EXHIBIT 99.5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Mikohn Nevada:
We have audited the accompanying balance sheets of Mikohn Nevada (the
"Company"), a wholly-owned subsidiary of Mikohn Gaming Corporation, as of
December 31, 2000 and 1999, and the related statements of operations, changes in
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mikohn Nevada as of December
31, 2000 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
December 12, 2001
1
Mikohn Nevada
Balance Sheets
(Amounts in thousands) As of December 31, As of September 30,
-------------------------------- -----------------------
1998 1999 2000 2000 2001
-------- -------- -------- -------- --------
(unaudited) (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1 $ 1 $ 1 $ 1 $ 1
Trade accounts receivable, net 4,326 2,891 5,470 4,285 6,133
Installment sales receivable - current 725 705 503 537 635
Inventories 8,451 10,574 7,843 21,337 9,136
Prepaid expenses and other 423 934 2,022 2,234 3,513
Deferred tax assets - current 512 399 2,633 399 2,633
------- ------- ------- ------- -------
Total current assets 14,438 15,504 18,472 28,793 22,051
Contracts and notes receivable - long-term 131 83 64
Property and equipment, net 6,704 9,695 12,967 11,127 17,506
Intangible assets 113 103 96
Goodwill 4,052 3,686 2,776 3,413 2,547
Deferred tax assets - noncurrent
Other assets 1,255 45 1,405 1,120 2,241
------- ------- ------- ------- -------
Total assets $26,693 $29,116 $35,620 $44,549 $44,409
======= ======= ======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Long-term debt - current $ - $ - $ 854 $ 833 $ 1,398
Accounts payable 1,199 1,476 2,416 4,156 2,390
Accrued expenses and other current
liabilities 293 232 1,067 621 2,539
Customer deposits 743 316 - 316 -
Deferred revenue - current - - 572 270 734
Intercompany payable 17,588 20,146 23,247 27,906 24,553
------- ------- ------- ------- -------
Total current liabilities 19,823 22,170 28,156 34,102 31,614
Long-term debt - noncurrent 1,574 1,818 2,225
Deferred revenue - noncurrent 1,207 1,079
Deferred tax liabilities - noncurrent 509 843 267 843 267
Other liabilities 1,500 1,500
------- ------- ------- ------- -------
Total liabilities 20,332 23,013 32,704 36,763 36,685
------- ------- ------- ------- -------
Stockholders' equity:
Preferred stock, $.01 par value, 500,000
shares authorized, none issued and
outstanding
Common stock, $.001 par value,
20,000,000 shares authorized, 100
shares issued and outstanding
Additional paid-in capital 3,500 3,500 3,500 3,500 3,500
Retained earnings 2,861 2,603 (584) 4,286 4,224
------- ------- ------- ------- -------
Total stockholders' equity 6,361 6,103 2,916 7,786 7,724
------- ------- ------- ------- -------
Total liabilities and stockholders'
equity $26,693 $29,116 $35,620 $44,549 $44,409
======= ======= ======= ======= =======
2
Mikohn Nevada
Statements of Operations
Nine Months Ended
(Amounts in thousands) Years Ended December 31, September 30,
-------------------------------- ----------------------
1998 1999 2000 2000 2001
------- ------- -------- ------- -------
(unaudited) (unaudited)
Revenues:
Gaming operations $ 4,416 $ 6,073 $14,835 $ 9,879 $20,592
Product sales 6,687 3,950 3,317 2,449 2,423
Related party sales 57 2,256 1,663 1,080 801
------- ------- ------- ------- -------
Total revenues 11,160 12,279 19,815 13,408 23,816
------- ------- ------- ------- -------
Cost of sales:
Cost of sales 5,007 4,427 10,526 4,432 5,617
Cost of sales-related party 57 1,142 1,232 794 534
------- ------- ------- ------- -------
Total cost of sales 5,064 5,569 11,758 5,226 6,151
------- ------- ------- ------- -------
Gross profit 6,096 6,710 8,057 8,182 17,665
Operating income (loss):
Selling, general and administrative
expenses 6,443 5,874 8,812 5,488 9,992
Write-off of assets and other 1,352 3,931
------- ------- ------- ------- -------
