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: June 30, 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
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(Registrant's telephone number, including area code)
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(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:
13,333,739 as of August 11, 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 June 30,
2003 (Unaudited) and December 31, 2002 2
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 2003 and
2002 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2003 and 2002
(Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 34
Item 4. Controls and Procedures 34
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits and Reports on Form 8-K 36
` Signatures 37
1
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
(Amounts in thousands) 2003 December 31,
(Unaudited) 2002
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 11,441 $ 16,275
Accounts and notes receivable, net 13,020 14,799
Inventories, net 9,465 10,578
Prepaid expenses 2,798 4,063
Deferred tax asset 3,313 3,313
------- -------
Total current assets 40,037 49,028
Notes receivable, net 394 408
Property and equipment, net 19,219 21,824
Intangible assets, net 56,559 57,838
Goodwill 2,860 2,860
Other assets 9,189 10,035
------- -------
Total assets $128,258 $141,993
======== ========
See notes to condensed consolidated financial statements.
2
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
(Amounts in thousands) 2003 December 31,
except share data) (Unaudited) 2002
------- -------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Trade accounts payable $ 6,764 $ 8,715
Customer deposits 2,577 3,928
Current portion of long-term debt
and notes payable 1,029 1,654
Accrued liabilities 9,326 11,241
Deferred revenues and license fees 1,654 1,501
------- -------
Total current liabilities 21,350 27,039
Long-term debt and notes payable,
net of unamortized discount of
$4,314 and $4,732 101,345 101,330
Other long-term liabilities 3,112 4,422
Deferred tax liability 16,114 16,114
------- -------
Total liabilities 141,921 148,905
Commitments and contingencies (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,
13,161,633 and 13,049,773 shares
issued and outstanding 1,316 1,305
Additional paid-in capital 67,711 67,299
Foreign currency translation (598) (858)
Accumulated deficit (81,380) (73,946)
------- -------
Subtotal (12,951) (6,200)
Less treasury stock, 194,913 shares,
at cost (712) (712)
------- -------
Total stockholders' deficit (13,663) (6,912)
------- -------
Total liabilities and stockholders'
deficit $128,258 $141,993
======== ========
See notes to condensed consolidated financial statements.
3
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, Three Months Ended Six Months Ended
except per share amounts) June 30, June 30,
2003 2002 2003 2002
------ ------ ------ ------
Revenues:
Gaming operations $ 9,773 $ 10,769 $ 19,310 $ 22,135
Product sales 13,686 13,245 26,882 23,707
------- ------- ------- -------
Total revenues 23,459 24,014 46,192 45,842
Operating costs and expenses:
Gaming operations 8,329 9,015 16,696 16,372
Product sales 11,338 12,918 22,427 22,817
Corporate expense 2,524 3,181 6,299 5,941
Severance expense - - 575 -
------- ------- ------- -------
Total operating costs and
expenses 22,191 25,114 45,997 45,130
Operating income (loss):
Gaming operations 1,444 1,754 2,614 5,763
Product sales 2,348 327 4,455 890
Corporate expense (2,524) (3,181) (6,299) (5,941)
Severance expense - - (575) -
------- ------- ------- -------
Total operating income (loss) 1,268 (1,100) 195 712
Interest expense (3,860) (4,026) (7,738) (7,811)
Other income (expense) 207 (115) 115 123
------- ------- ------- -------
Loss from continuing
operations before income
tax provision (2,385) (5,241) (7,428) (6,976)
Income tax provision (3) (424) (6) (490)
------- ------- ------- -------
Loss from continuing
operations (2,388) (5,665) (7,434) (7,466)
Loss from discontinued
operations, net of taxes - (147) - (276)
------- ------- ------- -------
Net loss $ (2,388) $ (5,812) $ (7,434) $ (7,742)
======== ======== ======== ========
Weighted average common shares:
Basic 12,910 12,817 12,893 12,795
Diluted 12,910 12,817 12,893 12,795
======== ======== ======== ========
Basic and diluted loss
per share:
Loss from continuing
operations $ (0.18) $ (0.44) $ (0.58) $ (0.59)
Loss from discontinued
operations - (0.01) - (0.02)
------- ------- ------- -------
Net loss $ (0.18) $ (0.45) $ (0.58) $ (0.61)
======= ======= ======= =======
See notes to condensed consolidated financial statements
4
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(Amounts in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------ ------ ------ ------
Net loss $ (2,388) $ (5,812) $ (7,434) $ (7,742)
Other comprehensive income:
Foreign currency translation
gain 297 116 260 164
------- ------- ------- -------
Comprehensive loss $ (2,091) $ (5,696) $ (7,174) $ (7,576)
See notes to condensed consolidated financial statements
5
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Six Months
Ended Ended
(Amounts in thousands) June 30, June 30,
2003 2002
------- -------
Cash flows from operating activities:
Net loss $ (7,434) $ (7,742)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation 5,346 4,604
Amortization 1,386 1,564
Provision for bad debts (85) 688
Provision for obsolete inventory 566 535
Amortization of debt discount and debt
issue costs 1,155 1,078
Discontinued operations - 276
Loss on disposition of assets 129 317
Other 30 195
Changes in assets and liabilities:
Accounts and notes receivable 1,879 1,832
Inventories 615 (862)
Other assets 1,267 (2,464)
Trade accounts payable (1,951) (1,171)
Accrued expenses and other liabilities (2,783) 936
Other liabilities (1,403) 1,726
------- -------
Net cash (used in) provided by operating
activities (1,283) 1,512
------- -------
Cash flows from investing activities:
Purchase of property and equipment (2,631) (2,301)
Cash provided by discontinued operations - 177
Increase in intangible assets - (490)
------- -------
Net cash used in investing activities (2,631) (2,614)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt - 32
Principal payments on long-term debt (115) (183)
Principal payments on capital leases (961) (994)
Principal payments on deferred license fees (237) (213)
Issuance of common stock 393 374
------- -------
Net cash used in financing activities (920) (984)
------- -------
Decrease in cash and cash equivalents (4,834) (2,086)
Cash and cash equivalents,
beginning of period 16,275 15,207
------- -------
Cash and cash equivalents,
end of period $ 11,441 $ 13,121
======== ========
See notes to condensed consolidated financial statements
6
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)(Continued)
Six Months Six Months
Ended Ended
(Amounts in thousands) June 30, June 30,
2003 2002
------- -------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 6,888 $ 6,817
======== ========
Federal and state income taxes $ 21 $ 55
======== ========
See notes to condensed consolidated financial statements.
7
MIKOHN GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 June 30, 2003, and the results
of its operations and cash flows for the six months ended June 30, 2003 and
2002. The results of operations for the three and six months ended June 30,
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 rounded to the
nearest thousand 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 install the system 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.
