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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended: March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ______to______
Commission File Number: 000-22752
MIKOHN GAMING CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada 88-0218876
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
920 Pilot Road, Las Vegas, NV 89119
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(Address of principal executive office and zip code)
(702) 896-3890
-----------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) YES ___ NO X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as the latest practicable date:
13,092,816 as of May 13, 2003
-------------- ----------------
(Amount Outstanding) (Date)
MIKOHN GAMING CORPORATION
TABLE OF CONTENTS
Page
----
Part I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2003
(Unaudited) and December 31, 2002 2
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months Ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Three Months Ended March 31, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 29
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 30
Signatures/Certifications 31
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
(Amounts in thousands) 2003 December 31,
(Unaudited) 2002
------ ------
ASSETS
Current assets:
Cash and cash equivalents $ 15,634 $ 16,275
Accounts and notes receivable, net 11,952 14,799
Inventories, net 11,309 10,578
Prepaid expenses 3,685 4,063
Deferred tax asset 3,313 3,313
------- -------
Total current assets 45,893 49,028
Notes receivable, net 282 408
Property and equipment, net 19,743 21,824
Intangible assets 57,174 57,838
Goodwill, net 2,860 2,860
Other assets 9,644 10,035
------- -------
Total assets $135,596 $141,993
======== ========
See notes to condensed consolidated financial statements.
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
(Amounts in thousands, 2003 December 31,
except par value data) (Unaudited) 2002
------ ------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Trade accounts payable $ 6,795 $ 8,715
Customer deposits 2,960 3,928
Current portion of long-term debt
and notes payable 1,350 1,654
Accrued liabilities 13,371 11,241
Deferred revenues and license fees 1,928 1,501
------- -------
Total current liabilities 26,404 27,039
Long-term debt and notes payable,
net of unamortized discount of
$4,523 and $4,732 101,325 101,330
Other long-term liabilities 3,645 4,422
Deferred tax liability 16,114 16,114
------- -------
Total liabilities 147,488 148,905
Commitments and contingencies (See Note 5)
Stockholders' 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,
13,085,298 and 13,049,773 shares
issued and outstanding 1,308 1,305
Additional paid-in capital 67,399 67,299
Foreign currency translation (895) (858)
Accumulated deficit (78,992) (73,946)
------- -------
Subtotal (11,180) (6,200)
Less treasury stock, 194,913 shares,
at cost (712) (712)
------- -------
Total stockholders' deficit (11,892) (6,912)
------- -------
Total liabilities and stockholders'
deficit $135,596 $141,993
======== ========
See notes to condensed consolidated financial statements.
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, Three Months Ended
except per share amounts) March 31,
2003 2002
------ ------
Revenues:
Gaming operations $ 9,537 $ 11,366
Product sales 13,196 10,462
------- -------
Total revenues 22,733 21,828
Operating costs and expenses:
Gaming operations 8,367 7,357
Product sales 11,089 9,899
Corporate expense 3,775 2,760
Severance expense 575 -
------ ------
Total operating costs and expenses 23,806 20,016
Operating income (loss):
Gaming operations 1,170 4,009
Product sales 2,107 563
Corporate expense (3,775) (2,760)
Severance expense (575) -
------ ------
Total operating income (loss) (1,073) 1,812
Interest expense (3,878) (3,785)
Other income (expense) (92) 238
------ ------
Loss from continuing operations
before income tax provision (5,043) (1,735)
Income tax provision (3) (66)
------- -------
Loss from continuing operations (5,046) (1,801)
Loss from discontinued operations,
net of income tax benefit - (129)
------ ------
Net loss $ (5,046) $ (1,930)
======== ========
Weighted average common shares:
Basic 12,877 12,783
Diluted 12,877 12,783
======== ========
Basic and diluted loss:
Loss from continuing operations $ (0.39) $ (0.14)
Loss from discontinued operations - (0.01)
------- -------
Net loss $ (0.39) $ (0.15)
======== ========
See notes to condensed consolidated financial statements
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Three Months Ended
(Amounts in thousands) March 31,
2003 2002
------ ------
Net loss $ (5,046) $ (1,930)
Other comprehensive income (loss):
Foreign currency translation gain (loss) (37) 48
------- -------
Comprehensive loss $ (5,083) $ (1,882)
======== ========
See notes to condensed consolidated financial statements
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
(Amounts in thousands) March 31,
2003 2002
------ ------
Cash flows from operating activities:
Net loss $ (5,046) $ (1,930)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 2,608 1,990
Amortization 693 754
Provision for bad debts 244 123
Provision for obsolete inventory 273 200
Amortization of debt discount and
debt issue costs 577 579
Discontinued operations - 129
Loss on disposition of assets 95 -
Other 7 3
Changes in assets and liabilities:
Accounts and notes receivable 2,729 (1,588)
Inventories (1,148) (1,856)
Other assets 372 (1,221)
Trade accounts payable (1,920) (1,736)
Accrued expenses and other liabilities 1,567 4,215
Other liabilities (639) 890
------ ------
Net cash provided by operating activities 412 552
Cash flows from investing activities:
Purchase of property and equipment (464) (100)
Cash provided by discontinued operations - 137
Other investing activities - (288)
------ ------
Net cash used in investing activities (464) (251)
Cash flows from financing activities:
Proceeds from long-term debt and notes
payable - 27
Principal payments on notes payable and
long-term debt (89) (33)
Principal payments on capital leases (480) (647)
Principal payments of deferred license
fees (117) (249)
Proceeds from issuance of common stock 97 297
------ ------
Net cash used in financing activities (589) (605)
------ ------
Decrease in cash and cash equivalents (641) (304)
Cash and cash equivalents, beginning of
period 16,275 15,207
------ ------
Cash and cash equivalents, end of period $ 15,634 $ 14,903
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 249 $ 234
Federal and state income taxes $ 6 $ 54
======== ========
See notes to condensed consolidated financial statements.
