<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: September 30, 2000
--------------------------------------
[ ] 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 of (IRS Employer Identification Number)
incorporation or organization)
1045 Palms Airport Drive, P.O. Box 98686, Las Vegas, NV 89193-8686
-----------------------------------------------------------------------------
(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:
11,067,694 as of November 3, 2000
-------------------- ----------------------
(Amount Outstanding) (Date)
<PAGE>
MIKOHN GAMING CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C> <C>
Part I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000
(unaudited) and December 31, 1999 2
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
1
<PAGE>
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in thousands) September 30,
2000 December 31,
(unaudited) 1999
------------- ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,424 $ 48
Accounts receivable, net 23,426 30,447
Notes receivable - related parties - current portion 1,892 2,144
Installment sales receivable - current portion 2,846 1,030
Inventories, net 37,904 26,793
Prepaid expenses 6,514 4,582
Assets held for sale 1,091 781
Deferred tax asset - current portion 1,420 1,420
-------- --------
Total current assets 76,517 67,245
-------- --------
Installment sales receivable - net of current portion 969 865
Notes receivable - related parties - net of current portion 156 150
Property and equipment, net 25,886 25,385
Intangible assets 15,542 16,810
Goodwill 39,163 40,208
Other assets 8,379 8,423
Deferred tax asset - net of current portion 2,914 2,914
-------- --------
Total assets $169,526 $162,000
======== ========
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in thousands) September 30,
2000 December 31,
(unaudited) 1999
------------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt and notes payable $ 2,227 $ 1,436
Trade accounts payable 10,961 11,615
Customer deposits 3,463 3,600
Accrued and other current liabilities 7,459 6,743
Deferred license fees - current portion 451 451
-------- --------
Total current liabilities 24,561 23,845
-------- --------
Long-term debt - net of current portion 87,712 85,417
-------- --------
Deferred license fees - net of current portion 1,538 1,806
-------- --------
Stockholders' equity:
Preferred stock, $.10 par value, 5,000 shares authorized,
none issued and outstanding
Common stock, $.10 par value, 100,000 shares authorized,
11,067 and 10,799 shares issued and outstanding 1,107 1,080
Additional paid-in capital 55,411 53,350
Stockholders' notes receivable (1,024) (1,251)
Foreign currency translation (745) (597)
Retained earnings / (accumulated deficit) 1,194 (1,422)
-------- --------
Subtotal 55,943 51,160
Less treasury stock, 19 shares, at cost (228) (228)
-------- --------
Total stockholders' equity 55,715 50,932
-------- --------
Total liabilities and stockholders' equity $169,526 $162,000
======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2000 and 1999 (unaudited)
<TABLE>
<CAPTION>
(Amounts in thousands except per share amounts) Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $28,248 $27,322 $76,522 $81,507
Cost of sales 13,835 14,120 34,906 41,618
------- ------- ------- -------
Gross profit 14,413 13,202 41,616 39,889
Selling, general and administrative expenses 9,821 9,677 29,941 29,069
------- ------- ------- -------
Operating income 4,592 3,525 11,675 10,820
Interest expense (2,705) (2,290) (7,663) (6,484)
Other income and expense 46 338 284 581
------- ------- ------- -------
Income before income tax provision 1,933 1,573 4,296 4,917
Income tax provision (759) (311) (1,680) (1,561
------- ------- ------- -------
Net income $ 1,174 $ 1,262 $ 2,616 $ 3,356
======= ======= ======= =======
Weighted average common shares:
Basic 11,021 10,730 10,939 10,704
======= ======= ======= =======
Diluted 11,178 10,747 11,077 10,722
======= ======= ======= =======
Earnings per share information:
Basic: $ 0.11 $ 0.12 $ 0.24 $ 0.31
======= ======= ======= =======
Diluted: $ 0.11 $ 0.12 $ 0.24 $ 0.31
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2000 and 1999 (unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,616 $ 3,356
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,324 3,671
Amortization 3,233 2,566
Provision for bad debts 363 40
Reserve for obsolete inventory 442 316
Change in exchange rate variance (148) 144
Changes in assets and liabilities:
Accounts receivable 6,658 91
Notes receivable - related parties 246 (148)
Installment sales receivable (1,920) 315
Inventories (11,553) (5,201)
Prepaid expenses and other assets (1,061) (2,577)
Trade accounts payable (654) 3,844
Accrued and other current liabilities 716 2,085
Customer deposits (137) (998)
-------- -------
Net cash provided by operating activities 3,125 7,504
-------- -------
Cash flows from investing activities:
Purchase of property and equipment (1,281) (2,508)
Gaming equipment leased to others (4,797) (2,634)
Proceeds from sales of property and equipment 943 889
Increase in intangible assets (920) (4,954)
-------- -------
Net cash used in investing activities (6,055) (9,207)
-------- -------
Cash flows from financing activities:
Proceeds from long-term debt and notes payable 8,489 2,426
Principal payments on notes payable and long-term debt (5,403) (2,571)
Principal payments of deferred license fees (268)
Proceeds from sale of common stock 1,488 327
-------- -------
Net cash provided by financing activities 4,306 182
-------- -------
Increase (decrease) in cash and cash equivalents 1,376 (1,521)
Cash and cash equivalents, beginning of period 48 3,732
-------- -------
Cash and cash equivalents, end of period $ 1,424 $ 2,211
======== =======
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
MIKOHN GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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, 1999.