Operating income (loss) (347) (516) (4,686) 2,694 7,673
Interest expense (149) (96) (206)
Other income and (expense) 140 119 (68) (9) (69)
------- ------- ------- ------- -------
Income (loss) before income tax provision (207) (397) (4,903) 2,589 7,398
Income tax provision (benefit) (70) (139) (1,716) 906 2,590
------- ------- ------- ------- -------
Net income (loss) $ (137) $ (258) $(3,187) $ 1,683 $ 4,808
======= ======= ======= ======= =======
3
MIKOHN NEVADA
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Amounts in thousands,
except share amounts) RETAINED
COMMON STOCK ADDITIONAL EARNINGS
------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ------ ---------- ------------ ---------
Balance, January 1, 1998 100 $ - $ 3,500 $ 2,998 $ 6,498
Net loss (137) (137)
------ ------ ---------- ------------ ---------
Balance, December 31, 1998 100 3,500 2,861 6,361
Net loss (258) (258)
------ ------ ---------- ------------ ---------
Balance, December 31, 1999 100 3,500 2,603 6,103
Net loss (3,187) (3,187)
------ ------ ---------- ------------ ---------
Balance, December 31, 2000 100 3,500 (584) 2,916
Net income 4,808 4,808
------ ------ ---------- ------------ ---------
Balance, September 30, 2001 (unaudited) 100 $ - $ 3,500 $ 4,224 $ 7,724
====== ====== ========== ============ =========
See notes to financial statements
4
Mikohn Nevada
Statements of Cash Flows
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------- -----------------------
(Amounts in thousands) 1998 1999 2000 2000 2001
------- ------- -------- -------- --------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ (137) $ (258) $ (3,187) $ 1,683 $ 4,808
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,687 2,079 3,494 2,309 3,449
Amortization 375 376 441 324 321
Write-off of assets and other 1,352 3,931
Provision for bad debts 122 442 378
Provision for obsolete inventory 210 3,819 200 315
Loss on sale of assets (4) 121 279 9 70
Changes in assets and liabilities:
Accounts receivable, net (2,655) 1,435 (3,021) (1,394) (1,041)
Installment sales receivable 2,092 (1,084) 285 251 (196)
Inventories 1,154 (1,720) 1,269 2,095 137
Prepaid expenses (347) (711) (1,208) (1,300) (1,491)
Other assets (1,209) 1,210 (873) (560) (928)
Trade accounts payable 147 277 940 2,680 (26)
Accrued and other current liabilities (399) (61) (881) 389 1,472
Customer deposits 302 (427) (316)
Deferred revenue (1,785) (131) (536)
Deferred taxes (3) 447
------- ------- -------- -------- --------
Net cash provided by operating activities (660) 3,246 5,283 6,686 6,732
------- ------- -------- -------- --------
Cash flows from investing activities:
Purchase of inventory leased to others (5,630) (5,804) (20,329) (18,538) (12,955)
Proceeds from sale-leaseback
transactions 11,500 2,000 3,500
Purchase of property and equipment (20)
Proceeds from sales of property and
equipment 692 242
------- ------- -------- -------- --------
Net cash used in investing activities (4,938) (5,804) (8,829) (16,538) (9,233)
------- ------- -------- -------- --------
Cash flows from financing activities:
Proceeds from capital lease transactions 3,000 3,000 2,000
Payments for capital leases (572) (349) (805)
Net change in intercompany balance 5,596 2,558 1,118 7,201 1,306
------- ------- -------- -------- --------
Net cash provided by financing activities 5,596 2,558 3,546 9,852 2,501
------- ------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents (2)
Cash and cash equivalents, beginning of
period 3 1 1 1 1
------- ------- -------- -------- --------
Cash and cash equivalents, end of period $ 1 $ 1 $ 1 $ 1 $ 1
======= ======= ======== ======== ========
5
MIKOHN NEVADA
NOTES TO FINANCIAL STATEMENTS
NOTE: All amounts (dollars and numbers) reported in the Notes to Financial
Statements are expressed in thousands and are rounded to the nearest thousand
unless otherwise specified (such as basis points).
