<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File No. 0-21754
SODAK GAMING, INC.
(Exact name of registrant as specified in its charter)
SOUTH DAKOTA 46-0407053
(State of Incorporation) (I.R.S. Employer Identification No.)
5301 S. Highway 16
Rapid City, South Dakota 57701
(Address of principal executive offices)
(605) 341-5400
(Registrant's telephone number, including area code)
Indicate by 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
----------- ----------
At June 30, 1996, there were outstanding 11,366,650 shares of the Company's
common stock.
Page 1 of 21
Exhibit Index Page 20
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SODAK GAMING, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 3
Consolidated Statements of Earnings for the three
months ended June 30, 1996 and 1995 5
Consolidated Statements of Earnings for the six
months ended June 30, 1996 and 1995 6
Consolidated Statements of Cash Flows for the six
months ended June 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal proceedings 16
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
2
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
- -----------------------------------------
SODAK GAMING, INC.
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995*
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,837,366 $ 974,221
Receivables:
Trade accounts, net of allowance for doubtful accounts 23,437,468 15,971,347
Short-term notes receivable 628,000 1,846,213
Notes receivable, current maturities 25,877,680 25,610,033
Accrued interest 447,528 322,012
Inventories:
Gaming machines 11,598,177 12,798,282
Repair parts and other gaming accessories 5,108,536 2,530,500
Prepaid expenses and other current assets 1,020,681 1,080,934
Deferred income taxes 669,000 528,000
----------------- -----------------
Total current assets 72,624,436 61,661,542
----------------- -----------------
Property and equipment:
Land and improvements 638,361 628,143
Building 5,684,121 5,640,453
Gaming operations equipment 12,587,916 4,674,004
Office furniture and equipment 2,198,340 1,791,327
Transportation equipment 1,897,045 1,837,565
Shop equipment 481,196 346,789
----------------- -----------------
23,486,979 14,918,281
Less accumulated depreciation 2,007,205 1,245,004
----------------- -----------------
Total property and equipment, net 21,479,774 13,673,277
----------------- -----------------
Other assets:
Notes receivable, net of current maturities 25,768,784 26,164,915
Net investment in direct financing-type lease 13,644,083 13,982,140
Amounts due from riverboat lessee 22,581,768 19,950,823
Real estate held for sale 1,140,435 1,140,435
Other assets 3,371,763 1,481,885
----------------- -----------------
Total other assets 66,506,833 62,720,198
----------------- -----------------
Total assets $ 160,611,043 $ 138,055,017
================= =================
* From audited financial statements
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
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SODAK GAMING, INC.
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995*
---------------- ----------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 29,925,640 $ 22,234,670
Current maturities of long-term debt 59,013 56,891
Income taxes payable 1,396,851 993,718
Accrued liabilities 1,451,250 1,502,170
---------------- ----------------
Total current liabilities 32,832,754 24,787,449
---------------- ----------------
Long-term debt, net of current maturities 25,514,329 18,043,977
---------------- ----------------
Deferred income taxes 1,151,000 963,000
---------------- ----------------
Shareholders' equity:
Preferred stock at $0.001 par value, 25,000,000 shares
authorized, none outstanding 0 0
Common stock at $0.001 par value, 75,000,000 shares
authorized, 11,366,650 and 11,361,138 shares
issued and outstanding at June 30, 1996 and
December 31, 1995, respectively 11,367 11,361
Additional paid-in capital 63,787,291 63,713,980
Retained earnings 37,314,302 30,535,250
---------------- ----------------
Total shareholders' equity 101,112,960 94,260,591
---------------- ----------------
Commitments and contingencies
Total liabilities and shareholders' equity $ 160,611,043 $ 138,055,017
================ ================
* From audited financical statements.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
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SODAK GAMING, INC.
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues:
Product sales $ 26,095,641 $ 20,202,625
Gaming operations 5,396,376 2,214,364
Wide area progressive systems 1,858,252 802,278
Financing income on notes receivables and other
financing arrangements 1,440,738 1,242,936
Other 8,265 25,828
------------- -------------
Total revenues 34,799,272 24,488,031
------------- -------------
Costs and expenses:
Cost of product sales 20,393,810 15,519,125
Gaming operations 2,962,672 82,805
Selling, general and administrative 4,522,758 3,838,300
Interest and financing costs 518,853 209,227
------------- -------------
Total costs and expenses 28,398,093 19,649,457
------------- -------------
Income from operations 6,401,179 4,838,574
Other income (expense) 8,974 (9,241)
------------- -------------
Earnings before income taxes 6,410,153 4,829,333
Provision for income taxes 2,328,828 1,772,870
------------- -------------
Net earnings $ 4,081,325 $ 3,056,463
============= =============
Earnings per common and common equivalent share $ 0.36 $ 0.27
============= ==============
Weighted average number of common and common
equivalent shares outstanding 11,447,075 11,373,786
============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
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SODAK GAMING, INC.