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 September 30, 2000, the
results of its operations for the three and nine months ended September 30, 2000
and 1999 and cash flows for the nine months ended September 30, 2000 and 1999.
The results of operations for the three and nine months ended September 30, 2000
are not necessarily indicative of the results to be expected for the entire
year.
As the Company has realigned the reporting of its business units, 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 prior years 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.
NOTE 2 - DIVESTITURE
On November 4, 1999, the Company entered into a Share Sale Agreement by which
the Company sold a 50% interest in its Australian subsidiary, Mikohn Gaming
Australasia Pty Limited ("MGA"), to TAB Limited ("TAB") for $4.9 million. The
Company also entered into a System Acquisition and Services Agreement (the
"System Agreement") with TAB which appointed the Company as the exclusive
supplier of the operating system for a wide-area linked progressive jackpot
system in New South Wales, Australia. TAB holds exclusive licenses from the New
South Wales government to install and operate a progressive jackpot system. The
hardware components of the system will be provided at cost. The software will be
licensed to TAB for a recurring license fee of $(AUD) 50.00 per month per device
with a minimum license fee of $(AUD) 1.5 million per year commencing upon
installation of the system. The Australian dollar exchange rate was $0.5492 at
September 30, 2000.
6
<PAGE>
Under the Share Sale Agreement, the Company was entitled to 100% of the income
of MGA for 1999. Therefore, MGA's income statement was included in the
Company's consolidated statements of operations and cash flows for 1999.
Starting on January 1, 2000, MGA is now reported on the equity method of
accounting. However, the MGA balance sheet was not included in the Company's
consolidated balance sheet as of December 31, 1999.
NOTE 3 - INVENTORIES
Inventories at September 30, 2000 and December 31, 1999 consist of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Raw materials $14,491 $14,616
Finished goods 9,060 6,247
Work-in-progress 16,070 7,693
------- -------
Subtotal 39,621 28,556
Reserve for obsolete inventory (1,717) (1,763)
------- -------
Total $37,904 $26,793
======= =======
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company is involved in routine litigation, including bankruptcies,
collection efforts, disputes with former employees and other matters in the
ordinary course of its business operations. Management knows of no matter,
pending or threatened, that in its judgment will or might have a material
adverse effect on the Company or its operations including those noted below.
On October 2, 1997, the Company filed suit against Acres Gaming, Inc.
("Acres") in the U.S. District Court, Las Vegas, Nevada seeking a declaratory
judgment that its MoneyTime(TM) system does not infringe a patent issued to
Acres in August 1997 (U.S. Patent No. 5,655,961) and that the Acres patent is
invalid (the "'961 Action"). In the '961 Action, the Company asserts claims for
relief against Acres for tortious interference with business relationships,
tortious interference with prospective business relationships and trade libel.
Acres has counterclaimed for patent infringement. Three subsequently filed
actions in the same court involving three subsequently issued patents (U.S.
Patent Nos. 5,741,183, 5,752,882 and 5,820,459), one filed by the Company
against Acres and two filed by Acres against the Company, Casino Data Systems
("CDS"), Sunset Station Hotel & Casino and New York-New York Hotel & Casino,
involve claims for patent infringement, non-infringement and invalidity similar
to the claims asserted in the '961 Action (the "'183 Action", the "'882 Action"
and the "'459 Action"). The '183 Action, the '882 Action and the `459 Action
have been consolidated with the '961 Action (the four actions hereafter referred
to as the "Consolidated Action"). Discovery in the Consolidated Action has
closed. The matter is presently set to go to trial in late February or March
2001. Management believes that the Company will prevail in the Consolidated
Action.
The Company is addressing tax issues relating to its table games operations.
They are summarized below:
7
<PAGE>
New Jersey Sales and Use Tax Audit Issue: The State of New Jersey (the
----------------------------------------
"State") Division of Taxation audited Mikohn's sales tax returns and issued a
Notice of Assessment Related to Final Audit Determination in the amount of $406
plus interest of $201. At issue is how the Company accounts for and remits
sales and use tax on its table game leases. Previously, the Company remitted
the tax on a monthly basis based on the amounts invoiced to its casino
customers. It is the State's position and the Company now concurs, that the
Company as the lessor of the table game, is the end user and is thus ultimately
responsible for the tax at the inception of the lease. At issue is the method
of computation of the tax due. It is the Company's contention that the tax
should be based upon the lessor's purchase price for the equipment, materials
and other tangible personal property purchased for lease rather than on the
lease revenue stream. The State has assessed the Company for the entire amount
of the tax liability based on the lease revenue stream and interest from the
original date of the leases. In July 1999, the Company objected to the
assessment, filed a protest and paid the tax due based upon the purchase price
of the equipment, materials and other tangible personal property.
