<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: March 31, 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:
10,964,286 May 9, 2000
- ---------------------------- as of --------------------
(Amount Outstanding) (Date)
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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 (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999 2
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
1
<PAGE>
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in thousands except per share amounts) March 31, December 31,
2000 1999
----- ----
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 641 $ 48
Accounts receivable, net 22,207 30,447
Notes receivable-related parties - current 1,893 2,144
Installment sales receivable - current 820 1,030
Inventories, net 29,118 26,793
Prepaid expenses 5,204 4,582
Assets held for sale 1,046 781
Deferred tax asset - current 1,420 1,420
------- -------
Total current assets 62,349 67,245
Notes receivable-related parties - noncurrent 152 150
Installment sales receivable - noncurrent 975 865
Property and equipment, net 24,877 25,385
Intangible assets 16,242 16,810
Goodwill 39,860 40,208
Other assets 8,394 8,423
Deferred tax asset - noncurrent 2,914 2,914
-------- ---------
Total assets $155,763 $162,000
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt and notes payable $ 1,376 $ 1,436
Trade accounts payable 6,816 11,615
Customer deposits 1,750 3,600
Accrued and other current liabilities 6,152 6,743
Deferred license fees - current 451 451
-------- ---------
Total current liabilities 16,545 23,845
-------- ---------
Long-term debt, net of current portion 85,864 85,417
-------- ---------
Deferred license fees - noncurrent 1,662 1,806
-------- ---------
Commitments and contingencies (see Note 4)
Stockholders' equity:
Preferred stock, $.10 par value, 5,000 shares authorized,
none issued and outstanding
Common stock, $.10 par value, 20,000 shares authorized,
10,963 and 10,799 shares issued and outstanding 1,096 1,080
Additional paid-in capital 54,090 53,350
Stockholders' notes receivable (1,251) (1,251)
Foreign currency translation (664) (597)
Accumulated deficit (1,351) (1,422)
------- -------
Subtotal 51,920 51,160
Less treasury stock, 19 shares, at cost (228) (228)
-------- --------
Total stockholders' equity 51,692 50,932
-------- --------
Total liabilities and stockholders' equity $155,763 $162,000
======== ========
</TABLE>
See notes to condensed consolidated financial statements
2
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MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
(Amounts in thousands except per share amounts)
2000 1999
------- -------
<S> <C> <C>
Sales $22,323 $25,175
Cost of sales 9,909 12,344
------- -------
Gross profit 12,414 12,831
Selling, general and administrative expenses 9,944 9,451
------- -------
Operating income 2,470 3,380
Interest expense (2,339) (2,090)
Other income and expense 50 124
------- -------
Income before income tax 181 1,414
Income tax provision (110) (503)
------- -------
Net income $ 71 $ 911
======= =======
Weighted average common shares:
Basic 10,837 10,675
======= =======
Diluted 10,964 10,675
======= =======
Earnings per share information:
Basic $ 0.01 $ 0.09
======= =======
Diluted $ 0.01 $ 0.09
======= =======
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
MIKOHN GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
(Amounts in thousands)
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 71 $ 911
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,367 1,148
Amortization 1,051 860
Provision for bad debts 14
Reserve for obsolete inventory 45 102
Change in exchange rate variance (67) 61
Changes in assets and liabilities:
Accounts receivable 8,240 (180)
Notes receivable - related parties 249
Installment sales receivable 100 198
Inventories (2,370) (3,384)
Prepaid expenses and other assets (593) (432)
Trade accounts payable (4,799) 998
Accrued and other current liabilities (591) (29)
Customer deposits (1,850) 414
------- -------
Net cash provided by operating activities 853 681
------- -------
Cash flows from investing activities:
Purchase of property and equipment (339) (400)
Gaming equipment leased to others (1,644) (554)
Proceeds from sales of property and equipment 859 6
Increase in intangible assets (135) (1,075)
------- -------
Net cash used in investing activities (1,259) (2,023)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt and notes payable 3,207 44
Principal payments on notes payable and long-term debt (2,820) (789)
Principal payments of deferred license fees (144)
Proceeds from sale of common stock 756 70
------- -------
Net cash provided by (used in) financing activities 999 (675)
------- -------
Increase (decrease) in cash and cash equivalents 593 (2,017)
Cash and cash equivalents, beginning of period 48 3,732
------- -------
Cash and cash equivalents, end of period $ 641 $ 1,715
======= =======
</TABLE>
See notes to condensed consolidated financial statements
4
<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 March 31,
2000, the results of its operations and cash flows for the three months ended
March 31, 2000 and 1999. The results of operations for the three months ended
March 31, 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.