1. GENERAL
These unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. Unless indicated otherwise, "Mikohn," the "Company,"
"we," "us" and "our" refer to Mikohn Gaming Corporation. These statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002. In the opinion of the Company, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting of normal accruals and charges) necessary to present
fairly the financial position of the Company at March 31, 2003, the results of
its operations and cash flows for the three months ended March 31, 2003 and
2002. The results of operations for the three months ended March 31, 2003 are
not necessarily indicative of the results to be expected for the entire year.
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.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition: The Company recognizes revenue depending on the
nature of the transaction 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.
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.
Stock-Based Compensation The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" effective December 31, 2002. This new standard
requires prominent disclosures in both the annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method on reported results.
At March 31, 2002, the Company had one stock-based employee plan and one
director compensation plan. 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, Three months ended March 31,
except per share amounts) 2003 2002
Net loss, as reported $ (5,046) $ (1,930)
Add: Stock-based compensation expense 7 42
Deduct: Total stock-based employee compensation
expense determined under fair value method (239) (248)
------- -------
Pro forma net loss $ (5,278) $ (2,136)
======== ========
Loss per share:
As reported -
Basic and diluted $ (0.39) $ (0.15)
Pro forma -
Basic and diluted $ (0.41) $ (0.17)
======== ========
Guarantees In November 2002, the FASB issued FIN No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others - an interpretation of FASB Statements
No. 5, 57 and 107 and rescission of FIN 34." The following is a summary of
the agreements that the Company has determined are within the scope of FIN 45.
Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the officer
or director's serving in such capacity. The term of the indemnification period
is for the officer's or director's lifetime. The Company has a separate
indemnification agreement with one of its directors that requires it, subject
to certain exceptions, to indemnify him to the fullest extent authorized or
permitted by its bylaws. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is
unlimited. However, the Company has a directors and officer liability
insurance policy that limits its exposure and enables it to recover a portion
of any future amounts paid. As a result of its insurance policy coverage, the
Company believes the estimated fair value of these indemnification agreements
is minimal and has no liabilities recorded for these agreements as of
March 31, 2003.
The Company enters into indemnification provisions under its agreements
with other companies in its ordinary course of business, typically with
landlords. Under these provisions the Company generally indemnifies the
indemnified party for losses suffered or incurred by the indemnified party as a
result of the Company's activities. These indemnification provisions generally
survive termination of the underlying agreement. The Company has not incurred
material costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the estimated
fair value of these agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of March 31, 2003.
Recently issued accounting standards In January 2003, the FASB issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities,"
which requires the consolidation of variable interest 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 interest 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.
3. INVENTORIES
Inventories at March 31, 2003 and December 31, 2002 consist of the
following:
March 31, December 31,
(Amounts in thousands) 2003 2002
------ ------
Raw materials $ 11,077 $ 9,689
Finished goods 3,679 3,924
Work-in-progress 896 1,037
------- -------
Subtotal 15,652 14,650
Reserve for obsolete inventory (4,343) (4,072)
------- -------
Total $ 11,309 $ 10,578
======== ========
4. GOODWILL AND OTHER INTANGIBLE ASSETS
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 September 30, 2002, did not
result in any impairment.
The net carrying value of goodwill and other intangible assets as of March
31, 2003 is comprised of the following:
Net Amount Allocated by Segment
(Amounts in thousands) Gaming Product
Operations Sales Corporate Total
------ ------ ------ ------
Goodwill $ 2,471 $ 389 $ - $ 2,860
Indefinite life intangible asset
(perpetual license) 50,532 - - 50,532
Definite life intangible assets
(see detail below) 3,643 1,102 1,897 6,642
------- ------- ------- -------
Total $ 56,646 $ 1,491 $ 1,897 $ 60,034
======== ======== ======== ========
The net carrying value of goodwill ($2.9 million) as of March 31, 2003 is
included in the geographic operations of North America ($2.5 million) and
Australia / Asia ($0.4 million).
Definite life intangible assets as of March 31, 2003, subject to
amortization, are comprised of the following:
(Amounts in thousands) Gross Carrying Accumulated
Amount Amortization Net
------ ------ ------
Patent / trademark rights $ 10,212 $ (6,063) $ 4,149
Covenants not to compete 9,847 (9,186) 661
Software development costs 2,158 (905) 1,253
Proprietary rights / other 934 (355) 579
------- ------- -------
Total $ 23,151 $(16,509) $ 6,642
======== ======== ========
Amortization expense for definite life intangible assets was approximately
$0.6 million for the three months ended March 31, 2003 compared to $0.7
million for the three months ended March 31, 2002
5. COMMITMENTS AND CONTINGENCIES
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 would reasonably be expected to
have a material adverse effect on the Company or its operations.