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS:
Mikohn Nevada (the "Company"), a wholly-owned subsidiary of Mikohn Gaming
Corporation (the "Parent") was incorporated on June 15, 1995 in Nevada. The
Company is a developer, manufacturer, and marketer of (i) proprietary branded
slot machines, including our Yahtzee(R) and Battleship(R) series of gaming
machines and (ii) gaming products, including gaming machines and keno systems.
The Parent performs certain centralized corporate functions that serve all
of its operations including the Company. Expenses related to these functions
(such as, legal and compliance, sales support, research and development and art)
have been allocated to its subsidiaries including the Company.
During the years ended December 31, 2000 and 1999, the Parent had an
outstanding credit facility. This credit facility was guaranteed by the
Company.
On August 22, 2001, the Parent completed the private placement of $105,000
of its 11.875% Senior Secured Notes due 2008 and warrants to purchase an
aggregate of 420 shares of its common stock at a price of $7.70 per share. The
notes are unconditionally guaranteed on a senior secured basis by the Parent's
domestic subsidiaries, including the Company. In addition, the Parent has agreed
to pledge the stock of the Company upon regulatory approval.
The Company's operations are concentrated in two principal business
segments: slot gaming operations and gaming products.
SLOT GAMING OPERATIONS. The Company established its slot gaming operations
business unit to develop, acquire, manufacture and distribute proprietary games,
and these have become increasingly important to our business. Increased
attention has been given to slot gaming operations because of the high recurring
revenues and profit margin potential for this business line. We own or license
the rights to several categories of proprietary games, which we place in casinos
under lease arrangements. These leases provide for fixed rental payments or a
participation in the game's operating results. Sales of proprietary games are
reflected in the reported results of our gaming products business segment while
revenues derived from leases are included in the results of our gaming
operations business segment.
GAMING PRODUCTS. We have been providing gaming products and equipment
through the Company since its inception. Our gaming products are found in almost
every major gaming jurisdiction.
6
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS. The unaudited financial statements for the
nine months ended September 30, 2001 and 2000 have been prepared in accordance
with generally accepted accounting principles for interim financial information.
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, 2001 and
2000 the results of its operations and cash flows for the nine months ended
September 30, 2001 and 2000. The results of operations for the nine months ended
September 30, 2001 are not necessarily indicative of the results to be expected
for the entire year.
CASH AND CASH EQUIVALENTS. Investments which mature within 90 days from
the date of purchase are treated as cash equivalents and are included in cash
and cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS. In accordance with reporting and
disclosure requirements of the Statement of Financial Accounting Standards
("SFAS") No. 107 - Disclosures about Fair Values of Financial Instruments, The
Company calculates the fair value of financial instruments and includes this
information in the Company's Notes to Financial Statements when the fair value
is different than the book value of those financial instruments. When fair
value is equal to book value, no disclosure is made. Fair value is determined
using quoted market prices whenever available. When quoted market prices are
not available, the Company uses alternative valuation techniques such as
calculating the present value of estimated future cash flows utilizing discount
rates commensurate with the risks involved.
CONCENTRATION OF CREDIT RISK. The Company sells its products and services
to distributors and gaming properties primarily in Nevada. The Company
established a financing program under which interest bearing installment sales
contracts collateralized by the equipment sold were entered into with credit
worthy customers, with payment terms typically ranging over periods of 12 to 24
months. The Company performs credit evaluations of its customers, and typically
requires advance deposits of approximately 50%.
RELATED PARTY TRANSACTIONS. The Company is dependent on the Parent for
funding. No interest is charged on funds advanced by the Parent. The Company
sells product to its Parent and other subsidiaries of the Parent which are
reflected in the accompanying statements of operations.
INVENTORIES. Inventories are stated at the lower of cost (determined using
the first-in, first-out method) or market.
LONG-LIVED ASSETS. Property and equipment are stated at cost and are
depreciated by the straight-line method over the useful lives of the assets,
which range from 5 to 10 years. Costs of major improvements are capitalized;
costs of normal repairs and maintenance are charged to expense as incurred.