Ancillary to the Share Sale Agreement, the Company entered into a Management
Services Agreement with MGA which provides that the Company will continue
directing the management of MGA so long as MGA operates profitably. The Company
also entered into a System Acquisition and Services Agreement (the "System
Agreement") with TAB which appoints 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 the 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 July 1, 2000. The
Australian dollar exchange rate was $0.6070 at March 31, 2000.
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.
5
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NOTE 3-INVENTORIES
Inventories at March 31, 2000 and December 31, 1999 consist of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Raw materials $13,982 $14,616
Finished goods 7,023 6,247
Work-in-progress 9,921 7,693
------- -------
Subtotal 30,926 28,556
Reserve for obsolete inventory (1,808) (1,763)
------- -------
Total $29,118 $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. Two subsequently filed actions
in the same court involving two subsequently issued patents (U.S. Patent Nos.
5,741,183 and 5,752,882), one filed by the Company against Acres and one 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" and the "882 Action"). The '183 Action and
the '882 Action have been consolidated with the '961 Action (the three actions
hereafter referred to as the "Consolidated Action"). Discovery in the
Consolidated Action closed on February 26, 1999. No trial date has been set.
Management believes that the Company will prevail in the Consolidated Action.
On October 13, 1998, Acres brought suit against the Company and CDS
alleging, as against the Company, that the MoneyTime(TM) system infringes a
patent (U.S. Patent No. 5,820,459) issued to Acres on October 13, 1998 (the "459
Action"). The Company has responded denying infringement and asserting that the
Acres patent is invalid. The '459 Action is in an early stage of discovery. No
trial date has been set. Management believes that the Company will prevail in
the '459 Action.
The Company is addressing tax issues relating to its table games
operations. They are summarized below:
New Jersey Sales 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 tax
on its table game leases. Previously, the Company remitted
6
<PAGE>
sales 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 sales tax at the inception of the lease. At issue is the
method of computation of the use tax due. It is the Company's contention that
use 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 sales 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 use tax due based upon the purchase
price of the equipment, materials and other tangible personal property.
A further issue is the passing of the 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
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 remitted to the U.S. 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 would 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 affect 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 segments: Product Sales, Systems,
Table Games, Slot Route and International. The Product Sales 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 and touch-screen multi-game
video machines. The Systems segment includes manufacturing of progressive
jackpot systems; it develops, markets and installs automated data collection
systems for player tracking and accounting for gaming machines. The Table Games
segment places tables under lease or license agreements generating recurring
revenue. It owns or licenses the rights to various progressive jackpot table
games including Caribbean Stud(R). The Slot Route segment leases, licenses and
places proprietary gaming machines under lease, structured participation or
license agreements generating recurring revenue. 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 segment includes the operations of the
Company's international operations including those in Europe and Peru. 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. The Company does not allocate
corporate expenses to its business segments.