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 may
total approximately $3.5 million. As of March 31, 2003, 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 $0.9 million
for a letter of credit to secure future rent payments and potentially could be
obligated to purchase an additional $2.1 million letter of credit.
6. LOSS PER SHARE
The following table provides a reconciliation of basic and diluted loss
per share:
(Amounts in thousands Dilutive
except per share amounts) Stock
Basic Options Diluted
------- ------- -------
For the three months ended March 31, 2003:
Net loss $ (5,046) $ - $ (5,046)
Weighted average shares 12,877 12,877
Per share amount $ (0.39) $ - $ (0.39)
======== ======== ========
For the three months ended March 31, 2002:
Net loss $ (1,930) $ - $ (1,930)
Weighted average shares 12,783 12,783
Per share amount $ (0.15) $ - $ (0.15)
======== ======== ========
Dilutive stock options of approximately 15,000 and 626,000 for the three
months ended March 31, 2003 and 2002, respectively, have not been included in
the computation of diluted net loss per share as their effect would be
antidilutive.
7. RELATED PARTY TRANSACTIONS
David J. Thompson announced his resignation as chief executive officer
effective August 16, 2002 and, on March 21, 2003, 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. In March
2003, as part of his retirement package, the Company paid the remaining amounts
owed Mr. Thompson totaling approximately $1.4 million and agreed to pay certain
legal costs incurred by him in the approximate amount of $0.5 million.
8. ACQUISITION/ DIVESTITURE OF SUBSIDIARIES
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
which was 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 for the three months ended
March 31, 2002 are as follows:
(Amounts in thousands)
Revenues $ 2,567
Operating costs and expenses 2,761
-------
Operating loss (194)
Other income (1)
-------
Net loss before income taxes (195)
Income tax benefit 66
-------
Loss from discontinued operations $ (129)
========
9. 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 due to 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.
Business segment information for the three months ended March 31, 2003 and
2002 consists of:
(Amounts in thousands) Three Months Ended
March 31,
Business Unit Segments 2003 2002
------ ------
Revenues:
Gaming operations
Slot operations $ 5,703 $ 7,177
Table games 3,834 4,189
------- -------
9,537 11,366
Product sales:
Signage and electronic
components 10,199 8,232
Player tracking and systems 2,548 1,942
Gaming machines 449 288
------- -------
13,196 10,462
------- -------
Total $ 22,733 $ 21,828
======== ========
Operating income (loss):
Gaming operations $ 1,170 $ 4,009
Product sales 2,107 563
Corporate (3,775) (2,760)
Severance expense (575) -
------- -------
Total $ (1,073) $ 1,812
======== ========
Depreciation and amortization
Gaming operations $ 2,389 $ 1,706
Product sales 221 249
Corporate 691 789
------- -------
Total $ 3,301 $ 2,744
======== ========
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 three months ended March 31, 2003 and
2002 consist of:
(Amounts in thousands) Three Months Ended
March 31,
Geographic Operations 2003 2002
------ ------
Revenues:
North America $ 18,604 $ 18,534
Australia / Asia 903 1,628
Europe / Africa 3,226 1,669
South America - (3)
------- -------
Total $ 22,733 $ 21,828
======== ========
Operating income (loss):
North America $ (639) $ 1,579
Australia / Asia (397) 257
Europe / Africa 538 (21)
South America - (3)
Severance expense (575) -
------- -------
Total $ (1,073) $ 1,812
======== ========
Depreciation and amortization
North America $ 3,265 $ 2,713
Australia / Asia 8 13
Europe / Africa 28 18
South America - -
------- -------
Total $ 3,301 $ 2,744
======== ========
10. 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
the 11.875% Senior Secured Notes due 2008. The financial statements for the
guarantor subsidiaries follow:
CONSOLIDATING CONDENSED BALANCE SHEETS
(Amounts in thousands) December 31, 2003
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
ASSETS
Current Assets:
Cash $ 13,599 $ 4 $ 2,031 $ - $ 15,634
Accounts and notes receivable,
net 5,924 4,057 1,971 - 11,952
Inventories, net 5,855 3,310 2,144 - 11,309
Other current assets 2,117 4,645 236 - 7,509
------- ------- ------- ------- -------
Total current assets 27,495 12,016 6,382 - 45,893
Property and equipment, net 6,896 12,389 458 - 19,743
Intangible assets 54,279 5,366 389 - 60,034
Investments in subsidiaries 9,909 - - (9.909) -
Other assets 8,457 1,469 - - 9,926
------- ------- ------- ------- -------
Total assets $107,036 $ 31,240 $ 7,229 $ (9,909) $135,596
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities $ 19,573 $ 3,551 $ 3,280 $ - $ 26,404
Intercompany transactions (19,206) 14,816 4,390 - -
------- ------- ------- ------- -------
Total current liabilities 367 18,367 7,670 - 26,404
Long-term debt, net 100,815 419 91 - 101,325
Other liabilities, long term 3,645 - - - 3,645
Deferred tax liability 14,101 2,013 - - 16,114
