<PAGE>
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, 1999
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[ ] 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
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MIKOHN GAMING CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0218876
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Indentification Number)
1045 Palms Airport Drive, P.O. Box 98686, Las Vegas, NV 89193-8686
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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
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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:
10,755,591 as of July 30, 1999
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(Amount Outstanding) (Date)
<PAGE>
MIKOHN GAMING CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998 2
Condensed Consolidated Statements of Operations for the Three and
Six Months ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the Six Months
ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
1
<PAGE>
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in thousands) June 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 2,048 $ 3,732
Accounts receivable, net 28,401 28,783
Installment sales receivable, current portion 916 1,387
Inventories, net 28,084 25,251
Prepaid expenses 5,717 4,611
Deferred tax asset 884 884
--------- ---------
Total current assets 66,050 64,648
Installment sales receivable, net of current portion 823 860
Property and equipment, net 22,731 22,625
Intangible assets 53,673 53,567
Other assets 8,043 8,453
Deferred tax asset - current 3,079 3,079
--------- ---------
Total assets $ 154,399 $ 153,232
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt and notes payable $ 873 $ 2,122
Trade accounts payable 7,165 9,098
Customer deposits 5,101 4,675
Accrued and other current liabilities 5,340 5,729
--------- ---------
Total current liabilities 18,479 21,624
--------- ---------
Long-term debt, net of current portion 86,688 84,881
--------- ---------
Stockholders' equity:
Preferred stock, $.10 par value, 5,000 shares authorized,
none issued and outstanding
Common stock, $.10 par value, 20,000 shares authorized,
10,733 and 10,681 shares issued and outstanding 1,073 1,068
Additional paid-in capital 51,789 51,618
Foreign currency translation (784) (1,018)
Accumulated deficit (2,618) (4,713)
--------- ---------
Subtotal 49,460 46,955
Less treasury stock, 19 shares, at cost (228) (228)
--------- ---------
Total stockholders' equity 49,232 46,727
--------- ---------
Total liabilities and stockholders' equity $ 154,399 $ 153,232
========= =========
See notes to condensed consolidated financial statements
</TABLE>
2
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MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
(Amounts in thousands except per share amounts) Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Sales $ 29,010 $ 25,621 $ 54,185 $ 47,400
Cost of sales 15,154 14,593 27,498 28,625
-------- -------- -------- --------
Gross profit 13,856 11,028 26,687 18,775
Selling, general and administrative expenses 9,941 8,947 19,392 16,913
-------- -------- -------- --------
Operating income 3,915 2,081 7,295 1,862
Interest expense (2,105) (912) (4,195) (1,736)
Other income and (expense) 120 (49) 244 132
-------- -------- -------- --------
Income before income tax provision 1,930 1,120 3,344 258
Income tax provision (747) (422) (1,250) (120)
-------- -------- -------- --------
Net income $ 1,183 $ 698 $ 2,094 $ 138
======== ======== ======== ========
Weighted average common shares:
Basic 10,707 10,520 10,691 10,413
======== ======== ======== ========
Diluted 10,708 10,639 10,692 10,532
======== ======== ======== ========
Earnings per share information:
Basic $ 0.11 $ 0.07 $ 0.20 $ 0.01
======== ======== ======== ========
Diluted $ 0.11 $ 0.07 $ 0.20 $ 0.01
======== ======== ======== ========
See notes to condensed consolidated financial statements
</TABLE>
3
<PAGE>
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
(Amounts in thousands)
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,094 $ 138
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 2,405 1,838
Amortization 1,701 1,002
Provision for bad debts 226 111
Change in exchange rate variance 234
Changes in assets and liabilities:
Accounts receivable 156 (646)
Installment sales receivable 508 (957)
Inventories (2,832) (2,248)
Prepaid expenses and other assets (697) (2,817)
Intangible assets (1,807) (503)
Trade accounts payable (1,932) (45)
Accrued and other current liabilities (389) 23
Customer deposits 426 (323)
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Net cash provided by (used in) operating activities 93 (4,427)
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Cash flows from investing activities:
Purchase of property and equipment (1,796) (578)
Gaming equipment leased to others (724) (709)
Proceeds from sales of property and equipment 9 10
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Net cash used in investing activities (2,511) (1,277)
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Cash flows from financing activities:
Proceeds from long-term debt and notes payable 3,176 3,719
Principal payments on notes payable and long-term debt (2,618) (132)
Proceeds from sale of common stock 176 1,060
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Net cash provided by financing activities 734 4,647
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Decrease in cash and cash equivalents (1,684) (1,057)
Cash and cash equivalents, beginning of period 3,732 4,896
------- -------
Cash and cash equivalents, end of period $ 2,048 $ 3,839
======= =======
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
MIKOHN GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- GENERAL
These condensed unaudited financial statements have been prepared in
accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements.
These statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on Form 10-
K for the year ended December 31, 1998.
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal accruals)
necessary to present fairly the financial position of the Company at June 30,
1999, the results of its operations for the three and six months ended June 30,
1999 and 1998 and cash flows for the six months ended June 30, 1999 and 1998.
The results of operations for the three and six months ended June 30, 1999 are
not necessarily indicative of the results to be expected for the entire year.
All amounts reported in this section are rounded to the nearest thousand
unless otherwise stated.
NOTE 2 -- RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133 - Accounting for Derivative Instruments and Hedging Activities.