7
<PAGE>
Business segment information for the quarters ended March 31, 2000 and 1999
consist of:
<TABLE>
<CAPTION>
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Business segments:
-----------------
Sales:
Product sales $12,990 $13,919
Systems 1,455 1,620
Table games 4,148 3,939
Slot route 2,445 1,348
International 1,285 4,349
-------- --------
$22,323 $25,175
======== ========
Gross profit:
Product sales $ 5,085 $ 6,125
Systems 915 599
Table games 4,069 3,854
Slot route 1,970 1,004
International 375 1,249
-------- --------
$12,414 $12,831
======== ========
Operating income:
Product sales $ 3,897 $ 4,927
Systems 719 455
Table games 3,513 3,314
Slot route 1,013 344
International (194) 183
Corporate (6,478) (5,843)
-------- --------
$ 2,470 $ 3,380
======== ========
Net income before tax:
Product sales $ 2,609 $ 3,689
Systems 559 451
Table games 3,161 2,995
Slot route 806 172
International (335) (115)
Corporate (6,619) (5,778)
-------- --------
$ 181 $ 1,414
======== ========
Geographic operations:
---------------------
Sales:
North America $21,038 $20,826
Australasia (147) 1,944
Europe / Africa 1,263 1,932
South America 169 473
-------- --------
$22,323 $25,175
======== ========
Gross profit:
North America $12,039 $11,581
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Australasia (147) 573
Europe / Africa 495 433
South America 27 244
-------- --------
$12,414 $12,831
======== ========
Operating income:
North America $ 2,664 $ 3,197
Australasia (147) 75
Europe / Africa 153 15
South America (200) 93
-------- --------
$ 2,470 $ 3,380
======== ========
Net income before tax:
North America $ 543 $ 1,529
Australasia (147) (83)
Europe / Africa 28 (85)
South America (243) 53
-------- --------
$ 181 $ 1,414
======== ========
</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 March 31, 2000 and 1999, the Company issued common
stock as follows:
2000 1999
---- ----
Common stock issuance:
Stock options exercised $ 557 $
Employee stock purchase plan 199 70
------- -------
$ 756 $ 70
======= =======
9
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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 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, 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.
10
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
REVENUE
<TABLE>
<CAPTION>
Charge
-------------------------
Business Segment 2000 1999 Amount % Comment
- ---------------- ---- ---- ------- --- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 12,990 $ 13,919 $ (929) -6.7% 1
Systems 1,455 1,620 (165) -10.2% 2
Table games 4,148 3,939 209 5.3% 3
Slot route 2,445 1,348 1.097 -81.4% 4
International 1,285 4,349 (3.064) -70.5% 5
----------- ---------- ----------
$ 22,323 $ 25,175 $ (2.852) -11.3%
=========== ========== ==========
Percentage to total revenues:
Product sales 58.2% 55.3%
Systems 6.5% 6.4%
Table games 18.5% 15.6%
Slot route 11.0% 5.4%
International 5.8% 17.3%
----------- ----------
100.0% 100.0%
=========== ==========
</TABLE>
1 The net decrease in product sales revenue of $929 between the comparable
periods is primarily due to: (i) a decrease in interior visual display
revenue of $398, (ii) a decrease in slot machine revenue of $337, (iii) a
decrease in electronics revenue of $185, (iv) a decrease in exterior sign
revenue of $82, (v) a decrease in other revenue of $82 and (vi) an increase
in slot glass revenue of $262. The decrease in interior visual display
revenue is the result of an absence of new casino openings in the most recent
period. The decrease in slot machine revenue is due to fewer sales of our
MiniBertha(TM) slot machine games. The decrease in electronics revenue is due
to lower sales levels to original equipment manufacturer ("OEM") customers.
2 The decrease in systems revenue of $165 is due to lower sales levels of our
CasinoLink(R) hardware products. The CasinoLink(R) hardware component revenue
decrease is actually more pronounced than the variance reveals; offsetting
the decrease was an increase in the software component revenue of the
CasinoLink(R) product line.
3 The increase in table game lease revenue of $209 is due to an increase in the
number of revenue producing units placed during the most recent period.
