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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended: June 30, 2002
------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from __________ to __________
Commission File Number: 0-22752
------------------------
MIKOHN GAMING CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0218876
--------------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
920 Pilot Road, Las Vegas, NV 89119
------------------------------------------------------
(Address of principal executive office and zip code)
(702) 896-3890
------------------------------------------------------
(Registrant's telephone number, including area code)
------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------- _______
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:
12,899,202 as of August 12, 2002
- -------------------------------- -----------------
(Amount Outstanding) (Date)
MIKOHN GAMING CORPORATION
TABLE OF CONTENTS
Page
Part I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 2002 (Unaudited)
and December 31, 2001 2
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (Unaudited) 6
Notes to 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 32
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 6. Exhibits and Reports on Form 8-K 33
1
MIKOHN GAMING CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 13,041 $ 15,124
Accounts receivable, net 15,144 20,320
Installment sales receivable - current 1,176 981
Inventories, net 18,205 17,693
Prepaid expenses 5,294 3,889
Deferred tax asset - current 5,022 5,275
-------------- -------------
Total current assets 57,882 63,282
Notes receivable - related parties - noncurrent 2,580 2,401
Installment sales and notes receivable - noncurrent 1,927 92
Property and equipment, net 30,015 32,510
Intangible assets, net 62,013 62,827
Goodwill, net 3,006 3,006
Other assets 11,785 11,469
-------------- -------------
Total assets $ 169,208 $ 175,587
============== =============
See notes to consolidated financial statements
2
MIKOHN GAMING CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, June 30,
except per share amounts) 2002 December 31,
(Unaudited) 2001
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Long-term debt and notes payable - current $ 2,373 $ 2,422
Trade accounts payable 6,850 8,210
Customer deposits 4,841 2,618
Accrued taxes 2,453 2,318
Accrued royalties 2,178 2,024
Accrued interest 2,269 2,213
Accrued and other current liabilities 3,812 3,060
Deferred revenues - current 1,311 1,508
Deferred license fees - current 447 447
--------------- -----------------
Total current liabilities 26,534 24,820
Long-term debt and notes payable - noncurrent,
net of original issue discount of $5,150 and $5,567 101,424 101,823
Deferred revenues - noncurrent 795 1,194
Deferred tax liability - noncurrent 17,823 18,076
Deferred license fees - noncurrent 807 1,020
--------------- -----------------
Total liabilities 147,383 146,933
--------------- -----------------
Commitments and contingencies (see Note 4)
Stockholders' equity:
Preferred stock, $0.10 par value, 5,000 shares
authorized, none issued and outstanding
Common stock, $0.10 par value, 100,000 shares
authorized, 12,847 and 12,765 shares issued and
outstanding 1,285 1,276
Additional paid-in capital 66,490 65,751
Stockholders' notes receivable (1,023) (1,023)
Foreign currency translation (914) (1,079)
Accumulated deficit (43,785) (36,043)
Less treasury stock, 19 shares, at cost (228) (228)
--------------- -----------------
Total stockholders' equity 21,825 28,654
--------------- -----------------
Total liabilities and stockholders' equity $ 169,208 $ 175,587
=============== =================
See notes to consolidated financial statements
3
MIKOHN GAMING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Amounts in thousands Three Months Ended Six Months Ended
(except per share amounts) June 30, June 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- -------------- -------------
Revenues:
Gaming operations $ 9,944 $ 11,108 $ 20,878 $ 20,932
Product sales 15,973 16,112 29,434 31,556
------------- ------------- -------------- -------------
Total revenues 25,917 27,220 50,312 52,488
------------- ------------- -------------- -------------
Operating costs:
Gaming operations 8,151 6,053 15,126 12,031
Product sales 15,894 14,018 28,936 28,680
Corporate expense 3,182 3,257 5,942 5,560
------------- ------------- -------------- -------------
Total operating costs 27,227 23,328 50,004 46,271
------------- ------------- -------------- -------------
Operating income (loss):
Gaming operations 1,793 5,055 5,752 8,901
Product sales 79 2,094 498 2,876
Corporate expense (3,182) (3,257) (5,942) (5,560)
------------- ------------- -------------- -------------
Total operating income (loss) (1,310) 3,892 308 6,217
Other income and (expense):
Interest expense (4,028) (2,420) (7,815) (4,878)
Other income and (expense) (124) 316 115 541
------------- ------------- -------------- -------------
Income (loss) before income tax
provision (5,462) 1,788 (7,392) 1,880
Income tax provision (350) (350)
------------- ------------- -------------- -------------
Net income (loss) $ (5,812) $ 1,788 $ (7,742) $ 1,880
============= ============= ============== =============
Weighted average common shares:
Basic 12,817 11,117 12,795 11,093
============= ============= ============== =============
Diluted 12,817 11,429 12,795 11,256
============= ============= ============== =============
Basic and diluted earnings (loss) per share:
Basic $ (0.45) $ 0.16 $ (0.61) $ 0.17
============= ============= ============== =============
Diluted $ (0.45) $ 0.16 $ (0.61) $ 0.17
============= ============= ============== =============
See notes to consolidated financial statements
4
MIKOHN GAMING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Amounts in thousands Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income (loss) $ (5,812) $ 1,788 $ (7,742) $ 1,880
Comprehensive income:
Foreign currency translation gain 116 165
------------- ------------- ------------- -------------
$ (5,696) $ 1,788 $ (7,577) $ 1,880
============= ============= ============= =============
See notes to consolidated financial statements
5
MIKOHN GAMING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2002 and 2001
(Amounts in thousands) 2002 2001
---- ----
Cash flows from operating activities:
Net income (loss) $ (7,742) $ 1,880
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 4,740 3,551
Amortization 1,564 2,366
Provision for bad debts 690 558
Reserve for obsolete inventory 565 225
Amortization of debt discount and debt acquisition costs 1,078 522
Stock options issued to consultants / officers 181
Equity in losses of unconsolidated subsidiaries 16 250
(Gain) / loss on sale of assets 317 (265)
Changes in assets and liabilities:
Accounts receivable 4,486 1,299
Notes receivable - related parties (179) (32)
Installment sales and notes receivable (2,030) (153)
Inventories (2,543) (913)
Prepaid expenses (1,405) (371)
Other assets (905) (437)
Trade accounts payable (1,360) (334)
Accrued and other current liabilities 764 (180)
Customer deposits 2,223 (30)
Deferred revenue (596) 65
-------------- ------------
Net cash provided by (used in) operating activities (136) 8,001
-------------- ------------
Cash flows from investing activities:
Purchase of inventory leased to others (9,610)
Proceeds from sale-leaseback transactions 2,500
Purchase of property and equipment (451) (1,629)
Proceeds from sales of property and equipment 270
Increase in intangible assets (490) (705)
-------------- ------------
Net cash used in investing activities (941) (9,174)
-------------- ------------
Cash flows from financing activities:
Proceeds from long-term debt and notes payable 32 433
Principal payments on notes payable and long-term debt (183) (403)
Principal payments of deferred license fees (213) (192)
Proceeds from capital lease transactions 2,000
Principal payments on capital leases (1,016) (931)
Proceeds from sale of common stock 374 381
-------------- ------------
Net cash provided (used in) by financing activities (1,006) 1,288
-------------- ------------
(continued)
6
MIKOHN GAMING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2002 and 2001
(Amounts in thousands) 2002 2001
---- ----
Increase (decrease) in cash and cash equivalents (2,083) 115
Cash and cash equivalents, beginning of period 15,124 462
------------- -----------
Cash and cash equivalents, end of period $ 13,041 $ 577
============= ===========
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 6,821 $ 4,505
============= ===========
Federal and state income taxes $ 55 $ 31
============= ===========
See notes to consolidated financial statements
7
MIKOHN GAMING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
These unaudited 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, 2001. In the opinion
of the Company, the accompanying unaudited consolidated financial statements
contain all adjustments (consisting only of normal accruals and adjustments)
necessary to present fairly the financial position of the Company at June 30,
2002, the results of its operations for the three and six months ended June 30,
2002 and 2001 and cash flows for the six months ended June 30, 2002 and 2001.