Management requires long-lived assets that are held and used by the Company to
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
INTANGIBLE ASSETS. Intangible assets consist of trademark rights. They
are recorded at cost and are amortized on a straight-line basis over the life of
the trademark, typically 15 years. Management regularly performs reviews to
determine if the carrying value of intangible assets is impaired. The purpose
of the review is to identify any facts or circumstances, either internal or
external, which may indicate whether the carrying value of the asset cannot be
recovered. See Note 9 - Write-off of Assets and Other.
GOODWILL. Goodwill consists of the excess purchase price over the fair
market value of the assets acquired and is amortized on a straight-line basis
over 15 years. Management regularly performs reviews to determine if the
carrying value of goodwill is impaired. The purpose of the review is to
identify any facts or circumstances, either internal or external, which may
indicate whether or not the carrying value of the asset can be recovered. See
Note 9 - Write-off of Assets and Other.
DEPOSITS AND PRODUCT SALES RECOGNITION. Deposit liabilities represent
amounts collected
7
in advance from customers pursuant to agreements under which the related sale of
inventory has not been completed.
REVENUE RECOGNITION. The Company recognizes revenue as follows:
Product sales are executed by a signed contract or customer purchase order.
Revenue is recognized when the completed product is delivered. If the agreement
calls for the Company to perform an installation after delivery, revenue,
related to the installation, is recognized when the installation has been
completed and accepted by the customer.
The leasing of proprietary slot machines occurs under signed lease
agreements. These contracts will either be on a participation or a lease basis.
Slot machine lease contracts are typically for a 12-month period with a 60-day
cancellation clause. On a participation basis, the Company earns a share of the
revenue that the casino earns from these slot machines. On a lease basis, the
Company charges a fixed amount per slot machine per day. Both types of revenue
are recognized on a monthly basis.
EQUITY INSTRUMENTS ISSUED TO VENDORS: Our Parent's accounting policy for
equity instruments issued to vendors in exchange for goods and services follows
the provisions of Emerging Issues Task Force ("EITF") 96-18 - Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and EITF 00-18 - Accounting
Recognition for Certain Transactions Involving Equity Instruments Granted to
Other Than Employees. The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or (ii) the
date at which the consultant or vendor's performance is complete.
The Company has received from Hasbro and Ripley licensing rights to
intellectual property, including rights to develop and market gaming devices and
associated equipment under the trademarks Yahtzee(R) and Battleship(R). In
exchange for these license agreements, the Parent granted Hasbro and Ripley
warrants to purchase shares of the Parent's common stock for each license. The
fair value, as determined above, of the acquired rights is capitalized and is
recognized as a charge to the statement of operations over the term of the
licensing agreement. At December 31, 2000, warrants to purchase 250 shares of
the Parent's common stock were vested with a fair market value of $889. In
connection with licenses to other properties, the Parent has issued an
additional 285 warrants that were not vested at December 31, 2000.
RESEARCH AND DEVELOPMENT. Costs associated with the development of
products are expensed when incurred. Such expenses totaled approximately $827,
$913 and $1,334 for the years ended December 31, 2000, 1999 and 1998,
respectively.
INCOME TAXES. The Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes, pursuant to which the Company records deferred
income taxes for temporary differences that are reported in different years for
financial reporting and for income tax purposes. Such deferred tax liabilities
and assets are classified into current and non-current amounts based on the
classification of the related assets and liabilities.
The Company is included in the Parent's consolidated federal income tax
return.
USE OF ESTIMATES AND ASSUMPTIONS. The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
8
results could differ from those estimates.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table presents the carrying amount and estimated fair value of
our financial instruments at December 31, 2000:
CARRYING ESTIMATED
AMOUNT FMV
----------- ------------
LIABILITIES:
Long-term debt $ 2,428 $ 2,339
=========== ============
The estimated fair value of long-term debt was calculated by discounting the
expected amortization principal and interest payments by the discount rates most
closely approximating that which would be required to place similar notes
payable and capitalized leases at the current time.