8
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 At June 30, 2003, the Company had one stock-
based employee plan, one director compensation plan and an employee stock
incentive plan. The Company accounts for these 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
9
Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation".
(Amounts in thousands, Six months ended June 30,
except per share amounts) 2003 2002
------ ------
Net loss, as reported $ (7,434) $ (7,742)
Reported stock-based compensation expense 30 181
Pro forma stock-based employee compensation
expense determined under fair value method (483) (506)
------- -------
Pro forma net loss $ (7,887) $ (8,067)
======== ========
Loss per share:
As reported $ (0.58) $ (0.61)
Basic and diluted
Pro forma
Basic and diluted $ (0.61) $ (0.63)
======== ========
Guarantees In November 2002, the FASB issued FIN No. 45, ("FIN 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 June 30, 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 June 30, 2003.
Recently issued accounting standards In May 2003, the FASB issued
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("FAS 150"). This statement affects the classification, measurement and
disclosure requirements of the following three types of freestanding
financial instruments; 1) mandatory redeemable shares, which the issuing
company is obligated to buy back with cash or other assets; 2) instruments
that do or may require the issuer to buy back some of its shares in exchange
for cash or other assets, which includes put options and forward purchase
contracts; and 3) obligations that can be settled with shares, the monetary
value of which is fixed, tied solely or predominately to a variable such as a
market index, or varies inversely with the value of the issuers' shares. In
general, FAS 150 is effective for all financial instruments entered into or
modifies after May 31, 2003, and other wise is effective at the beginning of
the first interim period beginning after June 15, 2003. The adoption of FAS
150 is not expected to have an impact on the Company's consolidated financial
position or disclosures.
10
3. INVENTORIES
Inventories at June 30, 2003 and December 31, 2002 consist of the following:
June 30, December 31,
(Amounts in thousands) 2003 2002
------ ------
Raw materials $ 10,603 $ 9,689
Finished goods 2,736 3,924
Work-in-progress 648 1,037
------- -------
Subtotal 13,987 14,650
Reserve for obsolete inventory (4,522) (4,072)
------- -------
Total $ 9,465 $ 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 at least 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 June
30, 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) 3,406 842 1,779 6,027
------- ------- -------- -------
Total $ 56,409 $ 1,231 $ 1,779 $ 59,419
======== ======== ======== ========
The net carrying value of goodwill ($2.9 million) as of June 30, 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 June 30, 2003, subject to
amortization, are comprised of the following:
Gross Carrying Accumulated
(Amounts in thousands) Amount Amortization Net
-------- -------- -------
Patent / trademark rights $ 10,212 $ (6,326) $ 3,886
Covenants not to compete 9,847 (9,420) 427
Software development costs 2,158 (982) 1,176
Proprietary rights / other 934 (396) 538
------- ------- -------
Total $ 23,151 $(17,124) $ 6,027
======== ======== ========
Amortization expense for definite life intangible assets was approximately
$1.2 million for the six months ended June 30, 2003 compared to $1.4 million
for the six months ended June 30, 2002
11
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 will total approximately $3.5 million. As of June 30, 2003, the
Company has not purchased any slot machines under this agreement and has paid
$0.3 million to the supplier to be used as an advance towards future slot
machine purchases or as part of a cancellation fee, estimated to be $0.6
million. The remaining $0.3 million of the cancellation has been previously
accrued for.
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 minimum net worth shortfall, 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:
Dilutive
(Amounts in thousands, Stock
except per share amounts) Basic Options Diluted
------- ------- -------
For the three months ended June 30, 2003:
Net loss $ (2,388) $ - $ (2,388)
Weighted average shares 12,910 12,910
Per share amount $ (0.18) $ - $ (0.18)
======== ======== ========
For the three months ended June 30, 2002:
Net loss $ (5,812) $ - $ (5,812)
Weighted average shares 12,817 12,817
Per share amount $ (0.45) $ - $ (0.45)
======== ======== ========
For the six months ended June 30, 2003:
Net loss $ (7,434) $ - $ (7,434)
Weighted average shares 12,893 12,893
Per share amount $ (0.58) $ - $ (0.58)
======== ======== ========
For the six months ended June 30, 2002:
Net loss $ (7,742) $ - $ (7,742)
Weighted average shares 12,795 12,795
Per share amount $ (0.61) $ - $ (0.61)
======== ======== ========
12
Dilutive stock options of approximately 60,000 and 337,000 for the three
months ended June 30, 2003 and 2002, respectively, have not been included in
the computation of diluted net loss per share as their effect would be
antidilutive. Dilutive stock options of approximately 30,000 and 481,000 for
the six months ended June 30, 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. In addition,
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 and six
months ended June 30, 2002 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(Amounts in thousands) 2002 2002
------ ------
Revenues $ 1,903 $ 4,470
Operating costs and expenses 2,113 4,874
------- -------
Operating loss (210) (404)
Other expense (11) (12)
------- -------
Net loss before income taxes (221) (416)
Income tax benefit 74 140
------- -------
Loss from discontinued operations $ (147) $ (276)
======== ========
13
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
providefor 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'sproduct 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 jurisdictionand 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 and six months ended June 30, 2003
and2002 consists of:
Three Months Ended Six Months Ended
(Amounts in thousands) June 30, June 30,
Business Unit Segments 2003 2002 2003 2002
------ ------ ------ ------
Revenues:
Gaming operations
Slot operations $ 5,959 $ 6,475 $ 11,662 $ 13,652
Table games 3,814 4,294 7,648 8,483
------- ------- ------- -------
9,773 10,769 19,310 22,135
Product sales:
Signage and electronic
components 10,448 10,381 20,647 18,613
Player tracking and systems 3,186 1,637 5,734 3,579
Gaming machines 52 1,227 501 1,515
------- ------- ------- -------
13,686 13,245 26,882 23,707
------- ------- ------- -------
Total $ 23,459 $ 24,014 $ 46,192 $ 45,842
======== ======== ======== ========
Operating income (loss):
Gaming operations $ 1,444 $ 1,754 $ 2,614 $ 5,763
Product sales 2,348 327 4,455 890
Corporate (2,524) (3,181) (6,299) (5,941)
Severance expense - - (575) -
------- ------- ------- -------
Total $ 1,268 $ (1,100) $ 195 $ 712
======== ======== ======== ========
Depreciation and amortization
Gaming operations $ 2,510 $ 2,308 $ 4,899 $ 4,014
Product sales 225 265 446 514
Corporate 696 851 1,387 1,640
------- ------- ------- -------
Total $ 3,431 $ 3,424 $ 6,732 $ 6,168
======== ======== ======== ========
14
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 and six months ended June 30, 2003
and 2002 consist of:
Three Months Ended Six Months Ended
(Amounts in thousands) June 30, June 30,