The results of operations for the three and six months ended June 30, 2002 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. All amounts reported in the notes to consolidated
unaudited financial statements are rounded to the nearest thousand unless
otherwise stated while units are reported in whole amounts.
2. CERTAIN SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition: The Company recognizes revenue depending on the line
of business as follows:
Product sales are executed by a signed contract or customer purchase order.
Revenue is recognized when the completed product is delivered. If the agreement
calls for Mikohn to perform an installation after delivery, revenue related to
the installation is recognized when the installation has been completed and
accepted by the customer.
System sales consist of a suite of products (some of which are sold
separately) that enable gaming entities to track customer gaming activity,
account for slot machine activity and operate progressive jackpot systems. There
are proprietary hardware and software components to the systems. The Company
accounts for system sales in accordance with Statement of Position 97-2 -
Software Revenue Recognition ("SOP 97-2"). System sales are considered multiple
element arrangements because they include hardware, software, installation,
training and post-sale customer support. System sales are evidenced by a signed
contract. Follow-up spare parts and hardware only sales are evidenced with a
purchase order. Revenue for system sales is recognized when:
. There is a signed contract with a fixed determinable price;
. Collectibility of the sale is probable and
. The hardware and software has been delivered, installed, training
completed and acceptance has occurred.
Not all systems contracts require installation. Examples include sales of
hardware only to (i) previous customers that are expanding their systems, (ii)
customers that have multiple locations and do the installation themselves and
require an additional software license and hardware and (iii) customers
purchasing spare parts.
8
Maintenance and support are sold under agreements with established
vendor-specific objective evidence of price. Maintenance contracts are generally
for a period of 12 months, with revenue recognized ratably over the contract
service period.
Further training is also sold under agreements with established
vendor-specific objective evidence of price, which is based on daily rates and
is recognized upon delivery.
The leasing of proprietary table games to casino customers occurs under
signed lease agreements. Table game lease contracts are typically for a 36-month
period with a 30-day cancellation clause. The lease revenue is recognized on a
monthly basis.
The leasing of proprietary slot machines occurs under signed lease
agreements. These contracts will either be on a participation or a fixed-rental
basis. Slot machine lease contracts are typically for a 12-month period with a
60-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 a monthly basis.
3. INVENTORIES
Inventories at June 30, 2002 and December 31, 2001 consist of the
following:
June 30, December 31,
2002 2001
---- ----
Raw materials $ 13,524 $ 13,876
Finished goods 7,651 7,187
Work-in-progress 2,896 3,058
------------ --------------
Subtotal 24,071 24,121
Reserve for obsolete inventory (5,866) (6,428)
------------ --------------
Total $ 18,205 $ 17,693
============ ==============
4. COMMITMENTS AND CONTINGENCIES
The Company is involved in routine litigation, including customer
bankruptcies, collection efforts, disputes with former employees and other
matters in the ordinary course of its business operations. Management knows of
no matter, pending or threatened, that in its judgment will or might have a
material adverse effect on the Company or its operations.
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 $4,000.
5. SEGMENT REPORTING
The Company's worldwide operations are concentrated in two principal
business segments: gaming operations and product sales. The gaming operations
business segment was established in 1993 to develop, acquire, manufacture and
distribute proprietary games, and these games have become increasingly important
to its business. Increased attention has been given to gaming operations because
of the high recurring revenues and profit margin potential for this business
line. Mikohn owns or licenses the rights to several categories of proprietary
games, which it places in casinos under lease arrangements. These leases either
provide for a fixed rental payment or a participation in the game's operating
results. Sales of proprietary games are reflected in the reported results of the
Company's
9
product sales business segment, while revenues derived from leases are included
in the results of its gaming operations business segment. The Company's product
sales business segment has been providing gaming products and equipment around
the world since 1987. First, it sold progressive jackpot systems and then it
expanded to sign manufacturing as well as other related products. Its gaming
products are found in almost every major gaming jurisdiction and include: (i)
interior casino signage, exterior signage and electronic components used in
progressive jackpot systems, (ii) player tracking and information gathering and
control systems and (iii) gaming machines for sale.
Business segment information for the three and six months ended June 30,
2002 and 2001 consist of:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
Business Unit Segments: 2002 2001 2002 2001
- ----------------------- ---- ---- ---- ----
Revenues:
Gaming operations $ 9,944 $ 11,108 $ 20,878 $ 20,932
Product sales:
Signage and electronic
components 12,546 13,343 23,430 26,910
Player tracking and information
gathering 1,379 1,359 3,226 2,484
Gaming machines and other 2,048 1,410 2,778 2,162
------------- -------------- ------------- -------------
15,973 16,112 29,434 31,556
------------- -------------- ------------- -------------
$ 25,917 $ 27,220 $ 50,312 $ 52,488
============= ============== ============= =============
Gross profit:
Gaming operations $ 7,678 $ 9,360 $ 16,332 $ 17,518
Product sales 5,074 6,780 9,747 11,699
------------- -------------- ------------- -------------
$ 12,752 $ 16,140 $ 26,079 $ 29,217
============= ============== ============= =============
Operating income (loss):
Gaming operations $ 1,793 $ 5,055 $ 5,752 $ 8,901
Product sales 79 2,094 498 2,876
Corporate (3,182) (3,257) (5,942) (5,560)
------------- -------------- ------------- -------------
$ (1,310) $ 3,892 $ 308 $ 6,217
============= ============== ============= =============
Income (loss) before income tax:
Gaming operations $ 1,176 $ 4,320 $ 4,170 $ 7,276
Product sales (424) 1,660 (875) 1,613
Corporate (6,214) (4,192) (10,687) (7,009)
------------- -------------- ------------- -------------
$ (5,462) $ 1,788 $ (7,392) $ 1,880
============= ============== ============= =============
10
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, 2002
and 2001 consist of:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
Geographic Operations: 2002 2001 2002 2001
- ---------------------- ------------- -------------- ------------- -------------
Revenues:
North America $ 22,328 $ 25,080 $ 43,429 $ 48,508
Australia/Asia 1,500 (193) 3,128 (250)
Europe/Africa 2,102 1,565 3,771 3,045
Latin America (13) 768 (16) 1,185
------------- -------------- ------------- -------------
$ 25,917 $ 27,220 $ 50,312 $ 52,488
============= ============== ============= =============
Gross profit:
North America $ 11,871 $ 15,211 $ 24,051 $ 27,684
Australia/Asia 238 (193) 906 (250)
Europe/Africa 656 778 1,138 1,268
Latin America (13) 344 (16) 515
------------- -------------- ------------- -------------
$ 12,752 $ 16,140 $ 26,079 $ 29,217
============= ============== ============= =============
Operating income (loss):
North America $ (733) $ 3,884 $ 652 $ 6,533
Australia/Asia (491) (193) (234) (250)
Europe/Africa (73) 162 (94) (21)
Latin America (13) 39 (16) (45)
------------- -------------- ------------- -------------
$ (1,310) $ 3,892 $ 308 $ 6,217
============= ============== ============= =============
Income (loss) before income tax:
North America $ (4,963) $ 1,793 $ (7,100) $ 2,245
Australia/Asia (474) (193) (215) (250)
Europe/Africa (12) 142 (61) (71)
Latin America (13) 46 (16) (44)
------------- -------------- ------------- -------------
$ (5,462) $ 1,788 $ (7,392) $ 1,880
============= ============== ============= =============
The following departments are included in corporate expense:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
Department: 2002 2001 2002 2001
- ----------- ------------- -------------- ------------- -------------
Human resources $ 120 $ 112 $ 258 $ 233
Executive and administration 655 587 1,081 753
Finance and MIS 882 853 1,765 1,743
Legal and compliance 304 330 510 508
Corporate facilities
management 85 93 189 196
Research and development 187 187
Marketing 286 231 500 345
Depreciation and amortization 850 864 1,639 1,595
------------- -------------- ------------- -------------
Total $ 3,182 $ 3,257 $ 5,942 $ 5,560
============= ============== ============= =============
11
6. GUARANTOR FINANCIAL STATEMENTS
On August 22, 2001, the Company completed the private placement of $105,000
of its 11.875% Senior Secured Notes due 2008 and warrants to purchase an
aggregate of 420 shares of its common stock at a price of $7.70 per share. In
addition, on August 10, 2001, the Company completed the sale of 1,500 shares of
its common stock to institutional investors in a private placement for $8,250.