Stockholders' equity (deficit) (11,892) 10,441 (532) (9,909) (11,892)
------- ------- ------- ------- -------
Total liabilities and
stockholders' equity (deficit) $107,036 $ 31,240 $ 7,229 $ (9,909) $135,596
======== ======== ======== ======== ========
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 and notes receivable,
net 7,414 4,280 3,105 - 14,799
Inventories, net 5,311 2,903 2,364 - 10,578
Other current assets 1,935 5,142 299 - 7,376
------ ------ ------ ------ ------
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
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Amounts in thousands) Three Months Ended March 31, 2003
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Revenues $ 12,500 $ 6,742 $ 4,129 $ (638) $ 22,733
Cost of sales 5,658 2,564 2,797 (638) 10,381
Selling, general and admin
expenses 6,584 5,075 1,191 - 12,850
Severance expense 425 58 92 - 575
------- ------- ------- ------- -------
Operating income (loss) (167) (955) 49 - (1,073)
Equity in earnings of
subsidiaries (1,035) - - 1,035 -
Interest expense (3,756) (47) (75) - (3,878)
Other income and (expense) (85) (4) (3) - (92)
------- ------- ------- ------- -------
Income (loss) before income
tax provision (5,043) (1,006) (29) 1,035 (5,043)
Income tax provision (3) - - - (3)
------- ------- ------- ------- -------
Net income (loss) $ (5,046) $ (1,006) $ (29) $ 1,035 $ (5,046)
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Amounts in thousands) Three Months Ended March 31, 2002
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Revenues $ 11,648 $ 8,930 $ 3,294 $ (2,044) $ 21,828
Cost of sales 5,001 3,293 2,147 (1,527) 8,914
Selling, general and admin
expenses 5,617 4,571 914 - 11,102
------- ------- ------- ------- -------
Operating income (loss) 1,030 1,066 233 (517) 1,812
Equity in earnings
of subsidiaries 169 - - (169) -
Interest expense (3,602) (84) (99) - (3,785)
Other income and (expense) 214 (49) 73 - 238
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income tax
benefit (provision) (2,189) 933 207 (686) (1,735)
Income tax benefit (provision) 259 (325) - - (66)
------- ------- ------- ------- -------
Income (loss) from continuing
operations (1,930) 608 207 (686) (1,801)
Loss from discontinued
operations, net of tax benefit - (129) - - (129)
------- ------- ------- ------- -------
Net income (loss) $ (1,930) $ 479 $ 207 $ (686) $ (1,930)
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING CASH FLOW STATEMENTS
(Amounts in thousands) Three Months Ended March 31, 2003
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Net cash provided by (used in)
operating activities $ (206) $ 435 $ 183 $ - $ 412
------- ------- ------- ------- -------
Cash flows from investing
activities:
Purchase of property and
equipment (436) (28) - - (464)
------- ------- ------- ------- -------
Net cash used in investing
activities (436) (28) - - (464)
Cash flows from financing
activities:
Principal payments on long-
term debt and capital leases (174) (389) (6) - (569)
Principal payments of deferred
license fees (117) - - - (117)
Proceeds from issuance of
common stock 97 - - - 97
------- ------- ------- ------- -------
Net cash used in financing
activities (194) (389) (6) - (589)
------- ------- ------- ------- -------
Increase (decrease) in cash and
cash equivalents (836) 18 177 - (641)
Cash and cash equivalents,
beginning of period 14,444 (14) 1,845 - 16,275
------- ------- ------- ------- -------
Cash and cash equivalents,
end of period $ 13,608 $ 4 $ 2,022 $ - $ 15,634
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING CASH FLOW STATEMENTS
(Amounts in thousands) Three Months Ended March 31, 2002
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Net cash provided by operating
activities $ 17 $ 282 $ 253 $ - $ 552
------- ------- ------- ------- -------
Cash flows from investing
activities:
Purchase of property and
equipment (78) - (22) - (100)
Cash provided by discontinued
operations - 137 - - 137
Other investing activities (265) - (23) - (288)
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities (343) 137 (45) - (251)
Cash flows from financing
activities:
Proceeds from long-term debt - - 27 - 27
Principal payments on long-
term debt and capital leases (257) (390) (33) - (680)
Principal payments of deferred
license fees (249) - - - (249)
Proceeds from issuance of
common stock and warrants 297 - - - 297
------- ------- ------- ------- -------
Net cash used in financing
activities (209) (390) (6) - (605)
------- ------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents (535) 29 202 - (304)
Cash and cash equivalents,
beginning of period 14,354 (184) 1,037 - 15,207
------- ------- ------- ------- -------
Cash and cash equivalents,
end of period $ 13,819 $ (155) $ 1,239 $ - $ 14,903
======== ======== ======== ======== ========
11. RESTRUCTURING EXPENSE AND SEVERANCE COSTS
Included in restructuring expense for 2002 was approximately $0.9 million
of 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. As of March 31, 2003, the $0.9
million accrual for employee severance has been paid.
