<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 March 31, 1997
--------------
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
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At March 31, 1997, there were outstanding 22,757,688 shares of the Company's
common stock.
Page 1 of 18
Exhibit Index Page 17
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Sodak Gaming, Inc.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Earnings for the three months ended
March 31, 1997 and 1996 3
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1996 6
Note to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal proceedings 14
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
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Sodak Gaming, Inc.
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
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<S> <C> <C>
Revenue:
Product sales $11,437,254 $14,482,607
Gaming operations 13,457,506 3,842,663
Wide area progressive systems 2,433,698 1,754,858
Financing income on notes receivable and
other financing arrangements 1,771,784 1,462,127
Other 3,674 6,782
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Total revenue 29,103,916 21,549,037
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Costs and expenses:
Cost of product sales 9,427,391 10,899,598
Gaming operations 12,924,429 1,518,883
Selling, general and administrative 4,477,498 4,408,266
Interest and financing costs 788,794 448,374
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Total costs and expenses 27,618,112 17,275,121
----------- -----------
Income from operations 1,485,804 4,273,916
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Other income:
Gain on sale of receivables 536,527 0
Other 8,639 6,787
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Total other income 545,166 6,787
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Earnings before income taxes 2,030,970 4,280,703
Provision for income taxes 751,459 1,582,976
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Net earnings $ 1,279,511 $ 2,697,727
=========== ===========
Earnings per common and common equivalent share $ 0.06 $ 0.12
=========== ===========
Weighted average number of common and common
equivalent shares outstanding 22,952,174 22,861,774
=========== ===========
</TABLE>
The accompanying note is an integral part of the consolidated financial
statements.
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Sodak Gaming, Inc.
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 *
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(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,217,260 $ 4,077,107
Receivables:
Trade accounts, net of allowance for doubtful accounts 10,731,065 20,258,980
Short-term notes receivable 12,451,522 391,018
Notes receivable, current maturities 19,297,382 23,197,351
Accrued interest 449,962 570,024
Inventories:
Gaming machines 13,139,304 16,410,597
Parts and other gaming accessories 3,698,426 4,225,674
Prepaid expenses 1,580,015 1,674,172
Refundable income taxes 200,000 875,000
Deferred income taxes 625,000 553,000
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Total current assets 66,389,936 72,232,923
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Property and equipment:
Land and improvements 1,357,616 1,357,616
Buildings and improvements 18,332,133 17,758,478
Leasehold improvements 1,250,629 1,083,466
Riverboat 13,687,115 13,687,115
Gaming operations equipment 23,734,621 23,314,614
Office furniture and equipment 2,599,462 2,496,142
Transportation equipment 2,177,242 2,150,488
Shop equipment 514,156 503,652
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63,652,974 62,351,571
Less accumulated depreciation and amortization (5,714,243) (4,410,249)
------------ ------------
Total property and equipment, net 57,938,731 57,941,322
------------ ------------
Other assets:
Notes receivable, net of current maturities 26,307,405 26,657,133
Real estate held for sale 596,658 596,658
Goodwill, net 8,017,556 8,155,401
Other assets, net 5,698,743 4,697,196
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Total other assets 40,620,362 40,106,388
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$164,949,029 $170,280,633
============ ============
* From audited financial statements.
The accompanying note is an integral part of the consolidated financial statements.
</TABLE>
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Sodak Gaming, Inc.
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996*
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(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 9,873,082 $ 28,328,425
Current maturities of long-term debt 1,766,000 1,751,000
Income taxes payable 52,525 161,615
Accrued liabilities 4,221,157 4,263,912
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Total current liabilities 15,912,764 34,504,952
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Long-term debt, net of current maturities 39,220,201 27,188,869
------------ -------------
Deferred income taxes 1,416,000 1,350,000
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Shareholders' equity:
Preferred stock at $0.001 par value, 25,000,000 shares
authorized, none issued and outstanding 0 0
Common stock at $0.001 par value, 75,000,000 shares
authorized, 22,757,688 shares issued and outstanding 22,758 22,758
Additional paid-in capital 64,072,273 64,072,273
Retained earnings 45,047,389 43,767,878
Cumulative translation adjustment (742,356) (626,097)
------------ ------------
Total shareholders' equity $108,400,064 $107,236,812
------------ ------------
$164,949,029 $170,280,633
============ ============
*From audited financial statements.
</TABLE>
The accompanying note is an integral part of the consolidated financial
statements.