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
Senior Secured Notes. The financial statements for the guarantor subsidiaries
follow:
MIKOHN GAMING CORPORATION
CONSOLIDATING CONDENSED BALANCE SHEETS
June 30, 2002
-------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash $ 11,899 $ (438) $ 1,580 $ - $ 13,041
Accounts receivable, net 6,428 6,327 2,389 15,144
Inventories, net 8,598 6,618 2,989 18,205
Other current assets 2,621 8,529 342 11,492
------------ -------------- -------------- --------------- ----------------
Total current assets 29,546 21,036 7,300 57,882
Property and equipment, net 10,271 19,301 443 30,015
Intangible assets, net 59,242 5,382 395 65,019
Investments in subsidiaries 14,820 (14,573) 247
Other assets 14,051 1,994 16,045
------------ -------------- -------------- --------------- ----------------
Total assets $ 127,930 $ 47,713 $ 8,138 $ (14,573) $ 169,208
============ ============== ============== =============== ================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities $ 16,428 $ 6,299 $ 3,807 $ - $ 26,534
Intercompany transactions (26,967) 22,001 4,966
------------ -------------- -------------- --------------- ----------------
Total current liabilities (10,539) 28,300 8,773 26,534
Long-term debt, net of original
issue discount of $5,150 100,251 1,097 76 101,424
Other liabilities, long term 811 791 1,602
Deferred tax liability - noncurrent 15,582 2,241 17,823
Stockholders' equity 21,825 15,284 (711) (14,573) 21,825
------------ -------------- -------------- --------------- ----------------
Total liabilities
and stockholders' equity $ 127,930 $ 47,713 $ 8,138 $ (14,573) $ 169,208
============ ============== ============== =============== ================
12
December 31, 2001
-----------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash $ 14,354 $ (267) $ 1,037 $ - $ 15,124
Accounts receivable, net 11,769 6,724 1,827 20,320
Inventories, net 7,729 7,298 2,666 17,693
Other current assets 3,180 6,747 218 10,145
----------- ------------- -------------- -------------- --------------
Total current assets 37,032 20,502 5,748 63,282
Property and equipment, net 10,824 21,276 410 32,510
Intangible assets, net 60,048 5,389 396 65,833
Investments in subsidiaries 14,017 (13,754) 263
Other assets 11,864 1,835 13,699
----------- ------------- -------------- -------------- --------------
Total assets $133,785 $ 49,002 $ 6,554 $ (13,754) $ 175,587
=========== ============= ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 15,446 $ 6,677 $ 2,697 $ - $ 24,820
Intercompany transactions (26,845) 22,458 4,387
----------- ------------- -------------- -------------- --------------
Total current liabilities (11,399) 29,135 7,084 24,820
Long-term debt, net of original
issue discount of $5,567 99,847 1,905 71 101,823
Other liabilities, long term 1,035 1,179 2,214
Deferred tax liability - noncurrent 15,648 2,428 18,076
Stockholders' equity 28,654 14,355 (601) (13,754) 28,654
----------- ------------- -------------- -------------- -------------
Total liabilities
and stockholders' equity $133,785 $ 49,002 $ 6,554 $ (13,754) $ 175,587
=========== ============= ============== ============== =============
13
MIKOHN GAMING CORPORATION
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2002
----------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Revenues $ 13,933 $ 11,317 $ 3,589 $ (2,922) $ 25,917
Cost of sales 6,713 5,842 2,708 (2,098) 13,165
Selling, general and
administrative expenses 7,662 4,942 1,458 14,062
----------- ------------- -------------- -------------- --------------
Operating income (loss) (442) 533 (577) (824) (1,310)
Equity in earnings of
subsidiaries (1,086) 1,086
Interest expense (3,845) (78) (105) (4,028)
Other income and (expense) (215) (93) 184 (124)
----------- ------------- -------------- -------------- --------------
Income (loss) before
income taxes (5,588) 362 (498) 262 (5,462)
Income tax (provision) benefit (224) (126) (350)
----------- ------------- -------------- -------------- --------------
Net income (loss) $ (5,812) $ 236 $ (498) $ 262 $ (5,812)
=========== ============= ============== ============== ==============
For the Three Months Ended June 30, 2001
----------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Revenues $ 15,106 $ 17,099 $ 2,140 $ (7,125) $ 27,220
Cost of sales 6,221 8,314 1,210 (4,665) 11,080
Selling, general and
administrative expenses 7,150 4,244 854 12,248
----------- ------------- -------------- -------------- --------------
Operating income (loss) 1,735 4,541 76 (2,460) 3,892
Equity in earnings of
subsidiaries 648 (648)
Interest expense (2,302) (62) (56) (2,420)
Other income and (expense) 66 208 42 316
----------- ------------- -------------- -------------- --------------
Income (loss) before
income taxes 147 4,687 62 (3,108) 1,788
Income tax (provision) benefit 1,641 (1,641)
----------- ------------- -------------- -------------- --------------
Net income (loss) $ 1,788 $ 3,046 $ 62 $ (3,108) $ 1,788
=========== ============= ============== ============== ==============
14
MIKOHN GAMING CORPORATION
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2002
--------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Revenues $ 25,581 $ 22,814 $ 6,883 $ (4,966) $ 50,312
Cost of sales 11,714 11,289 4,855 (3,625) 24,233
Selling, general and
administrative expenses 13,279 10,120 2,372 25,771
------------- -------------- ------------- ------------- --------------
Operating income (loss) 588 1,405 (344) (1,341) 308
Equity in earnings of
subsidiaries (917) 917
Interest expense (7,447) (164) (204) (7,815)
Other income and (expense) (1) (141) 257 115
------------- -------------- ------------- ------------- --------------
Income (loss) before
income taxes (7,777) 1,100 (291) (424) (7,392)
Income tax (provision) benefit 35 (385) (350)
------------- -------------- ------------- ------------- --------------
Net income (loss) $ (7,742) $ 715 $ (291) $ (424) $ (7,742)
============= ============== ============= ============= ==============
For the Six Months Ended June 30, 2001
--------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ -------------
Revenues $ 28,891 $ 29,003 $ 3,980 $ (9,386) $ 52,488
Cost of sales 12,717 14,205 2,446 (6,097) 23,271
Selling, general and
administrative expenses 12,811 8,502 1,687 23,000
------------- -------------- ------------- ------------- --------------
Operating income (loss) 3,363 6,296 (153) (3,289) 6,217
Equity in earnings of
subsidiaries 717 (717)
Interest expense (4,660) (115) (103) (4,878)
Other income and (expense) 193 295 53 541
------------- -------------- ------------- ------------- --------------
Income (loss) before
income taxes (387) 6,476 (203) (4,006) 1,880
Income tax (provision) benefit 2,267 (2,267)
------------- -------------- ------------- ------------- --------------
Net income (loss) $ 1,880 $ 4,209 $ (203) $ (4,006) $ 1,880
============= ============== ============= ============= ==============
15
MIKOHN GAMING CORPORATION
CONSOLIDATING CONDENSED CASH FLOW STATEMENTS
For the Six Months Ended June 30, 2002
--------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities $ (1,492) $ 702 $ 654 $ - $ (136)
------------ --------------- --------------- ------------- -------------
Cash flows from investing activities:
Purchase of inventory for
lease to others
Proceeds from sale-
leaseback transactions
Purchase of property and
equipment (221) (138) (92) (451)
Other investing activities (475) (15) (490)
------------ --------------- --------------- ------------- -------------
Net cash used in investing activities (696) (138) (107) (941)
------------ --------------- --------------- ------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt
and capital leases 32 32
Principal payments on debt and
capital leases (428) (735) (36) (1,199)
Principal payments of deferred
license fees (213) (213)
Proceeds from option exercise /
issuance of common stock 374 374
------------ --------------- --------------- ------------- -------------
Net cash used in financing activities (267) (735) (4) (1,006)
------------ --------------- --------------- ------------- -------------
Increase (decrease) in cash and
cash equivalents (2,455) (171) 543 (2,083)
Cash and cash equivalents,
beginning of period 14,354 (267) 1,037 15,124
------------ --------------- --------------- ------------- -------------
Cash and cash equivalents, end of
period $ 11,899 $ (438) $ 1,580 $ - $ 13,041
============ =============== =============== ============= =============
16
For the Six Months Ended June 30, 2001
--------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------------- --------------- --------------- -----------------
Net cash provided by operating
activities $ 2,136 $ 5,532 $ 333 $ - $ 8,001
--------- --------------- --------------- --------------- -----------------
Cash flows from investing activities:
Purchase of inventory for lease
to others (9,610) (9,610)
Proceeds from sale-leaseback
transactions 2,500 2,500
Purchase of property and
equipment (1,071) (204) (354) (1,629)
Other investing activities (654) 219 (435)
--------- --------------- --------------- --------------- -----------------
Net cash used in investing activities (1,725) (7,095) (354) (9,174)
--------- --------------- --------------- --------------- -----------------
Cash flows from financing activities:
Proceeds from long-term debt
and capital leases 370 2,000 63 2,433
Principal payments on debt and
capital leases (707) (520) (107) (1,334)
Principal payments of deferred
license fees (192) (192)
Proceeds from option exercise/
issuance of common stock 381 381
--------- --------------- --------------- --------------- -----------------
Net cash provided by (used in)
financing activities (148) 1,480 (44) 1,288
--------- --------------- --------------- --------------- -----------------
Increase (decrease) in cash and
cash equivalents 263 (83) (65) 115
Cash and cash equivalents,
beginning of period 540 (375) 297 462
--------- --------------- --------------- --------------- -----------------
Cash and cash equivalents, end of
period $ 803 $ (458) $ 232 $ - $ 577
========= =============== =============== =============== =================
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002. Under
SFAS No. 142, goodwill and indefinite life intangible assets, such as the
Company's perpetual license, are no longer amortized but are subject to periodic
impairment tests. Other intangible assets with finite lives, such as patents,
software development costs, trademark and proprietary property rights and
license and non-compete agreements will continue to be amortized over their
useful lives. In accordance with SFAS No. 142, the Company completed the
transitional intangible asset test upon adoption of SFAS No. 142 and the
transitional goodwill impairment test during the six months ended June 30, 2002.
The transitional intangible asset test did not result in a change in the useful
lives of the Company's definite life intangible assets or an impairment of the
Company's finite life intangible assets. The transitional goodwill test did not
result in an impairment of goodwill.
In connection with the adoption of SFAS No. 142, prior period amounts were
not restated. A reconciliation of the previously reported net income and
earnings per share for the six months ended
17
June 30, 2001 to the amounts adjusted for the elimination of amortization
expense recorded on goodwill and intangible assets prior to the adoption of SFAS
No. 142, net of income taxes, is as follows:
Net Basic Diluted
Income EPS EPS
----------------- ----------------- --------------
Reported amount $ 1,880 $ 0.17 $ 0.17
Addback: goodwill and intangible asset
amortization 915 0.08 0.08
----------------- ----------------- --------------
Adjusted amount $ 2,795 $ 0.25 $ 0.25
================= ================= ==============
The net carrying value of goodwill and other intangible assets as of June
30, 2002 is comprised of the following:
Net Amount Allocated by Segment
-------------------------------
Gaming Product
Operations Sales Corporate Net
--------------- --------------- --------------- --------------
Goodwill $ 2,471 $ 535 $ - $ 3,006
Indefinite life intangible assets 50,532 50,532
Finite life intangible assets (see
detail below) 5,598 3,017 2,866 11,481
--------------- --------------- --------------- --------------
Total $ 58,601 $ 3,552 $ 2,866 $ 65,019
=============== =============== =============== ==============
The change in the net carrying amount of goodwill, indefinite life
intangible assets and finite life intangible assets during the six months ended
June 30, 2002 is due to increases to, and amortization of, finite life assets.
The net carrying value of goodwill ($3,006) as of June 30, 2002 is included
in the geographic operations of North America ($2,616) and Australia/Asia
($390).
Finite life intangible assets as of June 30, 2002, subject to amortization,
are comprised of the following:
Gross Carrying Accumulated
Amount Amortization Net
-------------------- ------------------ ---------------
Patent/trademark rights $ 11,045 $ (5,403) $ 5,642
License agreements 2,357 (1,139) 1,218
Covenants not to compete 9,918 (8,508) 1,410
Software development costs 3,193 (1,196) 1,997
Proprietary rights/other 1,835 (621) 1,214
-------------------- ------------------ ---------------
Total $ 28,348 $ (16,867) $ 11,481
==================== ================== ===============
Amortization expense for finite life intangible assets was $1,445 for the
six months ended June 30, 2002. Annual estimated amortization expense for each
of the five succeeding fiscal years is expected to approximate $3,760, $2,530,
$1,710, $1,574 and $851.
18
9. RELATED PARTY TRANSACTIONS
During the three months and six months ended June 30, 2002, the Company
entered into various transactions with related parties. Specifically, the
Company charged interest of approximately $52 and $100, respectively, and sold
approximately $12 and $20, respectively, of net products and services to its 50%
owned, unconsolidated subsidiary in Latin America. The Company also had
significant transactions with its Australian affiliate prior to the Australian
business being consolidated with the Company on November 15, 2001. In
particular, during the three months and six months ended June 30, 2001, the
Company charged its Australian affiliate approximately $49 and $100,
respectively, in interest charges, approximately $100 and $200, respectively, in
royalty and table game fees and approximately $55 and $100, respectively, for
net sales of various products. All sales and expense charges to or from
affiliates were deemed to be arms-length transactions. At June 30, 2002, the
Company's 50% owned, unconsolidated subsidiary and certain employees of the
subsidiary owed the Company approximately $2,400 included in notes receivable -
related party.
Included in accounts receivable and notes receivable - related party are
amounts owed to the Company by its Chairman of the Board of Directors and CEO of
approximately $63 and $170, respectively at June 30, 2002. During July 2002, the
Company advanced an additional $50 to its Chairman and CEO.
Included in stockholder notes receivable at June 30, 2002 are amounts owed
from certain officers and directors of the Company totaling $1,023. These
amounts are due in October 2002.