4 The net increase in slot route revenue of $1,097 is due to: (i) an increase
in MoneyTime(TM) lease/participation revenue of $184, (ii) Yahtzee(TM)
lease/participation revenue of $922, (iii) a decrease in Flip-It(TM)
participation revenue of $68, and (iv) an increase in other slot route
revenue of $59. The number of MoneyTime(TM) units in place increased from 419
as of March 31, 1999 to 455 as of March 31, 2000. The number of Yahtzee(TM)
units in place as of March 31, 2000 was 537; no Yahtzee(TM) units were in
place as of March 31, 1999.
11
<PAGE>
5 The decrease in international revenue of $3,064 is due to: (i) a decrease in
revenue from our South American subsidiary of $304, (ii) a decrease in
revenue from our European subsidiary of $669 and (iii) a decrease in revenue
from our joint venture in Australia of $2,091. The decrease in revenue from
our South American unit is primarily the result of fewer new casino sign
projects in the region. The decrease in revenue from our European unit was
primarily due to lower sales of electronic and systems products during the
most recent period. The decrease in revenue from our Australian unit is the
result of two factors. First is a change in the accounting treatment of the
unit, from that of a wholly owned subsidiary, in which the unit's entire
revenue was consolidated with that of the parent's, to that of a joint
venture, which limits revenue recognition to our share of the joint venture's
net income after taxes for the period. For the three months ended March 31,
2000, we recorded as revenue a net loss of $147 from the joint venture as
compared to revenue of $1,944 for the three months ended March 31, 1999. The
joint venture's net loss is primarily related to continued regulatory delays
in the approval of new electronic products.
As of March 31, 2000, the Company had a backlog of orders believed to be
firm of $18.5 million. As of March 31, 1999 and December 31, 1999, the Company's
backlogs were $19.8 million and $16.8 million respectively. Management expects
that the backlog of orders at March 31, 2000 will be filled within 120 days.
GROSS PROFIT
<TABLE>
<CAPTION>
Charge
-------------------------
Business Segment 2000 1999 Amount % Comment
- ---------------- ---- ---- ------ --- -------
<S> <C> <C> <C> <C> <C>
Gross Profit:
Product sales $ 5,085 $ 6,125 $ (1,040) -17.0% 1
Systems 915 599 316 52.8% 2
Table games 4,069 3,854 215 5.6% 3
Slot route 1,970 1,004 966 96.2% 4
International 375 1,249 (874) -70.0% 5
--------- --------- ---------
$ 12,414 $ 12,831 $ (417) -3.2%
========= ========= =========
Gross profit margin:
Product sales 39.1% 44.0%
Systems 62.9% 37.0%
Table games 98.1% 97.8%
Slot route 80.6% 74.5%
International 29.2% 28.7%
Total gross profit margin 55.6% 51.0%
</TABLE>
1 The net decrease in product sales gross profit of $1,040 is primarily due to
lower sales of interior visual displays as well as reduced margin levels on
the lower revenue base. Gross profit from interior visual displays decreased
by $681, from $2,835 for the three months ended March 31, 1999 to $2,154 for
the three months ended March 31, 2000. Gross margins decreased from 46.9% for
the three months ended March 31, 1999 to 38.2% for the three months ended
March 31, 2000. Additionally, gross profit from slot machine sales decreased
by $162, from $165 for the three months ended March 31, 1999 to $3 for the
three months ended March 31, 2000. Gross profit margins on slot machine sales
also decreased from
12
<PAGE>
31.0% for the three months ended March 31, 1999 to 1.5% for the three months
ended March 31, 2000.
2 The increase in systems gross profit of $316 is due primarily to an increase
in CasinoLink(R) software sales, which carried a significantly higher gross
profit margin than hardware system sales during the most recent period. Gross
profit margins increased from 37.0% for the three months ended March 31, 1999
to 62.9% for the three months ended March 31, 2000.
3 The increase in table game gross profit of $215 is due to the increase in new
table games placed during the most recent period.