A further issue is the passing of the sales and use tax on to the lessee. The
Company's Caribbean Stud(R) Lease Agreement provides, in part, that the "Lessee
shall promptly reimburse to Mikohn any personal property taxes, gaming device
taxes, and any similar taxes or levies that Mikohn is obligated to pay for
tables". The State has already refunded to many of the casinos most of the
sales and use tax that was remitted by the Company. Although the casinos are
contractually obligated for the payment of sales tax, as it is a pass-through
tax, there is no guarantee that the casinos will reimburse the Company for any
assessment paid by it.
International Withholding Tax Issues: The Company has exposure to potential
------------------------------------
additional withholding taxes on payments repatriated by the previous owner of
Progressive Games, Inc. estimated at $1,379. 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 may
be charged back to the previous owner under the terms of the Stock Purchase
Agreement for the acquisition of Progressive Games, Inc. The Company had one
year from date of acquisition in which to effect a change in the amount of
goodwill. Based on the potential withholding tax exposure, the Company adjusted
goodwill in the amount of the $1,379 during August 1999.
NOTE 5 - SEGMENT REPORTING
The Company operates in five business unit segments: Product Sales, Systems,
Table Games, Slot Operations and International. The Product Sales Business Unit
segment designs, manufactures and installs interior signage and displays. It
also designs, manufactures, installs and maintains exterior signage. In
addition, it also manufactures and sells oversized gaming machines, touch-screen
multi-game video machines and progressive jackpot systems. The Systems Business
Unit segment develops, markets and installs automated data collection systems
for player tracking and accounting for gaming machines and table games. The
Table Games Business Unit segment places tables under lease or license
agreements generating recurring revenues. It owns or licenses the rights to
various proprietary table games including the game Caribbean Stud(R). The Slot
Operations Business Unit segment leases, licenses and places proprietary gaming
machines under lease, structured participation or license agreements
8
<PAGE>
generating recurring revenues. It owns or licenses the rights to several
categories of proprietary games, including branded slot machines, coin-push
gaming machines, oversized gaming machines and touch-screen multi-game video
machines. The International Business Unit segment includes the operations of the
Company's international operations including those in Europe and Latin America.
50% of the Company's Australian operation was divested late in 1999 and only 50%
of its net income after taxes is included in sales. Traditionally, the Company
did not allocate corporate expenses to its business unit segments. It is
currently in the process of developing a methodology to allocate certain
corporate expenses to its business unit segments.
Business unit segment information for the quarters ended September, 2000 and
1999 consist of:
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
Business Unit Segments 2000 1999 2000 1999
---------------------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
Sales:
Product Sales $16,825 $13,178 $ 41,445 $ 41,826
Systems 498 3,200 3,268 7,764
Table Games 4,438 4,199 15,607 12,387
Slot Operations 3,999 1,680 9,880 4,625
International 2,488 5,065 6,322 14,905
------- ------- -------- --------
$28,248 $27,322 $ 76,522 $ 81,507
======= ======= ======== ========
Gross profit:
Product Sales $ 6,676 $ 4,697 $ 16,591 $ 16,019
Systems 394 1,831 1,992 4,151
Table Games 4,064 3,934 14,557 11,878
Slot Operations 3,007 1,323 7,124 3,547
International 272 1,417 1,352 4,294
------- ------- -------- --------
$14,413 $13,202 $ 41,616 $ 39,889
======= ======= ======== ========
Operating income:
Product Sales $ 5,473 $ 3,443 $ 12,943 $ 12,324
Systems 199 1,766 1,472 3,836
Table Games 3,346 3,369 12,633 10,225
Slot Operations 1,708 582 3,848 1,393
International (332) 106 (433) 583
Corporate (5,802) (5,741) (18,788) (17,541)
------- ------- -------- --------
$ 4,592 $ 3,525 $ 11,675 $ 10,820
======= ======= ======== ========
Net income before taxes:
Product Sales $ 4,148 $ 2,567 $ 10,021 $ 10,138
Systems (54) 1,547 1,008 3,439
Table Games 2,879 2,992 10,333 8,305
Slot Operations 1,203 257 2,313 249
International (545) (78) (907) 226
Corporate (5,698) (5,712) (18,472) (17,440)
------- ------- -------- --------
$ 1,933 $ 1,573 $ 4,296 $ 4,917
======= ======= ======== ========
</TABLE>
Corporate Expense by Function:
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Business Unit Segments
----------------------
Human Resources $ 97 $ 166 $ 304 $ 464
Executive and Administration 646 623 1,644 1,965
Finance and MIS 702 535 2,045 1,628
Legal and Compliance 600 397 1,537 1,123
Corporate Facilities 81 92 247 270
Research and Development 361 1,331 3,566 3,951
Art and Design 242 358 1,017 1,071
Corporate Sales 1,447 1,215 4,225 4,164
Marketing 478 455 1,469 1,226
Depreciation and Amortization 798 569 2,384 1,679
Bad Debts 350 350
------- ------- -------- --------
$ 5,802 $ 5,741 $ 18,788 $ 17,541