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
1996 1995
-------------- ---------------
<S> <C> <C>
Revenues:
Product sales $40,578,248 $29,863,310
Gaming operations 9,239,039 4,321,987
Wide area progressive systems 3,613,110 1,233,609
Financing income on notes receivable and other
financing arrangements 2,902,865 2,209,619
Other 15,047 51,768
-------------- ---------------
Total revenues 56,348,309 37,680,293
-------------- ---------------
Costs and expenses:
Cost of product sales 31,293,408 23,045,556
Gaming operations 4,481,555 82,805
Selling, general and administrative 8,931,024 7,364,745
Interest and financing costs 967,227 255,965
-------------- ---------------
Total costs and expenses 45,673,214 30,749,071
-------------- ---------------
Income from operations 10,675,095 6,931,222
Other income 15,761 71,254
-------------- ---------------
Earnings before income taxes 10,690,856 7,002,476
Provision for income taxes 3,911,804 2,563,171
-------------- ---------------
Net earnings $ 6,779,052 $ 4,439,305
============== ===============
Earnings per common and common equivalent share $ 0.59 $ 0.39
============== ===============
Weighted average number of common and common
equivalent shares outstanding 11,438,981 11,367,462
============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
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SODAK GAMING, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,779,052 $ 4,439,305
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 832,955 222,884
Provision for doubtful accounts 303,000 150,000
Net deferred income taxes 47,000 165,000
Gross profit on sales financed through notes receivable (4,015,594) (4,762,903)
Changes in operating assets and liabilities:
Receivables (7,894,637) 7,983,751
Purchase of inventories sold under financed sales (10,730,385) (13,557,006)
Payments received on notes receivable relating
to financed sales 13,862,941 11,844,295
Inventories (3,855,064) 2,818,762
Prepaid expenses and other current assets 60,253 (210,075)
Accounts payable 7,690,970 (17,878,745)
Accrued liabilities (50,920) 286,963
Income taxes payable 403,133 (1,479,797)
--------------- --------------
Net cash provided by (used in) operating activities 3,432,704 (9,977,566)
--------------- --------------
Cash flows from investing activities:
Cash advanced on notes receivable (29,739) (4,143,692)
Payments received on notes receivable 2,259,475 1,213,453
Purchases of property and equipment (6,140,300) (4,469,654)
Increase in due from riverboat lessee (2,630,945) (1,991,191)
Principal payments received on direct financing-type lease 338,057 0
Increase in other assets (1,911,898) (89,824)
--------------- --------------
Net cash used in investing activities (8,115,350) (9,480,908)
--------------- --------------
Cash flows from financing activities:
Proceeds from long-term borrowings 16,250,000 11,000,000
Principal repayments of long-term debt (8,777,526) (3,025,660)
Net proceeds from exercise of stock options 73,317 0
--------------- --------------
Net cash provided by financing activities 7,545,791 7,974,340
--------------- --------------
Net increase (decrease) in cash and cash equivalents 2,863,145 (11,484,134)
Cash and cash equivalents, beginning of period 974,221 12,466,828
--------------- --------------
Cash and cash equivalents, end of period $ 3,837,366 $ 982,694
=============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 786,300 $ 228,460
Cash paid during the period for income taxes $ 3,461,671 $ 3,877,968
Supplemental disclosure of non-cash investing activity:
Gaming machines inventory transferred to
gaming operations equipment $ 2,477,133 $ 1,037,969
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
7
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SODAK GAMING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(UNAUDITED)
Note 1 - Unaudited Consolidated Financial Statements
- ----------------------------------------------------
The accompanying unaudited consolidated financial statements of Sodak
Gaming, Inc. and its consolidated subsidiaries, Sodak Gaming International,
Inc., Sodak Gaming Peru, S.A., Ecuasodak S.A., and Sodak Gaming do Brasil Ltda
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information, pursuant to the rules
and regulations of the Securities and Exchange Commission. Pursuant to such
rules and regulations, certain financial information and footnote disclosures
normally included in the consolidated financial statements have been condensed
or omitted. The results for the periods indicated are unaudited, but reflect all
adjustments (consisting only of normal recurring adjustments) which management
considers necessary for a fair presentation of operating results.