Geographic Locations 2003 2002 2003 2002
------ ------ ------ ------
Revenues:
North America $ 19,855 $ 20,425 $ 38,458 $ 38,959
Australia / Asia 970 1,500 1,873 3,128
Europe / Africa 2,634 2,102 5,861 3,771
South America - (13) - (16)
------- ------- ------- -------
Total $ 23,459 $ 24,014 $ 46,192 $ 45,842
======== ======== ======== ========
Operating income (loss):
North America $ 1,215 $ (523) $ 669 $ 1,056
Australia / Asia (359) (491) (848) (234)
Europe / Africa 412 (73) 949 (94)
South America - (13) - (16)
Severance expense - - (575) -
------- ------- ------- -------
Total $ 1,268 $ (1,100) $ 195 $ 712
======== ======== ======== ========
Depreciation and amortization
North America $ 3,387 $ 3,385 $ 6,652 $ 6,088
Australia / Asia 12 20 20 43
Europe / Africa 32 19 60 37
South America - - - -
------- ------- ------- -------
Total $ 3,431 $ 3,424 $ 6,732 $ 6,168
======== ======== ======== ========
15
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 (Unaudited)
(Amounts in thousands) June 30, 2003
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
ASSETS
Current Assets:
Cash $ 9,487 $ 2 $ 1,952 $ - $ 11,441
Accounts and notes
receivable, net 7,204 4,290 1,526 - 13,020
Inventories, net 4,174 3,170 2,121 - 9,465
Other current assets 2,179 3,638 294 - 6,111
------- ------- ------- ------- -------
Total current assets 23,044 11,100 5,893 - 40,037
Property and equipment, net 6,876 11,857 486 - 19,219
Intangible assets, net 53,669 5,360 390 - 59,419
Investments in subsidiaries 9,413 - - (9.413) -
Other assets 8,193 1,390 - - 9,583
------- ------- ------- ------- -------
Total assets $101,195 $ 29,707 $ 6,769 $ (9,413) $128,258
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities $ 15,935 $ 3,270 $ 2,145 $ - $ 21,350
Intercompany transactions (19,271) 14,633 4,638 - -
------- ------- ------- ------- -------
Total current liabilities (3,336) 17,903 6,783 - 21,350
Long-term debt, net 101,016 252 77 - 101,345
Other liabilities, long term 3,077 35 - - 3,112
Deferred tax liability 14,101 2,013 - - 16,114
Stockholders' equity (deficit) (13,663) 9,504 (91) (9,413) (13,663)
------- ------- ------- ------- -------
Total liabilities and stock-
holder's equity (deficit) $101,195 $ 29,707 $ 6,769 $ (9,413) $128,258
======== ======== ======== ======== ========
16
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 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, net 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
======== ======== ======== ======== ========
17
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands) Three Months Ended June 30, 2003
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Revenues $ 13,237 $ 6,952 $ 3,604 $ (334) $ 23,459
Cost of sales 5,738 2,765 2,276 (334) 10,445
Selling, general and
admin expenses 5,387 5,082 1,277 - 11,746
------- ------- ------- ------- -------
Operating income (loss) 2,112 (895) 51 - 1,268
Equity in earnings of
subsidiaries (794) - - 794 -
Interest expense (3,776) (38) (46) - (3,860)
Other income and (expense) 73 (4) 138 - 207
------- ------- ------- ------- -------
Income (loss) before income
tax provision (2,385) (937) 143 794 (2,385)
Income tax provision (3) - - - (3)
------- ------- ------- ------- -------
Net income (loss) $ (2,388) $ (937) $ 143 $ 794 $ (2,388)
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands) Three Months Ended June 30, 2002
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Revenues $ 13,933 $ 9,414 $ 3,589 $ (2,922) $ 24,014
Cost of sales 6,713 4,310 2,708 (2,098) 11,633
Selling, general and
admin expenses 7,662 4,361 1,458 - 13,481
------- ------- ------- ------- -------
Operating income (loss) (442) 743 (577) (824) (1,100)
Equity in earnings of
subsidiaries (1,086) - - 1,086 -
Interest expense (3,845) (76) (105) - (4,026)
Other income and (expense) (215) (84) 184 - (115)
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income tax
benefit (provision) (5,588) 583 (498) 262 (5,241)
Income tax benefit (provision) (224) (200) - - (424)
------- ------- ------- ------- -------
Income (loss) from continuing
operations (5,812) 383 (498) 262 (5,665)
Loss from discontinued operations,
net of tax benefit - (147) - - (147)
------- ------- ------- ------- -------
Net income (loss) $ (5,812) $ 236 $ (498) $ 262 $ (5,812)
======== ======== ======== ======== ========
18
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands) Six Months Ended June 30, 2003
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Revenues $ 25,737 $ 13,694 $ 7,733 $ (972) $ 46,192
Cost of sales 11,396 5,329 5,097 (972) 20,850
Selling, general and
admin expenses 11,971 10,157 2,444 - 24,572
Severance expense 425 58 92 - 575
------- ------- ------- ------- -------
Operating income (loss) 1,945 (1,850) 100 - 195
Equity in earnings of
subsidiaries (1,829) - - 1,829 -
Interest expense (7,532) (85) (121) - (7,738)
Other income and (expense) (12) (8) 135 - 115
------- ------- ------- ------- -------
Income (loss) before income
tax provision (7,428) (1,943) 114 1,829 (7,428)
Income tax provision (6) - - - (6)
------- ------- ------- ------- -------
Net income (loss) $ (7,434) $ (1,943) $ 114 $ 1,829 $ (7,434)
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands) Six Months Ended June 30, 2002
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Revenues $ 25,581 $ 18,344 $ 6,883 $ (4,966) $ 45,842
Cost of sales 11,714 7,603 4,855 (3,625) 20,547
Selling, general and
admin expenses 13,279 8,932 2,372 - 24,583
------- ------- ------- ------- -------
Operating income (loss) 588 1,809 (344) (1,341) 712
Equity in earnings of
subsidiaries (917) - - 917 -
Interest expense (7,447) (160) (204) - (7,811)
Other income and (expense) (1) (133) 257 - 123
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income tax
benefit (provision) (7,777) 1,516 (291) (424) (6,976)
Income tax benefit (provision) 35 (525) - - (490)
------- ------- ------- ------- -------
Income (loss) from continuing
operations (7,742) 991 (291) (424) (7,466)
Loss from discontinued operations,
net of tax benefit - (276) - - (276)
------- ------- ------- ------- -------
Net income (loss) $ (7,742) $ 715 $ (291) $ (424) $ (7,742)
======== ======== ======== ======== ========
19
CONDENSED CONSOLIDATING CASH FLOW STATEMENTS (Unaudited)
(Amounts in thousands) For the Six Months Ended June 30, 2003
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Net cash provided by (used in)
operating activities $ (4,046) $ 2,530 $ 233 $ - $ (1,283)
------- ------- ------- ------- -------
Cash flows from investing
activities:
Purchase of property and
equipment (796) (1,726) (109) - (2,631)
------- ------- ------- ------- -------
Net cash used in investing
activities (796) (1,726) (109) - (2,631)
------- ------- ------- ------- -------
Cash flows from financing
activities:
Principal payments on long-term
debt and capital leases (271) (788) (17) - (1,076)
Principal payments of deferred
license fees (237) - - - (237)
Issuance of common stock 393 - - - 393
------- ------- ------- ------- -------
Net cash used in financing
activities (115) (788) (17) - (920)
------- ------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents (4,957) 16 107 - (4,834)
Cash and cash equivalents,
beginning of period 14,444 (14) 1,845 - 16,275
------- ------- ------- ------- -------
Cash and cash equivalents,
end of period $ 9,487 $ 2 $ 1,952 $ - $ 11,441
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING CASH FLOW STATEMENTS (Unaudited)
(Amounts in thousands) For the Six Months Ended June 30, 2002
Non-
Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiaries inations Consolidated
Net cash provided by (used in)
operating activities $ (1,200) $ 2,058 $ 654 $ - $ 1,512
------- ------- ------- ------- -------
Cash flows from investing
activities:
Purchase of property and
equipment (513) (1,696) (92) - (2,301)
Cash provided by discontinued
operations - 177 - - 177
Other investing activities (475) - (15) - (490)
------- ------- ------- ------- -------
Net cash used in investing
activities (988) (1,519) (107) - (2,614)
------- ------- ------- ------- -------
Cash flows from financing
activities:
Proceeds from long-term debt - - 32 - 32
Principal payments on long-term
debt and capital leases (428) (713) (36) - (1,177)
Principal payments of deferred
license fees (213) - - - (213)
Issuance of common stock 374 - - - 374
------- ------- ------- ------- -------
Net cash used in financing
activities (267) (713) (4) - (984)
------- ------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents (2,455) (174) 543 - (2,086)
Cash and cash equivalents,
beginning of period 14,354 (184) 1,037 - 15,207
------- ------- ------- ------- -------
Cash and cash equivalents,
end of period $ 11,899 $ (358) $ 1,580 $ - $ 13,121
======== ======== ======== ======== ========
20
11. RESTRUCTURING EXPENSE AND SEVERANCE COSTS
Included in restructuring expense for the year ended December 31, 2002 was
a charge of approximately $3.3 million 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 August 2015, while the two leases in Nevada have
terms expiring in July 2004 and in December 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 through December
2017. At June 30, 2003 approximately $3.0 million of this accrual remains.
The Company is subleasing one of the Las Vegas buildings and is currently
seeking tenants for subleasing the other buildings.
Severance expense for the year ended December 31,2002 consists of 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 $2.0
million was paid to these individuals 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. 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 are approximately
$0.2 million. Subsequently, from August 2003 through August 2006, the
Company is required to pay approximately $0.2 million annually. At June 30,
2003, approximately $0.4 million remained unpaid.
Included in the severance expense caption in the Consolidated Statements
of Operations for the six months ended June 30, 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 June 30, 2003, approximately $0.1 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
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 and $1.0
million for the three and six months ended June 30, 2003, respectively, and
an estimated additional expense of $2.0 million for the years ended December
31, 2003 and December 31, 2004. In June 2003, the Company and ATI
terminated its agreement. The Company will continue to depreciate its slot
machines on the 24 month basis based on the current estimated useful lives of
the equipment and in accordance with its desire to pursue similar agreements
to utilize other manufacturers' slot machines on a going-forward basis.
13. EMPLOYEE STOCK INCENTIVE PLAN
In May 2003, the Company's shareholders approved the Employee Stock
Incentive Plan, which provides for the issuance of up to 500,000 shares of
common stock to Company employees through grants. All grants will include
conditions on vesting and all shares subject to a grant will be forfeited
unless the conditions are met within the term of the grant, which in no case
shall exceed a period of ten years. In May and June 2003, the Company issued
approximately 225,000 restricted shares to certain employees
21
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 we believe to be reasonable and
made in good faith, are subject to the uncertainties inherent in predicting
the future including the successful completion of the restructuring
transactions, 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
Amounts disclosed in the accompanying tables are rounded to the nearest
thousand while amounts included in text are disclosed in actual amounts. All
percentages reported are based on those rounded numbers.
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.
22
SEVERANCE EXPENSE
Included in the severance expense caption in the Consolidated Statements
of Operations for the six months ended June 30, 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 June 30, 2003, approximately $0.1 million of this severance
expense remains to be paid.
The severance expense is not included in the calculation of operating
income in the tables below.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2003 and 2002
REVENUES
(Amounts in thousands) Change
Business Segment 2003 2002 Amount % Comment
- ------------------ ------ ------ ------- ------ -------
Gaming operations $ 9,773 $ 10,769 $ (996) (9.2)% 1
Product sales 13,686 13,245 441 3.3 % 2
------- ------- -------
Total $ 23,459 $ 24,014 $ (555) (2.3)%
======== ======== ========
Percentage of total revenues:
Gaming operations 41.7% 44.8%
Product sales 58.3% 55.2%
------ ------
Total 100.0% 100.0%
====== ======
1. Gaming operations revenues during the three months ended June 30, 2003
were approximately $9.8 million, a decrease of approximately $1.0
million, or 9%, from revenues of approximately $10.8 million in the
2002 comparable period. This net decrease resulted from:
(i) a decrease in recurring revenues from leased slot machines of
approximately $0.5 million, from approximately $6.5 million in the
prior year quarter, to approximately $6.0 million in the current
quarter. This decline was attributable to a decrease in the average
number of branded slot machines leased to customers from
approximately 2,430 in the three months ended June 30, 2002, to
approximately 2,060 for the three months ended June 30, 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 $27.20 in the prior year quarter to $24.50 in the
current year quarter, contributed to this decline. Management
believes delays in offering 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 presently provides
these technological specifications in several markets and regulatory
approvals are in process for remaining markets. Revenue from non-
branded slot machines increased to approximately $0.7 million for
the three months ended June 30, 2003 from approximately $0.5 million
for the three months ended June 30, 2002. Average non-branded
machines outstanding were approximately 280 and 370 for the 2003 and
2002 quarterly periods, respectively. The decrease in average
machines leased was offset by an increase in the average win per day
from $15.70 in the prior year quarter to $25.80 in the current
quarter. Additionally, the Company received approximately $0.4
million in the 2003 quarter from its participation in an average of
approximately 300 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 $14.20 per day and did not exist in
the prior year quarter. Also during the quarter ended June 30,
2003, the Company sold 200 software licenses of certain proprietary
game content to a customer for approximately $0.4 million, net of
royalties. At June 30, 2003, the Company maintained 2,002, 253 and
303 of branded, non-branded and licensed games without hardware,
respectively. At June 30, 2002,
23
the Company maintained 2,330, 332 and 0 of branded, non-branded and
licensed games without hardware, respectively, and
(ii) a decrease of approximately $0.5 million in table games revenues.