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
Geographic Operations 2000 1999 2000 1999
--------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales:
North America $25,760 $22,257 $70,200 $66,602
Australasia (13) 2,271 (183) 5,866
Europe / Africa 2,095 2,295 5,355 7,617
South America 406 499 1,150 1,422
------- ------- ------- -------
$28,248 $27,322 $76,522 $81,507
======= ======= ======= =======
Gross profit:
North America $14,141 $11,784 $40,263 $35,594
Australasia (13) 738 (183) 1,712
Europe / Africa 169 519 1,093 1,953
South America 116 161 443 630
------- ------- ------- -------
$14,413 $13,202 $41,616 $39,889
======= ======= ======= =======
Operating income:
North America $ 4,924 $ 3,379 $12,108 $10,236
Australasia (13) 71 (183) (55)
Europe / Africa (188) 298 54 681
South America (131) (223) (304) (42)
------- ------- ------- -------
$ 4,592 $ 3,525 $11,675 $10,820
======= ======= ======= =======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------------
Geographic Operations 2000 1999 2000 1999
--------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income before taxes:
North America $ 2,274 $ 1,788 $ 4,754 $ 5,208
Australasia (13) (116) (183) (551)
Europe / Africa (192) 168 18 390
South America (136) (267) (293) (130)
------- ------- ------- -------
$ 1,933 $ 1,573 $ 4,296 $ 4,917
======= ======= ======= ======
</TABLE>
NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board 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. Although the
Company does not believe SFAS 133 will have a material impact on its
consolidated financial statements, because of the complexity of SFAS 133, the
ultimate impact of its adoption has not yet been determined.
NOTE 7 - COMMON STOCK
During the quarter ended September 30, 2000 and 1999, the Company issued
common stock as follows:
<TABLE>
<CAPTION>
September 30,
-------------------
2000 1999
----- -----
<S> <C> <C>
Common stock issuance:
Stock options exercised $ 61 $
Employee stock purchase plan 168 151
Notes receivable from shareholders (114)
----- -----
$ 229 $ 37
===== =====
</TABLE>
12
<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, adverse court decisions 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.
SIGNIFICANT TRENDS
Slot Market Trends
------------------
The Company leases slot machines to casinos in exchange for either a
percentage of the machine win or a fixed lease amount. There are several
significant trends that the Company believes will have an effect on its ability
to compete successfully in this market.
The market is rapidly shifting to video slot machines in place of the
traditional reel spinning slots machines. The most successful video games in
this market are the lower denomination multi-coin and multi-line machines. The
Company is developing its new games using this type of slot machine. Branded
games that use widely known consumer game and entertainment brand names have
become popular and are a noticeable trend in the marketplace. The Company has
concentrated on this segment of the market and is developing games under the
Yahtzee(R), Battleship(R), and Ripley's Believe It or Not(R) brands. The Company
also holds rights to other well-known brands. Branded games have been the most
successful slot machines, thus allowing manufacturers to lease these games to
casinos rather than selling them outright.
13
<PAGE>
The Company has elected to concentrate on this market, which generally offers
much higher gross margins.
The Company has been successful in bringing its Yahtzee slot games to market
and as of September 30, 2000 has over 1,500 units on lease in casinos. The
Battleship(R) video slot machine is just being introduced to the market and the
Company's backlog of orders for Yahtzee(R) and Battleship(R) exceeded 900 units
as of September 30, 2000.
California Casino Market
------------------------
California voters approved Native American casinos in March, 2000. Prior to
this election, tribal casinos operated in California but, for regulatory
reasons, the Company was prohibited from selling or leasing equipment into this
market. The March, 2000 referendum established this as a viable market for the
Company and the Company began to sell its products to California tribal casinos.
The enabling regulations in California establish a system to allocate a fixed
number of slot machines among the many tribes that have announced plans to
operate casinos. Each tribe has a deadline to place slot machines onto their
casino floors or they risk losing their slot allocation. This deadline has had
an effect on the Company's California operations. Leased slot machine orders
have benefited from these deadlines because the casinos have established the
placement of slot machines as their top priority. As of September 30, 2000, the
Company has received orders for 344 leased game units most of which are slot
machines. The Company believes that the market for its visual display products
will develop at a slower pace than its slot machine business as many of the
tribes are capital constrained and will place slot machines on their floors
first without visual displays. The Company believes that as the market becomes
more competitive and the tribes establish cash flow from their operations the
demand for visual displays will increase.
