)
------- ------- -------
Loss from continuing operations
before income tax provision (34,434) (7,208) (20,416)
Income tax provision (1,480) (847) (574)
------- ------- -------
Loss from continuing operations (35,914) (8,055) (20,990)
Loss from discontinued operations,
net of income taxes (1,989) (1,645) (1,115)
------- ------- -------
Net loss $ (37,903) $ (9,700) $ (22,105)
========= ========= =========
Weighted average common shares:
Basic 12,843 11,750 10,968
Diluted 12,843 11,750 10,968
======= ======= =======
Basic and diluted loss per share:
Loss from continuing operations $ (2.80) $ (0.69) $ (1.92)
Loss from discontinued operations (0.15) (0.14) (0.10)
------- ------- -------
Net loss per share $ (2.95) $ (0.83) $ (2.02)
======== ======== ========
See notes to consolidated financial statements
MIKOHN GAMING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2002, 2001 and 2000
(Amounts in thousands, 2002 2001 2000
------ ------ ------
Net loss $(37,903) $ (9,700) $(22,105)
Comprehensive loss:
Foreign currency translation gains
(losses) 221 (92) (390)
------- ------- -------
$(37,682) $ (9,792) $(22,495)
======== ======== ========
See notes to consolidated financial statements
MIKOHN GAMING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2002, 2001 and 2000
Additional Stockholders Foreign
(Amounts in thousands) Common Stock Paid-In Notes Currency Accumulated Treasury
Shares Amount Capital Receivable Translation Deficit Stock Total
------- ------- ------- ------- ------- ------- ------- ---
Balance, January 1, 2000 10,799 $ 1,080 $ 53,350 $ (1,251) $ (597) $ (4,238) $ (228) $ 48,116
Stock options exercised 194 20 815 835
Employee stock purchase plan 94 9 523 532
Stock options and warrants granted
to consultants and vendors 1,989 1,989
Payments on stockholders' notes 228 228
Translation adjustments (390) (390)
Net loss (22,105) (22,105)
------- ------- ------- ------- ------- ------- ------- -----
Balance, December 31, 2000 11,087 1,109 56,677 (1,023) (987) (26,343) (228) 29,205
Stock options exercised 66 6 261 267
Employee stock purchase plan 112 11 420 431
Stock options and warrants granted
to consultants and vendors 232 232
Private placement 1,500 150 6,766 6,916
Stock warrants issued with bonds 1,739 1,739
Other (344) (344)
Translation adjustments (92) (92)
Net loss (9,700) (9,700)
------- ------- ------- ------- ------- ------- ------- -----
Balance, December 31, 2001 12,765 1,276 65,751 (1,023) (1,079) (36,043) (228) 28,654
Stock options exercised 42 4 196 200
Employee stock purchase plan 143 15 436 451
Stock options and warrants granted
to consultants and vendors 769 769
Issuance of restricted stock 100 10 147 157
Reduction of stockholders' notes 1,023 1,023
Treasury shares acquired (484) (484)
Translation adjustments 221 221
Net loss (37,903) (37,903)
------- ------- ------- ------- ------- ------- ------- -----
Balance, December 31, 2002 13,050 $ 1,305 $ 67,299 $ - $ (858) $(73,946) $ (712) $ (6,912)
======= ======== ======== ======== ======== ======== ======== =======
See notes to consolidated financial statements
MIKOHN GAMING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
(Amounts in thousands) 2002 2001 2000
------ ------ ------
Cash flows from operating activities:
Net loss $(37,903) $ (9,700) $(22,105)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 9,160 7,355 6,006
Amortization 3,340 4,744 4,838
Provision for bad debts 4,698 3,807 3,179
Provision for obsolete inventory 4,193 1,991 4,775
Amortization of debt discount and debt
issue costs 2,233 1,787 -
Impairment loss 6,261 1,656 9,852
Discontinued operations 1,989 1,645 1,115
Loss on early retirement of debt - 3,135 -
Loss (gain) on disposition of assets 604 (22) (316)
Other 488 (172) 448
Changes in assets and liabilities:
Accounts receivable 3,334 (2,770) 820
Notes and installment sales receivable (1,315) (316) (4,253)
Inventories (3,728) (3,699) 1,883
Other assets (869) (1,555) (795)
Trade accounts payable (1,242) (474) (2,703)
Accrued expenses 8,912 457 1,351
Other liabilities 583 (280) 551
------- ------- -------
Net cash provided by operating activities: 738 7,589 4,646
Cash flows from investing activities:
Purchase of property and equipment (958) (2,052) (1,475)
Proceeds from sales of property and equipment 1,772 504 3,589
Cash provided by (used in) discontinued
operations 2,592 1,852 (1,024)
Increase in intangible assets (990) (1,446) (1,364)
Proceeds from note receivable, divestiture of
subsidiary - 100 4,418
Purchase of inventory leased to others - (12,955) (20,329)
Proceeds from sale leaseback transactions - 3,500 11,500
------- ------- -------
Net cash provided by (used in) investing
activities 2,416 (10,497) (4,685)
Cash flows from financing activities:
Proceeds from long-term debt and notes payable 54 99,670 4,823
Principal payments on notes payable and
long-term debt (284) (83,085) (7,405)
Principal payments on capital leases (2,163) (2,019) (1,216)
Principal payments of deferred license fees (439) (395) (395)
Purchase of treasury stock (223) - -
Proceeds from issuance of common stock and
warrants 743 9,352 1,367
Proceeds from notes receivable-stockholders 227 - 228
Debt issuance costs - (7,975) -
Proceeds from capital lease transactions - 2,019 3,000
------- ------- -------
Net cash (used in) provided by financing
activities (2,085) 17,567 402
Increase in cash and cash equivalents 1,069 14,659 363
Cash and cash equivalents, beginning of year 15,206 547 184
------- ------- -------
Cash and cash equivalents, end of year $ 16,275 $ 15,206 $ 547
======== ======== ========
See notes to consolidated financial statements
MIKOHN GAMING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31, 2002, 2001 and 2000
Amounts in thousands) 2002 2001 2000
------ ------ ------
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 13,751 $ 8,444 $ 9,610
State and federal taxes $ 55 $ 148 $ 235
======== ======== ========
Supplemental schedule of non-cash investing
and financing activities:
Reclassify inventory to gaming equipment
leased to others $ 3,952 $ 12,678 $ 6,788
Acquisition of Mikohn's Australia subsidiary $ 284 $ 518
Issuance of warrants $ 192 $ 1,420
Reduction of note receivable from stockholder $ 455
Acquisition of treasury stock $ 261
Deposit on assets transferred under contract $ 141
Gaming equipment leased to others acquired
through capital lease $ 2,000 $ 3,000
Property and equipment acquired through
capital lease $ 46 $ 1,125
Write-off of installment note and deferred
revenue $ 1,938
Reclassify notes payable from paid in capital $ 341
Reclassify accrued liability to goodwill $ 269
Divestiture of Mikohn's South America
subsidiary, net of cash received $ 400
Deferred revenue on sale of intellectual
property rights $ 1,938
======== ======== ========
See notes to consolidated financial statement
Certain items reported in the prior year have been reclassified to follow
the Company's current reporting practice. Additionally, all intercompany
activity has been eliminated.
Amounts disclosed in the accompanying footnote tables are shown in
thousands while amounts included in text are disclosed in actual amounts.
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business:
Mikohn Gaming Corporation (referred throughout these notes, together with
its subsidiaries as "Mikohn", "the Company", "we" or "our") was incorporated
in May 1986 in Nevada. Mikohn is a developer, manufacturer, and marketer of
(i) proprietary branded slot machine and table games, including our Yahtzee(r)
and Battleship(r) series of gaming machines and Caribbean Stud(r) table game,
and (ii) gaming products, including signage and progressive jackpot systems.
The Company's current facilities are in the U.S., the Netherlands, and
Australia.
Our worldwide operations are concentrated in two principal business
segments: gaming operations and product sales.
Gaming Operations. We established our gaming operations business unit in
1993 to develop, acquire, and distribute proprietary games, and these have
become increasingly important to our business. We own or license the rights
to several categories of proprietary games, which we place in casinos under
lease arrangements. These leases provide for fixed rental payments or a
participation in the game's operating results.
Product Sales. We have been providing gaming products and equipment
around the world since 1987. First selling progressive jackpot systems, we
expanded to sign manufacturing and other related products. Our gaming
products are found in almost every major gaming jurisdiction and include:
* interior signage and related electronic components;
* electronic player tracking and game monitoring systems and
* special order, oversized and other slot machines for sale.
Customers for our gaming products include casinos, slot machine
manufacturers, operators of wide-area gaming networks and lottery
authorities.
Business Activity. On November 4, 1999, the Company entered into four
agreements with TAB Limited, a publicly traded Australian corporation
("TAB").
Under a Share Sale Agreement, the Company sold 50% of the issued shares
in the capital of its Australian subsidiary, Mikohn Gaming Australasia Pty.,
Limited ("MGA"), for cash in the amount of $4.9 million.
Under the terms of the Share Sale Agreement, the Company was entitled to
and did report 100% of the income of MGA for 1999. Therefore, MGA's income
statement was included in the Company's consolidated statements of operations
and cash flows for 1999. Additionally, due to circumstances surrounding
certain put and call options included in the arrangement whereby TAB could
put such stock to the Company under certain circumstances, a determination
was made that, although a legal transfer of business ownership to TAB
occurred, the transaction was not recognized as a sale for accounting
purposes. As such, the net assets of MGA were segregated in the balance
sheets of the Company in order to properly convey the distinction between the
legal effect of the transaction and its accounting treatment.
A Shareholders Agreement between TAB, MGA and the Company provides for
the appointment and removal of directors, voting procedures, restrictions on
share transfers, activities requiring super majority approval and other
matters commonly found in agreements of this nature.
A Management Services Agreement between the Company and MGA provides that
the Company will make management personnel available to MGA. MGA is
responsible for compensating such personnel. The agreement terminates if the
Company's ownership of the issued share capital in MGA falls below 35% or if
the audited consolidated financial statements of MGA in a fiscal year show a
net loss on an after-tax basis. Other than reimbursement for expenses, the
Company receives no compensation under this agreement.
A System Acquisition and Services Agreement between TAB and the Company
required the Company to provide hardware and software to operate a wide area
progressive jackpot system in New South Wales, Australia. In the third
quarter 2001, the Company completed the project and the provisions relating
to the put option held by TAB for its stock in MGA were cancelled. As a
result, the Company included in other income a net gain of $1.3 million
relating to the sale of the stock and system project. The Company is to
provide certain services to TAB to further enhance the system, for which it
has been paid and has provided the hardware component of the system at cost.
The Company receives a software license fee of $(AUD)50.00 per month per
device connected to a linked progressive system. The Company anticipates
receiving approximately $0.5 million during the year ending December 31, 2003
from the software license fees.
Acquisitions / Divestitures of Subsidiaries. On November 15, 2001, the
Company converted $0.5 million of debt owing from MGA into 20,000,000 shares
of MGA, thereby increasing our ownership from 50% to approximately 92%. Prior
to this transaction, the Company had accounted for this unconsolidated
subsidiary using the equity method whereby the Company would record a 50%
share of earnings or losses of this subsidiary. Subsequent to this
transaction, the Company now consolidates all accounts of this subsidiary
into its consolidated financial statements. From January 1, 2001 to November
15, 2001, approximately $0.7 million was charged to product sales revenues
for the equity in losses of this affiliate. For the period November 15, 2001
to December 31, 2001, MGA accounted for approximately $1.0 million in
revenues, $0.3 million in gross profit and $0.4 million in net loss. The
Company acquired current assets of approximately $2,500 (principally
inventory) and non - current assets of approximately $1.0 million
(principally intangible assets). Liabilities, principally accounts payable
and accrued liabilities, of approximately $1.0 million were assumed.
Additionally, the related party receivable from MGA to the Company of
approximately $2.8 million, subsequent to the reduction of approximately $0.5
million of the amount owed from MGA to the Company for the 20,000,000 shares
of MGA, was eliminated from the assets of the Company.