Results of operations for interim periods are not necessarily indicative of
a full year of operations.
These condensed consolidated financial statements should be read in
conjunction with the 1995 financial statements and notes thereto.
Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
Note 2 - Acquisition of Gamblers Supply Management Company
- -----------------------------------------------------------
On July 1, 1996, the Company acquired all of the outstanding shares of
Gamblers Supply Management Company (GSMC) for $1 million in cash. The
acquisition will be accounted for using the purchase method of accounting. The
assets of GSMC consist of gaming machines, gaming equipment and the dockside
facilities, which include a 24-room hotel, parking lots, marina, restaurant,
lounge and other support facilities and related furniture, fixtures and
equipment. In addition to the purchase price, the Company has agreed to
guarantee a GSMC note payable to its former shareholders in the amount of $4.4
million. Sodak continues to hold notes receivable (relating to prior loans to
GSMC to finance the dockside facility and gaming equipment), lease payments
receivable and accrued interest receivable from GSMC aggregating to $22.6
million as of June 30, 1996.
8
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Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1995
Net earnings for the three months ended June 30, 1996 increased 33.5% to
$4.1 million, or $0.36 per share, compared to net earnings of $3.1 million, or
$0.27 per share, for the three months ended June 30, 1995. The Company's
principal revenue sources -- product sales, gaming operations, wide area
progressive systems, and financing -- all recorded increases in revenues and net
earnings for the three months ended June 30, 1996, compared to the same quarter
in 1995. Product sales and wide area progressive systems were the primary
contributors to the increase in net earnings. The greatest rate of revenue
growth occurred in gaming operations -- a 143.7% increase propelled by the
continued expansion of Latin American gaming operations.
REVENUES
Total revenues increased 42.1% to $34.8 million for the three months ended
June 30, 1996, compared to $24.5 million for the three months ended June 30,
1995.
PRODUCT SALES. Product sales increased 29.2% to $26.1 million for the three
months ended June 30, 1996, from $20.2 million in 1995. Total sales of gaming
machines, including specialty gaming machines and used machines, were
approximately 3,100 machines in 1996 as compared to approximately 2,250 machines
in 1995. The gaming machine placements in 1996 were primarily in the states of
Michigan and Wisconsin and in the province of Ontario, Canada.
GAMING OPERATIONS. Gaming operations revenue increased 143.7% to $5.4
million for the three months ended June 30, 1996, from $2.2 million in 1995.
This increase is primarily attributable to the growth of gaming operations in
Peru and the introduction of gaming operations in Ecuador and Brazil.
Gaming operations revenue consisted of $1.6 million in lease revenue from
the Miss Marquette riverboat for the three months ended June 30, 1996, compared
to $1.7 million in 1995 (the operating company of the Miss Marquette casino
complex, Gamblers Supply Management Company (GSMC), was purchased by the Company
on July 1, 1996 -- see page 15 for discussion); $0.4 million in revenue earned
from the Company's share of Harrah's Entertainment, Inc.'s (Harrah's) management
fee in connection with Harrah's Phoenix Ak-Chin casino and entertainment complex
in each of the three months ended June 30, 1996 and 1995 (Harrah's owns
approximately 14.1% of the Company's outstanding shares at June 30, 1996); and
$3.4 million in revenue from international gaming operations in 1996 compared to
$0.1 million in 1995.
The Company believes that gaming operations revenue will increase as a
result of the acquisition of GSMC (see page 15 for discussion) and as current
operations mature and additional operations and strategic
9
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markets are developed. However, there can be no assurance that such revenues
will be realized due primarily to gaming's dependence on its legal status and
public acceptance in certain jurisdictions.
WIDE AREA PROGRESSIVE SYSTEMS. Wide area progressive revenues increased
131.6% to $1.9 million for the three months ended June 30, 1996, from $0.8
million in 1995. Wide area progressive systems revenues are derived from the
operation of multi-link systems available to Native American casinos nationwide
in jurisdictions permitting such systems. The increase in revenues is a result
of the expansion of systems. At August 1, 1996, the Company was providing a
total of seven wide area progressive systems which were operating in 10 states:
Arizona (which permits the operation of intrastate wide area progressive systems
in lieu of interstate systems), Connecticut, Iowa, Louisiana, Michigan, New
Mexico, North Dakota, Oregon, South Dakota, and Wisconsin.