Additionally, a restructuring charge in 2002 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 12
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 March 31, 2003 approximately $3.2 million remains unpaid. The Company is
subleasing one of the Las Vegas buildings and is currently seeking tenants for
subleasing the other buildings.
Severance expense for 2002 were 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. 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. At
March 31, 2002, approximately $0.5 million remained unpaid.
Included in the severance expense caption in the Consolidated Statements of
Operations for the three months ended March 31, 2003 is approximately $0.6
million of employee severance costs for approximately 80 terminated employees
principally from reductions in service, international and management personnel.
At March 31, 2003, approximately $0.3 million of this severance expense
remains to be paid.
12. LONG LIVED ASSETS
The Company amended its service agreement with Aristocrat Technologies, Inc.
("ATI") in January 2003 to allow ATI to provide slot machines for the Company's
slot route. The agreement allows for the replacement of the Company's slot
machines with ATI's slot machines over the next 18 to 24 months. As a result
of this amendment to the ATI agreement, the Company has determined that the
estimated remaining useful life of its slot machines has been shortened to 24
months. Consequently, the Company has accelerated the depreciation of these
slot machines to a 24 month life resulting in additional depreciation expense
of approximately $0.5 million for the quarter ended March 31, 2003, and an
estimated additional expense of $2.0 million for the years ended December 31,
2003 and December 31, 2004.
MIKOHN GAMING CORPORATION
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY NOTICE
This report contains forward-looking statements in which management shares
its knowledge and judgment about factors that it believes may materially affect
Company performance in the future. Terms expressing future expectations,
enthusiasm or caution about future potential and anticipated growth in sales,
revenues and earnings and like expressions typically identify 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 there under, 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.
GENERAL INFORMATION
All dollar amounts reported in this section are expressed in thousands and
are rounded to the nearest thousand unless otherwise stated. However, numbers
of units and number of shares are expressed in whole amounts. All
percentages reported are based on those rounded numbers.
Amounts disclosed in the accompanying tables are shown in thousands while
amounts included in text are disclosed in actual amounts.
ACQUISITION / DIVESTITURE OF SUBSIDIARIES
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
which was 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.
RELATED PARTY TRANSACTIONS
David J. Thompson announced his resignation as chief executive officer
effective August 16, 2002 and, on March 21, 2003, 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. 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.
SEVERANCE EXPENSE
Included in the severance expense caption in the Consolidated Statements of
Operations for the three months ended March 31, 2003, is approximately $0.6
million of employee severance costs for approximately 80 terminated employees
principally from reductions in service, international and management personnel.
At March 31, 2003, approximately $0.3 million of this severance expense
remains to be paid.
The severance expense is not included in the calculation of operating income
in the table shown below.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 and 2002
REVENUES
(Amounts in thousands) Change
Business Segment 2003 2002 Amount % Comment
- -------------------- ------ ------ ------ --- ------
Gaming operations $ 9,537 $ 11,366 $ (1,829) (16.1)% 1
Product sales 13,196 10,462 2,734 26.1 % 2
------- ------- -------
Total $ 22,733 $ 21,828 $ 905 4.1 %
======== ======== ========
Percentage of total
revenues:
Gaming operations 42.0% 52.1%
Product sales 58.0% 47.9%
------ ------
Total 100.0% 100.0%
====== ======
1. Gaming operations revenues during the three months ended March 31, 2003
were $9.5 million, a decrease of $1.8 million, or 16%, from revenues of
$11.4 million in the 2002 comparable period. This net decrease resulted
from:
(i) a decrease in recurring revenues from leased slot machines of
approximately $1.5 million in the 2003 period, from approximately $7.2
million in the prior year quarter, to approximately $5.7 million in
the current year quarter. This decline was attributable to a decrease
in the average number of branded slot machines leased to customers
from approximately 2,600 in the prior year period to approximately
2,200 for the three months ended March 31, 2003. Management believes
that increased competition with other suppliers for limited casino
floor space contributed to this decline. Additionally, a reduction in
the average net win per day per branded slot machine, from $28 in the
prior year period to $24 in the current year period, contributed to
this decline. Management believes its inability to offer
technological specifications offered by competitors, such as ticket-
in, ticket-out and multi-denominational pay tables, on its slot
machines caused the decline in leased slot machines in casinos and
win per day. The Company expects to offer those technological
specifications within the next few months. Revenue from non-branded
slot machines remained relatively constant at approximately $0.7
million for both quarterly periods. Average non-branded machines
outstanding during the quarters were approximately 350 and 420 for the
2003 and 2002 quarterly periods, respectively. The decrease in average
machines was offset by an increase in the average win per day from $17
in the prior quarter to $21 in the current quarter. Additionally, the
Company received approximately $0.3 million in the 2003 quarterly
period from its participation in an average of approximately 320
licensed games for which the Company does not provide hardware for the
games. The Company intends to continue its pursuit of revenue 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
$11 per day and did not exist in the prior year quarter. At March 31,
2003, the Company maintained 2,122, 311 and 302 of branded, non-
branded and licensed games without hardware, respectively. At March
31, 2002, the Company maintained 2,525, 415 and 0 of branded, non-
branded and licensed games without hardware, respectively, and
(ii) a decrease of approximately $0.4 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 an increase in table game
revenues from the Company's European subsidiary. For the quarter
ended March 31, 2003, revenues from leased casino table games were
approximately $3.8 million compared with approximately $4.2 million
in 2002. The decrease was due primarily to a decrease in the average
number of leased casino table games from 1,100 during the prior year
quarter to 1,035 in the current year quarter. 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 the decline in the Company's table game placements. The
average monthly lease charge for table games was approximately $1,235
and $1,220 respectively for the three-month periods ending March 31,
2003 and 2002. The monthly lease revenue includes royalties and
commencement fees paid during the respective quarters. The increase
in the average monthly lease charge in the 2003 period was due
primarily to the improvement of table revenues from the Company's
European subsidiary. The Company maintained 1,000 and 1,081 table
games at March 31, 2003 and 2002, respectively.