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Sodak Gaming, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,279,511 $ 2,697,727
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,566,215 334,101
Provision for doubtful accounts 112,449 200,000
Deferred income taxes (6,000) 19,000
Gain on sale of receivables (536,527) 0
Changes in operating assets and liabilities:
Trade receivables 9,035,527 5,280,428
Notes receivable relating to financed sales (177,398) (526,779)
Inventories 465,712 (313,834)
Prepaid expenses 94,157 (675,316)
Accounts payable (18,699,283) (7,222,406)
Accrued liabilities (42,755) 215,695
Income taxes payable, net of refundable income taxes 565,910 477,964
------------ ------------
Net cash provided by (used in) operating activities (6,342,482) 486,580
------------ ------------
Cash flows from investing activities:
Cash advanced on notes receivable (3,874,961) 0
Payments received on notes receivable 849,608 947,699
Purchases of property and equipment (1,363,396) (1,433,200)
Increase in amounts due from riverboat lessee, prior
to acquisition 0 (1,507,973)
Increase in other assets (1,012,212) (1,443,471)
------------ ------------
Net cash used in investing activities (5,400,961) (3,436,945)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term borrowings 20,500,000 10,500,000
Principal repayments of long-term debt (8,453,668) (6,013,695)
------------ ------------
Net cash provided by financing activities 12,046,332 4,486,305
------------ ------------
Effect of exchange rate changes on cash and cash equivalents (162,736) 0
------------ ------------
Net increase in cash and cash equivalents 140,153 1,535,940
Cash and cash equivalents, beginning of period 4,077,107 974,221
------------ ------------
Cash and cash equivalents, end of period $ 4,217,260 $ 2,510,161
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 464,774 $ 243,214
Cash paid during the period for income taxes $ 0 $ 1,086,012
Supplemental schedule of non-cash investing activity:
Gaming machine inventory transferred to
gaming operations equipment $ 0 $ 1,243,515
The accompanying note is an integral part of the consolidated financial statements.
</TABLE>
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Sodak Gaming, Inc.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
Note 1 - Unaudited Consolidated Financial Statements
- ----------------------------------------------------
The accompanying unaudited consolidated financial statements of Sodak
Gaming, Inc. and its consolidated subsidiaries 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 1996 consolidated financial statements and notes thereto.
Certain 1996 amounts have been reclassified to conform to 1997
presentation.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
After its inception in 1989, the Company's sole line of business was the
marketing and distribution of gaming equipment to Native American casinos. Since
1993, a part of the Company's business strategy has been to diversify its
revenue base and has focused on the development of gaming opportunities that
generate recurring revenue sources.
As part of this strategy, the Company implemented the first interstate wide
area progressive systems and has entered the Iowa riverboat casino market and
emerging gaming markets in Latin America, where it develops, equips and operates
gaming halls and routes and a casino. In 1996, the Company acquired the
operating company of the Miss Marquette riverboat casino, Gamblers Supply
Management Company (GSMC), and assumed full operational responsibility of the
casino entertainment facility, which also includes a restaurant, lounge, marina
and hotel. The Company also began a casino operation in Ecuador and a video
bingo gaming hall in Brazil.
The Company also entered into an agreement in 1996 with the Confederacao
Brasileira de Futebol (CBF, or the Brazilian Soccer Federation) to own and
operate linked progressive video gaming systems in Brazil. In January 1997, the
Company entered into a joint venture agreement with IGT and Dreamport (a wholly-
owned subsidiary of GTECH Holdings) to proceed with the development and
operations of this system. The three companies will share equally in the
investment funding, expenses and profits or losses of the CBF project.
Results of Operations - Three Months Ended March 31, 1997
Compared to the Three Months Ended March 31, 1996
Net earnings for the three months ended March 31, 1997 decreased 53% to
$1.3 million, or $0.06 per share, compared to net earnings of $2.7 million, or
$0.12 per share, for the three months ended March 31, 1996. The primary factors
causing the decrease in net earnings were decreased product sales and lower
margins in gaming operations. Total revenue increased 35% to $29.1 million in
1997, compared to $21.5 million in 1996. Total costs and expenses increased 60%
to $27.6 million in 1997, compared to $17.3 million in 1996.
Product Sales
Revenue from product sales decreased 21% to $11.4 million in 1997 compared
to $14.5 million in 1996. The decrease was due to a 34% decrease in machine
sales revenue to $7.5 million in 1997 compared to $11.3 million in 1996
(including $3.4 million and $0.4 million of used machines sales in 1997 and
1996, respectively), which was partially offset by a 26% increase in ancillary
gaming and non-gaming product sales revenue to $4.0 million in 1997 compared to
$3.2 million in 1996. In 1997, the Company is continuing its strategy of being a
full-service provider to its customers by expanding its product line to include
additional gaming related and non-gaming related products and supplies.