The decrease in revenues in the quarter ended June 30, 2003 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 June 30, 2003, revenues
from leased casino table games were approximately $3.8 million
compared with approximately $4.3 million in the quarter ended June
30, 2002. The decrease was due primarily to a decrease in the
average number of leased casino table games from approximately 1,080
during the quarter ended June 30, 2002 to approximately 990 during
the quarter ended June 30, 2003. 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
$1,280 and $1,330 for the three months ending June 30, 2003 and
2002, respectively. The monthly lease revenue includes royalties and
commencement fees paid during the respective quarters. The decrease
in the average monthly lease charge in the current quarter was due
primarily to a decrease in table revenues from the Company's
domestic markets. The Company maintained 986 and 1,076 table games
at June 30, 2003 and 2002, respectively.
2. Product sales revenues during the three months ended June 30, 2003 were
$13.7 million, an increase of approximately $0.5 million, or 3%, from
revenues of $13.2 million in the 2002 comparable period. This net
increase during the current period was due principally to:
(i) an increase of approximately $1.6 million, or 95%, in systems
sales from approximately $1.6 million in 2002 quarter to $3.2
million in 2003 quarter. The improvement was due primarily to
increased sales to certain Canadian customers, which expanded casino
slot operations during the period, and increases in sales of table
tracking systems in the current year period, partially offset by
(ii) decreases in sales of interior signage, electronic components and
gaming machines of approximately $1.1 million from $11.6 million in
the 2002 quarter to $10.5 million in the 2003 quarter. The decrease
was due primarily to a reduction in interior signage sales in the
Company's Australia market coupled with a decrease in sales from the
Company's specialty slot machines, partially offset by an increase
in sales at the Company's European subsidiary and increases in slot
glass and keno sales revenues.
OPERATING INCOME (LOSS)
(Amounts in thousands) Change
Business Segment 2003 2002 Amount % Comment
- ------------------ ------ ------ ------- ------ -------
Gaming operations $ 1,444 $ 1,754 $ (310) (17.7)% 1
Product sales 2,348 327 2,021 618.0 % 2
------- ------- -------
Segment operating income 3,792 2,081 1,711 82.2 %
Corporate (2,524) (3,181) 657 20.7 % 3
------- ------- -------
Total operating income
(loss) $ 1,268 $ (1,100) $ 2,368 215.3 %
======== ======== ========
Depreciation and amortization:
Gaming operations $ 2,510 $ 2,308 $ 202 8.8 %
Product sales 225 265 (40) (15.1)%
Corporate 696 851 (155) (18.2)%
------- ------- -------
Total $ 3,431 $ 3,424 $ 7 0.2 % 4
======== ======== ========
24
1. Gaming operations reported operating income during the three months
ended June 30, 2003 of approximately $1.4 million compared to operating
income of approximately $1.7 million in the 2002 comparable period.
This net decrease of $0.3 million was primarily due to:
(i) a decrease of $0.3 million in table games' operating results
primarily due to the previously discussed decrease in recurring
revenues from leased casino table games of approximately $0.5
million. Total costs of revenues, exclusive of segment expenses, for
the three months ended June 30, 2003 and 2002 totaled approximately
$0.6 million and $0.8 million, respectively. Costs of revenues as a
percentage of revenues decreased to 14% in the 2003 quarter from 18%
in the 2002 quarter. The decrease was due primarily to a decrease in
refurbishment costs. Segment expenses, excluding depreciation and
amortization, were approximately $0.8 million for both 2003 and 2002
quarterly periods. Depreciation and amortization for the quarter
ended June 30, 2003 and 2002 was approximately $0.4 million and $0.3
million, respectively and
(ii) similar slot operations' operating results during the quarterly
periods ended June 30, 2003 and 2002. A revenue decline in the 2003
quarterly period, as discussed above, was offset by lower costs of
revenues and a decline in segment expenses related to decreases in
salaries and related costs as a result of reductions in the work
force during late 2002 and early 2003. Depreciation and amortization
for the three months ended June 30, 2003 and 2002 was approximately
$2.2 million and $2.0 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.
Management believes the acceleration of depreciation expense for its
slot machines continues to be appropriate although the ATI agreement
has been terminated as the Company will continue to pursue
replacement of its existing slot machines. This increase was offset
by an incremental depreciation expense adjustment in the 2002
quarter. Slot rental expense increased slightly to $1.4 million in
the 2003 quarter as compared to $1.3 million in the 2002 quarter.
2. Product sales reported operating income during the three months ended
June 30, 2003 of approximately $2.3 million, compared to operating
income of approximately $0.3 million in the 2002 comparable period.
This improvement of $2.0 million in operating income resulted
principally from:
(i) an increase in operating results from the Company's interior
signs, electronic displays and other product sales of $1.5 million,
primarily due to higher gross profit margins and a decrease in
segment expenses, partially offset by the previously discussed
decrease in revenues. Gross margins improved from 32% in the prior
year period to 37% 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 cost of sales, exclusive of segment expenses,
for the three months ended June 30, 2003 was $6.7 million compared
to approximately $7.9 million for the three months ended June 30,
2002. Depreciation and amortization remained stable at $0.2 million
for the three months ended June 30, 2003 and 2002. Segment expenses,
excluding depreciation and amortization, decreased from
approximately $3.1 million in the 2002 quarter to $1.8 million in
the 2003 quarter. 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 a significant
bad debt expense in the 2002 quarterly period of $0.6 million, and
(ii) an increase in the operating results from the Company's systems
business of approximately $0.5 million. The increase was due
primarily to the increase in revenues and an increase in gross
profit margins, partially offset by an increase in segment expenses.
Gross margins improved from 45% in the prior year period to 52% in
the current period. The improvement was caused principally by a
shift in the sales mix to higher margin software sales during the
quarter ended June 30, 2003 from lower margin hardware sales during
the quarter ended June 30, 2002. Costs of sales for the systems
business was $1.5 million during the quarter ended June 30, 2003
compared to $0.9 million during the comparable quarter in 2002.
Segment expenses, excluding depreciation and amortization, increased
from approximately $0.7 million in the 2002 period to approximately
$1.1 million in the 2003 period. The increase was due primarily to
25
increases in engineering and sales expenses. Depreciation and
amortization for the three months ended June 30, 2003 and 2002 was
less than $0.1 million for both periods.