New Casino Construction
-----------------------
The Company benefits from new casino construction in all of its product
segments but most significantly in its Product Sales Business Unit segment which
sells signs, progressive jackpot systems and slot machines. It has a dominant
market share in interior visual displays and the related electronic components
that go with these displays. The Company has received many large orders for
these products from new casinos over the last several years. The recent boom in
construction in Las Vegas, Nevada, Detroit, Michigan, the riverboat market and
Ontario, Canada has subsided and will be somewhat offset by new casino
construction in California. The demand for the Company's products within the
Product Sales Business Unit segment has declined over the last three years due
to lower construction levels. The Company expects its sales in this business
unit segment to be comparable to levels experienced in 1999 and 2000.
CHANGES IN REPORTING
As the Company has realigned the reporting of its business units, 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 prior years 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.
14
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2000 and 1999
---------------------------------------------
SALES / GROSS PROFIT
<TABLE>
<CAPTION>
Change
------------------------------------
Business Unit Segment: 2000 1999 Amount %
---------------------- ------- ------- ------------- -------------
<S> <C> <C> <C> <C>
Sales:
Product Sales $41,445 $41,826 $ (381) -0.9%
Systems 3,268 7,764 (4,496) -57.9%
Table Games 15,607 12,387 3,220 26.0%
Slot Operations 9,880 4,625 5,255 113.6%
International 6,322 14,905 (8,583) -57.6%
---------------- ---------------- --------------
Total $76,522 $81,507 $(4,985) -6.1%
================ ================ ==============
Percentage to total sales:
--------------------------
Product Sales 54.1% 51.3%
Systems 4.3% 9.5%
Table Games 20.4% 15.2%
Slot Operations 12.9% 5.7%
International 8.3% 18.3%
---------------- ----------------
Total 100.0% 100.0%
================ ================
<CAPTION>
Change
-------------------------------------
Business Unit Segment: 2000 1999 Amount %
---------------------- ------- ------- -------------- -------------
<S> <C> <C> <C> <C>
Gross profit:
Product Sales $16,591 $16,019 $ 572 3.6%
Systems 1,992 4,151 (2,159) -52.0%
Table Games 14,557 11,878 2,679 22.6%
Slot Operations 7,124 3,547 3,577 100.8%
International 1,352 4,294 (2,942) -68.5%
---------------- ---------------- --------------
Total $41,616 $39,889 $ 1,727 4.3%
================ ================ ==============
Gross profit margin:
--------------------
Product Sales 40.0% 38.3%
Systems 61.0% 53.5%
Table Games 93.3% 95.9%
Slot Operations 72.1% 76.7%
International 21.4% 28.8%
Total 54.4% 48.9%
</TABLE>
15
<PAGE>
Product Sales:
--------------
Revenues in the Product Sales segment for the nine months ended September 30,
2000 were $41,445 compared to $41,826 during the comparable period in 1999.
Gross profits for the current year were $16,591 up 3.6% from $16,019 last year.
The gross margin of 40.0% increased from 38.3% last year.
Systems:
--------
Systems revenues for the nine month period in 2000 were $3,268 a reduction of
57.9% from $7,764 in the previous year. Systems revenues last year benefited
from large sales in Ontario, Canada and Detroit, Michigan. No major new systems
contracts have been recorded in 2000. Systems gross profit for the nine months
was down 52.0% to $1,992 from $4,151 and was caused by the decline in revenues.
Table Games:
------------
Table Games revenues of $15,607 for the 2000 nine month period were up 26.0%
from the $12,387 revenues in the comparable period last year. The increase was
primarily due to a $2,588 sale of internet and video rights to certain games in
the second quarter of 2000. Gross profit for the nine months ended September
30, 2000 was $14,557 up 22.6% from $11,878 in last year's nine month period.
Again, the increase was due to the sale of internet and video rights. The gross
margin for the 2000 period was 93.3% compared to 95.9% last year and the decline
was caused by higher maintenance costs. As of September 30, 2000, the Company
had 1,116 table games on lease.
Slot Operations:
----------------
Slot Operations revenues for the nine month period ended September 30, 2000,
were $9,880 up 113.6% from $4,625 in the previous year. The increase was due to
the successful introduction of the Yahtzee(R) slot product, which had revenues
of $6,027 in 2000 compared to none in 1999. The increase from Yahtzee(R) slots
was partially offset from a decrease in revenues from other leased slots of
$772. Gross profit was up 100.8% to $7,124 from $3,547 in last year's nine month
period. The increase was due to the increase in revenues, however the gross
margin for 2000 was 72.1% down from last year's 76.7%. The reduction in gross
margin was due to higher maintenance costs.