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2000 and 1999 consist of the following:
2000 1999
---------- ----------
Trade accounts $ 5,644 $ 2,883
Other 8
---------- ----------
Subtotal 5,644 2,891
Less: allowance for doubtful accounts (174)
---------- ----------
Total $ 5,470 $ 2,891
========== ==========
Changes in the allowance for doubtful accounts for the years ended
December 31, 2000 and 1999 are summarized as follows:
2000 1999
---------- ----------
Allowance for doubtful accounts - beginning $ - $ -
Provision for bad debts (442)
Write-offs 268
Recoveries
---------- ----------
Allowance for doubtful accounts - ending $ (174) $ -
========== ==========
4. INSTALLMENT SALES RECEIVABLE
The Company finances certain sales. The amounts financed during 2000 and
1999 totaled approximately none and $344, respectively. At December 31, 2000 and
1999, the balance of installment sales receivable was $503 and $788 of which
$503 and $705, respectively, were due within 12 months. At December 31, 2000 and
1999, the Company had $174 and none, respectively, in allowance for doubtful
accounts for installment sales receivables which are included in the allowance
for doubtful accounts reported above, see Note 3 - Accounts Receivable.
9
5. INVENTORIES
Inventories at December 31, 2000 and 1999 consist of the following:
2000 1999
---------- ----------
Raw materials $ 3,989 $ 4,618
Finished goods 6,636 3,474
Work-in-progress 460 2,984
---------- ----------
Subtotal 11,085 11,076
Less: reserve for obsolete inventory (3,242) (502)
---------- ----------
Total $ 7,843 $ 10,574
========== ==========
Changes in the reserve for obsolete inventory for the years ended
December 31, 2000 and 1999 are summarized as follows:
2000 1999
---------- ----------
Reserve for obsolete inventory - beginning $ (502) $ (325)
Provision for obsolete inventory (3,819) (210)
Write-offs 1,079 33
---------- ----------
Reserve for obsolete inventory - ending $ (3,242) $ (502)
========== ==========
10
6. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2000 and 1999 consist of the
following:
2000 1999
---------- ----------
Leasehold improvements $ 532 $ 510
Machinery and equipment 76 61
Equipment leased to others 17,303 13,595
Furniture and fixtures 435 427
Transportation equipment 11 11
---------- ----------
Subtotal 18,357 14,604
Less: accumulated depreciation (5,390) (4,909)
---------- ----------
Total $ 12,967 $ 9,695
========== ==========
See Note 10 - Long-Term Debt
7. INTANGIBLE ASSETS
Intangible assets at December 31, 2000 and 1999 consist of the following:
2000 1999
---------- ----------
Trademark rights $ - $ 140
Less: accumulated amortization (37)
---------- ----------
Total $ - $ 103
========== ==========
During 2000, the trademark rights related to the Flip-It(TM) name were
written-off. The write-off was due to the decline in the Flip-It(TM) slot
operation. See Note 9 - Write-Off of Assets and Other.
8. GOODWILL
Goodwill at December 31, 2000 and 1999 consists of the following:
2000 1999
---------- ----------
Goodwill $ 4,585 $ 5,485
Less: accumulated amortization (1,809) (1,799)
---------- ----------
Total $ 2,776 $ 3,686
========== ==========
During 2000, goodwill related to the acquisition of Games of Nevada in the
amount of $545, net of amortization was written off. The write-off was due to
the decline in the Flip-It(TM) slot operation and write-down of related
inventory. See Note 9 - Write-Off of Assets and Other.
11
9. WRITE-OFF OF ASSETS AND OTHER
As a result of the Company's increased focus on its gaming operations and
branded slot machines following the review conducted as part of the Parent's
strategic repositioning initiative, the Company determined that certain of its
older non-branded slot machine games, prepaid royalties related to a licensing
agreement and goodwill had balance sheet costs (primarily long-term assets) in
excess of their present realizable value, resulting in a write-off of $2,431.
Provisions for inventory writedowns of $1,553 and $1,301 relating to the older
non-branded Flip-It(TM) product line as well as the Mikohn Classic(TM) slot
machines, respectively, have been included in cost of sales in the accompanying
financial statements.