In October 2001, the Company completed the sale of 50% of its interest in
Mikohn Latin America S.A. Certain officers and management of Mikohn Latin
America, through RLP Holdings, purchased a 50% interest for approximately
$0.5 million in cash and a note. The Company accounts for the financial
results of this entity using the equity method since October 2001. Equity in
earnings and losses of the affiliate is now charged to revenues on a monthly
basis with a corresponding charge to the Company's investment in subsidiary
account. Prior to the 50% divestiture, the financial results of Mikohn Latin
America were included in the consolidated results of operations. Through
September 30, 2001, Mikohn Latin America accounted for approximately $2.2
million in revenues, $0.9 million in gross profit, and net income of
approximately $0.1 million. From October to December 2001, approximately $0.3
million of equity in losses of affiliates is included in product sales
revenues. From this divestiture, the Company divested itself, for
consolidation accounting purposes, of approximately $2.1 million of current
assets (principally accounts receivable and inventory), approximately $1.0
million of non - current assets (principally property and equipment) and
approximately $0.7 million of liabilities (principally accounts payable and
accrued liabilities). Additionally, an intercompany payable of approximately
$1.3 million, owed from Mikohn Latin America to the Company at the time of
the divestiture, was converted into a note receivable from related party.
On May 14, 2002, the Company acquired 1,744,403 shares of MGA from TAB.
These shares represented approximately 8% of the issued and outstanding
shares of MGA, increasing the Company's ownership in this subsidiary to 100%.
The purchase price for the shares was approximately $1.1 million, with $0.8
million payable on closing and a promissory note for approximately $0.3
million. The promissory note is due June 30, 2005 and bears interest at 5%
per annum due at maturity. Simultaneously with the purchase of these shares,
the Company and TAB amended their existing licensing agreement granting TAB
additional rights to operate a Mystery(r) Linked Jackpot system in New South
Wales. In consideration for these additional rights, TAB agreed to pay a fee
of approximately $0.8 million within seven days after execution of the
agreement and to pay an additional fee, aggregating a minimum of
approximately $0.6 million over three years, in the amount of approximately
$8.00 per month per game connected to the system. The Company and TAB agreed
that monies owed by the Company to TAB for the purchase of the shares in MGA
could be offset by the monies owed by TAB to the Company under the terms of
the amended license agreement.
On September 20, 2002 the Company completed the sale of its remaining 50%
interest in its Latin American subsidiary as part of the restructuring
initiatives. The interest was sold for approximately $0.4 million consisting
of a cash payment of $0.1 million in October 2002 and a note for
approximately $0.3 million paid in full on November 15, 2002 in accordance
with the terms of the agreement. A charge of approximately $1.8 million was
recorded to reflect the forgiveness of an intercompany debt from the
subsidiary to the Company. As a result of the Company's divestiture of its
Latin American Subsidiary, goodwill related to the Latin American subsidiary
was deemed to have been impaired during the quarter ended September 30, 2002.
Therefore the Company recorded a goodwill impairment loss of approximately
$0.4 million.
During the third quarter of 2002, in connection with its restructuring
plan, the Company decided to divest its exterior sign operations in the
Product Sales segment. On October 1, 2002 the Company reached a definitive
agreement to sell the exterior sign operations. The transaction closed on
October 31, 2002 for $1.7 million consisting of cash payments received in
September and October 2002 of $0.5 million and $0.7 million, respectively, and
a note for $0.5 million paid on December 31, 2002. As a result of the sale, a
charge of approximately $1.1 million related to the impairment of the exterior
sign operations assets, net of the expected proceeds, was recorded as was the
loss from normal operations of the business. The loss from discontinued
operations is shown net of an income tax benefit of 34% applied to the pretax
loss from the discontinued operations. The operating results of this business
were previously included in the "Product Sales" segment and are presently
reflected as Discontinued Operations in the accompanying condensed
consolidated statements of operations.
The operating results of discontinued operations are as follows:
(Amounts in thousands) Year Ended December 31,
2002 2001 2000
------ ------ ------
Revenues $ 6,281 $ 12,896 $ 15,362
Operating costs and expenses 7,251 14,140 17,037
Write-off of assets and other 951 1,247 -
------ ------ ------
Operating loss (1,921) (2,491) (1,675)
Other income (expenses) (13) (1) (14)
Loss on sale of operations (1,079) - -
------ ------ ------
Net loss before income taxes (3,013) (2,492) (1,689)
Income tax benefit 1,024 847 574
------ ------ ------
Loss from discontinued operations $ (1,989) $ (1,645) $ (1,115)
======== ======== ========
The major components of the assets and liabilities of discontinued
operations, which did not change significantly through the closing date of
October 31, 2002, are as follows:
(Amounts in thousands) September 30, December 31,
2002 2001
------ ------
Accounts receivable, net $ 933 $ 2,118
Inventory, net 2,327 1,753
Property and equipment 642 723
Other assets 31 145
------ ------
Total assets $ 3,933 $ 4,739
======== ========
Current liabilities $ 1,127 $ 1,063
Other liabilities 66 98
------ ------
Total liabilities $ 1,193 $ 1,161
======== ========
Summary Of Significant Accounting Policies:
Principles of Consolidation. The consolidated financial statements
include the accounts for the Company and all of its majority-owned
subsidiaries and are maintained in accordance with accounting principles
generally accepted in the United States of America. All material intercompany
balances and transactions have been eliminated. The Company divested a 50%
interest in the issued shares in the capital of Mikohn Latin America S.A. at
the end of September 2001. Beginning in October 2001, the Company reported
this entity's operations under the equity method of accounting. On September
20, 2002 the Company completed the sale of its remaining 50% interest in
Mikohn Latin America S.A. From October 1, 2002 to December 31, 2002, the
consolidated financial statements do not included any results of Mikohn Latin
America S.A. Additionally, in November 2001, the Company acquired an
additional 42% interest in the capital of MGA. This subsidiary had previously
been accounted for using the equity method. However, because the Company,
beginning in November 2001, owned approximately 92% of this subsidiary, the
accounts of MGA are consolidated with the accounts of Mikohn Gaming
Corporation and other majority-owned subsidiaries. On May 14, 2002, the
Company increased its ownership in MGA to 100%.
Cash and Cash Equivalents. Cash and cash equivalents include cash on
hand, demand deposits, and short-term investments with original maturities of
less than ninety (90) days. The Company places its cash and temporary
investments with high quality institutions. At December 31, 2002, the Company
had deposits with high quality institutions in excess of FDIC insured limits.
The Company performs periodic evaluations of the relative credit standing of
these financial institutions.
Fair Values of Financial Instruments. In accordance with reporting and
disclosure requirements of the Statement of Financial Accounting Standards
("SFAS") No. 107 - Disclosures about Fair Values of Financial Instruments,
the Company calculates the fair value of financial instruments and includes
this information in the Company's Notes to Consolidated Financial Statements
when the fair value is different than the book value of those financial
instruments. When fair value is equal to book value, no disclosure is made.
Fair value is determined using quoted market prices whenever available. When
quoted market prices are not available, the Company uses alternative
valuation techniques such as calculating the present value of estimated
future cash flows utilizing discount rates commensurate with the risks
involved.
Receivables and Allowance for Doubtful Accounts. We regularly evaluate
the collectibility of our trade receivable balances based on a combination
of factors. When a customer's account becomes past due, we initiate dialogue
with the customer to determine the cause. If it is determined that the
customer will be unable to meet its financial obligation to us, such as in
the case of a bankruptcy filing, deterioration in the customer's operating
results or financial position or other material events impacting their
business, we record a specific reserve for bad debt to reduce the related
receivable to the amount we expect to recover given all information
presently available. We also record reserves for bad debt for all other
customers based on certain other factors including the length of time the
receivables are past due and historical collection experience with
individual customers. If circumstances related to specific customers change,
our estimates of the recoverability of receivables could materially change.
Notes Receivable - Related Parties. The Company classifies certain
receivables from officers, directors and Mikohn Latin America as "Notes
receivable-related parties". Included in December 31, 2002 are amounts owed
from one former officer and one former director of the Company that were due
and payable October 30, 2002. The loans arose out of a stock purchase plan
approved by the Board of Directors in October 1997. Under the plan, each
person who elected to participate purchased shares of the Company's
restricted common stock at the closing price on October 30, 1997. Each
participant borrowed from the Company the entire purchase price for the
shares of common stock he elected to buy. The loans are evidenced by
promissory notes and are secured by a pledge of the purchased shares. The
Company has given notice that the loans are in default, has demanded payment
and, on December 31, 2002, the Company foreclosed on the stock securing the
promissory notes. The two defaulted loans, including interest, total
approximately $0.3 million at December 31, 2002. In March 2003, the Company
filed a claim against the former officer and agreed to payment terms with the
former director in accordance with a promissory note. At December 31, 2001
the amounts owed related to the stock purchase plan was $1.0 million and was
included in the "Stockholders' notes receivable" caption.
In October 1997, the Board of Directors of the Company (the "Board")
authorized a loan in the amount of approximately $0.1 million to the chairman
of the Company's board of directors at an interest rate of 6.37% secured by
20,000 shares of the Company's common stock which is due to mature on October
20, 2002. In August 2002, as part of the separation agreement, severance
expense was applied by the Chairman to repay this loan. At December 31,
2001, the outstanding balance on this loan was approximately $0.2 million,
including interest.
On October 1, 2001, the Company divested itself of 50% of the issued
shares in the capital of Mikohn Latin America S.A. through a sale to RLP
Holdings, a company owned by officers and management of Mikohn Latin America.
The sale price was $0.5 million and RLP paid $0.1 million with the remaining
amount being financed plus interest. Additionally, the Company's
intercompany balance with Mikohn Latin America was converted to a note
receivable with an interest rate of 12.5%. At December 31, 2001, both the
amounts owed from RLP Holdings and the amounts owed from Mikohn Latin America
to the Company of $2.2 million are included in "notes receivable - related
parties" as a long - term note receivable. On September 20, 2002, the Company
sold its remaining interest in Mikohn Latin America for approximately $0.4
million consisting of a cash payment of $0.1 million in October 2002 and a
note for approximately $0.3 million paid on November 15, 2002 in accordance
with the terms of the agreement. As a result of the divesture, the balance
due on the related party note of $1.8 million was forgiven and a charge to
operations was recorded.
Inventories. Inventories are stated at the lower of cost (determined
using the first-in, first-out method) or market.
Long-Lived Assets. Property and equipment are stated at cost and are
depreciated by the straight-line method over the useful lives of the assets,
which range from 3 to 15 years. Proprietary slot machines leased to others
are transferred from inventory at cost and are generally depreciated over 5
years using the straight-line method. Costs of major improvements are
capitalized; costs of normal repairs and maintenance are charged to expense
as incurred. Management requires long-lived assets that are held and used by
the Company to be reviewed for impairment quarterly or whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable from related future undiscounted cash flows.
Patents and Trademarks. The Company capitalizes the cost of registering
and defending patents and trademarks. These costs are amortized over the
useful life of the patent or trademark.
Intangible Assets. Intangible assets consist of patent and trademark
rights, goodwill, intellectual property rights, covenants not to compete,
software costs, license fees and perpetual license. They are recorded at
cost and are amortized, except goodwill and perpetual license, on a straight-
line basis based on the period of time the asset is expected to contribute
directly or indirectly to future cash flows, which range from 5 to 40 years.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002.
Under SFAS No. 142, goodwill and indefinite life intangible assets, such as
the Company's perpetual license, are no longer amortized but are subject to
periodic impairment tests. Other intangible assets with finite lives, such
as patents, software development costs, trademark and proprietary property
rights and license and non-compete agreements will continue to be amortized
over their useful lives. Management performs reviews quarterly to determine if
the carrying value of intangible assets is impaired. Such reviews include an
independent valuation performed on certain intangible assets. The purpose of
these reviews is to identify any facts or circumstances, either internal or
external, which may indicate that the carrying value of the assets may not be
recoverable from related future, undiscounted cash flows.
Deferred License Fees. Shuffle Master licensed certain of its
intellectual property to Mikohn including rights under its coin sensing
patents and multi-tiered game wagering patents. For these rights, Mikohn
agreed to pay Shuffle Master future noncancellable royalties of approximately
$0.6 million per year over the next two years, including interest.
Deposits and Product Sales Recognition. Deposit liabilities represent
amounts collected in advance from customers pursuant to agreements under
which the related sale of inventory has not been completed.