International:
--------------
Revenues for the International segment for the nine months ended September 30,
2000, were $8,583 down 57.6% from $14,905 in 1999's nine month period. The
$8,583 revenue reduction was primarily the result of the change in reporting for
our 50% owned Australian operation from consolidated to the equity method of
accounting. The Australian subsidiary was wholly owned in 1999 and had $5,866
in revenues for the nine month period and in 2000 under the equity method of
reporting it included only the $183 loss in revenues. The European subsidiary
reported revenues of $5,355 for the nine months period in 2000 down 29.7% from
$7,617 in the previous year. All business unit segments revenues were lower in
Europe for the 2000 period. South America also reported lower revenues of
$1,150 down 19.1% from $1,422 in the previous year.
16
<PAGE>
Gross profit from the International segment in the nine month period ended
September 30, 2000 was $1,352 down 68.5% from $4,294 in the comparable 1999
period. The change to the equity method of reporting the Australian subsidiary
caused $1,895 of the decline. The European subsidiary also had a reduction in
gross profit of $860 due to the lower sales levels. The South American
subsidiary also reported reduced gross profit of $187 caused by the lower
revenue results.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in total were $29,941 for the
nine month period ended September 30, 2000 up 3.0% over the comparable 1999
period. Selling and marketing expenses were $10,321 for the 2000 nine month
period compared to $10,349 in the 1999 period. General and administrative
expenses were $8,195 for the nine months ended September 30, 2000 compared to
$8,112 in the comparable 1999 period. Research and developments costs were
$3,869 for the 2000 period compared to $4,372 in 1999. The reduction in
research and development costs was due to engineering staff working on work-in-
process inventory projects rather than the traditional research and development
projects. Depreciation for the nine month period in 2000 was $4,324 up 17.8%
from $3,671 in 1999 due to the increase in the placement of leased slot
machines. Amortization for the nine month period in 2000 was $3,233 up 25.7%
from $2,566 in 1999. The increase was due primarily to the amortization of
license rights acquired in the fourth quarter of 1999.
INTEREST EXPENSE
----------------
Interest expense for the nine months ended September 30, 2000 was $7,663 up
18.2% from $6,484 in the 1999 comparable period which was due to a increase in
the balance of interest bearing liabilities, an increase in the interest rates
due to higher market rates on our floating rate debt and a 0.5% increase in the
negotiated rate of our $86.0 million debt facility that took place in the first
quarter of 2000. The average interest rate for the nine month period ended
September 30, 2000 was 10.3% compared to an 8.9% average interest rate for the
comparable period in 1999.
OTHER INCOME AND EXPENSE
Other income and expense was $284 for the nine months ended September 30, 2000
compared to $581 for the comparable 1999 period. The decrease was primarily due
to a one-time $271 profit on the sale of our Gulfport, Mississippi facility in
1999.
INCOME TAX PROVISION
Income taxes for the nine months ended September 30, 2000 were $1,680 for an
effective tax rate of 39.1% as compared to $1,561 and an effective tax rate of
31.7% for the nine months ended September 30, 1999. The increase in the current
nine month period tax rate was due to a research and development tax credit that
was recorded in the third quarter of 1999. The current period's tax rate is
more indicative of the tax rate on a going-forward basis.
17
<PAGE>
EARNINGS PER SHARE
------------------
Both basic and diluted earnings per share for the nine months ended September
30, 2000 were $0.24 with basic and diluted weighted average common shares
outstanding of 10,939 and 11,077, respectively. For the nine months ended
September 30, 1999 basic and diluted earnings per share were $0.31 on both basic
and diluted weighted average common shares outstanding of 10,704 and 10,722,
respectively.
Three Months Ended September 30, 2000 and 1999
----------------------------------------------
SALES / GROSS PROFIT
<TABLE>
<CAPTION>
Change
-------------------------------------
Business Unit Segment: 2000 1999 Amount %
----------------------------- ------- ------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Product Sales $16,825 $13,178 $ 3,647 27.7%
Systems 498 3,200 (2,702) -84.4%
Table Games 4,438 4,199 239 5.7%
Slot Operations 3,999 1,680 2,319 138.0%
International 2,488 5,065 (2,577) -50.9%
------- ------- -------
Total $28,248 $27,322 $ 926 3.4%
======= ======= =======
Percentage to total revenues:
Product Sales 59.5% 48.2%
Systems 1.8% 11.7%
Table Games 15.7% 15.4%
Slot Operations 14.2% 6.2%
International 8.8% 18.5%
----- -----
Total 100.0% 100.0%
===== =====
</TABLE>
<TABLE>
<CAPTION>
Change
------------------------------------
Business Unit Segment: 2000 1999 Amount %
--------------------- ------- ------- -------------- -------------
<S> <C> <C> <C> <C>
Gross profit:
Product Sales $ 6,676 $ 4,697 $ 1,979 42.1%
Systems 394 1,831 (1,437) -78.5%
Table Games 4,064 3,934 130 3.3%
Slot Operations 3,007 1,323 1,684 127.3%
International 272 1,417 (1,145) -80.8%
------- ------- ------- -----
Total $14,413 $13,202 $ 1,211 9.2%
======= ======= =======
Gross profit margin:
Product Sales 39.7% 35.6%
Systems 79.1% 57.2%
Table Games 91.6% 93.7%
Slot Operations 75.2% 78.8%
International 10.9% 28.0%
Total 51.0% 48.3%
</TABLE>
18
<PAGE>
Product Sales:
--------------
Revenues for the quarter ended September 30, 2000 in the Product Sales segment
were $16,825 up 27.7% from $13,178 in the comparable period in the prior year.