On March 27, 2001, a jury returned a verdict in favor of Acres Gaming, Inc.
against Mikohn Gaming Corporation. The jury's award of $1,500 was included in
the accompanying statement of operations for the year ended December 31, 2000,
as it relates to the products of the Company.
During the fourth quarter of the year ended December 31, 1999, The Company
incurred a non-recurring asset write-off of $1,352 related to our P&M Coin
product line, which includes our Mikohn Classic(TM) slot machine games, pursuant
to SFAS No. 121 - Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, to more accurately reflect the value of the
P&M Coin slot machine product line. These charges included write-offs of both
the investment in the product line as well as prepaid royalties associated with
the product line.
10. LONG-TERM DEBT
Long-term debt at December 31, 2000 and 1999 consist of the following:
2000 1999
---------- ----------
Capital lease of gaming equipment. This $ 2,428 $ -
total consists of two capital leases that
bear individual interest rates between 8.8%
and 9.0% and whose terms are scheduled to
mature at various dates through 2003. The
related capitalized costs for these leases
were $2,452 at December 31, 2000.
---------- ----------
Total 2,428
Less: current portion (854)
---------- ----------
Long-term portion $ 1,574 $ -
========== ==========
During 2000, the Company entered into a series of sale-leaseback
transactions with various third party finance companies. The transactions
involve gaming equipment, have a term of 40 months and are being treated as
capital leases. Proceeds from these sale-leaseback transactions totaled $3,000.
12
Following is the long-term debt maturity schedule:
2001 $ 854
2002 933
2003 641
---------
Total $ 2,428
=========
11. COMMITMENTS
We lease certain of our facilities and equipment under various agreements
for periods through the year 2004. The following schedule shows the future
minimum rental payments required under these operating leases, which have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 2000.
2001 $ 4,711
2002 5,606
2003 5,614
2004 1,103
---------
Total $ 17,034
=========
Rent expense was $978, $559 and $545 for the years ended December 31, 2000,
1999 and 1998, respectively.
During 2000, the Company entered into a series of sale-leaseback
transactions with various third party finance companies. The transactions
involve gaming equipment, have a term of 40 months, a fair value purchase option
at the end of the term, and are being treated as operating leases. Proceeds from
these sale-leaseback transactions totaled $11,500. The Company recorded deferred
gains from these transactions totaling $1,902 which are being amortized,
straight-line, over the term of the respective leases as a reduction in rental
expense.
12. INCOME TAXES
The benefit for income taxes for the years ended December 31, 2000, 1999 and
1998 consist of:
2000 1999 1998
--------- --------- ---------
Current $ 1,095 $ (586) $ 317
Deferred (2,811) 447 (387)
--------- --------- ---------
Total benefit $ (1,716) $ (139) $ (70)
========= ========= =========
13
The benefit for income taxes for the years ended December 31, 2000, 1999 and
1998 differs from the amount computed at the federal income tax statutory rate
as a result of the following:
2000 % 1999 % 1998 %
-------- ----- -------- ----- -------- -----
Amount at statutory rate $ (1,716) 35.0% $ (139) 35.0% $ (72) 35.0%
Adjustments:
Non-deductible expenses 2 -2.8%
-------- -------- --------
Total benefit $ (1,716) 35.0% $ (139) 35.0% $ (70) 32.2%
======== ======== ========
The components of the net deferred tax asset at December 31, 2000 and 1999
consist of the following:
2000 1999
-------- --------
DEFERRED TAX ASSETS:
- --------------------
Current:
Inventory book / tax differences $ 1,847 $ 399
Prepaid expenses and other 61
Deferred revenue 200
Patent litigation 525
-------- --------
Subtotal 2,633 399
-------- --------
Non-current:
Deferred revenue 422
Sale leaseback 186
Intangible assets 23
-------- --------
Subtotal 631 -
-------- --------
Total deferred tax assets 3,264 399
-------- --------
DEFERRED TAX LIABILITIES:
- ------------------------
Current: - -
-------- --------
Non-current:
Fixed assets and other 898 843
-------- --------
Total deferred tax liabilities 898 843
-------- --------
Net deferred tax assets / (liabilities) $ 2,366 $ (444)
======== ========
13. CONCENTRATIONS OF CREDIT RISK
The financial instruments that potentially subject the Company to
concentrations of credit risk are primarily accounts and installment sales
receivable. Product sales are primarily to casinos and gaming equipment
manufacturers.