Other Assets. Other long term assets represent primarily unamortized loan
fees of approximately $7.0 million at December 31, 2002 and $7.3 million at
December 31, 2001, related to the Senior Secured Notes.
Commitments and Contingencies. The Company is involved in various legal
proceedings. It is the Company's policy to accrue for amounts related to
these legal matters if it is probable that a liability has been incurred and
the amount is reasonably estimable.
Foreign Currency Translation. The Company classifies foreign currency
gains/(losses) on its long-term investments in its foreign subsidiaries as
adjustments to the equity section of the balance sheet.
Foreign subsidiaries report their financial results in U. S. dollars by
using translation rates at the end of the period for balance sheet accounts,
except for those accounts which are required to be reported at historical
amounts, and by using an average translation rate for the period for income
statement accounts.
Revenue Recognition The Company recognizes revenue depending on the line
of business as follows:
Product sales are executed by a signed contract or customer purchase
order. Revenue is recognized when the completed product is delivered. If the
agreement calls for Mikohn to perform an installation after delivery, revenue
related to the installation is recognized when the installation has been
completed and accepted by the customer.
System sales consist of a suite of products (some of which are sold
separately) that enable gaming entities to track customer gaming activity,
account for slot machine activity and operate progressive jackpot systems.
There are proprietary hardware and software components to the systems. The
Company accounts for system sales in accordance with Statement of Position 97-
2 - Software Revenue Recognition ("SOP 97-2"). System sales are considered
multiple element arrangements because they include hardware, software,
installation, training and post-sale customer support. System sales are
evidenced by a signed contract. Follow-up spare parts and hardware-only sales
are evidenced by a purchase order. Revenue for system sales is recognized
when: (i) there is a signed contract with a fixed determinable price; (ii)
collectibility of the sale is probable; and (iii) the hardware and software
have been delivered, installed, training has been completed and acceptance has
occurred. Not all systems contracts require installation. Examples include
sales of hardware only to (i) previous customers that are expanding their
systems, (ii) customers that have multiple locations and do the installation
themselves and require an additional software license and hardware and (iii)
customers purchasing spare parts.
Maintenance and support are sold under agreements with established vendor-
specific objective evidence of price. These contracts are generally for a
period of 12 months and revenue is recognized ratably over the contract
service period. Further training is also sold under agreements with
established vendor-specific objective evidence of price, which is based on
daily rates and is recognized upon delivery.
The leasing of proprietary table games to customers occurs under signed
lease agreements. Table game lease contracts are typically for a 36-month
period with a 30-day cancellation clause. The lease revenue is recognized
on a monthly basis.
The leasing of proprietary slot machines occurs under signed lease
agreements. These contracts will either be on participation or a fixed-rental
basis. Slot machine lease contracts are typically for a month-to-month period
with a 30-day cancellation clause. On a participation basis, the Company earns
a share of the revenue that the casino earns from these slot machines. On a
fixed-rental basis, the Company charges a fixed amount per slot machine per
day. Revenues from both types of lease arrangements are recognized on the
accrual basis.
Stock-Based Compensation. At December 31, 2002, the Company has
stock-based employee and director compensation plans which are described more
fully in Note 16. The Company accounts for those plans in accordance with APB
No. 25, "Accounting For Stock Issued to Employees", and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as no options granted under those plans had an exercise price less than
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation".
(Amounts in thousands, except
per share amounts) 2002 2001 2000
------ ------ ------
Net loss, as reported $ (37,903) $ (9,700) $ (22,105)
Add: Stock-based employee
compensation expense 488 79 569
Deduct: Total stock based employee
compensation expense determined
under fair value method (852) (925) (984)
------- ------- -------
Pro forma net loss $ (38,267) $ (10,546) $ (22,520)
========= ========= =========
Earnings (loss) per share:
As reported -
Basic and diluted $ (2.95) $ (0.83) $ (2.02)
Proforma -
Basic and diluted $ (2.98) $ (0.90) $ (2.05)
======== ======== ========
Equity Instruments Issued to Consultants and Vendors. The Company's
accounting policy for equity instruments issued to consultants and vendors in
exchange for goods and services follows the provisions of Emerging Issues
Task Force ("EITF") 96-18 - Accounting for Equity Instruments That are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services and EITF 00-18 - Accounting Recognition for Certain Transactions
Involving Equity Instruments Granted to Other Than Employees. The measurement
date for the fair value of the equity instruments issued is determined at the
earlier of (i) the date at which a commitment for performance by the
consultant or vendor is reached or (ii) the date at which the consultant or
vendor's performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized as a
charge to the statement of operations over the term of the consulting
agreement. The number of uncancelled options issued to consultants at
December 31, 2002, was 177,500.
In addition, the Company has received from Hasbro and Ripley licensing
rights to intellectual property, including rights to develop and market
gaming devices and associated equipment under the trademarks Yahtzee(r),
Monopoly(r), Battleship(r), Trivial Pursuit(r) and Ripley's-Believe It
or Not!(r). In exchange for these license agreements, the Company granted
Hasbro and Ripley warrants to purchase shares of the Company's common stock
for each license. See Note 15.
Related Party Transactions. During the year ended December 31, 2002, the
Company entered into various material transactions with related parties.
Specifically, the Company charged interest of approximately $0.2 million and
sold approximately $0.2 million of products to its 50% owned, unconsolidated
subsidiary in Latin America. During the third quarter of 2002, the Company
sold its remaining 50% interest in its Latin American subsidiary as part of
the restructuring initiatives. During the year ended December 31, 2001,
subsequent to the Company's divestiture of 50% of this subsidiary on October
1, 2001, the Company charged interest of less than $0.1 million and sold
approximately $0.2 million of products to the Latin American subsidiary. The
Company also had significant transactions with its Australian affiliate from
prior to the Australian affiliate being consolidated with the Company on
November 15, 2001. Specifically, during the 2001 period, and the year ended
December 31, 2000, the Company charged its Australian affiliate approximately
$1.1 million and $1.2 million in interest charges, royalty fees and net sales
of various products and services, respectively. Approximately $0.6 million
and $0.1 million of net costs were charged from the Australian affiliate to
the Company for various costs from January 1, 2001 to November 15, 2001 and
for the year ended December 31, 2000, respectively. All sales and expense
charges to or from affiliates were deemed arms-length transactions.
Research and Development. Costs associated with the development of
products are expensed when incurred. Such expenses totaled approximately
$4.2 million, $4.2 million and $5.2 million for the years ended December 31,
2002, 2001 and 2000, respectively.
Software Development Capitalization. The Company capitalizes costs
related to the development of certain software products that meet the
criteria under SFAS No. 86 - Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed. Costs capitalized for the years
ended December 31, 2002 and 2001 were $0.6 million and $0.7 million,
respectively, and are included in the "Intangible assets" caption on the
accompanying balance sheet.
Income Taxes. The Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes, pursuant to which the Company records deferred
income taxes for temporary differences that are reported in different years
for financial reporting and for income tax purposes. Such deferred tax
liabilities and assets are classified into current and non-current amounts
based on the classification of the related assets and liabilities.
Use of Estimates and Assumptions. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates, judgments and
assumptions that we believe are reasonable based on our historical
experience, contract terms, observance of known industry trends and
information available from other outside sources. These estimates affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could materially differ from those initial
estimates.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table presents the carrying amount and estimated fair value
of our financial instruments at December 31, 2002:
(Amounts in thousands) Carrying Estimated
Amount FMV
------ -----
Assets:
Notes and installment sales receivable $ 921 $ 825
Liabilities:
Long-term debt $102,984 $ 80,013
======== ========
The estimated fair value of notes and installment sales receivables was
calculated by discounting the stream of receipts using discount rates
determined by management to reflect the risk, remaining maturities and
current comparable market rates of similar notes receivable and contract
receivables. The estimated fair value of long-term debt was determined by
using quoted market prices and where quoted market prices are not available
the fair value was calculated utilizing the present value of estimated future
cash flows and applying discount rates commensurate with the risks involved.
3. RECEIVABLES
Accounts receivable at December 31, 2002 and 2001 consist of the
following:
(Amounts in thousands) 2002 2001
------ ------
Trade accounts $ 15,572 $ 18,209
Employee - 318
Other 833 2,014
------ ------
Subtotal 16,405 20,541
Less: allowance for doubtful accounts (2,284) (1,768)
------ ------
Net $ 14,121 $ 18,773
======== ========
Installment sales and notes receivable at December 31, 2002 and 2001
consist of the following:
(Amounts in thousands) 2002 2001
------ ------
Installment sales $ 921 $ 1,073
Notes 1,500 -
------ ------
Subtotal 2,421 1,073
Less: allowance for doubtful accounts (1,500) (638)
------ ------
Net $ 921 $ 435
======== ========
Current portion $ 513 $ 343
======== ========
Changes in the allowance for doubtful accounts for the years ended
December 31, 2002 and 2001 are as follows:
(Amounts in thousands) 2002 2001
------ ------
Allowance for doubtful accounts - beginning $ (2,406) $ (2,903)
Consolidated affiliates - (162)
Provision for bad debts (4,698) (3,807)
Write - offs 3,635 4,558
Recoveries (315) (92)
------ ------
Allowance for doubtful accounts - ending $ (3,784) $ (2,406)
======== ========
The activity in the allowance for doubtful accounts balance during 2002
included approximately $4.2 million of significant charges taken during the
third quarter. A charge of approximately $1.7 million was recorded to reflect
the forgiveness of an intercompany debt related to the Company's sale of its
50% interest in its Latin American subsidiary as part of the restructuring
initiatives. Additionally a charge of $1.5 million was taken to reserve a
loan made to a company, which in turn granted the Company an exclusive
license to manufacture and distribute its video poker games. Based on the
debtor's financial condition and uncertainties surrounding the future
business plan related to the proprietary games, a reserve was recorded.
Various other uncertainties with other debtors caused the Company to record
an additional $1.0 million.
Of the approximately $4.2 million of charges taken in the third quarter
of 2002, approximately $1.5 million are related to the Company's gaming
operations business segment and approximately $2.7 million are related to the
Company's product sales business segment.
The activity in the allowance for doubtful accounts balance during 2001
included approximately $2.8 million of significant charges taken during the
fourth quarter. These charges were taken based on: a dispute with an
international customer which was deemed improbable of collection
(approximately $0.4 million); an analysis of and correspondence with two
debtors who purchased certain internet, video gaming and patent rights from
the Company, whose declining financial condition and lack of success with the
purchased rights caused an impairment in abilities to pay (approximately $1.9
million); and bankruptcy and other business declines from several debtors
(approximately $0.5 million).
Of the approximately $2.8 million of charges taken in the fourth quarter
of 2001, approximately $1.5 million are related to the Company's gaming
operations business segment, approximately $1.0 million are related to the
Company's product sales business segment and approximately $0.3 million are
related to the Company's discontinued operations.
4. INVENTORIES
Inventories at December 31, 2002 and 2001 consist of the following:
(Amounts in thousands) 2002 2001
------ ------
Raw materials $ 9,689 $ 11,711
Finished goods 3,924 7,187
Work-in-progress 1,037 2,044
------ ------
Subtotal 14,650 20,942
Less: reserve for obsolete inventory (4,072) (5,001)
------ ------
Total $ 10,578 $ 15,941
======== ========
Changes in the reserve for obsolete inventory for the years ended
December 31, 2002 and 2001 are as follows:
(Amounts in thousands) 2002 2001
------ ------
Reserve for obsolete inventory - beginning $ (5,001) $ (4,379)
Provision for obsolete inventory (4,193) (1,991)
Write-offs 5,122 1,369
------ ------
Reserve for obsolete inventory - ending $ (4,072) $ (5,001)
======== ========
The activity in the provision for obsolete inventory during 2002 included
approximately $4.0 million of significant charges taken in the third quarter.
Certain inventories were deemed obsolete in the quarter as the Company, in
accordance with its restructuring plan, entered into arrangements to
outsource certain international sign assembly operations and to discontinue
the pursuit of certain European system sales related to the tracking of
arcade devices. These charges amounted to approximately $1.0 million.
Additionally, the Company wrote down slow-moving inventories for specialized
electronic meters, slot machines and finished signs in the amount of
approximately $3.0 million as targeted sales levels were not achieved.
Of the approximately $4.0 million of charges taken in the third quarter of
2002, approximately $0.2 million are related to the Company's gaming
operations business segment and approximately $3.8 million are related to the
Company's product sales business segment.