SFAS 133 standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts. Under the standard,
entities are required to carry all derivative instruments in the statement of
financial position at fair value. SFAS 133 is effective for all fiscal years
beginning after June 15, 2000, which for the Company will be the year beginning
on January 1, 2001. The Company has not yet determined the impact that SFAS 133
will have on its financial statements but believes that any such impact will not
be material.
NOTE 3 -- ACQUISITION - PROGRESSIVE GAMES INC.
In September 1998, the Company contemporaneously acquired all of the
outstanding stock of Progressive Games, Inc. ("PGI") the developer of Caribbean
Stud, for an aggregate cash consideration of $35,847 as well as the two
exclusive distributors of Caribbean Stud in the major markets of Mississippi and
Louisiana, P&S Leasing Corporation, Inc. and P&S Leasing LLC (collectively
referred to as P&S Leasing) for an aggregate cash consideration of $3,300. All
of the outstanding stock of PGI was acquired from Donald W. Jones. In addition
to Caribbean Stud and certain other proprietary games, the assets of PGI include
equipment and other physical property used in the manufacture and distribution
of these games. All of the outstanding stock of P&S Leasing was owned by
Bertrand F. Hull and William S. Parrish.
5
<PAGE>
The purchase method of accounting for business combinations was applied to
the PGI and P&S Leasing acquisitions. Accordingly, the total purchase prices of
$35,847 and $3,300 for PGI and P&S Leasing, respectively, were allocated based
on the fair values of all their assets and liabilities at the date of
acquisition. The Company, with the exceptions noted below, does not anticipate
any material adjustments in 1999. The excess of the purchase price over the net
assets acquired in these acquisitions totaled $33,674. This goodwill amount will
be amortized in a straight line manner over a 40 year period. These acquisitions
were financed with funds from the private placement of long-term debt the
Company consummated in September 1998. Both the acquisitions and the private
placement of long-term debt were simultaneously occurring transactions. The
results of both PGI and P&S Leasing since the acquisition are included in the
Condensed Consolidated Statement of Operations for the three months and six
months ended June 30, 1999. Proforma condensed summary information for the three
and six month ended June 30, 1999 and 1998 as if the acquisitions of PGI and P&S
Leasing occurred on January 1, 1998 follows:
<TABLE>
<CAPTION>
June 30,
--------
3 Months 6 Months
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $29,010 $29,732 $54,185 $55,427
======= ======= ======= =======
Net income $ 1,183 $ 796 $ 2,094 $ 446
======= ======= ======= =======
EPS (basic and diluted) $ 0.11 $ 0.08 $ 0.20 $ 0.04
======= ======= ======= =======
</TABLE>
Upon the acquisition of PGI in September 1998, the Company also acquired a
number of pending lawsuits charging infringement of various patents owned by
PGI. The largest of these lawsuits involves the "Let It Ride Tournament" game
and the "Let It Ride Bonus" game (collectively the "LIRB Game") marketed by
Shuffle Master Gaming (the "Shuffle Master Lawsuit"). The Shuffle Master
Lawsuit includes a number of separate lawsuits filed by PGI against Shuffle
Master and numerous casinos offering the LIRB Game in Connecticut, Indiana,
Illinois, Mississippi, Missouri, Nevada and New Jersey, all of which have been
consolidated for pre-trial purposes by the Judicial Panel on Multi-District
Litigation before the United States District Court in Mississippi. Prior to the
consolidation of one of the lawsuits brought in New Jersey, the United States
District Court in New Jersey entered a preliminary injunction enjoining the
operation of the LIRB Game. That injunction is the subject of a motion to
vacate pending before the Mississippi District Court. In the Shuffle Master
Lawsuit, PGI has claimed that the LIRB Game infringes seven separate patents
owned by PGI. Shuffle Master has raised defenses of non-infringement, patent
invalidity and inequitable conduct and asserted counterclaims alleging antitrust
violations and unfair competition. Discovery is currently stayed; no trial date
has been set. Management believes that the Company will prevail in the Shuffle
Master lawsuit.
As a result of the PGI acquisition, the Company has exposure to potential
additional international withholding taxes on payments remitted to the U.S. to
the previous owner of PGI, estimated at $2,000. The Company has provided to the
former owner a Power of Attorney with which to handle the withholding tax
issues. To the extent that the Company does not prevail, any payments made
would be charged back to the previous owner under the terms of the Stock
Purchase Agreement for the acquisition of Progressive Games, Inc. To the extent
that the Company is ultimately responsible for the payment of tax, the amounts
would be capitalized as part of goodwill on the PGI acquisition. The Company has
one year from date of acquisition in which to affect a change in the amount of
goodwill. Any changes made after the one year period must be expensed. It is
Management's intention to resolve this uncertainty and effect all required
adjustments prior to the end of the one year window.
6
<PAGE>
NOTE 4 -- SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131 - Disclosures about Segments of
an Enterprise and Related Information ("SFAS 131"). SFAS 131 established
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also established standards for
related disclosures about products and services and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
group is the Operations Committee, which is comprised of the Chairman and each
of the Executive Vice-Presidents of Finance, Operations and Sales / Product
Development .