New gaming machine shipments decreased 66% to approximately 630 machines in
1997 compared to approximately 1,840 machines in 1996. In 1997, 79% of the new
machine shipments were to casinos in Kansas and Wisconsin. Sales of used
machines increased to approximately 1,360 machines in 1997
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compared to approximate 90 machines in 1996. The Company does not anticipate
that new machine shipments in 1997 will attain last year's record level. Growth
of gaming in Native American jurisdictions is outside the control of the Company
and is influenced by the legal, electoral and regulatory processes of those
jurisdictions.
The cost of product sales decreased 14% to $9.4 million in 1997, from $10.9
million in 1996. This decrease was attributable to the decreased sales volume of
new machines. The gross margin on product sales declined to 17.6% in 1997 as
compared to 24.7% in 1996. The decrease in the gross margin was primarily due to
the sale of approximately $3.4 million of used machines at their carrying value.
Excluding this used machine transaction, the gross margin on product sales was
25.5%.
Gaming Operations
Gaming operations revenue increased 250% to $13.5 million in 1997, from
$3.8 million in 1996. This increase was primarily attributable to the July 1,
1996 acquisition of GSMC and the growth of gaming operations in Latin America.
Direct costs of gaming operations increased $11.4 million to $12.9 million in
1997, compared to $1.5 million in 1996.
Domestic Gaming Operations
The Miss Marquette. GSMC, the management company of the Miss Marquette, was
acquired on July 1, 1996. The acquisition was accounted for using the purchase
method of accounting. Accordingly, the operations of the Miss Marquette since
July 1, 1996, are included in the consolidated statements of earnings. The
riverboat casino and entertainment facility has 682 machines and 36 table games
and is located on the Mississippi River at Marquette, Iowa. Revenue from the
Miss Marquette amounted to $7.4 million and direct operating costs were $7.3
million in 1997. Prior to its acquisition, the Company leased the riverboat
vessel to GSMC, providing the Company $1.6 million in lease revenue in 1996. Due
to seasonality, the operating margin of the Miss Marquette is anticipated to
improve for the remainder of 1997. However, there can be no assurance that such
improvement will be realized due to the regulatory nature of gaming, the
public's acceptance of gaming and other factors affecting performance.
Participation with Harrah's. The Company recognized revenue of $0.5 million
in both 1997 and 1996 as its share of Harrah's Entertainment, Inc.'s (Harrah's)
management fee from the Harrah's Phoenix Ak-Chin casino located near Phoenix,
Arizona (Harrah's is a 14% shareholder of the Company).
International Gaming Operations
As part of its strategy to increase its recurring revenue sources, in 1996
the Company expanded its operation of gaming halls and routes in Peru,
established a gaming hall in Brazil, and established a casino in Ecuador.
Peru. The Company operates gaming halls and route operations in Peru.
Revenue increased 121% to $3.8 million in 1997 compared to $1.7 million in 1996.
The increase is primarily the result of increasing the number of machines to
approximately 1,200 at March 31, 1997 compared to approximately 670 at March 31,
1996. Direct operating costs increased $2.4 million to $3.9 million in 1997
compared to $1.5 million in 1996, primarily as a result of the expansion of
machine placements since March 31, 1996. The
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increase in direct operating costs is also due to the imposition of a 200%
increase in the per-machine tax, effective October 1996, and increased
operations, administrative and reorganization costs relating to regulatory
changes. In January 1997, the Peruvian government announced regulatory changes
in conjunction with the transfer of gaming regulatory authority to the federal
government. Included in these changes were minimum machine requirements at
gaming halls. By July 31, 1997, gaming halls in Lima must have at least 120
machines per location and gaming halls in other cities must have at least 80
machines per location. The Company anticipates that it will reallocate its
1,200-machine base to fewer locations to accommodate the regulatory requirement.
Brazil. The Company established a gaming hall with 200 machines in the
Arpoador district of Rio de Janeiro in June 1996. Revenue was $1.2 million and
direct costs were $1.3 million in 1997. Management changes to improve efficiency
and to reduce costs are being implemented and the Company anticipates an
improvement in operating performance as the operation matures. However, there
can be no assurance that such improvement will be realized due primarily to
gaming's dependence on its regulatory status and public acceptance.