The activity in the provision for obsolete inventory during 2001 included
approximately $2.2 million of significant charges taken in the fourth
quarter. These charges were taken based on: a technological change related to
energy savings in the Company's exterior sign business which rendered certain
of its finished goods and raw materials obsolete (approximately $0.8
million)and is included in discontinued operations; the inability to sell
certain slot machine tracking systems and components after exhaustive efforts
(approximately $0.2 million); and other technological changes and excess and
slow-moving inventory brought on from a general business decline
(approximately $1.2 million).
Of these charges, $1.4 million are related to the Company's product sales
business segment.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 and 2001 consist of the
following:
(Amounts in thousands) 2002 2001
------ ------
Land $ - $ 1,018
Buildings and leasehold improvements 866 3,734
Machinery and equipment 6,013 6,501
Equipment leased to others 29,385 31,976
Furniture and fixtures 6,701 8,663
Transportation equipment 1,032 1,140
------ ------
Subtotal 43,997 53,032
Less: accumulated depreciation (22,173) (21,245)
------ ------
Total $ 21,824 $ 31,787
======== ========
Depreciation expense for property and equipment was approximately $9.2
million, $7.4 million and $6.0 million for the years ended December 31, 2002,
2001 and 2000, respectively
6. GOODWILL AND INTANGIBLE ASSETS
Intangible assets at December 31, 2002 and 2001 consist of the following:
(Amounts in thousands) 2002 2001
------ ------
Perpetual license $ 55,019 $ 55,019
Patent and trademark rights 10,269 10,891
Covenants not to compete 9,847 9,918
Software costs 2,158 2,977
License fees 100 2,357
Proprietary property rights / other 834 1,574
------ ------
Subtotal 78,227 82,736
Less: accumulated amortization (20,389) (19,909)
------ ------
Total $ 57,838 $ 62,827
======== ========
Goodwill at December 31, 2002 and 2001 consists of the following:
(Amounts in thousands) 2002 2001
------ ------
Goodwill $ 4,974 $ 5,240
Less: accumulated amortization (2,114) (2,234)
------ ------
Total $ 2,860 $ 3,006
======== ========
The change in the net carrying amount of intangible assets and goodwill
during the year ended December 31, 2002, is due primarily to impairment
charges and amortization expense. See Footnote 10.
In accordance with SFAS No. 142, the company performs an impairment
analysis on all of its long-lived and intangible assets on a quarterly basis.
For indefinite lived assets including perpetual licenses and goodwill, an
independent valuation is performed annually, to determine if any impairment
has occurred. An independent valuation test as of January 1, 2002, and
September 30, 2002, did not result in any impairment.
In connection with the adoption of SFAS No. 142, prior period amounts
were not restated. A reconciliation of the previously reported net income
and earnings per share for the years ended December 30, 2001 and 2000 to the
amounts adjusted for the elimination of amortization expense recorded on
goodwill and intangible assets prior to the adoption of SFAS No. 142, net of
income taxes, is as follows:
Net Basic Diluted
(Amounts in thousands) Loss EPS EPS
------ ----- -----
For the year ended December 31, 2001
Reported amount $ (9,700) $ (0.83) $ (0.83)
Add back: goodwill and intangible
asset amortization 1,782 0.15 0.15
------ ------ ------
Adjusted amount $ (7,918) $ (0.68) $ (0.68)
======== ======= =======
For the year ended December 31, 2000
Reported amount $(22,105) $ (2.02) $ (2.02)
Add back: goodwill and intangible
asset amortization 1,037 0.09 0.09
------ ------ ------
Adjusted amount $(21,068) $ (1.93) $ (1.93)
======== ======= =======
The net carrying value of goodwill and other intangible assets as of
December 31, 2002 is comprised of the following:
(Amounts in thousands) Net Amount Allocated by Segment
Gaming Product
Operations Sales Corporate Total
------ ------ ------ ------
Goodwill $ 2,860 $ - $ - $ 2,860
Indefinite life intangible asset
(perpetual license) 50,532 - - 50,532
Definite life intangible assets
(see detail below) 3,879 1,362 2,065 7,306
------- ------- ------- -------
Total $ 57,271 $ 1,362 $ 2,065 $ 60,698
======== ======== ======== ========
The net carrying value of goodwill ($2.9 million) as of December 31, 2002
is included in the geographic operations of North America ($2.5 million) and
Australia / Asia ($0.4 million).
Definite life intangible assets as of December 31, 2002, subject to
amortization, are comprised of the following:
Gross
Carrying Accumulated
(Amounts in thousands) Amount Amortization Net
------ ------ ------
Patent and trademark rights $ 10,269 $ (5,806) $ 4,463
Covenants not to compete 9,847 (8,953) 894
Software development costs 2,158 (829) 1,329
License fees 100 (21) 79
Proprietary property rights / other 834 (293) 541
------ ------ ------
Total $ 23,208 $(15,902) $ 7,306
======== ======== ========
Amortization expense for definite life intangible assets was
approximately $3.0 million, $4.2 million and $4.7 million for the years ended
December 31, 2002, 2001 and 2000, respectively. Annual estimated amortization
expense for each of the five succeeding fiscal years is as follows:
(Amounts in thousands)
2003 $ 2,388
2004 1,540
2005 1,416
2006 1,168
2007 277
Thereafter 517
------
Total $ 7,306
=========
7. ACCRUED LIABILITIES
Accrued liabilities at December 31, 2002 and 2001 consist of the
following:
(Amounts in thousands) 2002 2001
------ ------
Payroll and related costs $ 1,897 $ 2,313
Income taxes 2,726 2,318
Interest 2,132 2,213
Royalties 1,455 2,024
Restructuring and severance expense 2,157 -
Other 874 448
------ ------
Total $ 11,241 $ 9,316
======== ========
8. RESTRUCTURING EXPENSE
During the third quarter of 2002, the Company initiated a restructuring
plan for certain of its operations. The restructuring plan was designed to
achieve various objectives, principally related to reducing costs,
streamlining operations and improving financial performance on an ongoing
basis. The Company's Board of Directors approved the plan in August 2002,
which was subsequently acted upon by management during the third quarter of
2002. The principal restructuring initiatives included:
* Replacing the Chief Executive Officer, Chief Financial Officer and
certain other executives;
* Eliminating approximately 20% of the Company's permanent work force;
* Divesting non-core business units and product lines;
* Disposing under-utilized assets;
* Consolidating interior sign production capacity into one facility;
* Streamlining certain of the Company's warehousing and slot route
assembly operations; and
* Outsourcing and streamlining certain of the Company's international
sign operations.
As a result of implementing the above initiatives, the Company recorded
certain restructuring expenses, severance expenses, a loss from discontinued
operations and certain other significant operating costs during the third
quarter 2002. The Company also recorded an impairment loss relating to
certain of its indefinite and definite-lived intangible assets, property and
equipment and inventories. These impairment charges were recorded based on
valuation analyses whereby it was determined that cash flow, earnings and
other key operational criteria no longer supported the carrying values of
these assets. In addition, the Company took a charge to write-down the assets
of its exterior sign operations, net of expected proceeds. The charges
totaled $27.8 million for the third quarter and $28.0 million for the year
ended December 31, 2002, and are described below and in Footnotes 9 and 10.
Included in the restructuring expense caption for the year ended December
31, 2002 of approximately $0.9 million are principally non-officer employee
severance costs for approximately 130 terminated employees related to a
restructuring plan. Excluding the Company's research and development and
sales personnel, all employee groups within the Company were affected by the
terminations. At December 31, 2002, approximately $0.1 million of the
restructuring expense was unpaid.
Additionally, a restructuring charge of approximately $3.3 million was
taken to accrue the present value of long-term building lease commitments
which, in accordance with the actions taken by the Company, will not be
utilized as of specified dates as certain business operations have been
streamlined, consolidated or divested. The leases are for one building
located in Gulfport, Mississippi and for two buildings located in Las Vegas,
Nevada. The building lease in Mississippi has a term which expires in
approximately 4 years, while the two leases in Nevada have terms expiring in
July 2004 and in 2017. On a quarterly basis through July 2004, the Company
plans to remit cash of approximately $0.3 million under the lease agreements.
Subsequent to July 2004, the Company plans to remit cash of approximately
$0.1 million quarterly. At December 31, 2002 approximately $3.4 million
remains unpaid. The Company is subleasing one of the Las Vegas Buildings and
is currently seeking tenants for subleasing the other buildings.
Also included in restructuring expenses were write-downs of certain
property and equipment to their net realizable value in relation to the
curtailment of planned business operations with certain assembly facilities
and the sale of certain real estate. Specifically, a charge for approximately
$1.5 million was recorded for various leasehold improvements, machinery and
equipment and real estate. Of the $1.5 million, a building owned by the
Company in Las Vegas, Nevada, was sold for approximately $0.5 million less
than its book value of $2.2 million. The Company realized net cash proceeds
of $1.7 million from this sale in November 2002. The Company is attempting
to sell the machinery and equipment no longer useful to the Company.
9. SEVERANCE EXPENSE
Included in the severance expense caption in the Company's consolidated
statement of operations for the year ended December 31, 2002 are charges for
the separation and post-employment agreements of the Company's former CEO,
CFO and another officer. Including severance and other provisions of the
agreements, the total charge was approximately $4.8 million of which $1.8
million was a cash charge paid during the three months ended September 30,
2002. Approximately $0.6 million of the severance expense was applied by the
former CEO and CFO to repay outstanding loans and advances owed to the
Company. At December 31, 2002, approximately $2.3 million remained unpaid to
these individuals. However, in March 2003, the Company paid its former CEO
all remaining amounts owed him totaling $1.4 million in conjunction with his
retirement as Chairman of the Board of Directors. On a quarterly basis
through July 2003, the remaining required quarterly payments to the
individuals approximate $0.2 million. Subsequent to July 2003 to August
2006, the Company is required to pay approximately $0.2 million annually.
10. IMPAIRMENT LOSS
Year ended December 31, 2002
An impairment loss was recorded during the third quarter of 2002 for
certain definite-lived intangible assets. Management ascertained that the
actual and targeted revenues, earnings and cash flows generated from the
assets, no longer supported certain of its definite-lived intangible assets.
Based thereon, the Company recorded approximately $3.9 million in write-downs
of these impaired intangible assets. The write-downs consisted primarily of a
license agreement related to certain table game hardware of approximately
$1.0 million, software costs related to Monopoly(r) table games of
approximately $0.6 million, proprietary rights and software development costs
related to our table game tracking system of approximately $1.5 million and
capitalized costs associated with patents that are no longer deemed useful of
approximately $0.7 million.
The Company maintains certain indefinite-lived intangible assets as part
of its consolidated financial statements, principally in a perpetual license
related to its casino table game operations and, to a limited extent,
goodwill related to its slot route operations and international operations.
A valuation test as of January 1, 2002 did not result in any impairment.
However, as a result of the Company's divestiture of its Latin American
Subsidiary, goodwill related to the Latin American subsidiary was deemed to
have been impaired during the third quarter of 2002. Therefore, the Company
recorded a goodwill impairment loss of approximately $0.4 million.
In connection with the restructuring initiatives and a third quarter
valuation review of its long-lived assets, the Company determined that the
assets described below no longer generated sufficient cash flow to support
their carrying value. These assets are comprised of approximately 200 reel-
spinning slot machines and certain non-branded assets including MoneyTime(tm),
a proprietary jackpot system consisting of slot machines, signs, meters and
related electronics. The impairment charge recorded in the third quarter of
2002 related to these assets totaled approximately $1.7 million.
Additionally, the Company decided to no longer use certain trade show
equipment, after returning from its annual trade show in September 2002, and
recorded a charge for approximately $0.2 million, in the third quarter of
2002.
Year ended December 31, 2001
Two of the Company's operating units operated at losses during 2001.
Although the Company initially believed future business plans during 2001 did
not necessitate impairment losses relating to these operating units, the
downturn in the economy in the latter part of 2001 and an assessment of the
backlog of these operating units in the fourth quarter of 2001 and the first
quarter of 2002 caused the Company to record an impairment loss of
approximately $0.5 million, principally for goodwill of two of these
operating units. These charges relate to our corporate and product sales
operations.