3. Corporate expenses during the three months ended June 30, 2003 were
approximately $2.5 million, a decrease of approximately $0.7 million
from $3.2 million in the 2002 comparable period. The decrease was due
primarily to a significant recovery ($0.5 million) of a previously
written off bad debt and lower costs 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 offset, in part, by
increased legal and regulatory licensing fees of approximately $0.3
million.
4. Depreciation and amortization for each of the three months ended June
30, 2003 and 2002 was $3.4 million as the previously discussed increase
in depreciation related to leased slot machines was offset by decrease
in corporate depreciation and amortization.
INTEREST EXPENSE
Interest expense during the three months ended June 30, 2003 was $3.9
million, a slight decrease compared to $4.0 million during the three months
ended June 30, 2002. The decrease was due principally to a decrease in the
Company's capital lease obligations.
OTHER INCOME AND EXPENSE
Other income and expense, excluding interest income, during the three
months ended June 30, 2003 and 2002 was a net income of approximately $0.1
million compared to a net expense of approximately $0.2 million in the
comparable 2002 period. The expense in the prior year period was principally
related to losses from the disposition of assets. Interest income for each of
the three month periods ended June 30, 2003 and 2002 was approximately $0.1
million.
LOSS FROM DISCONTINUED OPERATIONS
During the three months ended June 30, 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
During the three months ended June 30, 2003, the Company recorded a tax
provision of less than $0.1 million compared to a provision of approximately
$0.4 million for the three months ended June 30, 2002. 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 certain state tax adjustments in addition to 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 June 30,
2003 were $0.18 on basic and diluted weighted average common shares
outstanding of approximately 12,910,000. Both basic and diluted loss per
share for the three months ended June 30, 2002 were $0.45 on basic and
diluted weighted average common shares outstanding of approximately
12,817,000. Dilutive stock options have not been included in the computations
of diluted net loss per share as their effect would be antidilutive.
26
Six Months Ended June 30, 2003 and 2002
REVENUES
(Amounts in thousands) Change
Business Segment 2003 2002 Amount % Comment
- ------------------ ------ ------ ------- ------ -------
Gaming operations $ 19,310 $ 22,135 $ (2,825) (12.8)% 1
Product sales 26,882 23,707 3,175 13.4 % 2
------- ------- -------
Total $ 46,192 $ 45,842 $ 350 0.8 %
======== ======== ========
Percentage of total revenues:
Gaming operations 41.8% 48.3%
Product sales 58.2% 51.7%
------ ------
Total 100.0% 100.0%
====== ======
1. Gaming operations revenues during the six months ended June 30, 2003
were $19.3 million, a decrease of approximately $2.8 million, or 13%,
from revenues of $22.1 million in the 2002 comparable period. This net
decrease resulted from:
(i) a decrease in recurring revenues from leased slot machines
of approximately $2.0 million, from approximately $13.7 million in
the six months ended June 30, 2002, to approximately $11.7 million
in the current year six-month period. This decline was attributable
to a decrease in the average number of branded slot machines leased
to customers from approximately 2,500 during the six months ended
June 30, 2002, to approximately 2,190 during the six months ended
June 30, 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 $27.50 during the six-month period
ended June 30, 2002 to $23.20 in the current year six-month period,
contributed to this decline. Management believes delays in its
ability 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 presently offers
these technological specifications in most gaming jurisdictions and
is seeking regulatory approvals in other jurisdictions. Revenue from
non-branded slot machines increased slightly to approximately $1.3
million in the 2003 six-month period from $1.2 million in the
similar 2002 period. Average non-branded machines outstanding were
approximately 320 and 380 for the 2003 and 2002 periods,
respectively. The decrease in average machines in the 2003 six-month
period was offset by an increase in the average win per day from
$17.30 in the prior year six-month period to $22.60 in the 2003 six-
month period. Additionally, the Company received approximately $0.8
million in the 2003 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 $13.40 per day in the 2003 six-
month period and these revenues did not exist in the prior year six-
month period. Also during the quarter ended June 30, 2003, the
Company sold 200 software licenses of certain proprietary game
content to a customer for approximately $0.4 million, net of
royalties, and
(ii) a decrease of approximately $0.8 million in table games revenues.
This decrease in the six months ended June 30, 2003 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 six months ended June 30, 2003,
revenues from leased casino table games were approximately $7.7
million compared with approximately $8.5 million for the six months
ended June 30, 2002. The decrease was due primarily to a decrease in
the average number of leased casino table games from approximately
1,100 during the 2002 six-month period to 1,030 in the similar six-
month
27
period of 2003. 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 $1,240 and
$1,290 for the six-month periods ending June 30, 2003 and 2002,
respectively. The monthly lease revenue includes royalties and
commencement fees paid during the respective periods. Management
believes the decrease in the average monthly lease charge in the
2003 six-month period was due primarily to alternative "felt" game
products offered by competitors.
2. Product sales revenues during the six months ended June 30, 2003
were $26.9 million, an increase of $3.2 million, or 13%, from revenues
of $23.7 million in the 2002 comparable period. This net increase
during the current period was due principally to:
(i) an increase of sales of interior signage of approximately $2.0
million, partially offset by a decrease in sales of electronic
displays of approximately 0.8 million. The increase in interior
signage sales in the current period 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. In addition, a decrease in
sales from the Company's specialty slot machines of $1.0 million
during the current year period was partially offset by increases in
slot glass and keno sales revenues of approximately $0.8 million,
and
(ii) an increase of approximately $2.1 million in systems sales from
approximately $3.6 million in the 2002 period to $5.7 million in the
2003 period. The improvement was due primarily to increased sales to
certain Canadian customers, which expanded casino slot operations
during the period, and increases in sales of table tracking systems
in the current year period.
OPERATING INCOME (LOSS)
(Amounts in thousands) Change
Business Segment 2003 2002 Amount % Comment
- ------------------ ------ ------ ------- ------ -------
Gaming operations $ 2,614 $ 5,763 $ (3,149) (54.6)% 1
Product sales 4,455 890 3,565 400.6 % 2
------- ------- -------
Segment operating income 7,069 6,653 416 6.3 %
Corporate (6,299) (5,941) (358) (6.0)% 3
------- ------- -------
Total operating income $ 770 $ 712 $ 58 8.1 %
======== ======== ========
Depreciation and amortization:
Gaming operations $ 4,899 $ 4,014 $ 885 22.0 %
Product sales 446 514 (68) (13.2)%
Corporate 1,387 1,640 (253) (15.4)%
------- ------- -------
Total $ 6,732 $ 6,168 $ 564 9.1 % 4
======== ======== ========
1. Gaming operations reported operating income during the six months ended
June 30, 2003 of approximately $2.6 million compared to operating
income of approximately $5.7 million in the 2002 period. This net
decrease of approximately $3.1 million was primarily due to:
(i) a decrease in the slot operations' operating results of
approximately $2.3 million, due primarily to the previously
discussed decrease in recurring revenues from leased slot machines
of approximately $2.0 million and an increase in depreciation and
amortization, partially offset by a decrease in the operating costs
to service, refurbish and maintain the Company's slot route in the
current period. Slot operations' depreciation and amortization
during the six months ended June 30, 2003 and 2002 was $4.2 million
and $3.4 million, respectively. The increase was due primarily to
accelerating the depreciation of certain slot machines in the 2003
six-month period
28
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. Management believes the acceleration
of depreciation expense for its slot machines continues to be
appropriate although the ATI agreement has been terminated as the
Company will continue to pursue replacement of its existing slot
machines. Slot rental expense increased slightly to $2.8 million in
the 2003 period as compared to $2.7 million in the 2002 period.