The Company operates in three business segments: Signs, Gaming Products and
Gaming Operations. The Signs segment designs, manufactures and installs interior
visual displays. It also, designs, manufactures, installs and maintains exterior
signage. The Gaming Products segment includes manufacturing of progressive
jackpot systems; it develops, markets and installs automated data collection
systems for player tracking and accounting for gaming machines and tables. It
also manufactures and sells oversized gaming machines and touch-screen multi-
game video machines. The Gaming Operations segment leases, licenses and places
proprietary games, machines and tables on lease, structured participation or
license agreements. It owns or licenses the rights to several categories of
proprietary games, including progressive jackpot table games, coin-push gaming
machines, oversized gaming machines and touch-screen multi-game video machines.
These table games and gaming machines produce recurring revenue on a lease,
participation or licensing agreement. The Company does not allocate corporate
expenses to the business segments.
Business segment information for the three and six months ended June 30,
1999 and 1998 consist of:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
Business segments: 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Sales:
Signs $ 12,429 $ 12,669 $ 24,380 $ 25,135
Gaming products 10,354 11,274 17,813 19,119
Gaming operations 6,227 1,678 11,992 3,146
-------- -------- -------- --------
$ 29,010 $ 25,621 $ 54,185 $ 47,400
======== ======== ======== ========
Gross profit:
Signs $ 4,813 $ 4,884 $ 9,297 $ 7,915
Gaming products 3,581 4,614 6,810 8,126
Gaming operations 5,462 1,530 10,580 2,734
-------- -------- -------- --------
$ 13,856 $ 11,028 $ 26,687 $ 18,775
======== ======== ======== ========
Operating income (loss):
Signs $ 3,072 $ 3,634 $ 6,323 $ 5,729
Gaming products 2,904 3,626 5,250 6,005
Gaming operations 4,209 949 8,192 1,740
Corporate (6,270) (6,128) (12,470) (11,612)
-------- -------- -------- --------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
Business segments: 1999 1998 1999 1998
<S> <C> <C> <C> <C>
$ 3,915 $ 2,081 $ 7,295 $ 1,862
======== ======== ======== ========
Net income before taxes:
Signs $ 2,252 $ 3,334 $ 4,729 $ 4,974
Gaming products 2,180 3,222 3,784 5,493
Gaming operations 3,733 711 7,201 1,285
Corporate (6,235) (6,147) (12,370) (11,494)
-------- -------- -------- --------
$ 1,930 $ 1,120 $ 3,344 $ 258
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
Geographic operations 1999 1998 1999 1998
- ---------------------
<S> <C> <C> <C> <C>
Sales:
North America $ 23,519 $ 21,890 $ 44,345 $ 39,467
Australia 1,652 1,384 3,595 3,227
Europe 3,389 2,042 5,322 3,919
South America 450 305 923 787
-------- -------- -------- --------
$ 29,010 $ 25,621 $ 54,185 $ 47,400
======== ======== ======== ========
Gross profit:
North America $ 12,228 $ 9,635 $ 23,810 $ 16,056
Australia 401 455 974 1,063
Europe 1,002 824 1,434 1,306
South America 225 114 469 350
-------- -------- -------- --------
$ 13,856 $ 11,028 $ 26,687 $ 18,775
======== ======== ======== ========
Operating income (loss):
North America $ 3,639 $ 1,586 $ 6,857 $ 850
Australia (199) 90 (126) 351
Europe 380 428 383 574
South America 95 (23) 181 87
-------- -------- -------- --------
$ 3,915 $ 2,081 $ 7,295 $ 1,862
======== ======== ======== ========
Net income (loss) before taxes:
North America $ 1,818 $ 663 $ 3,420 $ (760)
Australia (353) 42 (435) 352
Europe 380 435 222 572
South America 85 (20) 137 94
-------- -------- -------- --------
$ 1,930 $ 1,120 $ 3,344 $ 258
======== ======== ======== ========
</TABLE>
8
<PAGE>
MIKOHN GAMING CORPORATION
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. They are necessarily
speculative, and unforeseen factors such as unusual production problems,
competitive pressures, failure to gain the acceptance of regulatory authorities
and other adverse government action, customer resistance, delay in the
introduction of new products, the expiration or termination of rights to use key
intellectual property and general deterioration in economic conditions may cause
results to be materially poorer than any that may be 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-Q and 8-K
filed with the Securities and Exchange Commission.
CHANGES IN REPORTING
As the Company has realigned the reporting of its business units to conform
with revised FASB reporting requirements, certain items of prior year revenue
and expense have been reclassified to follow the Company's current reporting
practice. Additionally, all intercompany activity has been eliminated. Amounts
reported in 1998 have been adjusted to be consistent with the Company's current
reporting of intercompany activity. All amounts reported in this section are
rounded to the nearest thousand unless otherwise stated. All percentages
reported are based on those rounded numbers.
9
<PAGE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 1999 and June 30, 1998
SALES
<TABLE>
<CAPTION>
Change
------
Business Segment 1999 1998 Amount % Comment
---------------- ---- ---- ------ - -------
<S> <C> <C> <C> <C> <C>
Revenues:
Signs $ 24,380 $ 25,135 $ (755) -3.0% 1
Gaming products 17,813 19,119 (1,306) -6.8% 2
Gaming operations 11,992 3,146 8,846 281.2% 3
-------- -------- -------
$ 54,185 $ 47,400 $ 6,785 14.3%
======== ======== =======
Percentage to total revenues:
Signs 45.0% 53.0%
Gaming products 32.9% 40.3%
Gaming operations 22.1% 6.7%
----- -----
100.0% 100.0%
===== =====
</TABLE>
1 This decrease of $755 is due primarily to: (i) a decrease in exterior sign
sales of $437, (ii) a decrease in service revenues of $570 and (iii) an
offsetting increase in slot glass sales of $195. The decrease in the exterior
sign division reflects lower sales of its exterior video display products. The
decrease in the service division is due to lower maintenance contract revenue.