The Quartermania and Megabucks interstate systems were first introduced to
Native American casinos in August 1994; the Nickelmania interstate system was
introduced in November 1995; the Arizona intrastate Quartermania and Megabucks
systems were introduced in December 1995; and the Dollars Deluxe interstate
system was introduced in June 1996. The Company also operates a system available
to non-Native American casinos located in Deadwood, South Dakota. Based on
current market trends, the Company believes that the wide area progressive
revenues could increase through the placement of additional machines on existing
systems as well as the introduction of new systems.
FINANCING INCOME. Financing income on notes receivable and other financing
arrangements increased 15.9% to $1.4 million for the three months ended June 30,
1996, compared to $1.2 million in 1995. This increase was primarily due to an
increase in financing arrangements entered into.
COSTS AND EXPENSES
Total costs and expenses increased 44.5% to $28.4 million for the three
months ended June 30, 1996, compared to $19.6 million for the same three month
period in 1995.
PRODUCT SALES. The cost of product sales increased 31.4% to $20.4 million
for the three months ended June 30, 1996, from $15.5 million in 1995. This
increase was attributable to the increased sales volume of gaming machines. As a
percentage of product sales revenue, the cost of products increased to 78.2% in
1996, from 76.8% in 1995. The lower gross margin is due primarily to an increase
in the percentage of sales qualifying for discounts.
GAMING OPERATIONS. Gaming operations direct costs increased $2.9 million to
$3.0 million for the three months ended June 30, 1996, compared to $0.1 million
in 1995. This increase is attributed to the expansion of gaming operations in
Peru and the introduction of gaming operations in Ecuador and Brazil.
10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 17.8% to $4.5 million for the three months ended June 30,
1996, from $3.8 million in 1995. This increase resulted primarily from increases
in compensation and related employee costs and benefits, depreciation, travel
and other expenses associated with the development of new markets, including
gaming operations in the United States, Peru, Ecuador, Brazil, and other
countries, primarily in Latin America. These expenses are consistent with the
Company's growth philosophy and ongoing strategy to establish gaming operations
and other recurring revenue sources and to successfully pursue opportunities in
potential new gaming jurisdictions. As a percentage of total revenues, selling,
general and administrative expenses decreased to 13.0% in 1996 compared to 15.7%
in 1995.
INTEREST AND FINANCING. Interest and financing costs increased 148% to $0.5
million for the three months ended June 30, 1996, from $0.2 million in 1995. The
increase in financing costs is attributed to increased borrowings for 1) the
expansion of gaming operations in Latin America, 2) the increases in receivables
and contracts from the financing of product sales, and 3) the construction of a
new warehouse, assembly, systems operations and corporate headquarters facility.
The Company believes that interest and financing costs will increase during 1996
and future years as the Company continues its growth strategy.
INCOME FROM OPERATIONS
The cumulative effect of the above described changes resulted in a 32.3%
increase in income from operations to $6.4 million for the three months ended
June 30, 1996, from $4.8 million for the three months ended June 30, 1995. As a
percentage of revenues, income from operations decreased to 18.4% in 1996, from
19.8% in 1995. This decrease in the operating margin of the Company was
primarily the result of 1) the lower gross margin on product sales due to the
increase in sales qualifying for discounts, and 2) the expansion of
international gaming operations, which are in a phase of growth and
infrastructure development.
EARNINGS BEFORE INCOME TAXES
Earnings before income taxes increased 32.7% to $6.4 million for the three
months ended June 30, 1996, compared to $4.8 million for the three months ended
June 30, 1995. Provision for income taxes were $2.3 million in 1996, compared to
$1.8 million in 1995, representing 36.3% and 36.7% of earnings before income
taxes for the three months ended June 30, 1996 and 1995, respectively.
11
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RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1995
Net earnings for the six months ended June 30, 1996 increased 52.7% to $6.8
million, or $0.59 per share, compared to net earnings of $4.4 million, or $0.39
per share, for the six months ended June 30, 1995. The Company's principal
revenue sources -- product sales, gaming operations, wide area progressive
systems, and financing -- all recorded increases in revenues and net earnings
for the six months ended June 30, 1996, compared to the same period in 1995.
Product sales and wide area progressive systems were the primary contributors to
the increase in net earnings. The greatest rate of revenue growth occurred in
wide area progressive systems -- a 192.9% increase as a result of continued
expansion of machines to the systems.