In 1996, the Company entered into an agreement with the CBF to provide and
operate a video gaming system in Brazil. In January 1997, the Company entered
into a joint venture agreement with IGT and Dreamport to proceed with the
development and operations of this system. The three companies will share
equally in the investment funding, expenses and profits or losses of the CBF
project.
The operation of the system is subject to the CBF obtaining regulatory
approval in each state where the proposed system is to be offered. The agreement
provides for systems to be operational no later than 180 days after regulatory
authorization is obtained by the CBF. Project documentation and requests for
regulatory authorization have been submitted for approval in four states or
jurisdictions: Rio de Janeiro, Goias, the Federal District of Brasilia, and
Minas Gerais. In addition, regulatory approval is being pursued in the states of
Sao Paulo and Rio Grande de Sul. However, there can be no assurance that such
approvals will be obtained or that systems can become operational in the
indicated time frame.
Ecuador. The Company established a casino operation in Quito, Ecuador, in
March 1996. The casino is located in the Crowne Plaza Hotel and has 150 machines
and 10 table games. Revenue in 1997 was $0.4 million and direct costs associated
with the operation were $0.4 million.
Wide Area Progressive Systems
Wide area progressive systems revenue increased 39% to $2.4 million in 1997
compared to $1.8 million in 1996. This increase is a result of the increase in
the number of machines on the systems. Comparing March 31, 1997 to March 31,
1996, the Company offered systems in two additional states, Oregon and Kansas;
three new systems became operational, Dollars Deluxe, Fabulous 50's and Wheel of
Fortune; and the number of machines on the systems increased to approximately
1,300 from approximately 850. In 1997, the Company offered wide area progressive
systems in Arizona (which permits the operation of intrastate systems in lieu of
interstate systems), Connecticut, Iowa, Kansas, Louisiana, Michigan, New Mexico,
North Dakota, Oregon, South Dakota and Wisconsin. As of May 2, 1997, nine
systems were in operation: Megabucks (one interstate and one intrastate),
Dollars Deluxe, Fabulous 50's, Quartermania (one interstate and two intrastate),
Nickelmania and Wheel of Fortune (which began operating in March 1997). Based on
current market trends, the Company anticipates increased revenue from its wide
area progressive systems in 1997 as it proceeds with its strategy to
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place additional systems and machines in jurisdictions currently permitting the
operation of wide area progressive systems. The Company believes additional
jurisdictions may authorize the operation of such systems, thereby enabling
additional growth. However, there can be no assurance that necessary regulatory
approvals will be obtained in those prospective jurisdictions. Furthermore,
public acceptance of these systems and the entry of competing systems of other
gaming companies could affect the Company's future revenue.
Financing
Financing income on notes receivable and other financing arrangements
increased 21% to $1.8 million in 1997, compared to $1.5 million in 1996. This
increase was primarily due to a $0.5 million fee earned from arranging interim
financing for a casino project.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 2% to $4.5 million
in 1997, from $4.4 million in 1996. As a percentage of total revenue, selling,
general and administrative expenses decreased to 15% in 1997 compared to 20% in
1996. This decrease as a percentage of total revenue is primarily due to the
$7.6 million increase in revenue in 1997, which was mostly a result of the
increase in gaming operations revenue.
Interest and Financing Costs
Interest and financing costs increased to $0.8 million in 1997, from $0.4
million in 1996. The increase in interest and financing costs was primarily
attributable to increased borrowings for the expansion of gaming operations in
Latin America and for the assumption of debt in connection with the acquisition
of GSMC. The Company believes that interest and financing costs will continue to
increase in future years as the Company pursues its growth strategy.
Income from Operations
The cumulative effect of the above described changes resulted in a 65%
decrease in income from operations to $1.5 million in 1997, from $4.3 million in
1996. As a percentage of revenue, income from operations decreased to 5% in
1997, from 20% in 1996. The decrease in the operating margin was primarily the
result of decreased product sales and lower margins in gaming operations that
commenced subsequent to the first quarter of 1996.
Other
Other income includes $0.5 million of income recognized as a result of the
sale of receivables at a premium in 1997. Earnings before income taxes decreased
53% to $2.0 million in 1997, compared to $4.3 million in 1996. Provision for
income taxes was $0.7 million in 1997, compared to $1.6 million in 1996,
representing 37% of earnings before income taxes for both 1997 and 1996.
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Liquidity And Capital Resources
Working capital
Working capital increased $12.7 million to $50.5 million during the three
months ended March 31, 1997. This increase is due to an $18.6 million decrease
in current liabilities which was partially offset by a $5.8 million decrease in
current assets.