2. Product sales revenues during the three months ended March 31, 2003 were
$13.2 million, an increase of $2.7 million, or 26%, from revenues of
$10.5 million in the 2002 comparable period. This net increase during
the current period was due principally to:
(i) increases in sales of interior signage of approximately $2.5
million, partially offset by a decrease in sales of electronic
displays. The increase in interior signage sales occurred due to the
increase in sales at the Company's European subsidiary coupled with
an increase in domestic sales as several casino operators upgraded or
replaced their interior signage and displays, and
(ii) an increase of approximately $0.6 million in systems sales in the
2003 quarter as compared to the 2002 quarter, from approximately $1.9
million in 2002 to $2.5 million in 2003. Increased sales to certain
Canadian customers, which expanded casino slot operations during the
year, was the primary contributor to this increase.
OPERATING INCOME (LOSS)
(Amounts in thousands) Change
Business Segment 2003 2002 Amount % Comment
- -------------------- ------ ------ ------ --- ------
Gaming operations $ 1,170 $ 4,009 $ (2,839) (70.8)% 1
Product sales 2,107 563 1,544 274.2% 2
------- ------- -------
Segment operating
income (loss) 3,277 4,572 (1,295) (28.3)%
Corporate (3,775) (2,760) (1,015) (36.8)% 3
------- ------- -------
Total operating income
(loss) $ (498) $ 1,812 $ (2,310) (127.5)%
======== ======== ========
Depreciation and amortization:
Gaming operations $ 2,389 $ 1,706 $ 683 40.0 %
Product sales 221 249 (28) (11.2)%
Corporate 691 789 (98) (12.4)%
------- ------- -------
Total $ 3,301 $ 2,744 $ 557 20.3 % 4
======== ======== ========
1. Gaming operations reported operating income during the three months ended
March 31, 2003 of approximately $1.2 million compared to operating income
of approximately $4.0 million in the 2002 period. This net decrease of
$2.8 million was primarily due to:
(i) the previously discussed decrease in recurring revenues from leased
slot machines of approximately $1.5 million and an increase in
depreciation and amortization as well as increased operating costs,
partially offset by a decrease in the cost to service, refurbish and
maintain the Company's slot route. Depreciation and amortization for
the three months ended March 31, 2003 and 2002 was $2.1 million and
$1.4 million, respectively. The increase was due primarily to
accelerating the depreciation of certain slot machines in the current
quarter as the result of the agreement with Aristocrat Technologies,
Inc. ("ATI") to replace our existing slot machines placed in casinos
with ATI versions of these machines. Slot rental expense increased
slightly to $1.4 million in the 2003 period as compared to $1.3
million in the 2002 period. Segment expense, excluding slot rent
expense and depreciation and amortization expense, was approximately
$1.5 million in the 2003 period compared to approximately $1.2 million
in the 2002 period. This $0.3 million increase was caused by increases
in research and development costs and sales expenses during the three
months ended March 31, 2003, partially offset by a decrease in
salaries and related costs as a result of a reduction in the work
force during the third quarter of 2002. Maintenance and refurbishment
costs for slot machines decreased from $2.0 million to $1.7 million
for the three months ended March 31, 2003 and 2002, respectively, due
primarily to the decrease in the average number of slot machines
leased during the current period, and
(ii) the previously discussed decrease in recurring revenues from leased
casino table games of approximately $0.4 million and an increases in
costs of revenues as a percentage of revenues and segment expenses.
Total costs of revenues, exclusive of segment expenses, for the three
months ended March 31, 2003 and 2002 totaled approximately $0.6
million for both periods. Costs of revenues as a percentage of
revenues increased to 16% in the 2003 period from 14% in the 2002
period. Segment expenses, excluding depreciation and amortization,
were approximately $0.7 million in the 2003 period as compared with
$0.5 million in the 2002 period. The increase was due primarily to
an increase in sales and engineering related costs. Depreciation and
amortization for the three months ended March 31, 2003 and 2002 was
$0.3 million for both periods.
2. Product sales reported operating income during the three months ended
March 31, 2003 of approximately $2.1 million, compared to operating
income of approximately $0.6 million in the 2002 period. This
improvement of $1.5 million in operating income resulted principally
from:
(i) the previously discussed increase in revenues, as well as higher
gross profit margins and a decrease in operating costs from the
Company's interior signs, electronic displays and other product sales.