4 The increase in slot route gross profit of $966 is primarily due to: (i) an
increase in MoneyTime(TM) slot machine gross profit of $169, (ii) gross
profit from Yahtzee(TM) slot machines of $704 of which there were no units in
place during the March 31, 1999 period and (iii) an increase in other slot
machine route gross profit of $59. The increase in gross profit from the
MoneyTime(TM) slot machine route is directly related to the increase in units
placed during the most recent period.
5 The net decrease in international gross profit of $874 is due to: (i) a
decrease in gross profit from our South American subsidiary of $216, (ii) a
slight increase in gross profit from our European subsidiary of $62 and (iii)
a decrease in gross profit from our joint venture in Australia of $720. The
decrease in the South American operation is due to lower revenue levels and a
reduction in the overall gross profit margin from 51.5% for the three months
ended March 31, 1999 to 16.5% for the three months ended March 31, 2000. The
increase in gross profit from the European operation is due to increased
gross profit margins during the most recent period. For the three months
ended March 31, 2000 gross profit margins increased to 39.1% from 22.4% for
the three months ended March 31, 1999. The decrease in gross profit from our
Australian unit is the result of two factors. Predominant among them is a
change in the accounting treatment of the unit, from that of a wholly owned
subsidiary, in which the unit's entire revenue was consolidated with that of
the parent's, to that of a joint venture, which limits revenue recognition to
our share of the joint venture's net income after taxes for the period. For
the three months ended March 31, 2000, we recorded as gross profit a net loss
of $147 from the joint venture as compared to gross profit of $573 for the
three months ended March 31, 1999. The joint venture's net loss is primarily
related to continued regulatory delays in the approval of new electronic
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
March 31, 2000 increased by 5% or $493, from $9,451 for the three months ended
March 31, 1999 to $9,944 for the three months ended March 31, 2000. The
significant factors effecting this increase are as follows:
Selling, product development and marketing expenses for the three months
ended March 31, 2000 increased by 1% or $50, from $3,380 for the three months
ended March 31, 1999 to $3,430 for the three months ended March 31, 2000.
General and administrative expenses for the three months ended March 31,
2000 decreased by 9% or $245, from $2,701 for the three months ended March 31,
1999 to $2,456 for the three months ended March 31, 2000.
Research and development expenses for the three months ended March 31, 2000
increased by 20% or $279, from $1,361 for the three months ended March 31, 1999
to $1,640 for the three
13
<PAGE>
months ended March 31, 2000. This increase is due primarily to: (i) increased
expenses for the development of new slot machine and table games, and (ii)
increased expenses related to the development of our table and slot systems
product lines.
Capitalized software development costs for the three months ended March 31,
2000 decreased by 100% or $76, from $76 for the three months ended March 31,
1999 to $0 for the three months ended March 31, 2000.
Depreciation expense for the three months ended March 31, 2000 increased by
19% or $218, from $1,149 for the three months ended March 31, 1999 to $1,367 for
the three months ended March 31, 2000. This increase is due primarily to
increased depreciation associated with the Company's capitalized recurring
revenue games.
Amortization expense for the three months ended March 31, 2000 increased by
22% or $191, from $860 for the three months ended March 31, 1999 to $1,051 for
the three months ended March 31, 2000. This increase is primarily due to: (i)
increased goodwill amortization related to the adjustment of the goodwill
recognized in the acquisitions of Progressive Games, Inc. ("PGI") and P&S
Leasing LLC and P&S Leasing Corporation ("P&S Leasing"), and (ii) the
amortization of software capitalization costs.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2000 increased by 12%
or $249, from $2,090 for the three months ended March 31, 1999 to $2,339 for the
three months ended March 31, 2000. This increase is due primarily to increased
borrowings on our revolver loan as well as a higher average interest rate on all
outstanding debt. The average interest rate on outstanding debt for the three
months ended March 31, 2000 was 9.9% as compared to 8.8% for the three months
ended March 31, 1999.