REVENUES
Total revenues increased 49.5% to $56.3 million for the six months ended
June 30, 1996, compared to $37.7 million for the first six months in 1995.
PRODUCT SALES. Product sales increased 35.9% to $40.6 million for the six
months ended June 30, 1996, from $29.9 million in 1995. Total sales of gaming
machines, including specialty gaming machines and used machines, were
approximately 5,050 machines in 1996, as compared to approximately 3,300
machines in 1995. The gaming machine placements in 1996 were primarily in the
states of Arizona, Connecticut, Kansas, Michigan, Mississippi and Wisconsin and
in the province of Ontario, Canada.
GAMING OPERATIONS. Gaming operations revenue increased 113.8% to $9.2
million for the six months ended June 30, 1996, from $4.3 million in 1995. This
increase is primarily attributable to the growth of gaming operations in Peru
and the introduction of gaming operations in Ecuador and Brazil.
Gaming operations revenue consisted of $3.3 million in lease revenue from
the Miss Marquette riverboat for the six months ended June 30, 1996, compared to
$3.4 million in 1995 (the operating company of the Miss Marquette casino
complex, GSMC, was purchased by the Company on July 1, 1996 -- see page 15 for
discussion); $0.9 million in revenue earned from the Company's share of Harrah's
management fee in connection with Harrah's Phoenix Ak-Chin casino and
entertainment complex for each of the six months ended June 30, 1996 and 1995
(Harrah's owns approximately 14.1% of the Company's outstanding shares at June
30, 1996); and $5.1 million in revenue from international gaming operations in
1996 compared to $0.1 million in 1995.
The Company believes that gaming operations revenue will increase as a
result of the acquisition of GSMC (see page 15 for discussion) and as current
operations mature and additional operations and strategic markets are developed.
However, there can be no assurance that such revenues will be realized due
primarily to gaming's dependence on its legal status and public acceptance in
certain jurisdictions.
12
<PAGE>
WIDE AREA PROGRESSIVE SYSTEMS. Wide area progressive revenues increased
192.9% to $3.6 million for the six months ended June 30, 1996, from $1.2 million
in 1995. Wide area progressive systems revenues are derived from the operation
of multi-link systems available to Native American casinos nationwide in
jurisdictions permitting such systems. The increase in revenues is a result of
the expansion of systems. At August 1, 1996, the Company was providing a total
of seven wide area progressive systems which were operating in 10 states:
Arizona (which permits the operation of intrastate wide area progressive systems
in lieu of interstate systems), Connecticut, Iowa, Louisiana, Michigan, New
Mexico, North Dakota, Oregon, South Dakota, and Wisconsin.
The Quartermania and Megabucks interstate systems were first introduced to
Native American casinos in August 1994; the Nickelmania interstate system was
introduced in November 1995; the Arizona intrastate Quartermania and Megabucks
systems were introduced in December 1995; and the Dollars Deluxe interstate
system was introduced in June 1996. The Company also operates a system available
to non-Native American casinos located in Deadwood, South Dakota. Based on
current market trends, the Company believes that the wide area progressive
revenues could increase through the placement of additional machines on existing
systems as well as the introduction of new systems.
FINANCING INCOME. Financing income on notes receivable and other financing
arrangements increased 31.4% to $2.9 million for the six months ended June 30,
1996, compared to $2.2 million in 1995. This increase was primarily due to an
increase in financing arrangements entered into.
COSTS AND EXPENSES
Total costs and expenses increased 48.5% to $45.7 million for the six
months ended June 30, 1996, compared to $30.7 million in 1995.
PRODUCT SALES. The cost of product sales increased 35.8% to $31.3 million
for the six months ended June 30, 1996, from $23.0 million in 1995. This
increase was attributable to the increased sales volume of gaming machines. As a
percentage of product sales revenue, the cost of products was 77.1% in 1996 and
77.2% in 1995.
GAMING OPERATIONS. Gaming operations direct costs increased $4.4 million to
$4.5 million for the six months ended June 30, 1996, compared to $0.1 million in
1995. This increase is attributed to the expansion of gaming operations in Peru
and the introduction of gaming operations in Ecuador and Brazil.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 21.3% to $8.9 million for the six months ended June 30, 1996,
from $7.4 million in 1995. This increase resulted primarily from increases in
compensation and related employee costs and benefits, advertising and promotion,
depreciation, provision for doubtful accounts, travel and other expenses
associated with
13
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the development of new markets, including gaming operations in the United
States, Peru, Ecuador, Brazil, and other countries, primarily in Latin America.