2 This decrease of $1,306 is due primarily to: (i) a decrease in slot machine
sales of $2,217, (ii) a decrease in electronic display sales of $1,800 and
(iii) an offsetting increase in electronic systems sales of $2,673. The
decrease in slot machine sales reflects lower sales of our MiniBertha(TM) slot
machine. The decrease in electronic display product revenue reflects lower
sales of electronic meters to original equipment manufacturers ("OEMs").
Additionally, electronic display product revenue was lower due to delay of a
new product introduction in Australia. The increase in electronic system
revenues reflects strong growth in international markets including Europe,
Australia and Canada.
3 This increase of $8,846 is due primarily to: (i) an increase in slot route
revenue of $970 and (ii) an increase in table game revenue of $7,642. The
increase in slot route revenue reflects a larger number of MoneyTime(TM) slot
machines on route during 1999 as compared to 1998. The increase in table game
revenue is due to the acquisitions of PGI and P&S Leasing on September 2,
1998, which resulted in an increased number of table games under license
during the most recent period, as well as our efforts to expand the number of
table games under license agreements since the acquisitions.
As of June 30, 1999, the Company had a backlog of orders believed to be firm of
$19,332. As of June 30, 1998 and December 31, 1998, the Company's backlogs were
$15,450 and $22,024, respectively. Management expects that the backlog of
orders at June 30, 1999, will be filled within 120 days.
10
<PAGE>
GROSS PROFIT
<TABLE>
<CAPTION>
Change
------
Business Segment 1999 1998 Amount % Comment
---------------- ---- ---- ------ - -------
<S> <C> <C> <C> <C> <C>
Gross profit:
Signs $ 9,297 $ 7,915 $ 1,382 17.5% 1
Gaming products 6,810 8,126 (1,316) -16.2% 2
Gaming operations 10,580 2,734 7,846 287.0% 3
-------- -------- -------
Total $ 26,687 $ 18,775 $ 7,912 42.1%
======== ======== =======
Gross profit margin:
Signs 38.1% 31.5%
Gaming products 38.2% 42.5%
Gaming operations 88.2% 86.9%
Total 49.3% 39.6%
</TABLE>
1 This increase of $1,382 is primarily due to improved margins in interior
visual displays, exterior signs, and service. Gross margins in interior
visual displays increased from 39.1% to 44.9% between the periods as a result
of manufacturing consolidation and efficiency efforts. Profit margins in the
exterior sign and service divisions increased from 26.6% to 31.4% and from
2.9% to 30.3% respectively.
2 This decrease of $1,316 is primarily due to: (i) a decrease in slot machine
sales gross profit of $1,442, (ii) a decrease in electronic display gross
profit of $865 and (iii) an offsetting increase in electronic systems gross
profit of $953. The decrease in slot machines sales gross profit reflects
lower sales levels during the most recent period as well as a lower overhead
absorption level due to this lower volume. The decrease in electronic display
gross profit is due to lower sales to OEMs during the most recent period. The
increase in electronic systems gross profit levels closely parallels the
corresponding increases in sales volume.
3 This increase of $7,846 is primarily due to: (i) an increase in slot route
gross profit of $609 and (ii) an increase in table game gross profit of
$7,003. The increase in slot route gross profit reflects the increased number
of games during the most recent period. The increase in table game gross
profit is directly attributable to the acquisition of PGI and P&S Leasing on
September 2, 1998 and the increased number of table games under license during
this most recent period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended June
30, 1999 increased by 15% or $2,479, from $16,913 for the six months ended June
30, 1998 to $19,392 for the six months ended June 30, 1999. The significant
factors effecting this increase are as follows:
Selling, product development and marketing expenses for the six months
ended June 30, 1999 increased by 4% or $232, from $6,581 for the six months
ended June 30, 1998 to $6,813 for the six months ended June 30, 1999. Although
other factors caused variations among the mix of expenses between the periods,
the primary reason for this increase is our increased focus on
11
<PAGE>
the product development process including improving the time to market for new
products under development.
General and administrative expenses for the six months ended June 30, 1999
increased by 17% or $833, from $4,772 for the six months ended June 30, 1998 to
$5,605 for the six months ended June 30, 1999. This increase is the result of
additional administrative expenses associated with the larger slot machine and
table game routes we now own and operate, increased expenses relating to our
efforts to expand and improve the product development function and increased bad
debt reserves.
Research and development expenses for the six months ended June 30, 1999
increased by 6% or $150, from $2,718 for the six months ended June 30, 1998 to
$2,868 for the six months ended June 30, 1999. This increase is due to increased
expenses for the development of new slot machine and table game products.
For the six months ended June 30, 1999, the Company capitalized certain
costs related to software development of new products that have achieved
technological feasibility. Capitalized software development costs for the six
months ended June 30, 1999 increased by 55% or $97, from $177 for the six months
ended June 30, 1998 to $274 for the six months ended June 30, 1999.