Our interior visual display sales of $6,051 were up 33.7% from last year's sales
of $4,526. Exterior sign sales were $5,823 up 48.4% from last year's $3,925.
Interior visual displays and exterior sign sales increased due to a large sale
to the new Aladdin Casino in Las Vegas, Nevada. Sales to the Aladdin Casino in
the third quarter of 2000 amounted to $3,264. Slot machine sales of $838 were
up 166.9% from last year's $314 due to sales into the California market which
did not exist last year. Service sales of $600 were down 45.7% from last year's
$1,104 due to more of our service department's efforts being devoted to service
of our Slot Operations business segment which are eliminated instead of service
invoiced to customers.
Gross profit for product sales was $6,676 for the three months ended September
30, 2000 up 42.1% from $4,697 in the comparable period in the prior year. The
increase was due mostly to an increase in revenues, which accounted for $1,289
of the increased gross profit; however, the increase in gross margin from 35.6%
to 39.7% accounted for another $690 of the increase. Within the Product Sales
business segment the gross margin on interior signs improved from 40.2% to 55.2%
which contributed $501 to the gross profit increase. Exterior signs had gross
profit of $839 compared to $737 last year. The exterior sign gross margin was
14.4% compared to 18.8% last year. We expected improved margins in exterior
signs but experienced significant rework expenses related to two jobs
incorporating our new LED technology. These jobs experienced cost overruns
exceeding $800 related to the rework compared to the original estimated project
costs.
Systems:
--------
Revenues for the quarter ended September 30, 2000 in the Systems segment were
$498 down 84.4% from $3,200 in the comparable period in the prior year due to
major sales in the 1999 quarter in Ontario, Canada and Detroit, Michigan. Gross
profit was $394 down 78.5% from the 1999 quarter primarily due to the reduction
in revenues. The gross margin was 79.1% up from 57.2% last year due to the
reduced sales this year being comprised more of high margin licensing and
software revenues.
Table Games:
------------
Revenues for the quarter ended September 30, 2000 in the Table Games segment
were $4,438 up 5.7% from the comparable period in the prior year. The leased
table game unit base has been flat over the last year and the increase in
revenues has been due to an increase in the average price per unit. Table Games
gross margin for the quarter was 91.6% compared to 93.7% last year with the
decrease coming from higher maintenance expenses.
Slot Operations:
----------------
Revenues for the quarter ended September 30, 2000 in the Slot Operations
segment were $3,999 up 138.0% from $1,680 in the comparable period in the prior
year. This increase is
19
<PAGE>
driven by the continued increase in the placement of leased Yahtzee(R) slots. We
had approximately 1,500 Yahtzee(R) slots placed at the end of the quarter versus
none in the prior year. Gross profit on Slot Operations was up accordingly, with
an increase of 127.3%. The gross margin was reduced slightly from 78.8% to 75.2%
due to additional service requirements of the Yahtzee(R) video slot.
International:
--------------
Revenues for the quarter ended September 30, 2000 in the International segment
were $2,577 down 50.9% from $5,065 in the comparable period in the prior year.
The principle reason for the reduction is that our Australian subsidiary is no
longer consolidated due to the sale of a 50% interest to TAB Limited in the
fourth quarter of 1999. Sales of that subsidiary in the 1999 quarter were
$2,271. In 2000 the Australian subsidiary had a $13 loss for the quarter which
was included in the International segment revenues.
Gross profit for the international subsidiaries was $272 down 80.8% from 1999
gross profit of $1,417. The non-consolidation of the Australian subsidiary
caused $738 of the reduction while $350 was caused by lower gross profits in
Europe due to higher than normal manufacturing overhead costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the quarter ended September
30, 2000 were $9,821 up $1.5% from $9,677 in the comparable period in the prior
year. Within this expense category selling and marketing costs were $3,474 in
2000 down 1.7% from $3,535 in 1999. General and administrative expenses were
$3,185 up 27.1% from $2,505 in 1999. This difference was primarily due to a
$536 increase in bad debt expense. Research and development expense of $465 was
down from $1,503 last year due to engineering staff working on work-in-process
inventory projects rather than the traditional research and development
projects. Depreciation for the quarter ended September 30, 2000 was $1,602, an
increase of 26.4% over last year's depreciation of $1,267. The increase is
primarily due to an increase in our slot machine units on lease. Amortization
for the quarter was $1,087 up 25.7% from $865 in the comparable quarter last
year. The increase was primarily due to the amortization of a license acquired
in the fourth quarter of 1999.