These expenses are consistent with the Company's growth philosophy and ongoing
strategy to establish gaming operations and other recurring revenue sources and
to successfully pursue opportunities in potential new gaming jurisdictions. As a
percentage of total revenues, selling, general and administrative expenses
decreased to 15.8% in 1996 compared to 19.5% in 1995.
INTEREST AND FINANCING. Interest and financing costs increased 278% to $1.0
million for the six months ended June 30, 1996, from $0.3 million in 1995. The
increase in financing costs is attributed to increased borrowings for 1) the
expansion of gaming operations in Latin America, 2) the increases in receivables
and contracts from the financing of product sales and 3) the construction of a
new warehouse, assembly, systems operations and corporate headquarters facility.
The Company believes that interest and financing costs will increase during 1996
and future years as the Company continues its growth strategy.
INCOME FROM OPERATIONS
The cumulative effect of the above described changes resulted in a 54.0%
increase in income from operations to $10.7 million for the six months ended
June 30, 1996, from $6.9 million for the six months ended June 30, 1995. As a
percentage of revenues, income from operations increased to 18.9% in 1996, from
18.4% in 1995. This improvement in the operating margin of the Company was
primarily attributable to the growth in revenues from wide area progressive
systems, which have lower costs than product sales due to the absence of a `cost
of goods sold' component.
EARNINGS BEFORE INCOME TAXES
Earnings before income taxes increased 52.7% to $10.7 million for the six
months ended June 30, 1996, compared to $7.0 million for the six months ended
June 30, 1995. Provision for income taxes were $3.9 million in 1996, compared to
$2.6 million in 1995, representing 36.6% of earnings before income taxes for
both six month periods ended June 30, 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital increased $2.9 million to $39.8 million during the six
months ended June 30, 1996. This increase was primarily a result of a $2.9
million increase in cash and cash equivalents, a $6.6 million increase in
receivables, and a $1.4 million increase in inventories. The increases were
partially offset by a $7.7 million increase in accounts payable and a $0.4
million increase in income taxes payable.
14
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CASH FLOWS
During the six months ended June 30, 1996 the Company's cash and cash
equivalents increased $2.9 million to $3.8 million. Cash provided by operating
activities was $3.4 million for the six months ended June 30, 1996. Cash
provided by operating activities was primarily the result of $6.8 million in net
earnings, $0.8 million in depreciation and amortization, $13.9 million in
payments received on notes receivable relating to financed sales, a $7.7 million
increase in accounts payable, and a $0.4 million increase in income taxes
payable. These proceeds were partially offset by $14.7 million in gross profit
and inventories sold under financing arrangements, a $7.9 million increase in
receivables, and a $3.9 million increase in inventories.
Cash used in investing activities for the six months ended June 30, 1996
was $8.1 million, which consisted of $6.1 million used to purchase property and
equipment primarily for gaming operations in Latin America, a $2.6 million
increase in amounts due from riverboat lessee and a $1.9 million increase in
other assets, primarily for capitalized development costs in Latin America. Cash
used in investing activities was partially offset by $2.3 million of payments
received on notes receivable.
Financing activities provided $7.5 million during the six months ended June
30, 1996 as a result of net proceeds from long-term borrowings under a revolving
credit facility. The increase in debt is primarily due to the purchase of gaming
equipment and related costs associated with the expansion of international
markets.
In 1994, the Company invested $21.8 million (excluding approximately $5.7
million of equipment financing provided by the Company) in the Miss Marquette
riverboat casino, which the Company leased to GSMC beginning October 1, 1994 for
a period of eight years with automatic extensions of an additional 17 years.
This investment consisted of (a) $14.3 million expended by Sodak to acquire and
refurbish a riverboat, and (b) an additional $7.5 million that the Company
loaned to GSMC to fund costs incurred by GSMC to develop and construct dockside
facilities and related amenities. The lease required scheduled lease payments of
the greater of an aggregate of $25 million, or 50% of defined net income from
the related casino operations, determined annually, during the first 43 months
of the lease; and 50% of defined net income from related casino operations
thereafter, beginning in April 1998.
GSMC was unable to meet regularly scheduled payments under the lease and
financing notes due to dockside facility construction and preopening cost
overruns. The Company allowed GSMC to fund the cost overruns with operating cash
flow.