Depreciation expense for the six months ended June 30, 1999 increased by
31% or $565, from $1,840 for the six months ended June 30, 1998 to $2,405 for
the six months ended June 30, 1999. This increase is due primarily to: (i)
increased depreciation associated with capitalized recurring revenue games,
including MoneyTime and (ii) increased depreciation related to the acquisition
of the assets of PGI.
Amortization expense for the six months ended June 30, 1999 increased by
70% or $699, from $1,002 for the six months ended June 30, 1998 to $1,701 for
the six months ended June 30, 1999. This increase is primarily due to: (i)
increased goodwill amortization related to the acquisitions of PGI and P&S
Leasing and (ii) the amortization of the capitalized patent costs acquired
during the acquisitions of PGI and P&S Leasing.
INTEREST EXPENSE
Interest expense for the six months ended June 30, 1999 increased by 142%
or $2,459, from $1,736 for the six months ended June 30, 1998 to $4,195 for the
six months ended June 30, 1999. Included in this interest expense is the
amortization of loan costs of $443 and $164 for the six months ended June 30,
1999 and June 30, 1998, respectively. This increase in interest expense is due
to the increased debt related to the acquisitions of PGI and P&S Leasing. The
average interest rate on outstanding debt for the six months ended June 30, 1999
was 8.6% as compared to 9.8% for the six months ended June 30, 1998.
OTHER INCOME AND EXPENSE
Other income and expense for the six months ended June 30, 1999 changed by
$152, from an expense of $88 for the six months ended June 30, 1998 to income
of $64 for the six months ended June 30, 1999.
12
<PAGE>
Interest income for the six months ended June 30, 1999 decreased by 18% or
$40, from $220 for the six months ended June 30, 1998 to $180 for the six months
ended June 30, 1999.
INCOME TAX PROVISION
Income taxes for the six months ended June 30, 1999 were $1,250 or an
effective tax rate of 37.4% as compared to $120 and effective rate of 46.5% for
the six months ended June 30, 1998. The decrease in the tax rate between the
comparable periods is primarily due to the impact of the permanent treatment of
certain non-deductible expenses during the six months ended June 30, 1998 on a
relatively small base of income before taxes. The add-back did not have as large
an impact during the most recent period due to the larger base upon which the
provision is computed.
EARNINGS PER SHARE
Basic and diluted earnings per share for the six months ended June 30, 1999
were $.20 on both basic and diluted weighted average common shares outstanding
of 10,691 and 10,692, respectively. For the six months ended June 30, 1998 basic
and diluted earnings per share were $.01 on both basic and diluted weighted
average common shares outstanding of 10,413 and 10,532, respectively.
Three Months Ended June 30, 1999 and June 30, 1998
SALES
<TABLE>
<CAPTION>
Change
------
Business Segment 1999 1998 Amount % Comment
---------------- ---- ---- ------ - -------
<S> <C> <C> <C> <C> <C>
Revenues:
Signs $ 12,429 $ 12,669 $ (240) -1.9% 1
Gaming products 10,354 11,274 (920) -8.2% 2
Gaming operations 6,227 1,678 4,549 271.1% 3
-------- -------- -------
$ 29,010 $ 25,621 $ 3,389 13.2%
======== ======== =======
Percentage to total revenues:
Signs 42.8% 49.4%
Gaming products 35.7% 44.0%
Gaming operations 21.5% 6.6%
----- ------
100.0% 100.0%
===== =====
</TABLE>
1 This decrease of $240 is due to: (i) a decrease in interior visual display
sales and service revenue of $789 and $263, respectively, (ii) an offsetting
increase in exterior sign sales of $534 and (iii) an offsetting increase in
slot glass sales of $278. The decrease in interior visual display sales during
the most recent period reflects lower sales levels in international markets as
well as lower sales levels to OEM customers. The decrease in service revenue
is due to lower maintenance contract revenue.
13
<PAGE>
2 This decrease of $920 is due primarily to: (i) a decrease in slot machine
sales of $1,812, (ii) a decrease in electronic display sales of $1,534 and
(iii) an offsetting increase in electronic system sales of $2,455. The
decrease in slot machine sales reflects lower sales of the MiniBertha slot
machine during the most recent period. The decrease in electronic display
sales results from lower sales to OEMs during the most recent period. The
increase in electronic system sales reflects increased sales in Europe,
Australia and Canada.
3 This increase of $4,549 is due primarily to: (i) an increase in slot route
revenue of $514 and (ii) an increase in table game revenue of $3,978. The
increase in slot route revenue reflects a larger number of MoneyTime slot
machines on route during 1999 as compared to 1998. The increase in table game
revenue is due to the acquisitions of PGI and P&S Leasing on September 2,
1998, which resulted in an increased number of table games under license
during the most recent period, as well as our efforts to expand the number of
table games under license agreements since the acquisitions.