Additionally, the Company decided in the fourth quarter that it would no
longer use certain long-lived nonoperating assets. Since these assets,
principally related to trade shows, non-compete agreements and slot route
revenue production, were deemed to no longer benefit the Company, the Company
recorded an impairment charge of approximately $1.2 million. These charges
relate to our corporate operations and our gaming operations business
segment.
Year ended December 31, 2000
During the fourth quarter 2000, an analysis of present and future cash
flows from certain assets related to older slot machine product lines revealed
the these assets were impaired, resulting in asset write-offs totaling
approximately $6.5 million. Specifically, cash flows from the Company's Flip-
It(tm) and P & M Coin products could no longer support the carrying value of
these assets. Based on the future cash flow and earnings projections from
these older assets, management decided in the fourth quarter of 2000 to write
off the net book value of these assets of approximately $2.4 million. In
addition, the Company wrote off assets from its surveillance and security
systems operations of approximately $0.7 million due to similar impairment
issues reflecting the projected cash flow and earnings projections from such
assets. The Company also wrote off approximately $3.4 million of prepaid
royalties related to a certain licensing agreement previously deemed to be
realizable. This write-off was based on the repositioning analysis performed
at the end of 2000 when it appeared that sales opportunities became less
likely. All of these charges relate to our product sales business segment.
In early 2001, the Company received an adverse verdict in a patent
lawsuit. Accordingly, a $1.5 million jury award plus related legal costs of
approximately $1.7 million were incurred in the fourth quarter of 2000. These
charges relate to our corporate operations.
11. DEBT AND CAPITAL LEASES
Long - term debt and capital leases at December 31, 2002 and 2001 consists
of the following:
CAPTION>
(Amounts in thousands) 2002 2001
------ ------
11.875% Senior Secured Notes due August 15, 2008,
net of unamortized discount of $4,732 and $5,567 $100,268 $ 99,433
Capital leases secured by transportation, gaming
and manufacturing equipment, interest rates between
4.1% and 13.19% and due through 2006. The related
capitalized cost for these leases is $5,425 and $6,767 2,137 4,191
Unsecured promissory note to TAB, Ltd. bearing interest
at 5%, principal and interest due June 30, 2005 284 -
Notes payable secured by transportation and office equipment,
interest rates between 0% to 12% due through 2004 109 145
Unsecured notes payable to individuals bearing interest at
10% due through 2003 44 185
Other 142 194
------- -------
Total 102,984 104,148
Less: current portion (1,654) (2,381)
------- -------
Long - term portion $101,330 $101,767
======== ========
Following is the long - term debt maturity schedule:
(Amounts in thousands)
2003 $ 1,654
2004 722
2005 53
2006 287
2007 -
Thereafter 100,268
-------
Total $ 102,984
=========
In February 2002, the Company completed the acquisition of a $17.5
million working capital revolving line of credit facility (the "Facility")
with Foothill Capital Corporation ("Foothill"). Borrowings under the
Facility are based on (i) eligible accounts receivable, as defined, up to
$7.5 million with interest at LIBOR plus 2.75% or prime plus 0.75% and (ii)
Table Game EBITDA, as defined, up to $10.0 million with interest at prime
plus a range of 2.0% to 3.5% depending on Debt Coverage Ratios, as defined in
the Facility. Any borrowings under the Facility are secured by a first
secured interest in substantially all of the Company's assets. The Company
pays a 0.5% per annum unused line fee. The Facility has early payoff
penalties during the term of the line at 3.0% during the first year, 2.0%
during the second year, and 1.0% during the third year. The Facility has an
initial term of three years and includes certain restrictive financial
covenants, including maintenance of $20.0 million of annual EBITDA, minimum
table games revenue of $0.8 million monthly and a table game installed base
of not less than 600 games. At June 30 and September 30, 2002, the Company
was not in compliance with its covenant to maintain minimum amounts of annual
EBITDA. The Company and Foothill subsequently amended the EBITDA covenant to
require the Company to maintain a trailing twelve months EBITDA of $15.0
million for each of the quarters ended September 30, 2002, December 31, 2002
and March 31, 2003. The calculation of EBITDA was also amended to allow for
certain non-cash charges to be excluded. The EBITDA covenant increases to
$17.0 million for the quarter ended June 30, 2003 and increases to the
original amount of $20.0 million for the quarter ended September 30, 2003 and
each quarter thereafter for the remaining term of the Facility. The capacity
of the Facility will be $12.5 million until the Company has achieved EBITDA
of $20.0 million for three consecutive quarters, at which point the capacity
of the Facility will revert to the original $17.5 million. At December 31,
2002, the Company was in compliance with the financial covenants associated
with the Facility.
On May 14, 2002, the Company acquired 1,744,403 shares of Mikohn
Australasia Pty Limited ("MGA") from TAB Limited ("TAB"). These shares
represented 8% of the issued and outstanding shares of MGA, increasing the
Company's ownership in this subsidiary from 92% to 100%. The purchase price
for the shares was approximately $1.1 million, with $0.8 million payable on
closing and a promissory note for approximately $0.3 million. The promissory
note is due June 30, 2005 and bears interest at 5% per annum due at maturity.
On August 22, 2001, the Company completed the private placement of $105.0
million of its 11.875% Senior Secured Notes due 2008 and warrants to purchase
an aggregate of 420,000 shares of its common stock at a price of $7.70 per
share. Interest payments of approximately $6.2 million are due on May 1 and
November 1 until 2008. The Senior Secured Notes due 2008 are secured by a
security interest in certain of the Company's assets and certain assets of
its subsidiaries. On or after August 15, 2005, the Company will have the
right to redeem all or some of the notes at a price that will decrease over
time from 105.938% of the principal amount in 2005 to 100.0% of the principal
amount in 2007, plus accrued and unpaid interest. The Senior Secured Notes
due 2008 include a covenant whereby the Company may only purchase additional
slot machines if it maintains $5.0 million of available liquidity, as
defined. The Company is in compliance with this covenant as of December 31,
2002.
Each warrant issued entitles the holder to purchase four shares of our
common stock at a price of $7.70. The warrants expire on August 15, 2008.
The fair market value of the warrants at date of issue was recorded as
additional paid in capital.
During 2001, the Company entered into two sale - leaseback transactions
with various third party finance companies. The transactions involve gaming
equipment, have terms of 40 months and 44 months and are being treated as
capital leases. Proceeds from these sale - leaseback transactions totaled
$2.0 million.
12. COMMITMENTS AND CONTINGENCIES
We lease certain of our facilities and equipment under various agreements
for periods through the year 2017. The following schedule shows the future
minimum rental payments required under these operating leases, which have
initial or remaining non - cancelable lease terms in excess of one year as of
December 31, 2002:
Net
Minimum Sublease Minimum
(Amounts in thousands) Payments Rentals Payments
2003 $ 9,031 $ (200) $ 8,831
2004 4,189 (240) 3,949
2005 2,388 (240) 2,148
2006 2,225 - 2,225
2007 2,135 - 2,135
Thereafter 9,403 - 9,403
------- ------- -------
Total $ 29,371 $ (680) $ 28,691
======== ======= ========
Rent expense was $8.8 million, $7.7 million and $4.0 million for the
years ended December 31, 2002, 2001 and 2000, respectively.
In March 2002, the Company entered into a contractual commitment to
purchase a minimum of 125 slot machines each calendar quarter beginning July
1, 2002 through June 30, 2003 for a new slot machine introduction. These
purchases will total approximately $3.5 million. As of December 31, 2002, the
Company has not purchased any slot machines under this agreement. In March
2003, the Company paid $0.3 million to the supplier to be used as an advance
against future slot machine purchases or as part of the cancellation fee.
A former supplier to the Company has alleged that the Company has an
outstanding commitment to purchase certain electronic components in the amount
of approximately $0.5 million. The Company does not believe that the amount
or the alleged contractual relationship are valid and does not plan to acquire
the components.
A lease agreement for a building in Las Vegas, NV contains a minimum net
worth requirement stating that if the net worth of the Company falls below a
specified threshold, the Company must provide the landlord with a letter of
credit to secure future rent payments. During the years ended December 31,
2001 and 2002, the Company's minimum net worth did not meet the requirements
under the lease agreement. Because of the violations, the Company paid $0.8
million for a letter of credit to secure future rent payments and potentially
could be obligated to purchase an additional $2.2 million letter of credit.
The Company is involved in routine litigation, including bankruptcies,
collection efforts, disputes with former employees and other matters in the
ordinary course of its business operations. Management knows of no matter,
pending or threatened, that in its judgment will or might have a material
adverse effect on the Company or its operations.
13. INCOME TAXES
The provision for income taxes for the years ended December 31, 2002,
2001 and 2000 consist of:
(Amounts in thousands) 2002 2001 2000
------ ------ ------
Current $ 456 $ - $ -
Deferred - - -
------ ------ ------
Total provision $ 456 $ - $ -
======== ======== ========
Continuing operations $ 1,480 $ 847 $ 574
Discontinued operations (1,024) (847) (574)
------- ------- -------
Total provision $ 456 $ - $ -
======== ======== ========
The provision for income taxes for the years ended December 31, 2002,
2001 and 2000 differs from the amount computed at the federal income tax
statutory rate as a result of the following:
(Amounts in thousands) 2002 % 2001 % 2000 %
------ --- ------ --- ------ ---
Amount at statutory rate $ (13,266) (35.0)% $ (3,395) (35.0)% $ (7,737) (35.0)%
Adjustments:
State income tax and other 15 0.0 % (142) (1.5)% (150) (0.7)%
Non-deductible expenses 120 0.3 % 47 0.5 % 98 0.4 %
Prior year adjustment of deferred
tax 331 0.9 % 3,719 38.4 % (682) (3.1)%
Tax credits - - (200) (2.1)% 16 0.1 %
Valuation allowance 13,256 35.0 % (29) (0.3)% 8,455 38.3 %
------- ------- -------
Total provision $ 456 1.2 % $ - - $ - -
========= ======== ========
The components of the net deferred tax liability at December 31, 2002
and 2001 consist of the following:
(Amounts in thousands) 2002 2001
------ ------
Deferred tax assets:
Current:
Inventory book / tax differences $ 2,634 $ 3,961
Prepaid expenses and other 679 1,221
Patent litigation - 93
------- -------
Subtotal 3,313 5,275
Noncurrent:
Deferred revenue $ 1,067 $ 382
Tax credits 1,388 1,354
Intangible assets 519 294
Net operating loss carryforward 24,992 9,946
Valuation allowance (21,682) (8,426)
------- -------
Subtotal 6,284 3,550
------- -------
Total deferred tax assets 9,597 8,825
Deferred tax liabilities:
Current: - -
Noncurrent:
Perpetual license 18,150 17,939
Sale leaseback 1,015 1,245
Property and equipment and other 3,233 2,442
------- -------
Subtotal 22,398 21,626
------- -------
Total deferred tax liabilities 22,398 21,626
------- -------
Net deferred tax liability $ 12,801 $ 12,801
========= =========
At December 31, 2002, the Company had federal and alternative minimum tax
("AMT") net operating loss carryforwards of approximately $68.4 million and
$53.8 million, which will begin to expire after the year ended December 31,
2018. The Company also had General Business and AMT tax credit carryforwards
of approximately $1.1 million and $0.3 million, respectively. At December
31, 2002, a valuation allowance was recorded to reduce the deferred tax asset
because recognition of the tax benefit could not be assured.
14. EARNINGS PER SHARE
The following table provides a reconciliation of basic and diluted income
(loss) per share:
(Amounts in thousands Dilutive
except per share amounts) Stock
Basic Options Diluted
----- ----- -----
For the year ended December 31, 2002:
Net loss $ (37,903) $ - $ (37,903)
Weighted average shares 12,843 12,843
Per share amount $ (2.95) $ - $ (2.95)
========= ====== =========
For the year ended December 31, 2001:
Net loss $ (9,700) $ - $ (9,700)
Weighted average shares 11,750 11,750
Per share amount $ (0.83) $ - $ (0.83)
========= ====== =========
For the year ended December 31, 2000:
Net loss $ (22,105) $ - $ (22,105)
Weighted average shares 10,968 10,968
Per share amount $ (2.02) $ - $ (2.02)
========= ====== =========
Dilutive stock options of approximately 243,000, 332,000 and 126,000 for
the years ended December 31, 2002, 2001 and 2000, respectively, have not been
included in the computation of diluted net loss per share as their effect
would be antidilutive.