14
At December 31, 2000, accounts and installment sales receivable on a
operations basis are as follows:
INSTALLMENT
ACCOUNTS SALES
RECEIVABLE RECEIVABLE TOTAL
---------- ---------- -----------
Trade receivables:
Gaming operations $ 5,265 $ - $ 5,265
Gaming product 379 503 882
---------- ---------- -----------
$ 5,644 $ 503 $ 6,147
========== ========== ===========
14. SEGMENT REPORTING
The Company's operations are concentrated in two principal business
segments: gaming operations and gaming products. See Note 1 - Description of
Business and Summary of Significant Accounting Policies.
Business segment information for the years ended December 31, 2000, 1999 and
1998 consists of:
BUSINESS SEGMENTS: 2000 1999 1998
- ------------------ --------- --------- ---------
REVENUES:
Gaming operations $ 14,835 $ 6,073 $ 4,416
Gaming products 4,980 6,206 6,744
--------- --------- ---------
Total $ 19,815 $ 12,279 $ 11,160
========= ========= =========
GROSS PROFIT:
Gaming operations $ 9,226 $ 4,577 $ 3,058
Gaming products (1,169) 2,133 3,038
--------- --------- ---------
Total $ 8,057 $ 6,710 $ 6,096
========= ========= =========
OPERATING LOSS:
Gaming operations $ 1,450 $ (666) $ (1,315)
Gaming products (2,205) 1,502 968
--------- --------- ---------
Subtotal (755) 836 (347)
Write-off of assets and other (3,931) (1,352)
--------- --------- ---------
Total $ (4,686) $ (516) $ (347)
========= ========= =========
DEPRECIATION AND AMORTIZATION:
Gaming operations $ 3,826 $ 2,328 $ 1,935
Gaming products 109 127 127
--------- --------- ---------
Total $ 3,935 $ 2,455 $ 2,062
========= ========= =========
15
BUSINESS SEGMENTS: 2000 1999 1998
- ------------------ --------- --------- ---------
ASSETS:
Gaming operations $ 23,451 $ 16,338 $ 12,901
Gaming products 12,169 12,778 13,791
--------- --------- ---------
Total $ 35,620 $ 29,116 $ 26,692
========= ========= =========
CAPITAL EXPENDITURES:
Gaming operations $ 9,287 $ 4,892 $ 4,665
Gaming products 45 87 85
--------- --------- ---------
Total $ 9,332 $ 4,979 $ 4,750
========= ========= =========
15. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 -
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 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 No. 133 is effective for all fiscal
years beginning after June 15, 2000, and will be effective for us for the year
beginning on January 1, 2001. The Company does not believe that SFAS No. 133
will have a material impact on our financial statements.
In July 2001, the FASB issued SFAS No. 141 - Business Combinations and SFAS
No. 142 - Goodwill and Other Intangible Assets. The primary impact on the
Company is that the excess of purchase price over fair market value of net
assets acquired ("goodwill") and other certain intangible assets will no longer
be amortized beginning January 1, 2002. Instead, goodwill and certain
intangible assets will be reviewed annually for impairment. The Company is in
the process of assessing the impact of not recording amortization of goodwill
and certain other intangible assets, but has not determined the extent to which
it will affect the financial statements.
In August 2001, the FASB issued SFAS No. 144 - Accounting for the Impairment
on Disposal of Long-Lived Assets, effective January 1, 2002. SFAS No. 144
supersedes SFAS No. 121 and portions of other accounting statements. The
provisions applicable to the Company are substantially the same as those applied
under SFAS No. 121 and the Company, therefore, does not believe that the
adoption of SFAS No. 144 will have a material impact on its results of
operations or financial position. The Company is, however, required to complete
the initial assessment of impairment by 2002.
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