Maintenance and refurbishment costs for slot machines decreased from
$4.0 million in the prior year period to $3.5 million in the current
period, due primarily to the decrease in the average number of slot
machines leased during the current period. Segment expenses,
excluding slot rent expense and depreciation and amortization expense,
for both six-month periods ended June 30, 2003 and 2002 were
approximately $2.9 million, and
(ii) a decrease in table games' operating results of approximately
$0.8 million, due primarily to the previously discussed decrease in
recurring revenues from leased casino table games of approximately
$0.8 million. Total costs of revenues, exclusive of segment
expenses, for the six months ended June 30, 2003 and 2002 totaled
approximately $1.2 million and 1.4 million, respectively. The
decrease in the current period was due primarily to a decrease in
the average number of leased table games. Costs of revenues as a
percentage of revenues improved slightly from 16% in the prior year
period to 15% in the current year period. Segment expenses,
excluding depreciation and amortization, were approximately $1.5
million and $1.3 million for the six-month periods ended June 30,
2003 and 2002, respectively. This increase was due primarily to
slight increases in engineering costs and sales and related costs.
Depreciation and amortization for the six months ended June 30, 2003
increased slightly to $0.7 million from $0.6 million for the 2002
comparable six-month period.
2. Product sales reported operating income during the six months ended
June 30, 2003 of approximately $4.5 million, compared to operating
income of approximately $0.9 million in the 2002 comparable period.
This improvement of $3.6 million in operating income resulted
principally from:
(i) an increase in operating results from the Company's interior
signs, electronic displays and other product sales of approximately
$3.2 million, primarily due to the previously discussed increase in
revenues, higher gross profit margins and a decrease in segment
expenses. Gross margins improved to 37% during the six months ended
June 30, 2003 as compared to 33% in the similar 2002 six-month
period. This improvement in 2003 was caused principally by lower
manufacturing costs as a result of the consolidation of
manufacturing operations in August 2002. Total costs of sales,
exclusive of segment expenses, for the six months ended June 30,
2003 were $13.3 million compared to approximately $13.5 million for
the six months ended June 30, 2002. Depreciation and amortization
decreased slightly during the six months ended June 30, 2003 to $0.4
million from $0.5 million for the six months ended June 30, 2002.
Segment expenses, excluding depreciation and amortization, decreased
from approximately $5.4 million in the 2002 period to $3.5 million
in the 2003 period. This $1.9 million decrease was due primarily to
certain charges for international restructuring, labor relations
matters and bad debt charges of approximately $1.0 million in the
2002 six-month period and 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) an increase in the operating results from the Company's systems
business of approximately $0.4 million. The increase in the six
months ended June 30, 2003 was due primarily to the previously
discussed increase in revenues, partially offset by a decrease in
gross profit margins and an increase in segment expenses. Gross
margins decreased from 52% in the six-month period ended June 30,
2002 to 48% in the similar 2003 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 six months ended June
30, 2003. Costs of sales for the systems business was $3.0 million
during the six months ended June 30, 2003 compared to $1.7 million
during the same period in 2002. Segment expenses, excluding
depreciation and amortization, increased from approximately $1.7
million in the 2002 period to approximately $2.2 million in the 2003
period due primarily to increases in engineering costs and sales and
related costs.
29
Depreciation and amortization for the six months ended June 30, 2003
and 2002 was less than $0.1 million for both periods.
3. Corporate expenses during the six months ended June 30, 2003 were
$6.3 million, an increase of approximately $0.4 million from $5.9
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, offset by a decrease in
salaries and related costs of approximately $1.0 million as a result of
the reduction in the work force during the third quarter of 2002.
4. Depreciation and amortization during the six months ended June 30,
2003 was $6.7 million, an increase of $0.5 million, compared to $6.2
million in the 2002 comparable period. This increase was primarily due
to the previously discussed 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 six months ended June 30, 2003 was $7.7
million, a slight decrease compared to $7.8 million during the six months
ended June 30, 2002. The decrease was due principally to a decrease in the
Company's capital lease obligations.
OTHER INCOME AND EXPENSE
Other income and expense, excluding interest income, during the period
ended June 30, 2003, was a net expense of less than $0.1 million compared to
a net expense of approximately $0.2 million in the comparable 2002 period.
The expense in the prior year period was principally related to losses from
the disposition of assets. Interest income for the six months ended June 30,
2003 was approximately $0.1 million compared to interest income for the six
months ended June 30, 2002 of approximately $0.3 million. This decrease was
due primarily to a decrease in average interest rates during the current
period and interest income from debt related to the Company's unconsolidated
Latin American Subsidiary in the prior year period.
LOSS FROM DISCONTINUED OPERATIONS
During the six months ended June 30, 2002, the Company recorded losses
from discontinued operations, net of income tax benefits calculated at a 34%
tax rate, of approximately $0.3 million. The losses relate to the Company's
exterior sign operation, which was sold effective October 31, 2002.
INCOME TAXES
During the six months ended June 30, 2003, the Company recorded a tax
provision of less than $0.1 million compared to a provision of approximately
$0.5 million for the six months ended June 30, 2002. 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
state tax adjustments in addition to 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 six months ended June 30,
2003 were $0.58 on basic and diluted weighted average common shares
outstanding of approximately 12,893,000. Both basic and diluted loss per
share for the six months ended June 30, 2002 were $0.61 on basic and diluted
weighted average common shares outstanding of approximately 12,795,000.
Dilutive stock options have not been included in the computations of diluted
net loss per share as their effect would be antidilutive.
30
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2003, the Company incurred a net loss of
approximately $7.4 million. Net cash and cash equivalents at June 30, 2003
were $11.4 million, a decrease of approximately $4.9 million from $16.3
million at December 31, 2002. Working capital decreased to $18.7 million at
June 30, 2003 from $22.0 million at December 31, 2002. The working capital
decrease was due principally to decreases in cash and cash equivalents of
approximately $4.8 million, accounts and notes receivable of approximately
$1.8 million, inventories of approximately $1.1 million and prepaid expenses
of approximately $1.3 million, partially offset by decreases in trade
accounts payable of approximately $1.9 million, accrued liabilities of
approximately $1.9 million and customer deposits of approximately $1.0
million.