15. BENEFIT PLANS
The Company adopted a savings plan (the "401(k) Plan") qualified under
Section 401(k) of the Internal Revenue Code of 1986, as amended. The 401(k)
Plan covers substantially all employees who are not covered by a collective
bargaining unit. The Company's matching contributions for 2002, 2001 and
2000 were approximately $0.2 million, $0.2 million and $0.2 million,
respectively.
16. STOCK BASED COMPENSATION PLANS
In 1993, the Company adopted, and in 1996, 1997 and 1999 amended, (i) a
Stock Option Plan under which non-qualified and incentive stock options
(as defined by the Internal Revenue Code) to purchase up to 2.9 million
shares of the Company's Common Stock which may be issued to officers,
directors (other than non-employee directors), employees, consultants,
advisers, independent contractors and agents and (ii) a Director Plan under
which stock options to purchase up to 0.3 million shares of the Company's
Common Stock which may be issued only to non-employee directors. Generally,
options have been granted at the fair market value on the date of grant and
typically become exercisable at the rate of 20% of the options granted on
each of the first through the fifth anniversaries of the date of the grant.
Furthermore, options are normally granted with a term of ten years. The
Company accounts for these plans under Accounting Principles Board Opinion
No. 25 - Accounting for Stock Issued to Employees, under which no
compensation cost has been recognized.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for the 2000 through 2002 grants: risk-free interest rate at the date of
grant which ranged from 3.125% to 7.78%; expected dividend yield of 0.0%;
expected life of the option from 1 to 6 years; and expected volatility
between 50 and 60 percent.
A summary of the status of the Company's stock option plans at December
31, 2002, 2001 and 2000 and changes during the years then ended is presented
in the table below:
2002 2001 2000
(Amounts in thousands ---------- ---------- ----------
except per option amounts) Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
Director Plan:
Options, beginning of year 275 $5.78 215 $5.97 160 $5.64
Granted 55 5.93 60 5.10 55 6.94
Exercised - - -
Cancelled (73) 6.17 - -
---- ---- ----
Options, end of year 257 5.70 275 5.78 215 5.97
Exercisable at end of year 157 5.62 162 6.07 113 6.25
==== ==== ====
Weighted average fair value of
options granted during the year $4.30 $3.74 $4.89
===== ===== =====
Employee Plan:
Options, beginning of year 1,890 $5.57 1,763 $5.71 1,954 $5.75
Granted 468 5.69 534 4.34 394 5.51
Exercised (42) 4.83 (67) 4.07 (194) 4.30
Cancelled (248) 4.68 (340) 4.67 (391) 6.38
----- ----- -----
Options, end of year 2,068 4.82 1,890 5.57 1,763 5.71
Exercisable at end of year 1,407 4.79 978 4.58 827 4.45
===== ===== =====
Weighted average fair value of
options granted during the year $4.14 $3.21 $4.16
===== ===== =====
The following table summarizes information concerning options outstanding
and options exercisable as of December 31, 2002:
(Amounts in thousands Options Outstanding Options Exercisable
except per option amounts) Weighted
Average Weighted Weighted
Number Remaining Average Number Average
of Contractual Exercise of Exercise
Range of Exercise Prices Options Life Price Options Price
------ ------ ------ ------ ------
Director Plan:
$2.75 - $4.06 39 6.2 $ 2.98 39 $ 2.98
$4.37 - $5.50 141 7.5 5.33 55 4.86
$7.25 - $9.25 72 6.5 7.10 58 7.13
$17.25 5 0.9 17.25 5 17.25
---- ----
257 157
==== ====
Employee Plan:
$3.00 - $4.50 1,114 5.4 $ 4.01 866 $ 4.11
$4.56 - $6.75 659 7.7 5.01 359 5.02
$6.87 - $10.00 295 6.9 7.51 182 7.53
----- ----
2,068 1,407
===== =====
Along with the above-discussed stock option plans, the Company may from
time to time grant stock warrants to various licensors as well as other
individuals with whom the Company does business. In 1998, the Company entered
into various licensing agreements with Hasbro, Inc. and Hasbro International,
Inc. (together, "Hasbro") which granted the Company rights to intellectual
property, including rights to develop and market gaming devices and
associated equipment under the trademarks Yahtzee(r), Monopoly(r) and
Battleship(r). In exchange for these license agreements, the Company granted
Hasbro warrants to purchase up to 125,000 shares of the Company's common
stock for each license at an average exercise price of $5.70 per share. In
connection with licenses to other properties, the Company has issued an
additional 375,000 warrants which were not vested at December 31, 2002. In
addition, the Company entered into a licensing agreement with Ripley
Entertainment which granted the Company rights to intellectual property,
including rights to develop and market gaming devices and associated
equipment under the trademark for Ripley's Believe It or Not!(r), in exchange
for which the Company granted Ripley's Entertainment to purchase up to 35,000
shares of the Company's common stock at an exercise price of $6.75 per share.
At December 31, 2002, warrants to purchase 535,000 shares of the Company's
common stock were issued and vested with a fair market value of approximately
$1.9 million.
17. CONCENTRATIONS OF CREDIT RISK
The financial instruments that potentially subject the Company to
concentrations of credit risk are primarily accounts and installment sales
receivable. The Company established a financing program under which interest
bearing installment sales contracts collateralized by the equipment sold were
entered into with credit worthy customers, with payment terms typically
ranging over periods of 12 to 24 months. The Company performs credit
evaluations of its customers, and typically requires advance deposits of
approximately 50%.
At December 31, 2002, net accounts and installment sales receivable by
region, as a percentage of total receivables, at December 31, 2002 were as
follows:
Installment
Accounts Sales
Receivable Receivable Total
------ ------ ------
Domestic region 73.2% 6.1% 79.3%
International region:
Australia / Asia 10.3 - 10.3
Europe / Africa 9.4 - 9.4
Other international 1.0 - 1.0
----- ----- -----
Total international 20.7 - 20.7
----- ----- -----
Total 93.9% 6.1% 100.0%
===== ===== =====
18. GUARANTOR FINANCIAL STATEMENTS
The Company's domestic subsidiaries are 100% owned and have provided full
and unconditional guarantees on a joint and several basis on the payment of
11.875% Senior Secured Notes due 2008.
The financial statements for the guarantor subsidiaries follow:
CONSOLIDATING CONDENSED BALANCE SHEETS
(Amounts in thousands) December 31, 2002
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
ASSETS
Current Assets:
Cash $ 14,444 $ (14) $ 1,845 $ - $ 16,275
Accounts receivable, net 6,736 4,280 3,105 - 14,121
Inventories, net 5,311 2,903 2,364 - 10,578
Other current assets 3,613 5,142 299 - 8,054
------ ------ ------ ------ ------
Total current assets 29,104 12,311 7,613 - 49,028
Property and equipment, net 7,086 14,307 431 - 21,824
Intangible assets 54,939 5,370 389 - 60,698
Investments in subsidiaries 6,128 - - (6,128) -
Other assets 8,898 1,545 - - 10,443
------- ------- ------- ------- -------
Total assets $106,155 $ 33,533 $ 8,433 $ (6,128) $141,993
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities $ 18,207 $ 4,367 $ 4,465 $ - $ 27,039
Inter-company transactions (24,174) 19,790 4,384 - -
------ ------ ------ ------ ------
Total current liabilities (5,967) 24,157 8,849 - 27,039
Long-term debt, net 100,694 580 56 - 101,330
Other liabilities, long term 4,239 183 - - 4,422
Deferred tax liability 14,101 2,013 - - 16,114
Stockholders' equity (deficit) (6,912) 6,600 (472) (6,128) (6,912)
------- ------- ------- ------- -------
Total liabilities and stock-
holders' equity (deficit) $106,155 $ 33,533 $ 8,433 $ (6,128) $141,993
======== ======== ======== ======== ========
CONSOLIDATING CONDENSED BALANCE SHEETS
(Amounts in thousands) December 31, 2001
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
ASSETS
Current Assets:
Cash $ 14,354 $ (185) $ 1,037 $ - $ 15,206
Accounts receivable, net 12,407 4,539 1,827 - 18,773
Inventories, net 7,729 5,546 2,666 - 15,941
Assets of disposal group - 4,739 - - 4,739
Other current assets 2,542 6,699 218 - 9,459
------ ------ ------ ------ ------
Total current assets 37,032 21,338 5,748 - 64,118
Property and equipment, net 10,824 20,553 410 - 31,787
Intangible assets 60,048 5,389 396 - 65,833
Investments in subsidiaries 14,017 - - (13,754) 263
Other assets 11,864 1,722 - - 13,586
------- ------- ------- ------- -------
Total assets $133,785 $ 49,002 $ 6,554 $(13,754) $175,587
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities $ 15,446 $ 5,571 $ 2,697 $ - $ 23,714
Liabilities of disposal group - 1,161 - - 1,161
Intercompany transactions (26,845) 22,458 4,387 - -
------ ------ ------ ------ ------
Total current liabilities (11,399) 29,190 7,084 - 24,875
Long-term debt, net 99,847 1,849 71 - 101,767
Other liabilities, long term 1,035 1,180 - - 2,215
Deferred tax liability 15,648 2,428 - - 18,076
Stockholders' equity (deficit) 28,654 14,355 (601) (13,754) 28,654
------- ------- ------- ------- -------
Total liabilities and stock-
holders' equity (deficit) $133,785 $ 49,002 $ 6,554 $(13,754) $175,587
======== ======== ======== ======== ========
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands) Year Ended December 31, 2002
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Revenues $ 59,840 $ 34,484 $ 18,186 $ (9,922) $102,588
Cost of sales 29,770 15,416 13,818 (7,196) 51,808
Selling, general and admin
expenses 27,768 21,329 4,150 - 53,247
Restructuring expense 2,942 2,391 285 - 5,618
Severance expense 4,774 - - - 4,774
Impairment loss 4,521 1,740 - - 6,261
------- ------- ------- ------- -------
Operating loss (9,935) (6,392) (67) (2,726) (19,120)
Equity in earnings of
subsidiaries (10,419) - - 10,419 -
Interest expense (15,036) (282) (371) - (15,689)
Other income and (expense) 269 (231) 337 - 375
------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes (35,121) (6,905) (101) 7,693 (34,434)
Income tax (provision) benefit (2,782) 1,308 (6) - (1,480)
------- ------- ------- ------- -------
Income (loss) from
continuing operations (37,903) (5,597) 107) 7,693 (35,914)
Loss from discontinued
operations, net of income
tax benefit - (1,989) - - (1,989)
------- ------- ------- ------- -------
Net income (loss) $(37,903) $ (7,586) $ 107) $ 7,693 $(37,903)
======== ======== ======== ======== ========
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Amounts in thousands) Year Ended December 31, 2001
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Revenues $ 63,431 $ 37,093 $ 9,947 $(12,310) $ 98,161
Cost of sales 30,058 12,607 6,603 (7,915) 41,353
Selling, general and admin
expenses 29,103 16,646 3,376 - 49,125
Impairment loss 1,041 306 309 - 1,656
------- ------- ------- ------- -------
Operating income (loss) 3,229 7,534 (341) (4,395) 6,027
Equity in earnings of
subsidiaries (2,359) - - 2,359 -
Interest expense (11,180) (307) (232) - (11,720)
Loss on early retirement of debt (3,135) - - - -
Other income and (expense) 1,565 105 (50) - 1,620
------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes (11,880) 7,331 (623) (2,036) (7,028)
Income tax (provision) benefit 2,180 (3,027) - - (847)
------ ------ ------ ------ ------
Income (loss) from
continuing operations (9,700) 4,304 (623) (2,036) (8,055)
Loss from discontinued
operations, net of income
tax benefit - (1,531) - - (1,531)
------- ------- ------- ------- -------
Net income (loss) $ (9,700) $ 2,659 $ (623) $ (2,036) $ (9,700)
======== ======== ======== ======== ========
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands) Year Ended December 31, 2000
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Revenues $ 64,353 $ 26,516 $ 8,702 $(14,167) $ 85,404
Cost of sales 27,580 16,436 7,394 (10,110) 41,300
Selling, general and admin
expenses 31,382 9,923 2,803 - 44,108
Write-off of assets and other 5,921 3,931 - - 9,852
------- ------- ------- ------- -------
Operating loss (530) (3,774) (1,495) (4,057) (9,856)
Equity in earnings of
subsidiaries (10,611) - - 10,611 -
Interest expense (10,105) (308) (85) - (10,498)
Other income and (expense) 71 (74) (59) - (62)
------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes (21,175) (4,156) (1,639) 6,554 (20,416)
Income tax provision (benefit) (930) 356 - - (574)