Gross margins improved from 35% in the prior year period to 38% in
the current period. This increase in the current period was caused
principally by lower manufacturing costs as a result of the
consolidation of manufacturing operations in August 2002. Total costs
of revenues, exclusive of segment expenses, for the three months ended
March 31, 2003 was $6.6 million compared to approximately $5.6 million
for the three months ended March 31, 2002. Depreciation and
amortization remained stable at $0.2 million for the three months
ended March 31, 2003 and 2002. Segment expenses, excluding
depreciation and amortization, decreased from approximately $2.3
million in the 2002 period to $1.7 million in the 2003 period. This
decrease was due primarily to a decrease in the work force and other
cost saving measures initiated in the third quarter of 2002 as part
of the restructuring plan, and
(ii) a decrease in the operating results from the Company's systems
business of approximately $0.2 million. The decrease was due primarily
to a decrease in gross profit margins and an increase in segment
expenses, partially offset by the increase in revenues. Gross margins
decreased from 58% in the prior year period to 44% in the current
period. This decrease was caused principally by a shift in the sales
mix from higher margin software sales to lower margin hardware sales
in the quarter ended March 31, 2003. Costs of sales for the systems
business was $1.4 million during the quarter ended March 31, 2003
compared to $0.8 million during the same quarter in 2002. Segment
expenses, excluding depreciation and amortization, increased slightly
from approximately $1.0 million in the 2002 period to approximately
$1.1 million in the 2003 period. The increase was due primarily to
an increase in sales expenses. Depreciation and amortization for the
three months ended March 31, 2003 and 2002 was less than $0.1 million
for both periods.
3. Corporate expenses during the three months ended March 31, 2003 were $3.8
million, an increase of approximately $1.1 million from $2.7 million in
the 2002 comparable period. The increase was due primarily to increases
in legal and regulatory licensing fees of approximately $1.0 million,
which include legal expenses incurred by the former CEO and by the
Company in connection with licensing issues in several jurisdictions,
audit fees of approximately $0.2 million, related to the reaudit of the
Company's 2000 and 2001 financial statements and medical insurance costs
of approximately $0.2 million, partially offset by a decrease in salaries
and related costs as a result of the reduction in the work force during
the third quarter of 2002.
4. Depreciation and amortization during the three months ended March 31,
2003 was $3.3 million, an increase of $0.6 million from $2.7 million in
the 2002 comparable period. This increase was primarily due to the
aforementioned increase in depreciation related to leased slot machines,
partially offset by a slight decrease in corporate depreciation and
amortization.
INTEREST EXPENSE
Interest expense during the three months ended March 31, 2003 was $3.9
million, a slight increase from $3.8 million during the three months ended
March 31, 2002. This increase was due primarily to increased charges
related to the Company's revolving line of credit facility.
OTHER INCOME AND EXPENSE
Other income and expense, excluding interest income, during the quarter
ended March 31, 2003, was a net expense of approximately $0.1 million compared
to net income of less than $0.1 million in the comparable 2002 period.
Interest income for the quarter ended March 31, 2003 was less than $0.1
million compared to interest income for the quarter ended March 31, 2002 of
approximately $0.2 million. The decrease was due principally to a decrease
in average interest rates during the current period.
LOSS FROM DISCONTINUED OPERATIONS
During the quarter ended March 31, 2002, the Company recorded losses from
discontinued operations, net of income tax benefits calculated at a 34% tax
rate, of approximately $0.1 million. The losses relate to the Company's
exterior sign operation, which was sold effective October 31, 2002.
INCOME TAXES
For each of the three month periods ended March 31, 2003 and 2002, the
Company recorded a tax provision of less than $0.1 million. The primary
component of the income tax provision for the current period was state income
taxes. The primary component of the income tax provision for the prior year
period was an offset to a tax benefit recorded relative to discontinued
operations losses. The tax provision offsets the tax benefit from the
discontinued operations losses for the period. No tax benefit was recognized
by the Company related to its loss from continuing operations, as the benefit
has been fully reserved.
LOSS PER SHARE
Both basic and diluted loss per share for the three months ended March 31,
2003 were $0.39 on basic and diluted weighted average common shares
outstanding of approximately 12,877,000. Both basic and diluted loss per
share for the three months ended March 31, 2002 were $0.15 on basic and
diluted weighted average common shares outstanding of approximately
12,783,000. Dilutive 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 three months ended March 31, 2003, the Company incurred a net loss
of approximately $5.0 million. Net cash and cash equivalents at March 31, 2003
were $15.6 million, a decrease of approximately $0.7 million from $16.3 million
at December 31, 2002. Working capital decreased to $19.5 million at March 31,
2003 from $22.0 million at December 31, 2002. This working capital decrease was
due principally to decreases in accounts and notes receivable of approximately
$2.8 million and an increase in accrued liabilities of approximately $2.1
million, partially offset by decreases in trade accounts payable of
approximately $1.9 million and in customer deposits of approximately $1.0
million.