10. ACQUISITION / DIVESTITURE OF SUBSIDIARIES
On May 14, 2002, the Company acquired 1,744,403 shares of Mikohn
Australasia Pty Limited ("MGA") from TAB Limited ("TAB"). These shares
represented 8% of the issued and outstanding shares of MGA, increasing the
Company's ownership in this subsidiary from 92% to 100%. The purchase price for
the shares was AUD2,000, payable AUD1,500 on closing and a promissory note for
AUD500. Promissory note is due June 30, 2005 and bears interest at 5% per annum;
principal and interest payable or due at maturity. Simultaneously with the
purchase of these shares, the Company and TAB amended their existing licensing
agreement granting TAB additional rights to operate a Mystery(R) Linked Jackpot
system in New South Wales. In consideration for these additional rights, TAB
agreed to pay a fee of AUD1,500 within seven days after execution of the
agreement and to pay an additional fee, aggregating a minimum of AUD1,125 over
three years, in the amount of AUD15.00 (actual) per month per game connected to
the system. The Company and TAB agreed that monies owed by the Company to TAB
for the purchase of the shares in MGA could be offset by the monies owed by TAB
to the Company under the terms of the amended license agreement.
19
11. EARNINGS PER SHARE
The following table provides a reconciliation of basic and diluted income
(loss) per share as required by SFAS No. 128, "Earnings per Share":
Dilutive
Stock
Basic Options Diluted
----- ------- -------
For the three month period 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 three month period ended June 30, 2001:
- -----------------------------------------------
Net income $ 1,788 $ - $ 1,788
============== =============== ============
Weighted average shares 11,117 312 11,429
============== =============== ============
Per share amount $ 0.16 $ - $ 0.16
============== =============== ============
For the six month period ended June 30, 2002:
- ---------------------------------------------
Net loss $ (7,742) $ - $ (7,742)
============== =============== ============
Weighted average shares 12,795 12,795
============== =============== ============
Per share amount $ (0.61) $ - $ (0.61)
============== =============== ============
For the six month period ended June 30, 2001:
- ---------------------------------------------
Net income $ 1,880 $ - $ 1,880
============== =============== ============
Weighted average shares 11,093 163 11,256
============== =============== ============
Per share amount $ 0.17 $ - $ 0.17
============== =============== ============
Dilutive stock options for the three months ended June 30, 2002 (626) have
not been included in the computation of diluted net loss per share as their
effect would be antidilutive. Likewise, dilutive stock options for the six
months ended June 30, 2002 (481) have not been included in the computation of
diluted net loss per share as their effect would be antidilutive.
12. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the SEC issued Staff Accounting Bulletin ("SAB") No. 102,
"Selected Loan Loss Allowance Methodology and Documentation Issues". SAB 102
gives guidance on the documentation and methodologies used in the determination
of loan loss allowances. We believe the adoption of this bulletin will not have
a material impact on our consolidated financial condition or results of
operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and / (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. SFAS
No. 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company is currently evaluating the impact that this
standard will have on its consolidated financial statements.
20
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets".
This statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001, which will begin January 1, 2002. Based on a
recent analysis, the adoption of this statement did not have a material impact
on our consolidated financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44
and 64, Amendment of SFAS No. 13, and Technical Corrections". Among other
things, SFAS No. 145 rescinds various pronouncements regarding early
extinguishment of debt and allows extraordinary accounting treatment for early
extinguishment only when the provisions of Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" are met. SFAS No. 145 provisions regarding
early extinguishment of debt are generally effective for fiscal years beginning
after May 15, 2002. Management believes the adoption of SFAS No. 145, which will
be implemented during 2003, will not have a material impact on its consolidated
financial statements.
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 made in good faith, are subject to
the uncertainties inherent in predicting the future. Factors such as
competition, customer dissatisfaction, failure to gain new product acceptance,
software, Internet gaming, our maintaining licenses for branded games, our
dependence on Sigma Game Inc., our operating history, our high leverage and
accompanying debt service obligations, onerous taxation and other adverse
government action (including, without limitation, with respect to gaming
regulations and our gaming licenses and approvals), terrorism in general and
governmental response thereto, unusual risks attending foreign transactions and
general deterioration in economic conditions may cause results to differ
materially from any that are projected. Forward-looking statements speak only as
of the date they are made, and readers are warned that the Company undertakes no
obligation to update or revise such statements to reflect new circumstances or
unanticipated events as they occur.
Readers are urged to carefully review and consider disclosures made by the
Company in this and other reports that discuss factors germane to the Company's
business. See particularly the Company's reports on Forms 10-K, 10-K/A, 10-Q,
10-Q/A and 8-K filed with the Securities and Exchange Commission.
GENERAL INFORMATION
All dollar amounts reported in this section (from this point forward) are
expressed in thousands and are rounded to the nearest thousand unless otherwise
stated. However, numbers of units and number of shares are expressed in whole
amounts. All percentages reported are based on those rounded numbers.
RESTRUCTURING AND COST CONTAINMENT
On August 7, 2002, the Company announced that as part of an overall review
of business operations and operating efficiencies it is reducing its workforce
by approximately 15%. In addition, we have announced our intent to consolidate
our manufacturing and electronics operations to our state-of-the-art
manufacturing facility in Hurricane, Utah. We anticipate the manufacturing
transition to be completed prior to year-end.
On August 13, 2002, the Company's board of directors approved the terms of
a severance agreement with Don W. Stevens, the Company's former executive vice
president, treasurer and chief financial officer. The terms of the agreement
require the Company to pay Mr. Stevens a sum equal to $701, which is net of
principal and interest aggregating $296 as of July 31, 2002 owed to the Company
by Mr. Stevens under two promissory notes. The $701 is payable $300 upon
execution of the agreement with the balance of $401 evidenced by a promissory
note bearing interest at 8% per annum payable in 36 monthly installments
commencing September 15, 2002. The Company also agreed that Mr. Stevens could
retain 215,000 stock options granted to him during the period of his employment,
all of which are fully vested and otherwise will be exercisable in accordance
with their terms at the time they were issued. In addition, Mr. Stevens and his
family will remain covered under the Company's executive medical plan through
August 13, 2005.
ACQUISITION / DIVESTITURE OF SUBSIDIARIES
In October 2001, the Company completed the sale of 50% of its interest in
Mikohn Latin America S.A. ("Mikohn Latin America"). Certain employees of Mikohn
Latin America, through RLP Holdings, purchased a 50% interest for $500 in cash
and a note. Since October 2001, the Company has accounted for the financial
results of this entity using the equity method. Equity in earnings and losses of
the unconsolidated subsidiary is now charged to revenues on a monthly basis with
a corresponding charge to the Company's investment in subsidiary account. Prior
to the 50% divestiture, the financial results of Mikohn Latin America were
included in the consolidated results of operations. For the six months ended
June 30, 2001, Mikohn Latin America accounted for approximately $1,200 in
revenues, $500 in gross profit, and a net loss of approximately $40 and these
amounts are included in the financial analysis below. For the three months ended
June 30, 2001, Mikohn Latin America accounted for approximately $800 in
revenues, $300 in gross profit, and net income of approximately $60 and these
amounts are included in the financial analysis below. From January to June 2002,
approximately $16 of equity in losses of unconsolidated subsidiaries is included
in gaming products revenues below.
On November 15, 2001, the Company converted $518 of debt owing from Mikohn
Gaming Australasia Pty., Ltd ("MGA") into 20 million shares of MGA, thereby
increasing our ownership from 50%
22
to approximately 92%. Previous to this transaction, the Company had accounted
for this unconsolidated subsidiary using the equity method whereby the Company
would record a 50% share of earnings or losses of this subsidiary. The Company
now consolidates all accounts of this subsidiary into its consolidated financial
statements. For the six and three-month periods ended June 30, 2002,
approximately $250 and $150, respectively, was charged to gaming products
revenues below for the equity in losses of this unconsolidated subsidiary. For
six and three-month periods ended June 30, 2002, MGA accounted for approximately
$3,100 and $1,500, respectively, in revenues, $900 and $200, respectively, in
gross profit and an approximate net loss of $15 and $0, respectively. These
amounts are included in the financial analysis below.