------- ------- ------- ------- -------
Income (loss) from
continuing operations (22,105) (3,800) (1,639) 6,554 (20,990)
Loss from discontinued
operations, net income
tax benefit - (1,115) - - (1,115)
------- ------- ------- ------- -------
Net income (loss) $(22,105) $ (4,915) $ (1,639) $ 6,554 $(22,105)
======== ======== ======== ======== ========
CONSOLIDATING CONDENSED CASH FLOW STATEMENTS
(Amounts in thousands) For the Twelve Months Ended December 31, 2002
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Net cash provided by (used
in) operating activities $ 300 $ (524) $ 962 $ - $ 738
Cash flows from investing
activities:
Purchase of property and
equipment (393) (260) (305) - (958)
Proceeds from sale of
equipment 1,772 - - - 1,772
Cash provided by
discontinued operations - 2,592 - - 2,592
Other investing activities (990) - - - (990)
------- ------- ------- ------- -------
Net cash provided by (used
in) investing activities 389 2,332 (305) - 2,416
Cash flows from financing
activities:
Proceeds from long-term debt - - 54 - 54
Principal payments on long-
term debt (211) - (73) - (284)
Principal payments on capital
leases (696) (1,463) (4) - (2,163)
Principal payments on
deferred license fees (439) - - - (439)
Proceeds from issuance of
common stock and warrants 743 - - - 743
Proceeds from notes
receivable-stockholders 227 - - - 227
Purchase of treasury stock (223) - - - (223)
------- ------- ------- ------- -------
Net cash used in financing
activities (599) (1,463) (23) - (2,085)
------- ------- ------- ------- -------
Increase in cash and cash
equivalents 90 345 634 - 1,069
Cash and cash equivalents,
beginning of period 14,354 (185) 1,037 - 15,206
------- ------- ------- ------- -------
Cash and cash equivalents,
end of period $ 14,444 $ 160 $ 1,671 $ - $ 16,275
======== ======== ======== ======== ========
CONSOLIDATING CONDENSED CASH FLOW STATEMENTS
(Amounts in thousands) For the Twelve Months Ended December 31, 2001
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Net cash provided by (used in)
operating activities $ (959) $ 7,334 $ 1,214 $ - $ 7,589
Cash flows from investing
activities:
Purchase of inventory for
lease to others - (12,955) - - (12,955)
Proceeds from sale-
leaseback transactions - 3,500 - - 3,500
Purchase of property and
equipment (1,458) (488) (106) - (2,052)
Proceeds from note receivable,
sale of subsidiary 100 - - - 100
Cash provided by discontinued
operations - 1,852 - - 1,852
Other investing activities (1,065) 123 - - (942)
------- ------- ------- ------- -------
Net cash used in investing
activities (2,423) (7,968) (106) - (10,497)
Cash flows from financing
activities:
Proceeds from long-term debt 99,410 - 260 - 99,670
Debt issuance costs (7,975) - - - (7,975)
Principal payments on long-
term debt (82,450) - (635) - (83,085)
Proceeds from issuance of
common stock and warrants 9,352 - - - 9,352
Other financing activities (1,141) 739 7 - (395)
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities 17,196 739 (368) - 17,567
Increase in cash and cash
equivalents 13,814 105 740 - 14,659
Cash and cash equivalents,
beginning of period 540 (290) 297 - 547
------- ------- ------- ------- -------
Cash and cash equivalents,
end of period $ 14,354 $ (185) $ 1,037 $ - $ 15,206
======== ======== ======== ======== ========
CONSOLIDATING CONDENSED CASH FLOW STATEMENTS
(Amounts in thousands) For the Twelve Months Ended December 31, 2000
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Net cash provided by (used in)
operating activities $ (3,534) $ 7,813 $ 367 $ - $ 4,646
Cash flows from investing
activities:
Purchase of inventory for
lease to others - (20,329) - - (20,329)
Proceeds from sale-
leaseback transactions - 11,500 - - 11,500
Purchase of property and
equipment (1,304) (20) (151) - (1,475)
Proceeds from note receivable,
sale of subsidiary 4,418 - - - 4,418
Cash used by discontinued
operations - (1,024) - - (1,024)
Other investing activities 648 1,577 - - 2,225
------- ------- ------- ------- -------
Net cash (used in) provided by
investing activities 3,762 (8,296) (151) - (4,685)
Cash flows from financing
activities:
Proceeds from long-term debt 4,823 - - - 4,823
Principal payments on long-
term debt (5,172) (1,781) (452) - (7,405)
Proceeds from issuance of
common stock and warrants 1,367 - - - 1,367
Other financing activities (751) 2,383 (15) - 1,617
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities 267 602 (467) - 402
Increase (decrease) in cash
and cash equivalents 495 119 (251) - 363
Cash and cash equivalents,
beginning of period 45 (409) 548 - 184
------- ------- ------- ------- -------
Cash and cash equivalents,
end of period $ 540 $ (290) $ 297 $ - $ 547
======== ======== ======== ======== ========
19. SEGMENT REPORTING
The Company's worldwide operations are concentrated in two principal
business segments: gaming operations and product sales. The gaming
operations business segment was established in 1993 to develop, acquire,
manufacture and distribute proprietary games, and these games have become
increasingly important to its business. Increased attention has been given
to gaming operations because of the high recurring revenues and profit margin
potential for this business line. Mikohn owns or licenses the rights to
several categories of proprietary games, which it places in casinos under
lease arrangements. These leases either provide for a fixed rental payment
or a participation in the game's operating results. Sales of proprietary
games are reflected in the reported results of the Company's product sales
business segment, while revenues derived from leases are included in the
results of its gaming operations business segment. The Company's product
sales business segment has been providing gaming products and equipment
around the world since 1987. Initially, the Company sold progressive jackpot
systems and then expanded to manufacturing signs, jackpot meters, and related
products. The Company's gaming products are found in almost every major
gaming jurisdiction and include: (i) interior casino signage and electronic
components used in progressive jackpot systems, (ii) player tracking and
accounting systems and (iii) gaming machines.
A 50% interest in the stock of the Company's Australian operation was
divested late in 1999 and, therefore, only 50% of MGA's net loss after taxes
is included in revenues effective in 2000. Effective November 2001, the
Company owns approximately 93% of MGA and the entity is consolidated from
that point. In May 2002, the Company increased its ownership share to 100%.
In October 2001, the Company sold 50% interest in its Latin American
subsidiary and, therefore, equity in earnings from this affiliate has been
charged to revenues since then. Prior to the divesture, the financial results
of this operation were included in the consolidated results of the Company.
In September 2002 the Company completed the sale of its remaining interest in
the Latin American subsidiary. The accounting policies of the segments are
the same as those described in Note 1 - Description of Business and Summary
of Significant Accounting Policies. All inter-segment transactions have been
eliminated.
Business segment information for the years ended December 31, 2002, 2001
and 2000 consists of:
(Amounts in thousands)
2002 2001 2000
Business Segments: ------ ------ ------
Revenue:
Gaming operations
Gaming machines $ 27,306 $ 27,602 $ 14,836
Table games 16,553 17,203 20,340
------- ------- -------
43,859 44,805 35,176
Product sales:
Signage and electronic components 46,738 43,341 41,226
Player tracking and systems 9,372 6,951 5,685
Gaming machines 2,619 3,064 3,317
------- ------- -------
58,729 53,356 50,228
------- ------- -------
Total Revenues $ 102,588 $ 98,161 $ 85,404
========= ========= =========
Operating income (loss):
Gaming operations $ 7,894 $ 15,662 $ 14,543
Product sales 2,553 4,881 (621)
Corporate (12,914) (12,860) (13,926)
------- ------- -------
Subtotal (2,467) 7,683 (4)
Restructuring expense (5,618) - -
Severance expense (4,774) - -
Impairment loss (6,261) (1,656) (9,852)
------- ------- -------
Total $ (19,120) $ 6,027 $ (9,856)
========= ========= =========
Depreciation and amortization:
Gaming operations $ 8,188 $ 7,743 $ 6,356
Product sales 993 1,100 1,295
Corporate 3,320 3,257 3,179
------- ------- -------
Total $ 12,501 $ 12,100 $ 10,830
========= ========= =========
Assets:
Gaming operations $ 85,572 $ 95,572 $ 100,112
Product sales 25,777 41,264 44,748
Corporate 30,644 38,751 21,886
------- ------- -------
Total $ 141,993 $ 175,587 $ 166,746
========= ========= =========
Capital expenditures:
Gaming operations $ 6,081 $ 13,926 $ 9,788
Product sales 727 1,922 1,315
Corporate 467 1,064 1,334
------- ------- -------
Total $ 7,275 $ 16,912 $ 12,437
========= ========= =========
The Company attributes revenue and expenses to a geographic area based on
the location from which the product was shipped or the service was performed.
Geographic segment information for the years ended December 31, 2002, 2001
and 2000 consists of:
(Amounts in thousands)
2002 2001 2000
------ ------ ------
Geographic Operations:
Revenue:
North America $ 84,403 $ 88,214 $ 76,916
Australia / Asia 8,703 237 (215)
Europe / Africa 9,498 7,756 7,055
South America (16) 1,954 1,648
------- ------- -------
Total $ 102,588 $ 98,161 $ 85,404
========= ========= =========
Operating income:
North America $ (2,721) $ 8,009 $ 1,706
Australia / Asia (51) (733) (215)
Europe / Africa 321 631 (1,088)
South America (16) (224) (407)
------- ------- -------
Subtotal (2,467) 7,683 (4)
Restructuring expense (5,618) - -
Severance expense (4,774) - -
Impairment loss (6,261) (1,656) (9,852)
------- ------- -------
Total $ (19,120) $ 6,027 $ (9,856)
========= ========= =========
Depreciation and amortization:
North America $ 12,357 $ 11,939 $ 10,603
Australia / Asia 61 15 -
Europe / Africa 83 97 161
South America - 49 66
------- ------- -------
Total $ 12,501 $ 12,100 $ 10,830
========= ========= =========
Assets:
North America $ 133,576 $ 169,034 $ 162,725
Australia / Asia 4,377 3,627 -
Europe / Africa 4,040 2,926 2,164
South America - - 1,857
------- ------- -------
Total $ 141,993 $ 175,587 $ 166,746
========= ========= =========
Capital expenditures:
North America $ 6,971 $ 16,192 $ 12,286
Australia / Asia 86 46 -
Europe / Africa 218 60 68
South America - 614 83
------- ------- -------
Total $ 7,275 $ 16,912 $ 12,437
========= ========= =========
20. RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2001, the FASB issued Statement No. 143, "Accounting for
Asset Retirement Obligations." This statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and the normal operation of a long-lived asset, except for
certain obligations of lessees. Statement No. 143 is effective for
financial statements issued for fiscal years beginning after September 15,
2002. Management does not expect the adoption of this statement to have a
material effect on the Company.
In April 2002, the FASB issued Statement No. 145, "Rescission of
Statement Nos. 4, 44 and 64, Amendment of Statement No. 13, and Technical
Corrections". Among other things, Statement No. 145 rescinds various
pronouncements regarding early extinguishment of debt and allows
extraordinary accounting treatment for early extinguishment only when the
provisions of Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" are met. Statement No. 145 provisions regarding early
extinguishment of debt are generally effective for fiscal years beginning
after May 15, 2002. Management adopted Statement No. 145, and the impact
was a reclassification of approximately $3.1 million from an extraordinary
item to an other income and expense of a loss from the early retirement of
debt during 2001.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting
for restructuring and similar costs. Statement No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force (EITF) Issue
No. 94-3. The Company will adopt the provisions of Statement No. 146 for
restructuring activities initiated after December 31, 2002. Statement No.
146 requires that the liability for costs associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF
94-3, a liability for an exit cost was recognized at the date of a
company's commitment to an exit plan. Statement No. 146 also establishes
that the liability should initially be measured and recorded at fair value.