Cash provided by operating activities was approximately $0.4 million for the
three months ended March 31, 2003. The significant items affecting this amount
were a net loss of approximately $5.0 million offset by non-cash charges of:
(i) $3.3 million for depreciation and amortization, (ii) $0.5 million for
inventory and receivable valuation provisions and (iii) $0.6 million for
amortization of debt discount and issue costs. Significant changes in operating
assets and liabilities also affecting cash provided by operating activities was
an increase in accrued liabilities of $2.1 million, principally from an
increase in accrued interest related to long-term debt, and a net decrease in
accounts and notes receivable of approximately $2.7 million, partially offset
by a net increase in inventories of approximately $1.1 million and decreases
in accounts payable of approximately $1.9 million, and in customer deposits of
approximately $1.0 million.
Cash used in investing activities was approximately $0.5 million during the
three months ended March 31, 2003 due primarily from purchases of property
and equipment.
Cash used in financing activities was approximately $0.6 million during the
three months ended March 31, 2003, principally as a result of principal
payments on debt, deferred license fees and capital leases of approximately
$0.7 million offset, in part, by proceeds of approximately $0.1 million from
the issuance of common stock.
The following table summarizes the Company's contractual obligations at
March 31, 2003, for long-term debt, capital leases, operating leases, license
fees, slot machine purchases and employment agreements for the periods shown:
(Amounts in thousands) Less than 1-3 4-5 After 5
Contractual Obligations Total 1 year years years years
- ------------------------ ----- ------ ----- ----- -----
Long-term debt $105,536 $ 150 $ 102 $ 284 $105,000
Capital leases 1,661 1,199 462 - -
Operating leases 27,144 8,467 5,495 4,315 8,867
License fees 785 334 451 - -
Purchase of slot machines 300 300 - - -
Employment agreements 4,039 1,888 1,941 210 -
------- ------- ------- ------- -------
Total $139,465 $ 12,338 $ 8,451 $ 4,809 $113,867
======== ======== ======== ======== ========
The above table includes accretion of debt discount of $4.5 million.
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 March 31, 2003.
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 $0.8 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 March 31, 2003, 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
$15.6 million, cash generated from operations, and the capacity of $12.5
million under the Facility, management believes the Company has sufficient
working capital on both a short- and long-term basis.
CAPITAL EXPENDITURES AND OTHER
During the three months ended March 31, 2003, the Company spent
approximately $0.5 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 March 31, 2003, 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 ATI whereby ATI 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 ATI 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 ATI, so we may focus our efforts
on game development, including game conceptualization, art and software program
design. ATI 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 ATI versions of these machines.
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.
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 totaling approximately $1.4 million and agreed to
pay certain legal costs incurred by the former CEO in the approximate amount
of $0.5 million.
RESTRUCTURING EXPENSES AND SEVERANCE COSTS
Included in restructuring expense for 2002 was approximately $0.9 million
of 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. As of March 31, 2003, the $0.9
million accrual for employee severance has been paid.
Additionally, a restructuring charge in 2002 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 12
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 March 31, 2003 approximately $3.2 million remains unpaid. The Company is
subleasing one of the Las Vegas buildings and is currently seeking tenants for
subleasing the other buildings.
Severance expense for 2002 were 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. 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 $0.1 million. Subsequent to July 2003 to August
2006, the Company is required to pay approximately $0.1 million annually. At
March 31, 2003, approximately $0.5 million remained unpaid.
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. The Company did not
purchase any shares of its common stock during the three months ended March
31, 2003. Through March 31, 2003, the Company has purchased approximately
76,000 shares of its common stock for approximately $0.2 million. As of
March 31, 2003, the Company had approximately 195,000 shares of common stock
held in treasury.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. Certain of our
accounting policies, including the estimated lives assigned to our assets, the
determination of bad debts, inventory valuation reserves and asset impairment
require that we apply significant judgment in defining the appropriate
assumptions for calculating financial estimates. By their nature, these
judgments are inherently subject to a degree of uncertainty. Our judgments are
based on our historical experience, terms of existing contracts, our observance
of industry trends, information provided by or gathered from our customers and
information available from other outside sources, as appropriate. There can be
no assurance that actual results will not differ from our estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
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.
MIKOHN GAMING CORPORATION
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to Part I, Item 7A, of the Company's annual report on Form 10-K for
the fiscal year ended December 31, 2002. There have been no material
changes in market risks since the fiscal year end.
Item 4. - 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.
MIKOHN GAMING CORPORATION
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits:
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
B. Reports on Form 8-K:
A report filed on Form 8-K with the Securities and Exchange Commission
on March 13, 2003 to disclose the Company's unaudited financial results
for the fourth quarter and 2002 fiscal year.
A report filed on Form 8-K with the Securities and Exchange Commission
on March 14, 2003 to disclose the retirement of Dennis Garcia and Bruce
Peterson from the Company's Board of Directors.
A report filed on Form 8-K with the Securities and Exchange Commission on
March 24, 2003 to disclose the retirement of David J. Thompson from the
Company's Board of Directors and that Peter G. Boynton will assume the
role of Chairman of the Board of Directors.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
MIKOHN GAMING CORPORATION, Registrant
/s/ John M. Garner
-------------------------
JOHN M. GARNER
Chief Financial Officer
May 13, 2003
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-Q 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: May 13, 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-Q 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: May 13, 2003
By: /s/ John M.Garner
---------------------
JOHN M. GARNER
Chief Financial Officer