GROSS PROFIT
<TABLE>
<CAPTION>
Change
------
Business Segment 1999 1998 Amount % Comment
---------------- ---- ---- ------ - -------
<S> <C> <C> <C> <C> <C>
Gross profit:
Signs $ 4,813 $ 4,884 $ (71) -1.5% 1
Gaming products 3,581 4,614 (1,033) -22.4% 2
Gaming operations 5,462 1,530 3,932 257.0% 3
-------- -------- -------
Total $ 13,856 $ 11,028 $ 2,828 25.6%
======== ======== =======
Gross profit margin:
Signs 38.7% 38.6%
Gaming products 34.6% 40.9%
Gaming operations 87.7% 91.2%
Total 47.8% 43.0%
</TABLE>
1 This decrease of $71 is primarily due to: (i) a decrease in interior visual
display gross profit of $336 and (ii) an offsetting increase in exterior sign
gross profit of $272. The decrease in interior visual display gross profit is
proportional to the decreased sales levels for interior visual displays
during the most recent period. The increase in exterior sign gross profit
resulted from the increased sales levels during the most recent period as
well as a general improvement in profit margin during the most recent period.
Gross profit margins for the exterior sign division increased from 28% for
the three months ended June 30, 1998 to 31% for the three months ended June
30, 1999.
2 This decrease of $1,033 is primarily due to: (i) a decrease in slot machine
sales gross profit of $1,056, (ii) a decrease in electronic display gross
profit of $838 and (iii) an offsetting increase in electronic systems gross
profit of $890. The decrease in slot machine sales gross profit reflects both
lower sales volume during the most recent period as well as lower gross
profit margins on those sales. A significant number of the slot machine sales
during the most recent period were MiniBertha route games that were converted
to sales. These types of conversion sales are typically lower margin sales
because they are discounted based on the length of time the customer had the
slot machine under route license agreement. The
14
<PAGE>
decrease in electronic display gross profit reflects the lower sales volume
during the most recent period. The increase in electronic system gross profit
corresponds to the increase in sales during the most recent period.
3 This increase of $3,932 is primarily due to: (i) an increase in slot route
gross profit of $248 and (ii) an increase in table game gross profit of
$3,627. The increase in slot route gross profit reflects the larger number of
slot machines under license agreements during the most recent period. The
increase in table game gross profit is directly attributable to the
acquisition of PGI and P&S Leasing on September 2, 1998 and the increased
number of table games under license during this most recent period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
June 30, 1999 increased by 11% or $994, from $8,947 for the three months ended
June 30, 1998 to $9,941 for the three months ended June 30, 1999. The
significant factors affecting this increase are as follows:
Selling, product development and marketing expenses for the three months
ended June 30, 1999 decreased by 2% or $85, from $3,518 for the three months
ended June 30, 1998 to $3,433 for the three months ended June 30, 1999.
General and administrative expenses for the three months ended June 30,
1999 increased by 25% or $577, from $2,327 for the three months ended June 30,
1998 to $2,904 for the three months ended June 30, 1999. This increase is the
result of additional administrative expenses associated with the PGI and P&S
Leasing acquisitions, increased expenses relating to our efforts to expand and
improve the product development function and increased bad debt reserves.
Research and development expenses for the three months ended June 30, 1999
decreased by 4% or $71, from $1,578 for the three months ended June 30, 1998 to
$1,507 for the three months ended June 30, 1999. This decrease reflects lower
equipment charges to research and development projects during the most current
period. These charges were $97 lower during June 1999 than in June 1998.
For the three months ended June 30, 1999, the Company capitalized certain
software development costs related to software development of new products that
have achieved technological feasibility. Capitalized software development costs
for the three months ended June 30, 1999 decreased by 25% or $44, from $177 for
the three months ended June 30, 1998 to $133 for the three months ended June 30,
1999.
Depreciation expense for the three months ended June 30, 1999 increased by
33% or $312, from $944 for the three months ended June 30, 1998 to $1,256 for
the three months ended June 30, 1999. This increase is due primarily to: (i)
increased depreciation associated with capitalized recurring revenue games,
including MoneyTime and (ii) increased depreciation related to the acquisition
of the assets of PGI.
Amortization expense for the three months ended June 30, 1999 increased by
45% or $260, from $581 for the three months ended June 30, 1998 to $841 for the
three months ended June 30, 1999. This increase is primarily due to: (i)
increased goodwill amortization related to the acquisitions of PGI and P&S
Leasing and (ii) amortization of capitalized patent costs associated with the
acquisitions of PGI and P&S Leasing.
15
<PAGE>
INTEREST EXPENSE
Interest expense for the three months ended June 30, 1999 increased by 131%
or $1,193, from $912 for the three months ended June 30, 1998 to $2,105 for the
three months ended June 30, 1999. Included in this interest expense is the
amortization of loan costs of $223 and $82 for the three months ended June 30,
1999 and June 30, 1998, respectively. This increase in interest expense is due
to the increased debt related to the acquisitions of PGI and P&S Leasing. The
average interest rate on outstanding debt for the three months ended June 30,
1999 was 8.7% as compared to 10.4% for the three months ended June 30, 1998.
OTHER INCOME AND EXPENSE
Other income for the three months ended June 30, 1999 changed by $163,
from an expense of $120 for the three months ended June 30, 1998 to an income of
$43 for the three months ended June 30, 1999.
Interest income for the three months ended June 30, 1999 increased by 10%
or $7, from $70 for the three months ended June 30, 1998 to $77 for the three
months ended June 30, 1999.
INCOME TAX BENEFIT
Income taxes for the three months ended June 30, 1999 equaled a provision
of $747 or an effective tax rate of 38.7% as compared to a tax provision of $422
and effective rate of 37.7% for the three months ended June 30, 1998.