On July 1, 1996, the Company acquired all of the outstanding shares of GSMC
for $1 million in cash. The acquisition will be accounted for using the purchase
method of accounting. The assets of GSMC consist of gaming machines, gaming
equipment and the dockside facilities, which include a 24-room hotel, parking
lots, marina, restaurant, lounge and other support facilities and related
furniture, fixtures and equipment. In addition to the purchase price, the
Company has agreed to guarantee a GSMC note payable to its former shareholders
in the amount of $4.4 million. Sodak continues to hold notes receivable
(relating to prior loans to GSMC to finance the dockside facility and gaming
equipment), lease payments receivable and accrued interest receivable from GSMC
aggregating to $22.6 million as of June 30, 1996.
15
<PAGE>
INDEBTEDNESS / LINES OF CREDIT
The Company had $25.6 million of long term debt outstanding at June 30,
1996. Of that amount, $25 million is borrowed under proceeds from a $50 million
long-term revolving credit facility from a syndicate of banks. The revolving
line has two components, a $20 million tranche (Tranche A) to be used for
general corporate purposes and a $30 million tranche (Tranche B) for
acquisitions and major capital equipment expenditures. Tranche A matures in
February 1999, plus two one-year renewal options subject to bank approval, and
Tranche B matures in February 2001. The amount available under Tranche B is
reduced by $1.875 million quarterly beginning in 1997. The unused portion of the
revolving credit facility is subject to a commitment fee, based on a calculation
as defined in the agreement. Interest is payable based on variable rates which,
at the Company's option, are based on the prime rate, federal funds rate plus
1%, or a Eurodollar rate plus an applicable margin. Amounts borrowed are secured
by substantially all Company assets, excluding real estate, but including a
first preferred ship mortgage on the Miss Marquette riverboat.
The remaining $0.6 million is secured by certain transportation equipment
and carries an interest rate of 7.45%; the majority of this loan is due in
December 1998.
CAPITAL COMMITMENTS
As part of an agreement with Harrah's, the Company guaranteed financing
relating to 50% of the construction cost of a Native American casino facility,
managed by Harrah's, that opened in December 1994. As of August 1, 1996, the
Company's outstanding guaranty was approximately $1.1 million. As a
consideration for the loan guaranty, the Company receives, from Harrah's, 4% of
the distributable net income of the gaming operation over the term of the
management contract.
During 1994, the Company assisted a casino management company in acquiring
$8 million in financing from a financial institution. The Company guaranteed the
management company's debt and receives a loan guarantee fee based on a
percentage of the outstanding loan balance. As of August 1, 1996, the Company's
guaranty was approximately $4.9 million.
PART II. OTHER INFORMATION
Item 1. Legal proceedings
- -------------------------
RICO Litigation. On April 26, 1994, the Company was named as a defendant in
a class action lawsuit filed in the United States District Court, Middle
District of Florida, by William A. Poulos and William Ahearn, respectively, each
of whom sought to assert claims on behalf of themselves and "all other similarly
situated ("the plaintiffs"). Each of the plaintiffs filed suit against Sodak and
approximately 41 other defendants (each a "defendant" and collectively "the
defendants"). These two lawsuits were ordered consolidated by the Court, and the
action has been transferred to the United States District Court, District of
Nevada, for further proceedings. Each defendant is involved in the gaming
business as either a gaming machine manufacturer, distributor, or casino
operator. The class action lawsuit arises out of alleged fraudulent marketing
and
16
<PAGE>
operation of casino video poker machines and electronic slot machines. The
plaintiffs allege that the defendants have engaged in a course of fraudulent and
misleading conduct intended to induce people in playing their gaming machines
based on a false belief concerning how those machines actually operate as well
as the extent to which there is actually an opportunity to win on any given
play. The plaintiffs allege that the defendants' actions constitute violations
of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and give rise
to claims of common law fraud and unjust enrichment. The plaintiffs are seeking
monetary damages in excess of $1 billion and are asking that any damage awards
be trebled under applicable federal law.
On April 15, 1996, the Nevada Federal District Court issued Orders granting
Sodak's and other's motions to dismiss and allowed plaintiffs to file amended
Complaints to properly state a claim on or before May 31, 1996. The amended
complaint was filed at the close of work of May 31, 1996. Accompanying the
amended complaint was a motion seeking leave to substitute plaintiff Brenda
McElmore in the place and stead of plaintiff Mr. Ahearn. The Company believes
the plaintiffs' lawsuit to be without merit and the Company intends to
vigorously pursue all legal defenses available to it.