OTHER INCOME AND EXPENSE
Other income for the three months ended March 31, 2000 decreased by 267% or
$56, from income of $21 for the three months ended March 31, 1999 to an expense
of $35 for the three months ended March 31, 2000.
Interest income for the three months ended March 31, 2000 decreased by 17%
or $18, from $103 for the three months ended March 31, 1999 to $85 for the three
months ended March 31, 2000.
INCOME TAX PROVISION
Income taxes for the three months ended March 31, 2000 equaled a provision
of $110 or an effective tax rate of 60.8% as compared to a provision of $503 and
effective rate of 35.6% for the three months ended March 31, 1999. The increase
in the tax rates between the comparable periods is primarily due to the
permanent add-back treatment required for certain corporate expenses and the
goodwill associated with the acquisitions of PGI and P&S Leasing.
EARNINGS PER SHARE
Basic and diluted earnings per share for the three months ended March 31,
2000 were $0.01 and $0.01 on basic and diluted weighted average common shares
outstanding of 10,837 and 10,964, respectively. For the three months ended March
31, 1999 basic and diluted earnings per
14
<PAGE>
share were $0.09 and $0.09 on basic and diluted weighted average common shares
outstanding of 10,675 and 10,675, respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2000, the Company had net income of
$71 as compared to a net income of $911 for the three months ended March 31,
1999.
Net cash provided by operating activities for the three months ended March
31, 2000 was $853. The most significant uses of cash reflected in this net
provision were: (i) an increase in inventories of $2,370, (ii) a decrease in
accounts payable of $4,799, (iii) a decrease in customer deposits of $1,850,
(iv) an increase in prepaid expenses of $593, and (v) an increase in accrued and
other current liabilities of $591. The most significant provision of cash was a
decrease in trade accounts receivable of $8,240. Net cash used in investing
activities for the three months ended March 31, 2000 was $1,259. The most
significant items reflected in this total include: (i) gaming equipment leased
to customers of $1,644, (ii) maintenance capital expenditures of $339 and (iii)
proceeds from the sale of our vacant manufacturing facility in Rapid City, South
Dakota of $859. Net cash provided by financing activities for the three months
ended March 31, 2000 was $999 principally related to the issuance of common
stock.
Cash balances as of March 31, 2000 were $641, up from $48 at December 31,
1999. We expect cash provided from operating activities, our ability to increase
the revolving line of credit or term loans by $5,000 and our ability to finance
new proprietary games with lease financing will be sufficient to meet our cash
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 a consortium of lenders including
Hartford Life Insurance Company, The Travelers Insurance Company, Allstate
Insurance Company, Fidelity Guarantee Life Insurance Company, United States
Fidelity & Guarantee Company, and First Source Financial LLP 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 we have
agreed to: (i) 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) adhere to a number of other financial restrictions.
First Source Financial LLP is acting as the lender's 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. The proceeds of this placement were used to acquire the stock of PGI and
P&S Leasing as well as provide additional working capital. As of the date of
this filing, we have borrowed $4,900 of the funds available under the revolving
line of credit and have $100 available under this line. Additionally we have the
ability to increase the revolving line of credit or our term loans by another
$5,000.
As of December 31, 1999 we were in non-compliance with certain covenants
for which we have 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 equipment
15
<PAGE>
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.
16
<PAGE>
MIKOHN GAMING CORPORATION
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits:
27 Financial Data Schedule
B. Reports on Form 8-K:
None
17
<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: May 12, 2000
18
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 623
<SECURITIES> 18
<RECEIVABLES> 23,648
<ALLOWANCES> 1,441
<INVENTORY> 29,118
<CURRENT-ASSETS> 62,349
<PP&E> 42,951
<DEPRECIATION> 18,074
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0
0
<COMMON> 1,096
<OTHER-SE> 50,596
<TOTAL-LIABILITY-AND-EQUITY> 155,763
<SALES> 22,323
<TOTAL-REVENUES> 22,323
<CGS> 9,909
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