On May 14, 2002, the Company acquired 1,744,403 shares of MGA from TAB
Limited ("TAB"). These shares represented 8% of the issued and outstanding
shares of MGA, increasing the Company's ownership in this subsidiary from 92% to
100%. The purchase price for the shares was AUD2,000, payable AUD1,500 on
closing and a promissory note for AUD500. Promissory note is due June 30, 2005
and bears interest at 5% per annum; principal and interest payable or due at
maturity. Simultaneously with the purchase of these shares, the Company and TAB
amended their existing licensing agreement granting TAB additional rights to
operate a Mystery(R) Linked Jackpot system in New South Wales. In consideration
for these additional rights, TAB agreed to pay a fee of AUD1,500 within seven
days after execution of the agreement and to pay an additional fee, aggregating
a minimum of AUD1,125 over three years, in the amount of AUD15.00 (actual) per
month per game connected to the system. The Company and TAB agreed that monies
owed by the Company to TAB for the purchase of the shares in MGA could be offset
by the monies owed by TAB to the Company under the terms of the amended license
agreement.
RELATED PARTY TRANSACTIONS
During the three months and six months ended June 30, 2002, the Company
entered into various transactions with related parties. Specifically, the
Company charged interest of approximately $52 and $100, respectively, and sold
approximately $12 and $20, respectively, of net products and services to its 50%
owned, unconsolidated subsidiary in Latin America. The Company also had
significant transactions with its Australian affiliate prior to the Australian
business being consolidated with the Company on November 15, 2001. In
particular, during the three months and six months ended June 30, 2001, the
Company charged its Australian affiliate approximately $49 and $100,
respectively, in interest charges, approximately $100 and $200, respectively, in
royalty and table game fees and approximately $55 and $100, respectively, for
net sales of various products. All sales and expense charges to or from
affiliates were deemed to be arms-length transactions.
23
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 and 2001
REVENUES:
Change
------
Business Segment 2002 2001 Amount % Comment
---------------- ---- ---- ------ - -------
Gaming operations $ 9,944 $ 11,108 $(1,164) -10.5% 1
Product sales 15,973 16,112 (139) -0.9% 2
------------ ------------ -------------
Total $ 25,917 $ 27,220 $(1,303) -4.8%
============ ============ =============
Percentage of total revenues:
Gaming operations 38.4% 40.8%
Product sales 61.6% 59.2%
------------ ------------
100.0% 100.0%
============ ============
1. Gaming operations revenues during the three months ended June 30, 2002
were $9,944, a $1,164 decrease, or 10.5%, from $11,108 in the 2001
comparable period. This net decrease resulted from (i) a decrease in
recurring revenues from leased slot machines of approximately $400 in
the 2002 period attributable to an approximate 6% reduction in the
average net win per day per slot machine. The average number of slot
machines outstanding during the three months ended June 30, 2002 did
not change significantly from the comparable period of the prior year.
(At June 30, 2002 and 2001, the Company had approximately 2,400
branded slot machines in casino locations) and (ii) a decrease of
approximately $800 in table games revenues reflecting a decline of
approximately 50 average leased table games, as compared to the 2001
three-month period, as well as an approximate 10% decrease in the
average monthly lease charge on leased table games and reduced lease
commencement fees in the 2002 period.
2. Product sales revenues during the three months ended June 30, 2002
were $15,973, a $139 decrease, or 0.9%, from $16,112 in the 2001
comparable period. This net decrease during 2002 was due principally
to decreases in electronic displays of approximately $800 offset, in
part, by an increase of approximately $700 in gaming machine sales and
other.
24
OPERATING INCOME (LOSS):
Change
------
Business Segment 2002 2001 Amount % Comment
---------------- ---- ---- ------ - -------
Gaming operations $ 1,793 $ 5,055 $ (3,262) -64.5% 1
Product sales 79 2,094 (2,015) -96.2% 2
------------- ------------ --------------
Total segment operating
income 1,872 7,149 (5,277) -73.8%
Corporate (3,182) (3,257) 75 2.3% 3
------------- ------------ --------------
Total operating income (loss) $(1,310) $ 3,892 $ (5,202) -133.7%
============= ============ ==============
Depreciation and amortization:
Gaming operations $ 2,298 $ 1,917 $ 381 19.9%
Product sales 341 349 (8) -2.3%
Corporate 851 864 (13) -1.5% 4
------------- ------------ --------------
Total $ 3,490 $ 3,130 $ 360 11.5%
============= ============ ==============
1. Gaming operations operating income during the three months ended June
30, 2002 was $1,793, a $3,262 decrease, or 64.5% from $5,055 in the
2001 comparable period. This net decrease was primarily due to (i) the
decrease in recurring revenues from leased slot machines and table
games of approximately $1,200 attributable to an approximate 6%
reduction in the average net win per day per slot machine, (ii) an
increase in refurbishment costs associated with the transfer and
replacement of leased slot machines during the 2002 period of
approximately $500 (costs of refurbishment and transfer expenses are
expensed to cost of sales as incurred and occurred on a significantly
more frequent basis than in the 2001 period because of an aging
inventory of games), and (iii) increases in rent and depreciation
expense during the 2002 period of approximately $1,300 resulting from
the growth and related lease financing of slot machine placements in
the Company's route operation as compared to the prior year quarterly
period.
2. Product sales operating income during the three months ended June 30,
2002 was $79, a $2,015 decrease, or 96.2%, from $2,094 in the 2001
comparable period. This decline in operating income resulted
principally from lower gross profit margins. During the three months
ended June 30, 2002, the Company incurred a charge of $350 related to
labor issues and due to a decline in production volume in its sign
plants, gross margins declined by approximately 10% as the fixed
manufacturing overhead expenses were absorbed over a smaller
production base. Additionally, increases in research and development
costs related to certain new product development and certain expenses
for personnel reductions in the 2002 period contributed to the
decrease in operating income.
3. Corporate expenses during the three months ended June 30, 2002 were
$3,182, a $75 decrease, or 2.3% from $3,257 in the 2001 comparable
period. Increases in executive administration and marketing costs were
offset by a decrease in unallocated research and development costs.
4. Depreciation and amortization during the three months ended June 30,
2002 was $3,490, a $360 increase, or 11.5%, from $3,130 in the 2001
comparable period. This increase was primarily due to a significantly
larger amount of slot route equipment being depreciated in the 2002
period as compared to the 2001 period combined with an acceleration of
depreciating signage and certain slot machines in the slot route. This
increase amounted to approximately $700. Offsetting this increase was
the curtailment in the amortization of certain goodwill and intangible
assets of approximately $400 due to the implementation of SFAS No.
142, "Goodwill and Other Intangible Assets" beginning January 1, 2002.
25
INTEREST EXPENSE:
Interest expense during the three months ended June 30, 2002 was $4,028, a
$1,608 increase, or 66.4%, from $2,420 comparable period. This increase was due
to higher average outstanding borrowings in the 2002 three-month period of
approximately $18,000, a higher average effective interest rate in 2002 of
approximately 14% compared to approximately 10% in 2001 and a sales and use tax
audit of approximately $160.
OTHER INCOME AND (EXPENSE):
Other income and expense, excluding interest income, during the second
quarter of 2002 was a net expense of $233 compared to $146 of net income in the
similar 2001 period. This decline in other income / (expense) of $379 in the
2002 quarterly period was caused principally by losses incurred from the
disposal of certain non-operating assets in the 2002 period and the absence of
gains on certain nonrecurring gains on property and equipment transactions in
the period of approximately $350.