EARNINGS PER SHARE
Basic and diluted earnings per share for the three months ended June 30,
1999 were $.11 on both basic and diluted weighted average common shares
outstanding of 10,707 and 10,708, respectively. For the three months ended June
30, 1998 basic and diluted earnings per share were $.07 on both basic and
diluted weighted average common shares outstanding of 10,520 and 10,639,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999, the Company had net income of
$2,094 as compared to a net income of $138 for the six months ended June 30,
1998.
Net cash provided by operating activities for the six months ended June
30,1999 amounted to $93. The major items reflected were: (i) an increase in
inventories of $2,832, (ii) an increase in intangible assets of $1,807, (iii) a
decrease in accounts payable of $1,932 and (iv) a decrease in accruals and other
current liabilities of $389. Offsetting these uses of cash, accounts receivable
and installment sales receivable decreased by $664 and customer deposits
increased by $426. Net cash used in investing activities was $2,511 and cash
provided by financing activities amounted to $734.
16
<PAGE>
The increase in inventory levels during the most recent period is
attributable to the Company's effort to manufacture games that will be
capitalized as gaming equipment leased to customers when placed at customer
sites under lease or license agreements. Net cash used in investing activities
consisted primarily of investments in property and equipment as well as
investments in gaming equipment leased to customers.
Cash balances as of June 30, 1999 were $2,048, down from $3,732 at December
31, 1998. We expect that cash provided from operating activities, as well as an
available revolving line of credit and the ability to increase the this line of
credit by $5,000, will be sufficient to meet our requirements during the
remainder of 1999.
On September 2, 1998, we completed the closing of an Amended and Restated
Credit Agreement. This agreement was funded by First Source Financial LLP and a
consortium of lenders and consisted of a $13,500 fixed rate term loan bearing
interest at 10.25% per annum; a $67,500 variable rate term loan bearing interest
at either prime plus 225 basis points or LIBOR plus 325 basis points; and a
$5,000 variable rate revolving line of credit which bears interest at either
prime plus 175 basis points or LIBOR plus 275 basis points. As part of this
Amended and Restated Credit Agreement the Company has agreed: (i) to maintain
certain financial ratios, (ii) to comply with certain financial covenants, (iii)
not to allow the incurrence of additional debt or the payment of cash dividends,
unless expressly permitted by the Amended and Restated Credit Agreement and (iv)
to adhere to a number of other financial restrictions. First Source Financial
LLP is acting as the lenders' agent for this transaction. The term loans will
begin maturing in April 2002 with equal 16.7% principal repayments due every six
months until complete maturity on October 24, 2004. The proceeds of this
placement were used to acquire PGI and P&S Leasing as well as to provide
additional working capital. We have been in compliance with the covenants and
terms of the Amended and Restated Credit Agreement and believe that we will
remain in compliance. As of the date of this filing, we have borrowed $3,500 of
the funds available under the revolving line of credit and have $1,500 available
under this line. Additionally, we have the ability to increase the revolving
line of credit by another $5,000.
YEAR 2000
The approach of the year 2000 poses problems for businesses utilizing
computers or embedded technology (such as micro controllers) in their
operations. Many computer programs and systems operating machinery and
equipment are date sensitive and will only recognize the last two digits of the
year. Such programs and systems may recognize the year 2000 as the year 1900 or
not at all. This problem is commonly described as the "Year 2000 Issue" or
"Y2K" and it has the potential to produce errors in information and system
failures. Assessments of the potential cost and effect of the Year 2000 Issue
vary significantly among businesses, and it is extremely difficult to predict
the actual impact. Recognizing this uncertainty, management has made and is
continually updating its comprehensive assessment of the Company's exposure to
the Year 2000 Issue and what is required to ensure that the Company is Year 2000
compliant.
The Company manufactures and sells a number of products that include
software components. As part of its overall assessment of the Year 2000 Issue,
the Company has identified products or product versions that require
modification or other remedial action and has developed and is implementing a
plan to facilitate this effort. The corrective action plan includes
modifications, upgrades or replacements of non-compliant software systems. The
Company believes that the required modifications, upgrades and replacements of
software systems will
17
<PAGE>
most likely be completed and approved by the various gaming jurisdictions during
1999 and that there will be enough time for additional testing, revisions and
installations before year end.
The Company believes that it's corrective action plan is adequate and
realistic. Nevertheless, if one or more of the Company's systems has been
overlooked or if implementation of the corrective action plan fails to achieve
Year 2000 compliance for one or more software systems, there could be a material
adverse impact on the Company's business operations and/or financial
performance.
The Year 2000 readiness of the Company's customers varies. The Company is
encouraging its customers to evaluate their own system requirements and needs.
Efforts by customers to address the Year 2000 Issue may affect the demand for
certain of the Company's products and services. However, to date the Company is
unable to determine what impact, if any, customer Y2K problems might have on its
revenue.
The Company is also in the process of assessing the Year 2000 readiness of
its key suppliers and business partners. The Year 2000 Issue presents a number
of other risks and uncertainties that could impact the Company, such as the
ability of certain governments and gaming commissions of the various
jurisdictions where the Company conducts business to timely act on updates to
Company products, including software, that require regulatory approval before
the Company's customers can lawfully use them.