On September 26, 1995, another RICO-based class action was filed in the
United States District Court, District of Nevada, by Larry Schreier, which named
the Company as a defendant, along with the same 41 other defendants (each a
"defendant" and collectively "the defendants"). The plaintiff in this action is
a resident of Tulsa, Oklahoma, and purports to bring this action on behalf of
himself and "all other similarly situated" (the "plaintiffs"), namely, all
members of "casino card clubs" and players in "video poker tournaments", which
would appear to be a sub-class of plaintiffs within the two prior class actions
identified above and which are presently pending against the Company in the
District of Nevada. Except for the identification of the class which the
plaintiff seeks to represent, all substantive allegations of this action are
virtually identical to the consolidated Poulos/Ahearn actions, and, the Company
believes, is also without merit.
This latest action is presently in its initial pleading phase, with answers
or dispositive motions yet to be filed on behalf of the Company. The Company
intends to vigorously pursue this action with all legal defenses available to
it, and to shortly file various dispositive motions on its behalf.
Item 2. Changes in Securities
- ------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
17
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company held its annual meeting of shareholders on April 30, 1996 for
the purposes of electing members of the Board of Directors of the Company and to
ratify the selection of KPMG Peat Marwick LLP as independent auditors of the
Company for the fiscal year ending December 31, 1996.
There were 11,361,138 shares of Common Stock entitled to vote at the
meeting and a total of 9,660,194 shares (85%) were represented at the meeting.
The shareholder voting was as follows:
1. Election of Directors:
WITHHOLD
FOR AUTHORITY
--------- ----------
Michael G. Wordeman 9,564,642 95,552
Roland W. Gentner 9,564,742 95,452
Thomas Celani 9,564,842 95,352
Colin V. Reed 9,432,962 227,232
Manuel Lujan, Jr. 9,564,842 95,352
Ronnie Lopez 9,564,742 95,452
2. To ratify the selection of KPMG Peat Marwick LLP as independent auditors of
the Company for the fiscal year ending December 31, 1996:
For - 9,654,889 Against-1,450 Abstain-3,885 Broker Non-Vote-0
Item 5. Other Information
- --------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a. Exhibits
11.1 Calculation of Earnings Per Common and Common Equivalent Share.
b. Reports on Form 8-K
Form 8-K dated July 15, 1996, reporting the Company's acquisition of
all of the outstanding shares of Gamblers Supply Management Company.
18
<PAGE>
Signatures
----------
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 duly authorized.
Date: August 7, 1996
SODAK GAMING, INC.
By: \s\ David R. Johnson
-----------------------------
David R. Johnson
Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Numbered Page
- ----------- -------------
11.1 Calculation of Earnings Per Common and
Common Equivalent Share 21
27 Financial Data Schedule
20
<PAGE>
Exhibit 11.1
SODAK GAMING, INC.
CALCULATION OF EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SHARES OUTSTANDING
Weighted Average common shares outstanding 11,363,985 11,361,138 11,362,561 11,361,138
Adjustments for common equivalents(1) 83,090 12,648 76,420 6,324
------------- ------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 11,447,075 11,373,786 11,438,981 11,367,462
NET EARNINGS $4,081,325 $3,056,463 $6,779,052 $4,439,305
EARNINGS PER COMMON AND
COMMON EQUVALENT SHARE $ 0.36 $ 0.27 $ 0.59 $ 0.39
====================================================================================================================================
</TABLE>
(1) Represents adjustment computed under treasury stock method
for restricted stock and stock options granted at fair market value
at date of grant.
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the consolidated financial statements of Sodak Gaming, Inc.'s Form 10-Q
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,837,366
<SECURITIES> 0
<RECEIVABLES> 24,559,045
<ALLOWANCES> 1,121,577
<INVENTORY> 16,706,713
<CURRENT-ASSETS> 72,624,436
<PP&E> 23,486,979
<DEPRECIATION> 2,007,205
<TOTAL-ASSETS> 160,611,043
<CURRENT-LIABILITIES> 32,832,754
<BONDS> 25,573,342
<COMMON> 11,367
0
0
<OTHER-SE> 101,101,593
<TOTAL-LIABILITY-AND-EQUITY> 160,611,043
<SALES> 40,578,248
<TOTAL-REVENUES> 56,348,309
<CGS> 31,293,408
<TOTAL-COSTS> 45,673,214
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 303,000
<INTEREST-EXPENSE> 967,227
<INCOME-PRETAX> 10,690,856
<INCOME-TAX> 3,911,804
<INCOME-CONTINUING> 6,779,052
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,779,052
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