Accordingly, Statement No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure", which amends
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation". Statement No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, Statement
No. amends the disclosure requirements of Statement No. 123 to require more
prominent and more frequent disclosures in financial statements of the
effects of stock-based compensation. The transition guidance and annual
disclosure provisions of Statement No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are
effective for financial reports containing condensed financial statements
for interim periods beginning after December 15, 2002. The adoption of
Statement No. 148 did not have a material impact on the Company's
consolidated balance sheet or results of operations. The Company will
provide the interim disclosures required by Statement No. 148 beginning in
the first quarter of 2003 and has provided the required annual disclosure
in the accompanying consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others," which disclosures
are effective for financial statements issued after December 15, 2002.
While the Company has various guarantees included in contracts in the
normal course of business, primarily in the form of indemnities, these
guarantees would only result in immaterial increases in future costs, but
do not represent significant or contingent liabilities of the indebtedness
of others.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which requires the
consolidation of variable interests entities, as defined. FIN 46 is
applicable to financial statements issued after 2002, however, disclosures
are required currently if the Company expects to consolidate any variable
interests entities. The Company does not expect to identify any variable
interest entities that must be consolidated, but may be required to make
additional disclosures. The maximum exposure of any investment that may be
determined to be in a variable interest entity is limited to the amount
invested.
QUARTERLY RESULTS OF OPERATIONS (unaudited)
(Amounts in thousands)
1 ST 2 ND 3 RD 4 TH ANNUAL
------ ------ ------ ------ ------
Revenues:
2002 $ 21,828 $ 24,013 $ 29,634 $ 27,113 $102,588
2001 $ 20,842 $ 24,230 $ 25,152 $ 27,938 $ 98,161
Gross profit:
2002 $ 12,914 $ 12,381 $ 10,382 $ 15,103 $ 50,780
2001 $ 12,078 $ 15,474 $ 15,379 $ 13,877 $ 56,808
Net income (loss) from continuing operations:
2002 $ (1,801) $ (5,667) $(28,619) $ 172 $(35,914)
2001 $ (35) $ 1,720 $ (1,214) $ (8,525) $ (8,055)
Net income (loss):
2002 $ (1,930) $ (5,812) $(30,240) $ 79 $(37,903)
2001 $ 92 $ 1,788 $ (1,418) $(10,161) $ (9,700)
Weighted average shares outstanding:
Basic -
2002 12,783 12,817 12,849 12,920 12,843
2001 11,068 11,117 12,072 12,721 11,750
Diluted -
2002 12,783 12,817 12,849 12,920 12,843
2001 11,084 11,429 12,072 12,721 11,750
Net income (loss) per share:
Basic -
2002 $ (0.15) $ (0.45) $ (2.35) $ 0.01 $ (2.95)
2001 $ 0.01 $ 0.16 $ (0.12) $ (0.80) $ (0.83)
Diluted -
2002 $ (0.15) $ (0.45) $ (2.35) $ 0.01 $ (2.95)
2001 $ 0.01 $ 0.16 $ (0.12) $ (0.80) $ (0.83)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information required by this item is incorporated by reference to the
Company's Current Reports on Form 8-K filed with the Securities and Exchange
Commission on April 29, 2002 and May 17, 2002.
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
The information required by Items 10 through 13 is set forth under the
captions "Election of Directors," "Management," "Executive Compensation,"
"Principal Stockholders" and "Certain Transactions" in Mikohn Gaming
Corporation's definitive Proxy Statement for the 2003 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, and is incorporated herein by reference as if set forth in full.
PART IV
Item 14. Controls and Procedures
(a) - Disclosure Controls and Procedures. The Company maintains
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c)) designed to ensure that it is able to collect the information
it is required to disclose in the reports it files with the SEC, and to
process, summarize and disclose this information within the time periods
specified in the rules of the SEC. The Company's Chief Executive and Chief
Financial Officers are responsible for establishing and maintaining these
controls and procedures and, as required by the rules of the SEC, evaluating
their effectiveness. Based on their evaluation of the Company's disclosure
controls and procedures which took place as of a date within 90 days prior to
the filing date of this report, the Chief Executive and Chief Financial
Officers believe that these controls and procedures are effective to ensure
that the Company is able to collect, process and disclose the information it
is required to disclose in the reports it files with the SEC within the
required time periods.
(b) - Changes in Internal Controls. The Company maintains a system of
internal controls designed to provide reasonable assurance that: (1)
transactions are executed in accordance with management's general or specific
authorization; (2) transactions are recorded as necessary (a) to permit
preparation of financial statements in conformity with generally accepted
accounting principles, and (b) to maintain accountability for assets; (3)
access to assets is permitted only in accordance with management's general or
specific authorization; and (4) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
Since the date of the most recent evaluation of the Company's internal
controls by the Chief Executive and Chief Financial Officers, there have been
no significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. and 2. Financial Statements and Schedules
The financial statements and schedules filed as part of this report are
listed in the Index to Consolidated Financial Statements under Item 8.
(3) Exhibits required by Securities and Exchange Commission
Regulation S-K:
3.1 Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (No. 33-69076).
3.2 Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2
to Amendment No. 1 to the Company's Registration Statement on Form S-1
(No. 33-69076).
4.1 Agreement between the Company, The Young Group, Inc. and John R.
Young, dated November 7, 1994 (the "Young Agreement"), including
certain exhibits thereto and a supplemental list identifying all
exhibits and schedules thereto, incorporated by reference to Exhibit
2.1 to the Company's Form 10-Q for the quarter ended September 30,
1994.
*10.1 Stock Option Plan, as amended, incorporated by reference to Exhibit
4.3 to the Company's Registration Statement on Form S-8 (No. 33-
73506).
*10.2 Director Stock Option Plan, as amended, incorporated by reference to
Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.
10.3 Form of Indemnification Agreement between the Company and its
directors and executive officers, incorporated by reference to Exhibit
10.9 to Amendment No. 1 to the Company's Registration Statement on
Form S-1 (No. 33-69076).
*10.4 Employment Agreement dated October 17, 1988, as amended, between the
Company and David J. Thompson, incorporated by reference to Exhibit
10.10 to Amendment No. 1 to the Company's Registration Statement on
Form S-1 (No. 33-69076).
*10.5 Second Amendment to Employment Agreement, dated as of July 1, 1993,
between the Company and David J. Thompson, incorporated by reference
to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994.
*10.6 Employment Agreement, dated as of May 1, 1994, between the Company and
Charles H. McCrea, Jr., incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 8-K/A dated September 1, 1994.
10.7 Sales Agreement dated January 6, 1995, between Michael Wichinsky dba
Games of Nevada and the Company incorporated by reference to Exhibit
10.25 to the Company's Report on Form 10-K for the year ended December
31, 1994.
*10.8 Employment Agreement dated June 2, 1996, between the Company and Don
Stevens incorporated by reference to Exhibit 10.25 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
*10.9 Employment Agreement dated January 27, 1997, between the Company and
Louie Peyton incorporated by reference to Exhibit 10.26 of the
Company's Form 10-Q dated March 31, 1997.
10.10 Agreement dated April 9, 1998, between the Company and Progressive
Games, Inc. for the Company to acquire the stock of Progressive Games,
Inc. incorporated by reference to Exhibit 10.53 of the Company's Form
10-Q dated March 31, 1998.
*10.11 Third Amendment to Employment Agreement between the Company and Dennis
A. Garcia dated November 16, 2001 incorporated by reference to Exhibit
10.56 of the Company's Form 10-K dated December 31, 2001.
*10.12 Sixth Amendment to Employment Agreement between the Company and
Charles H McCrea, Jr. dated November 19, 2001 incorporated by
reference to Exhibit 10.57 of the Company's Form 10-K dated December
31, 2001.
*10.13 Fifth Amendment to Employment Agreement between the Company and Donald
W. Stevens dated November 19, 2001 incorporated by reference to
Exhibit 10.58 of the Company's Form 10-K dated December 31, 2001.
*10.14 Eighth Amendment to Employment Agreement between the Company and David
J Thompson dated November 19, 2001 incorporated by reference to
Exhibit 10.59 of the Company's Form 10-K dated December 31, 2001.
*10.15 Employment Agreement between the Company and Olaf Vancura dated August
31, 1998 incorporated by reference to Exhibit 10.60 of the Company's
Form 10-K dated December 31, 2001.
*10.16 First Amendment to Employment Agreement between the Company and Olaf
Vancura dated November 15, 2001 incorporated by reference to Exhibit
10.61 of the Company's Form 10-K dated December 31, 2001.
10.17 Secured Convertible Debenture dated March 11, 2002 between the Company
and GameCraft, Inc. incorporated by reference to Exhibit 10.62 of the
Company's Form 10-K dated December 31, 2001.
*10.18 Employment agreement dated August 14, 2002 between the Company and
Russel H. McMeekin, Chief Executive Officer incorporated by reference
to Exhibit 10.63 of the Company's Form 10-Q dated September 30, 2002.
*10.19 Employment agreement dated August 19, 2002 between the Company and
John M. Garner, Chief Financial Officer incorporated by reference to
Exhibit 10.64 of the Company's Form 10-Q dated September 30, 2002.
*10.20 Employment agreement dated April 26, 1999 between the Company and
Michael Dreitzer.
*10.21 First Amendment to Employment agreement dated January 8, 2002 between
the Company and Michael Dreitzer.
*10.22 Second Amendment to Employment agreement dated September 26, 2002
between the Company and Michael Dreitzer.
10.23 Amendment Number 2 to Loan and Security Agreement dated November 29,
2002 between the Company and Foothill Capital Corporation.
*10.24 Second Amendment to Employment agreement dated January 8, 2003 between
the Company and Olaf Vancura.
21.1 Subsidiaries.
23.1 Consent of BDO Seidman, LLP.
99 Audited Financial Statements for Mikohn Nevada
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Management contracts and compensation plans
(b) Reports on Form 8-K filed during the fourth quarter of 2002.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MIKOHN GAMING CORPORATION
April 14, 2003 By: /s/ JOHN M. GARNER
-----------------------
John. M. Garner
Executive Vice President,
Treasurer, and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ PETER G. BOYNTON Chairman of the Board April 14, 2003
- -------------------------
Peter G. Boynton
/s/ TERRANCE W. OLIVER Director April 14, 2003
- -------------------------
Terrance W. Oliver
/s/ JAMES E. MEYER Director April 14, 2003
- ------------------------
James E. Meyer
/s/ DOUGLAS M. TODOROFF Director April 14, 2003
- ------------------------
Douglas M. Todoroff
/s/ RUSSEL H. MCMEEKIN Chief Executive Officer April 14, 2003
- ------------------------ (Principal Executive
Russel H. McMeekin Officer)
/s/ JOHN M.GARNER Chief Financial Officer April 14, 2003
- ------------------------ (Principal Accounting and
John M. Garner Financial Officer)
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
SARBANES-OXLEY SECTION 302
I, Russel H. McMeekin, certify that:
1. I have reviewed this report on Form 10-K of Mikohn Gaming
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial information included in this
report, and the financial statements on which the financial
information is based, fairly present in all material respects the
financial condition, results of operations, changes in net assets,
and cash flows of the registrant as and for the periods presented
in this report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during this period in which this report
is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this report (the
"Evaluation Date"); and
(c) presented in this report our conclusions about the
effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors:
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize, and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in
this report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with respect to
significant deficiencies and material weaknesses.
Date April 14, 2003
By: /s/ RUSSEL H. MCMEEKIN
-----------------------
Russel H. McMeekin
Chief Executive Officer
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
SARBANES-OXLEY SECTION 302
I, John M. Garner, certify that:
1. I have reviewed this report on Form 10-K of Mikohn Gaming
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial information included in this
report, and the financial statements on which the financial
information is based, fairly present in all material respects the
financial condition, results of operations, changes in net assets,
and cash flows of the registrant as and for the periods presented
in this report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during this period in which this report is
being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this report (the
"Evaluation Date"); and
(c) presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors:
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize, and report financial data and have identified
for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with respect
to significant deficiencies and material weaknesses.
Date: April 14, 2003
By: /s/ JOHN M.GARNER
-------------------
John M. Garner
Chief Financial Officer