The primary computer programs utilized in the Company's operations and
financial reporting systems have been acquired from independent software
vendors. All of these vendors have been formally contacted to determine whether
their systems are Year 2000 compliant. To the extent they are not, timelines
have been established as to when the Company will receive the required upgrades
to assure that these systems will be Year 2000 compliant. Maintenance or
modification of existing software is expensed as incurred, while the purchase of
new software will be capitalized and amortized over the software's useful life.
The Company does not expect to incur costs in connection with the Year 2000
Issue that would have a material impact on operations. Although the Company
believes that its computer software systems will be Year 2000 compliant, no
assurance can be given that all systems provided by software vendors will have
all modifications necessary to make them Year 2000 compliant on a timely basis.
The Year 2000 Issue has an impact on non-information technology systems
(i.e., embedded data) such as the Company's manufacturing systems and physical
facilities including, but not limited to, security systems and utilities. The
non-information technology system issues are more difficult to identify and
resolve. The Company is actively identifying non-technology Year 2000 Issues
concerning its products and services, as well as those that impact its physical
facility locations. As the various non-information technology systems are
identified, management is formulating action plans to ensure minimal disruption
of its business processes. Although management believes that its efforts will be
successful and the costs will not be material to its financial condition and
results of operations, it recognizes that any failure or delay could cause a
disruption in its business and might have a significant financial impact.
The Company has estimated total costs to achieve Year 2000 compliance on
its internal software and systems to be $400. The Company expects to capitalize
costs that are planned system upgrades and expense costs that are incurred only
to make the software Y2K compliant. It has incurred costs of approximately $230
to date, $193 of which was capitalized as part of the Company's internally used
software upgrade program and the remaining amount was previously expensed. Of
the additional estimated $170, the Company expects that most will be capitalized
as part of planned system upgrades.
18
<PAGE>
The Company's current cost estimate for efforts associated with achieving
compliance with the products that it manufactures, markets, distributes or
otherwise sells to its customers is $1,300. Of this amount, $900 is related to
the Company's Caribbean Stud product line and is expected to be charged back to
the previous owner under the terms and conditions of the Stock Purchase
Agreement with PGI. To the extent the recovery of these amounts is not
forthcoming, the Company will charge the cost to the goodwill account
established during the acquisition of PGI. As previously noted, the Company has
one year from date of acquisition in which to affect a change in the amount of
goodwill. Any changes made after the one year period must be expensed. It is
Management's intention to resolve this uncertainty and effect all required
adjustments prior to the end of the one year window. The remaining $400 of costs
are primarily related to the Company's CasinoLink product line and are expensed
as they are incurred.
The Company expects to fund these Year 2000 Issue costs from its operating
cash flows and does not believe the Year 2000 Issue will have a material impact
on the Company's cash resources or liquidity.
To minimize any potential unforeseen impact, the Company is in the process
of developing a contingency plan. Management will continue to formulate
additional plans as necessary, based upon the results of current research and
investigation. It is the Company's intention to ensure that it has adequate
resources and sources of supplies to minimize any potential business
interruptions. Although the Company believes the Year 2000 Issue will not
materially affect its consolidated financial position or results of operations,
it acknowledges that it cannot state with certainty that the Year 2000 Issues
will not, in some manner now unforeseen, have an adverse impact upon it.
19
<PAGE>
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 14, 1999, heretofore filed with the
Commission and incorporated by this reference.
(a) The annual meeting of stockholders was on held May 11, 1999. On the record
date, March 15, 1999, there were 10,680,075 shares of common stock
outstanding and entitled to vote.
(b) Only the two Class 1 directors of the Company were standing for reelection,
and both were reelected. The number of votes cast "FOR" and "ABSTAIN" with
respect to each (no votes were cast "AGAINST" either director) were as
follows:
<TABLE>
<CAPTION>
Votes
Director Votes For Abstain
-------- ----------------- ------------
<S> <C> <C>
Thompson, David J. 9,217,531 114,060
Campbell, John 9,215,474 116,117
</TABLE>
(c) The continued retention of Deloitte & Touche LLP as independent auditors
was approved. 9,263,331 shares voted in favor thereof, 66,545 shares voted
against and 1,715 shares abstained.
Item 6 -- Exhibits and Reports on Form 8-K
A. Exhibits:
27 Financial Data Schedules
B. Reports on Form 8-K:
None
20
<PAGE>
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
BY: /s/ Donald W. Stevens
----------------------------------
Donald W. Stevens, Executive Vice
President, Treasurer, Principal
Financial Officer
Dated: August 6, 1999
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,029
<SECURITIES> 19
<RECEIVABLES> 29,524
<ALLOWANCES> 1,123
<INVENTORY> 28,084
<CURRENT-ASSETS> 66,050
<PP&E> 37,795
<DEPRECIATION> 15,064
<TOTAL-ASSETS> 154,399
<CURRENT-LIABILITIES> 18,479
<BONDS> 87,561
0
0
<COMMON> 1,073
<OTHER-SE> 48,159
<TOTAL-LIABILITY-AND-EQUITY> 154,399
<SALES> 54,185
<TOTAL-REVENUES> 54,185
<CGS> 27,498
<TOTAL-COSTS> 46,420
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 226
<INTEREST-EXPENSE> 4,195
<INCOME-PRETAX> 3,344
<INCOME-TAX> 1,250
<INCOME-CONTINUING> 2,094
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,094
<EPS-BASIC> .20
<EPS-DILUTED> .20
</TABLE>