Cash Flows
During the three months ended March 31, 1997, the Company's cash and cash
equivalents increased $0.1 million to $4.2 million. Cash used in operating
activities was $6.3 million in 1997 compared to $0.5 million provided in 1996.
The cash flows from operations for 1997 were primarily affected by net income,
depreciation and amortization, and changes in receivables, inventories and
accounts payable.
Cash used in investing activities amounted to $5.4 million in 1997 and $3.4
million in 1996. Cash used in investing activities consisted primarily of $3.9
million advanced on notes receivable for customer financing in 1997; $1.4
million used to purchase property and equipment in both 1997 and 1996; $1.0
million and $1.4 million increase in other assets in 1997 and 1996,
respectively; and $1.5 million increase in amounts due from riverboat lessee,
prior to the acquisition of GSMC, in 1996. The 1997 property and equipment
purchases were primarily attributable to a building addition to the corporate
facility and gaming operations equipment. The increase in other assets during
1997 was primarily due to capitalizing start-up costs associated with the CBF
project. Cash used in investing activities was partially offset by $0.8 million
and $0.9 million in payments received on notes receivable from casino
development financing in 1997 and 1996, respectively.
Financing activities provided $12 million cash in 1997 compared to $4.5
million provided in 1996, primarily from the net proceeds of long-term
borrowings under a revolving credit facility in both years. The increase in debt
since December 31, 1996 was primarily used to fund working capital needs.
Indebtedness/Lines of Credit
The Company had $41 million of debt outstanding at March 31, 1997. Of that
amount, $35.8 million was borrowed under 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 June 1997. The unused portion of the revolving credit
facility is subject to a commitment fee, based upon a calculation as defined in
the revolving credit 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.
Of the remaining $5.2 million of debt, $3.5 million relates to debt payable
to the former shareholders of GSMC, $1.2 million relates to various other debt
secured by certain property of the Miss Marquette riverboat casino and $0.5
million is secured by certain transportation equipment.
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Capital Commitments
During 1994, the Company assisted a casino management company in acquiring
$8 million in financing from a financial institution. The Company also
guaranteed the $8 million debt and in return receives a loan guarantee fee based
on a percentage of the outstanding loan balance. As of May 2, 1997, the
outstanding loan balance was approximately $1.8 million.
During 1996, the Company entered into an agreement with the CBF to own and
operate, on behalf of the CBF, linked progressive video gaming systems in
Brazil. In January 1997, the Company, IGT and Dreamport formed a joint venture
for purposes of development and operation of the CBF project under which equity,
loans, and profits or losses will be shared equally. Under the terms of the
joint venture agreement, the Company has committed to provide initial equity and
loans of up to $4 million. In addition, as of March 31, 1997, the Company has
incurred start-up costs associated with the CBF project of approximately $4
million which are included in other assets in the consolidated balance sheets.
When the CBF project becomes operational, these costs will be amortized on a
straight-line basis over the life of the contract, but not to exceed five years.
International Operations
Approximately 19% of total revenue in 1997 was derived outside of the
United States, compared to 8% in 1996. International operations are subject to
certain risks, including but not limited to unexpected changes in regulatory
requirements, fluctuations in exchange rates, tariffs and other barriers, and
political and economic instability. There can be no assurance that these factors
will not have an adverse impact on the Company's operating results. To date, the
Company has not experienced significant translation or transaction losses
related to foreign exchange fluctuations due to the limited size of its
international operations. As the Company continues to expand its international
operations, exposure to gains and losses on foreign currency transactions may
increase. The Company has not yet engaged, but may in the future engage, in
currency hedging transactions intended to reduce the effect of fluctuations in
foreign currency exchange rates.
Impact of Inflation
Inflation did not have a significant effect on the Company's operations
during the three months ended March 31, 1997.
Cautionary Notice
This report contains forward-looking statements reflecting the Company's
expectations or beliefs concerning future events which could materially affect
Company performance in the future. Terms indicating future expectation, optimism
about future potential, anticipated growth in revenue, earnings of the Company's
business lines and like expressions typically identify such statements. Actual
results and events may differ significantly from those discussed in forward-
looking statements.
All forward-looking statements are subject to the risks and uncertainties
inherent with predictions and forecasts. They are necessarily speculative
statements, and unforeseen factors, such as competitive pressures, changes in
regulatory structure, failure to gain the approval of regulatory authorities,
changes in customer acceptance of gaming, general risks associated with the
conduct of international business (such as foreign currency exchange rate
fluctuation, changes of governmental control or laws, changes in
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relations between the United States and other countries, or changes in economic
conditions) could cause results to differ materially from any that may be
expected.