Interest income in the 2002 quarterly period was $109 compared to $170 in
the 2001 quarter ended June 30, 2001. This decrease of $61 was due principally
to a significant decrease in average interest rates versus the prior year
quarterly period and a curtailment in interest income recorded from
interest-bearing notes as certain charges have been deferred in the 2002 period
pending cash receipt. Offsetting these decreases was an increase in cash and
cash equivalent balances during the three-month period ended June 30, 2002 which
resulted from the net cash proceeds of the Company's refinancing in August 2001.
INCOME TAXES:
During the three months ended June 30, 2002, the Company recorded a tax
provision of $350 compared to $0 for the three months ended June 30, 2001. The
Company recorded certain state tax adjustments during the 2002 period.
LOSS PER SHARE:
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 12,817. Both basic and diluted earnings per share for the three months ended
June 30, 2001 were $0.16 on basic and diluted weighted average common shares
outstanding of 11,117 and 11,429.
26
Six months ended June 30, 2002 and 2001
REVENUES:
Change
------
Business Segment 2002 2001 Amount % Comment
---------------- ---- ---- ------ - -------
Gaming operations $20,878 $ 20,932 $ (54) -0.3% 1
Product sales 29,434 31,556 (2,122) -6.7% 2
------------ ------------ -------------
Total $50,312 $ 52,488 $ (2,176) -4.1%
============ ============ =============
Percentage of total revenues:
Gaming operations 41.5% 39.9%
Product sales 58.5% 60.1%
------------ ------------
100.0% 100.0%
============ ============
1. Gaming operations revenues during the six months ended June 30,
2002 were $20,878, a $54 decrease, or 0.3%, from $20,932 in the
2001 comparable period. This net decrease resulted from (i) an
increase in recurring revenues from leased slot machines of
approximately $1,100 in the 2002 period attributable to the
addition of approximately 300 average branded units in operation
(at June 30, 2002 and 2001, the Company had approximately 2,400
branded slot machines on lease) and (ii) a decrease of
approximately $1,100 in table games revenues reflecting a decline
of approximately 50 average leased table games as compared to the
2001 six-month period as well as an approximate 8.0% decrease in
the average monthly lease charge on leased table games.
2. Product sales revenues during the six months ended June 30, 2002
were $29,434, a $2,122 decrease, or 6.7%, from $31,556 in the
2001 comparable period. This decrease during 2002 was due
principally to a decrease of approximately $3,500 in interior and
exterior visual display products offset, in part, by increases of
$700 and $600, respectively, in player tracking system sales and
revenues from the sale of slot machines.
OPERATING INCOME:
Change
------
Business Segment 2002 2001 Amount % Comment
---------------- ---- ---- ------ - -------
Gaming operations $ 5,752 $ 8,901 $ (3,149) -35.4% 1
Product sales 498 2,876 (2,378) -82.7% 2
------------ ------------ -------------
Total segment operating
income 6,250 11,777 (5,527) -46.9%
Corporate (5,942) (5,560) (382) -6.9% 3
------------ ------------ -------------
Total operating income $ 308 $ 6,217 $ (5,909) -95.0%
============ ============ =============
Depreciation and amortization:
Gaming operations $ 4,000 $ 3,593 $ 407 11.3%
Product sales 664 729 (65) -8.9%
Corporate 1,640 1,595 45 2.8% 4
------------ ------------ -------------
Total $ 6,304 $ 5,917 $ 387 6.5%
============ ============ =============
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1. Gaming operations operating income during the six months ended
June 30, 2002 was $5,752, a $3,149 decrease, or 35.4%, from
$8,901 in the 2001 comparable period. This decrease was primarily
due to increases in slot machine rent and depreciation expense
during the 2002 period of approximately $2,400 resulting from the
growth and related lease financing of slot machine placements in
the Company's route operation and an increase in refurbishment
costs associated with the transfer and replacement of leased slot
machines during the 2002 period of approximately $800. Costs of
refurbishment and transfer expenses for slot machines are
expensed to cost of sales as incurred. These occurred on a
significantly more frequent basis than in the 2001 period due to
the aging of the games.
2. Product sales operating income during the six months ended June
30, 2002 were $498, a $2,378 decrease, or 82.7%, from $2,876 in
the 2001 comparable period. This decline in operating income
resulted principally from a decrease in interior and exterior
visual display product revenues of approximately $3,500 and a
decline in the gross profit percentage from 37% in 2001 to 32% in
2002. This gross margin decline was primarily the result of
reduced production levels in the Company's manufacturing
facilities during the six months ended June 30, 2002, whereby the
fixed manufacturing overhead expenses were absorbed over a
smaller production base. Additionally, increases in research and
development related to certain new product development costs;
certain costs associated with personnel reductions in the 2002
period and charges of $350 related to labor issues contributed to
the decrease in operating income.
3. Corporate expenses during the six months ended June 30, 2002 were
$5,942, a $382 increase, or 6.9%, from $5,560 in the 2001
comparable period. This increase occurred principally from a
forfeiture of certain incentive compensation in the 2001 period
of approximately $220 as well as a slight increase in
depreciation and amortization during the 2002 period.
4. Depreciation and amortization during the six months ended June
30, 2002 was $6,304, a $387 increase, or 6.5%, from $5,917 in the
2001 comparable period. This increase was primarily due to a
significantly larger amount of slot route equipment being
depreciated in the 2002 period as compared to the 2001 period
combined with an acceleration of depreciating signage and certain
slot machines in the slot route offset, in part, by a curtailment
in the amortization of certain goodwill and intangible assets of
approximately $800 due to the implementation of SFAS No. 142
beginning January 2002.
INTEREST EXPENSE:
Interest expense during the six months ended June 30, 2002 was $7,815, a
$2,937 increase, or 60.2%, from $4,878 in the 2001 comparable period. This
increase was due to higher average outstanding borrowings in the 2002 six-month
period of approximately $18,000, a higher average effective interest rate in
2002 of approximately 14% compared to approximately 10% in 2001 contributed to
the increase and a sales and use tax audit of approximately $160.
OTHER INCOME AND (EXPENSE):
Other income and expense, excluding interest income, for the six months
ended June 30, 2002 was a net expense of $178, a decrease of $383, from $205 of
net income the six months ended June 30, 2001. This decline was caused
principally from certain nonrecurring gains on property and equipment
transactions in the 2001 period of approximately $350.
Interest income for the six months ended June 30, 2002 was $293, a
decrease of $43, from $336 for the six months ended June 30, 2001. This decrease
was due principally to a significant decrease in average interest rates versus
the prior year six month period and a curtailment in interest income recorded
from interest-bearing notes as certain charges have been deferred in the 2002
period pending cash receipt. Offsetting these decreases was an increase in cash
and cash equivalent balances during the six-month period ended June 30, 2002
which resulted from the net cash proceeds of the Company's refinancing in August
2001.
28
INCOME TAX PROVISION:
During the six months ended June 30, 2002, the Company recorded an income
tax provision of $350 compared to $0 for the six months ended June 30, 2001. The
Company recorded certain state tax adjustments during the 2002 period.
EARNINGS PER SHARE:
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 12,795. Both basic and diluted earnings per share for the six months ended
June 30, 2001 were $0.17 on basic and diluted weighted average common shares
outstanding of 11,093 and 11,256.