INTEREST EXPENSE
Interest expense for the quarter ended September 30, 2000 was $2,705 up 18.1%
from $2,290 in the comparable period in the prior year which was due to a rise
in the balance of interest bearing liabilities, an increase in the interest
rates due to higher market rates on our floating rate debt and a 0.5% increase
in the negotiated interest rate on our $86.0 million debt facility that took
place in the first quarter of 2000. The average interest rate for the quarter
ended September 30, 2000 was 10.7% compared to a 9.5% average interest rate for
the comparable period in the prior year.
OTHER INCOME AND EXPENSE
20
<PAGE>
Other income and expense for the quarter ended September 30, 2000 was $46 down
86.4% from $338 in the comparable period in the prior year. This decrease was
primarily due to a one-time $271 profit on the sale of our Gulfport, Mississippi
facility in 1999.
INCOME TAX PROVISION
Income tax provision for the quarter period ended September 30, 2000 was $759
for an effective tax rate of 39.3% as compared to $311 and an effective tax rate
of 19.8% in the comparable period in the prior year. The increase in the
current quarter tax rate was due to a research and development tax credit that
was recorded in the third quarter of 1999.
EARNINGS PER SHARE
Both basic and diluted earnings per share for the quarter ended September 30,
2000 were $0.11 with basic and diluted weighted average common shares
outstanding of 11,021 and 11,178, respectively. For the quarter ended September
30, 1999 basic and diluted earnings per share were $0.12 on both basic and
diluted weighted average common shares outstanding of 10,730 and 10,747,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2000, net income was $2,616 compared
to a net income of $3,356 for the comparable period in 1999.
Net cash provided by operating activities for the nine months ended September
30, 2000 amounted to $3,125. The major items other than earnings were: (i) an
increase in inventories of $11,553 which was primarily due to an increase in
slot machines waiting for installation following regulatory approvals, (ii) an
increase in installment sales receivable of $1,920, (iii) a decrease in accounts
payable of $654, (iv) an offsetting decrease in accounts receivable of $6,658,
and (v) an increase in accrued and other current liabilities of $716.
Net cash used in investing activities of $6,055 consisted primarily of
investments in property and equipment as well as investments in gaming equipment
leased to customers. Net cash provided by financing activities of $4,306
primarily consisted of draws under our revolving credit facility, financing
under capital leases and employee stock option exercises which were offset by
principle repayments of Term Loan A and Term Loan B.
Our cash balance as of September 30, 2000 was $1,424, up from $48 at December
31, 1999. We expect that cash provided from operating activities as well as our
ability to increase the revolving line of credit or term debt by $5,000 and
increase our indebtedness for a variety of other specific purposes will be
sufficient to meet our requirements during the remainder of 2000.
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
21
<PAGE>
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 to:
(i) maintain certain financial ratios, (ii) comply with certain financial
covenants, (iii) not allow the incurrence of additional debt or the payment of
cash dividends, unless expressly permitted by the Amended and Restated Credit
Agreement and (iv) adhere to a number of other financial restrictions. First
Source Financial LLP is acting as the lenders' agent for this transaction. The
term loans are due to begin maturing in April 2002 with equal 16.7% principal
repayments due every six months until complete maturity on October 24, 2004. As
of the date of this filing we have borrowed $4,623 of the funds available under
the revolving line of credit and have $377 available under this line.
Additionally, we have the ability to increase the revolving line of credit or
term loan debt by another $5,000.
At December 31, 1999 we were in non-compliance with certain covenants for
which we received waivers. Due to the nature of these covenants we found it
necessary to amend the existing credit agreement and certain covenants in order
to avoid the occurrence of non-compliance during 2000. On April 7, 2000, we
completed the Second Amendment to the Amended and Restated Credit Agreement.
This amendment, in addition to revising certain covenants during 2000, also
provides us with the opportunity to seek additional financing, divest certain
assets and repay portions of the term loans without incurring pre-payment
penalties. In exchange for this amendment we agreed to a pricing increase on all
outstanding debt tranches, which includes Term Loan A, Term Loan B and the
Revolver Loan. Term Loan A will bear a variable interest rate equal to the Prime
Lending Rate plus 275 basis points or the LIBOR rate plus 375 basis points. Term
Loan B will bear a fixed interest rate of 10.75%. The Revolver Loan will bear a
variable interest rate equal to the Prime Lending Rate plus 225 basis points or
the LIBOR rate plus 325 basis points.
22
<PAGE>
MIKOHN GAMING CORPORATION
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits:
27 Financial Data Schedules
B. Reports on Form 8-K:
None
23
<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: November 13, 2000
24