Forward-looking statements are made in the context of information available
as of the date stated. The Company undertakes no obligation to update or revise
such statements to reflect new circumstances or unanticipated events as they
occur.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
On April 26, 1994, the Company was named as a defendant in a class action
filed in the United States District Court, Middle District of Florida, by
William A. Poulus and William Ahearn, respectively, each of whom asserted claims
on behalf of themselves and "all other similarly situated" parties (the
plaintiffs). The suit was filed against Sodak and approximately 41 other
defendants (the defendants). These initial two lawsuits transferred to Nevada
and consolidated with a September 16, 1995 third lawsuit filed in the United
States District Court, District of Nevada, by Larry Schreier, which also named
the Company as a defendant, along with the same 41 other defendants.
Additionally, a class action was filed in the United States District Court,
Middle District of Florida, by William Poulos, against various cruise lines (the
"Cruise Ship" case). While the "Cruise Ship" case did not name the Company as a
defendant, it has been transferred to Nevada and consolidated with the above
named cases pursuant to an order issues by Judge David Ezra in December 1996.
All of the above mentioned actions (the consolidated action) involve
defendants who are involved in the gaming business as either a gaming machine
manufacturer, distributor, casino operator or cruise ship operator. The
consolidated action arises out of alleged fraudulent marketing and 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 into 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.
In his consolidation order of December 1996, Judge Ezra ordered the
plaintiffs to file a consolidated amended complaint. He also ordered that all
prior motions to dismiss be deemed withdrawn, with leave for the defendants to
refile them upon receipt of the consolidated amended complaint. He also ordered
that the consolidated amended complaint have no substantive changes from the
original complaint on file. The consolidated amended complaint is currently
subject to motions to strike based on defendants assertion that it has
substantive changes contrary to the court's order. Motions to dismiss are also
pending.
The plaintiffs responded to defendants' motions on May 2, 1997. The
defendants have a deadline of May 23, 1997 to reply.
The Company believes the consolidated action is without merit. The Company
intends to vigorously pursue all legal defenses available to it and to
participate in the defense as fully as possible through the defendants' steering
committee which was created pursuant to a court order.
-14-
<PAGE>
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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
None.
-15-
<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: May 8, 1997
Sodak Gaming, Inc.
By: /s/ David R. Johnson
-----------------------------------
David R. Johnson
Chief Financial Officer
-16-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Numbered Page
- ------ -------------
<S> <C>
11.1 Calculation of Earnings Per Common and Common Equivalent Share 18
27 Financial Data Schedule
</TABLE>
-17-
<PAGE>
Exhibit 11.1
Sodak Gaming, Inc.
CALCULATION OF EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, March 31,
1997 1996
------------ -------------
<S> <C> <C>
Shares Outstanding
Weighted average common shares outsanding 22,757,688 22,722,276
Adjustments for common stock equivalents (1) 194,486 139,498
Weighted average number of common and ------------ -------------
common equivalent shares outstanding 22,952,174 22,861,774
============ ===========
Net Earnings $ 1,279,511 $ 2,697,727
============ ===========
Earnings per common and
common equivalent share $ 0.06 $ 0.12
============ ===========
</TABLE>
- -------------------------------------------------------------------------------
(1) Represents adjustment computed under the treasury stock method for
stock options granted at fair market value at date of grant.
-18-
<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>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,217,260
<SECURITIES> 0
<RECEIVABLES> 11,691,200
<ALLOWANCES> 960,135
<INVENTORY> 16,837,730
<CURRENT-ASSETS> 66,389,936
<PP&E> 63,652,974
<DEPRECIATION> 5,714,243
<TOTAL-ASSETS> 164,949,029
<CURRENT-LIABILITIES> 15,912,764
<BONDS> 40,986,201
0
0
<COMMON> 22,758
<OTHER-SE> 108,377,306
<TOTAL-LIABILITY-AND-EQUITY> 164,949,029
<SALES> 11,437,254
<TOTAL-REVENUES> 29,103,916
<CGS> 9,427,391
<TOTAL-COSTS> 27,618,112
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 112,449
<INTEREST-EXPENSE> 788,794
<INCOME-PRETAX> 2,030,970
<INCOME-TAX> 751,459
<INCOME-CONTINUING> 1,279,511
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,279,511
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