LIQUIDITY AND CAPITAL RESOURCES
For the six-month period ended June 30, 2002, the Company incurred a net
loss of $7,742. Net cash and cash equivalents at June 30, 2002 were $13,041, a
decrease of $2,083 from $15,124 at December 31, 2001. Working capital decreased
to $31,348 at June 30, 2002 from $38,462 at December 31, 2001, a decrease of
$7,114. This working capital decrease was principally the result of a decrease
in cash and cash equivalents of approximately $2,100, a decrease in receivables
of approximately $5,000 and an increase in customer deposits and accrued
liabilities of approximately $3,000 offset, in part, by an increase in prepaid
expenses of approximately $1,400 and a decrease in accounts payable of
approximately $1,400.
Cash used in operating activities was $136 for the six months ended June
30, 2002. The significant items affecting this amount were a net loss of $7,742
offset by non-cash charges for depreciation, amortization and valuation
provisions of approximately $8,600. Significant changes in operating assets and
liabilities were net increases in other assets and prepaid expenses of
approximately $2,300, a decrease of approximately $1,400 in accounts payable and
an increase in customer deposits of approximately $2,200. Net receivables
decreased approximately $2,300 and were offset by increases in inventory of
approximately $2,500.
Cash used in investing activities was $941 during the six months ended
June 30, 2002. The items affecting this amount were an increase in intangible
assets of approximately $490 and purchases of property and equipment of
approximately $450.
Cash used in financing activities was $1,006 during the six months ended
June 30, 2002, principally a result of principal payments on debt, deferred
license fees and capital leases of approximately $1,400 offset, in part, by
proceeds of approximately $374 from the issuance or exercise of common stock or
options.
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 year years years years
----------------------- ----- ------ ----- ----- -----
Long-term debt $ 105,427 $ 143 $ - $ 284 $ 105,000
Capital lease obligations 3,520 2,227 1,282 11
Operating leases 32,926 8,922 9,573 3,608 10,823
------------ ------------ ------------- ----------- -------------
Total $ 141,873 $ 11,292 $ 10,855 $ 3,903 $ 115,823
============ ============ ============= =========== =============
Above table includes accretion of debt discount of $5,150.
On August 22, 2001, the Company completed the private placement of $105,000
of its 11.875% Senior Secured Notes due 2008 and warrants to purchase an
aggregate of 420,000 shares of its common
29
stock at a price of $7.70 per share. Interest payments of $6,234 are due each 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
the Guarantor subsidiaries, as defined. 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 is to maintain
$5,000 of available liquidity, as defined. The Company is in compliance with
this covenant as of June 30, 2002.
Following each fiscal year, if the Company has excess cash flow for such
fiscal year, the Company will offer to purchase up to an aggregate principal
amount of notes equal to 50.0% of such excess cash flow at a price equal to
100.0% of the principal amount plus accrued and unpaid interest.
The Company also completed, on August 10, 2001, the sale of 1,500,000
shares of its common stock to institutional investors in a private placement for
$8,250. The total proceeds were used to retire certain term loans and other
credit facilities, to fund related fees and expenses and for working capital
purposes.
In February 2002, the Company completed the acquisition of a $17,500
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 $7,500 with interest at LIBOR
plus 2.75% or prime plus 0.75% and (ii) Table Game EBITDA, as defined, up to
$10,000 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
will be secured by a first secured interest in substantially all of the
Company's assets. We will pay 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 period of three years and includes certain restrictive financial
covenants, including maintenance of $20,000 of annual EBITDA, minimum table
games revenue of $750 monthly and a table game installed base of not less than
600 games. As of June 30, 2002, the Company owed no amounts to Foothill under
its line of credit but was not in compliance with its covenant to maintain
$20,000 of annual EBITDA. As of June 30, 2002, Foothill issued a limited
one-time waiver of the covenant default. Foothill also amended the EBITDA
covenant requirement, as defined, for certain calendar quarters subsequent to
June 30, 2002. Specifically, the Company is to maintain a trailing twelve months
of EBITDA, as defined, of approximately $15,000 for the quarters ended September
30, 2002, December 31, 2002 and March 31, 2003. The EBITDA covenant increases to
approximately $17,000 as of June 30, 2003 and increases to the original amount
of $20,000 at September 30, 2003. The capacity of the line of credit will be
$12,500 until the Company has achieved EBITDA, as defined, of $20,000 for three
consecutive quarters, at which point the capacity of the line of credit will
revert to the original $17,500.
Based on the amount of cash in banks of approximately $13,000, availability
under the Company's line of credit Facility and cash generated from operations,
management believes the Company has sufficient working capital on both a short
and long-term basis.
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, asset impairment and
self insurance reserves 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. To provide an understanding of the methodology we apply, our
significant accounting policies are discussed where appropriate in this
discussion and analysis and in the notes to our consolidated financial
statements.
30
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the SEC issued Staff Accounting Bulletin ("SAB") No. 102,
"Selected Loan Loss Allowance Methodology and Documentation Issues". SAB 102
gives guidance on the documentation and methodologies used in the determination
of loan loss allowances. We believe the adoption of this bulletin will not have
a material impact on our consolidated financial condition or results of
operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and / (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. SFAS
No. 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company is currently evaluating the impact that this
standard will have on its consolidated financial statements.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets".
This statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001, which will begin January 1, 2002. Based on a
recent analysis, the adoption of this statement did not have a material impact
on our consolidated financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44
and 64, Amendment of SFAS No. 13, and Technical Corrections". Among other
things, SFAS No. 145 rescinds various pronouncements regarding early
extinguishment of debt and allows extraordinary accounting treatment for early
extinguishment only when the provisions of Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" are met. SFAS No. 145 provisions regarding
early extinguishment of debt are generally effective for fiscal years beginning
after May 15, 2002. Management believes the adoption of SFAS No. 145, which will
be implemented during 2003, will not have a material impact on its consolidated
financial statements.
CAPITAL EXPENDITURES
During the six months ended June 30, 2002, the Company spent less than $500
for purchases of property and equipment. The Company presently does not plan any
significant purchases of property and equipment for the year ending December 31,
2002. 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. The Company, in March 2002, 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 $4,000. Presently, the Company owns or leases
approximately 800 machines which are not currently in use at casinos. Due to the
number of slot machines owned or leased by the Company which are not currently
in use at casinos, planned purchases for slot machines (inventory leased to
others) for 2002 should be significantly less than in 2001.
In April 2002, the Company acquired certain rights to develop software from
its primary supplier of slot machines in exchange for an advance payment on
royalties. The advance royalty payment made by the Company in April 2002 was
approximately $1,600.
31
MIKOHN GAMING CORPORATION
Item 3.- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to Part I, Item 7A, of the Company's annual report on Form 10-K for
the fiscal year ended December 31, 2001. There have been no material changes in
market risks since the fiscal year end.
32
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 19, 2002, heretofore filed with the SEC
and incorporated herein by this reference.
The annual meeting of stockholders was held on May 15, 2002. On the record
date, March 20, 2002, there were 12,798,558 outstanding shares of common stock;
each share entitled to one vote on all matters properly presented for
stockholder action. At the meeting, 10,810,132 shares were represented by
proxies and 2,099,822 shares were present in person.
Action was taken on the following matter at the meeting:
Election of three Class 1 directors (the directors are divided into three
classes and are elected for three-year terms). Only the incumbent Class 1
directors were nominated. The results of the election were as follows:
Votes
Director Votes For Withheld
-------- --------- ---------
David J. Thompson 10,329,994 480,138
John K. Campbell 10,637,867 172,265
On June 5, 2002, Mr. Campbell retired from our Board of Directors. The
Board of Directors appointed Peter Boynton to fill the vacancy created by Mr.
Campbell's retirement.
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits:
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
B. Reports on Form 8-K:
04/29/2002 Filed Form 8-K to dismiss the Company's previous
accountant's, Arthur Andersen, LLP.
05/17/2002 Filed Form 8-K to engage BDO Seidman, LLP as the Company's
accountants.
33