Cash used in operating activities was approximately $1.3 million for the
six months ended June 30, 2003. The significant items affecting this amount
were a net loss of approximately $7.4 million partially offset by non-cash
charges of: (i) $6.7 million for depreciation and amortization, (ii) $0.5
million for inventory and receivable valuation provisions and (iii) $1.2
million for amortization of debt discount and issue costs. Significant
changes in operating assets and liabilities also affecting cash used in
operating activities were net decreases in accounts payable, accrued
liabilities and in customer deposits, partially offset by decreases in
accounts and notes receivable and prepaid expenses.
Cash used in investing activities was approximately $2.6 million during
the six months ended June 30, 2003 primarily for purchases of property and
equipment.
Cash used in financing activities was approximately $0.9 million during
the six months ended June 30, 2003, primarily as a result of principal
payments on debt, deferred license fees and capital leases of approximately
$1.3 million offset, in part, by proceeds of approximately $0.4 million from
the issuance of common stock.
The following table summarizes the Company's contractual obligations at
June 30, 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 $105,496 $ 128 $ 368 $ - $105,000
Capital lease obligations 1,192 901 291 - -
Operating leases 24,945 7,274 5,052 4,287 8,332
License fees 791 480 311 - -
Purchase of slot machines 300 300 - - -
Employment agreements 3,531 1,828 1,563 140 -
------- ------- ------- ------- -------
Total $136,255 $ 10,911 $ 7,585 $ 4,427 $113,332
======== ======== ======== ======== ========
The above table includes accretion of debt discount of $4.3 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 June 30, 2003.
31
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 increased 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 June 30, 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
$11.4 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 six months ended June 30, 2003, the Company spent approximately
$2.6 million for purchases of property and equipment. The Company presently
plans to spend approximately $4.0 million for property and equipment during
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 annually 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 June 30, 2003, the
Company has not purchased any slot machines under this agreement and has paid
$0.3 million to the supplier to be used as an advance towards future slot
machine purchases or as part of a cancellation fee, estimated to be $0.6
million.
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. In June 2003, the Company and ATI terminated the agreement
and the Company plans to pursue other outsourcing arrangements similar to the
terminated agreement with ATI. However, the Company can give no assurances
that such arrangements will be achieved and may continue to operate its slot
business using
32
existing slot machines which may require as much as $3,000 per device to
upgrade to technologically current specifications.
Presently, the Company owns or leases approximately 900 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, 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 the year ended December 31, 2002 was
a charge of approximately $3.3 million 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 August 2015, while the two leases in Nevada have
terms expiring in July 2004 and in December 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 through December
2017. At June 30, 2003 approximately $3.0 million of this accrual remains.
The Company is subleasing one of the Las Vegas buildings and is currently
seeking tenants for subleasing the other buildings.
Severance expense for 2002 consist of 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 $2.0 million was paid to these
individuals 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. 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 are approximately $0.2 million.
Subsequently, from August 2003 through August 2006, the Company is required
to pay approximately $0.2 million annually. At June 30, 2003, approximately
$0.4 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 six months
ended June 30, 2003. Through June 30, 2003, the Company has purchased
approximately 76,000 shares of its common stock for approximately $0.2
million. As of June 30, 2003, the Company had approximately 195,000 shares
of common stock held in treasury.
33
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 May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity" ("FAS 150"). This statement affects the
classification, measurement and disclosure requirements of the following
three types of freestanding financial instruments; 1) mandatory redeemable
shares, which the issuing company is obligated to buy back with cash or other
assets; 2) instruments that do or may require the issuer to buy back some of
its shares in exchange for cash or other assets, which includes put options
and forward purchase contracts; and 3) obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominately to
a variable such as a market index, or varies inversely with the value of the
issuers' shares. In general, FAS 150 is effective for all financial
instruments entered into or modifies after May 31, 2003, and other wise is
effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of FAS 150 is not expected to have an impact on the
Company's consolidated financial position or disclosures.
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
The Company maintains disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) 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. These disclosure
controls and procedures are designed and maintained by or under the
supervision of the Company's Chief Executive Officer and Chief Financial
Officer, as required by the rules of the SEC. The Company's Chief Executive
Officer and Chief Financial Officer are responsible for evaluating the
effectiveness of the disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures which took
place as of the end of the period covered by 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. During the period covered by this
report, there have been no changes in the Company's internal controls over
financial reporting that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial
reporting.
34
MIKOHN GAMING CORPORATION
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
Certain matters were submitted to the stockholders for their approval or
other action at the annual meeting of stockholders, all as set forth in the
Company's Proxy Statement dated April 30 2003, heretofore filed with the SEC
and incorporated herein by this reference.
The annual meeting of stockholders was held on May 29, 2003. On the
record date, March 31, 2003, there were 13,006,185 outstanding shares of
common stock; each share entitled to one vote on all matters properly
presented for stockholder action. At the meeting, 8,888,699 shares were
represented by proxies and 1,809,496 shares were voted in person.
Action was taken on the following matters at the meeting:
1. The election of two Class 2 directors to hold office until the 2006
Annual Meeting of Stockholders or until their successors are elected
and qualified;
Votes
Director Votes For Withheld
------------------- --------- ---------
Douglas M. Todoroff 9,808,017 890,187
James E. Meyer 9,343,167 1,355,028
2. Amending the Employee Stock Option Plan in certain respects as set forth
in the proxy statement;
Votes Broker
Votes For Against Abstain Non-Votes
--------- --------- --------- ---------
3,378,808 1,490,719 21,715 5,446,953
3. Amending the Director Stock Option Plan in certain respects as set forth
in the proxy statement, and
Votes Broker
Votes For Against Abstain Non-Votes
--------- --------- --------- ---------
4,176,057 1,049,385 25,800 5,446,953
4. Approving the Employee Stock Incentive Plan as set forth in the proxy
statement;
Votes Broker
Votes For Against Abstain Non-Votes
--------- --------- --------- ---------
4,362,201 868,186 20,855 5,446,953
35
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits:
10.25 Employee Stock Incentive Plan dated February 25, 2003.
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a)
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a)
32.1 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 April 2, 2003, to disclose that the Company expects to file an
extension for its filing of its 10-K for the year ended December 31,
2002.
A report filed on Form 8-K with the Securities and Exchange Commission
on May 15, 2003, to disclose the Company's unaudited financial results
for the first quarter of 2003.
A report filed on Form 8-K with the Securities and Exchange Commission
on June 18, 2003, to announce the appointment of Rick Lee Smith to the
Company's Board of Directors.
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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
August 13, 2003
37